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26–242 PDF 2017

S. HRG. 115–50 

SECONDARY SANCTIONS AGAINST CHINESE INSTITUTIONS: ASSESSING THEIR UTILITY FOR CONSTRAINING NORTH KOREA 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

NATIONAL SECURITY AND INTERNATIONAL TRADE 

AND FINANCE 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING HOW CHINESE BANKS, BUSINESSES, AND PERSONS PROVIDE NORTH KOREA WITH DIRECT AND INDIRECT ACCESS TO FINANCIAL MARKETS AND RESOURCES, ALLOWING PYONGYANG TO EVADE 

OR MITIGATE INTERNATIONAL SANCTIONS 

MAY 10, 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 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON NATIONAL SECURITY AND INTERNATIONAL TRADE AND FINANCE

BEN SASSE, Nebraska, Chairman 

JOE DONNELLY, Indiana, Ranking Democratic Member 

BOB CORKER, Tennessee 

TOM COTTON, Arizona 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

MARK R. WARNER, Virginia 

HEIDI HEITKAMP, North Dakota 

BRIAN SCHATZ, Hawaii 

AMMON SIMON, Subcommittee Staff Director 

KLON KITCHEN, National Security Advisor 

NICK CATINO, Democratic Subcommittee Staff Director 

(II)

C O N T E N T S 

WEDNESDAY, MAY 10, 2017 

Page 

Opening statement of Chairman Sasse ................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Donnelly .............................................................................................. 9 

WITNESSES 

Adam J. Szubin, Distinguished Practitioner-in-Residence, Johns Hopkins University, School of Advanced International Studies; Of Counsel, Sullivan 

& Cromwell; and Former Acting Secretary of the Treasury and Acting 

Under Secretary of the Treasury for Terrorism and Financial Crimes ........... 2 

Prepared statement .......................................................................................... 27 

Juan C. Zarate, Chairman and Cofounder, Financial Integrity Network; 

Chairman and Senior Counselor, Center on Sanctions and Illicit Finance; 

Former Deputy Assistant to the President and Deputy National Security 

Adviser for Combating Terrorism; and Former Assistant Secretary of the 

Treasury for Terrorist Financing ........................................................................ 3 

Prepared statement .......................................................................................... 31 

(III)

(1) 

SECONDARY SANCTIONS AGAINST CHINESE 

INSTITUTIONS: ASSESSING THEIR UTILITY 

FOR CONSTRAINING NORTH KOREA 

WEDNESDAY, MAY 10, 2017 

U.S. SENATE, SUBCOMMITTEE ON NATIONAL SECURITY

AND INTERNATIONAL TRADE AND FINANCE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Subcommittee met, at 10:07 a.m., in room SD–538, Dirksen 

Senate Office Building, Hon. Ben Sasse, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN BEN SASSE 

Chairman SASSE. The hearing will come to order. 

I would like to welcome everyone to this meeting of the National 

Security and International Trade and Finance Subcommittee of the 

Banking Committee. I am pleased to be joined by my colleague and 

friend and our Committee’s Ranking Member, Senator Joe Donnelly, from Indiana, as well as other Members of the Subcommittee 

here today, as we seek greater understanding of how so-called secondary sanctions might be used to counter North Korean belligerence and Chinese support. 

I am going to offer a more complete opening statement, and Senator Donnelly is going to offer a more complete opening statement 

later in the hearing. We are going to be a little bit unorthodox in 

our timing because of some of the things that are happening on the 

Senate floor this morning that may prohibit the Committee from 

meeting at some point in the course of our hearing. So even though 

both of you have excellent opening statements that are filled with 

content that I think we will want to unpack—I do not think we 

want them just for the record; we would like to hear longer opening 

statements from you two—would you be willing to confine yourselves to maybe 3 minutes each just as a kickoff so we can get to 

some questions from some Democratic Members that are going to 

be called to another caucus meeting shortly? So I think we will go 

a little bit out of order in our questioning, if each of you could just 

have maybe 3-minute opening statements. 

Great. I will give very brief biographies of the two of you. 

Adam Szubin is currently the senior practitioner-in-residence at 

Johns Hopkins University School of Advanced International Studies. He is also the former Acting Secretary of the U.S. Treasury Department as well as the Acting Under Secretary of the Treasury for 

Terrorism and Financial Crimes. Welcome, Mr. Szubin. 

2 

Joining him today is the Honorable Juan Zarate, chairman of the 

Financial Integrity Network, chairman and senior counselor of the 

Center on Sanctions and Illicit Finance, former Deputy Assistant 

to the President and Deputy National Security Adviser for Combating Terrorism, and the former Assistant Secretary of the Treasury for Terrorist Financing. Welcome, Mr. Zarate. 

Gentlemen, both your written statements will be included in the 

record later, and after Senator Donnelly and I make statements, 

subsequently we will let you make opening statements again, but 

maybe just 2 or 3 minutes from each of you. 

Mr. Szubin, welcome and thanks for being here. 

STATEMENT OF ADAM J. SZUBIN, DISTINGUISHED PRACTITIONER-IN-RESIDENCE, JOHNS HOPKINS UNIVERSITY, 

SCHOOL OF ADVANCED INTERNATIONAL STUDIES; OF 

COUNSEL, SULLIVAN & CROMWELL; AND FORMER ACTING 

SECRETARY OF THE TREASURY AND ACTING UNDER SECRETARY OF THE TREASURY FOR TERRORISM AND FINANCIAL CRIMES 

Mr. SZUBIN. Thank you very much. Chairman Sasse, Ranking 

Member Donnelly, Members of this Subcommittee, it is a true 

honor to be here. This is my first time testifying outside of the Government. I think it is fitting given our relations over the 13 years 

I had in Treasury, and it really is an honor to be back. 

I am often asked a pretty core question at this moment, which 

is whether, as with Iran, the international community could generate enough sanctions pressure to force a North Korean Government to the table to negotiate a peaceful and verifiable end to its 

nuclear weapons program. It is obviously an immensely difficult 

question, but I do believe the answer is a qualified ‘‘yes.’’ 

Let me just share my top-line assessments, and then I will obviously yield in the interest of time. 

First, North Korea is not self-reliant or ‘‘sanctions-proof.’’ Its 

leadership depends upon access to foreign imports and international banking services, and that access can be disrupted. 

Second, sanctions leverage over North Korea is concentrated in 

one country: China. If China is prepared to take a qualitatively 

tougher stance on sanctions against North Korea, sanctions have a 

chance to succeed. If not, they do not. 

Third, despite years of high-level international attempts, China 

has thus far resisted more than incremental enhancements to its 

sanctions posture. China does harbor serious concerns about Kim 

Jong-un and their nuclear program, but a collapse of the North Korean regime and the chaos that it would unleash on China’s border 

poses a far greater threat in China’s eyes. 

For that reason, U.S. sanctions alone will not force China to 

adopt a sufficiently aggressive approach no matter how draconian 

and costly those sanctions become. China will not be strong-armed 

into a course of action that it believes imperils its own national security. 

For that reason, serious and high-level engagement with China 

will be needed to set out a way forward, to include an intensive 

pressure campaign, and the various scenarios that could follow 

from it, including potential leadership change in North Korea. 

3 

China will not roll the dice when it comes to the fate of its impoverished nuclear-armed neighbor. Concerns over stability will be 

paramount, but I believe that our interests can be reconciled with 

China’s. 

What is needed here is a massive diplomatic investment and 

multilateral engagement to marshal a campaign, including China 

and other countries around the world, both the like-minded and the 

resistant. Having participated in a comparable campaign with respect to Iran, I would urge both the Administration and Congress 

to staff key leadership positions at the State Department and the 

Treasury Department quickly, including confirming Sigal 

Mandelker, who has been nominated to serve as the next Under 

Secretary for TFI. I know her to be an intelligent, experienced, and 

strong leader. And I believe that it would be counterproductive in 

the extreme to deplete our Foreign Service Corps at a time when 

we need them so urgently, both on this issue and the whole range 

of national security and foreign policy threats we face. 

To conclude, even with a concentrated and strategic efforts, we 

obviously cannot guarantee that a diplomatic effort powered by 

new sanctions pressure will succeed, but I believe that it has a real 

chance to do so, and I am not aware of a better alternative. Faced 

with this ever-growing menace, it is our duty to put all of the considerable talents, intelligence, and energies of the U.S. Government 

behind this effort. 

Thank you again for having me to testify. 

Chairman SASSE. Thank you, Mr. Szubin. 

Mr. Zarate. 

STATEMENT OF JUAN C. ZARATE, CHAIRMAN AND COFOUNDER, FINANCIAL INTEGRITY NETWORK; CHAIRMAN 

AND SENIOR COUNSELOR, CENTER ON SANCTIONS AND ILLICIT FINANCE; FORMER DEPUTY ASSISTANT TO THE PRESIDENT AND DEPUTY NATIONAL SECURITY ADVISER FOR 

COMBATING TERRORISM; AND FORMER ASSISTANT SECRETARY OF THE TREASURY FOR TERRORIST FINANCING 

Mr. ZARATE. Chairman Sasse, Ranking Member Donnelly, and 

distinguished Members of the Subcommittee, it is really an honor 

to be here today. Thank you for the invitation. I will tell you it is 

an honor to be testifying next to my very good friend, former colleague, and one of the great professionals in this field, Adam 

Szubin, somebody for whom I have enormous respect. And I expect 

him to take all the hard questions, Mr. Chairman. 

[Laughter.] 

Mr. ZARATE. Mr. Chairman, as you and I discussed and as we 

know, this is a timely and important hearing. What was once seen 

solely as a threat from North Korea to peace and stability on the 

Korean peninsula and in the region has now become a looming, potentially direct threat to the U.S. homeland. All the while North 

Korea tests ballistic missiles and increases the pace of its nuclear 

program, it is also proliferating its technology for profit, engaging 

in illicit finance and commercial activity, exploiting forced labor 

and human rights abuses to make money for the regime, and even 

using cyber tools to attack financial infrastructure. 

4 

This is also a moment to challenge the orthodoxies because of the 

urgency of the task at hand, and I agree with Adam that this is 

a moment to think about a renewed financial pressure and economic campaign against North Korea that has as its centerpiece 

the change in the Chinese calculus with respect to their interests. 

Now, this is not easy. The Chinese have been pressured in the 

past. They have showed glimmers of wanting to cooperate, including recent rejections of coal imports from North Korea. But the 

Chinese have a different strategic interest, and our interests and 

theirs have not aligned with respect to the use of financial pressure 

in an existential way against the regime in Pyongyang. 

I think this is a moment for China to assume its role as a great 

power, to be able to influence its North Korean ally. This Administration and this Congress will have to grapple with how best to obtain, to a certain extent coerce, and sustain Chinese cooperation in 

order to maximize pressure on North Korea. And, ultimately, we 

have to change the calculus in Pyongyang to either slow or stop the 

pace of its nuclear program. 

But the linchpin here is the Chinese calculus. Unfortunately, this 

has been the third rail of the sanctions debate. There has been an 

uneasiness with a willingness to pressure China or to pursue efforts that touch the Chinese economy or Chinese interests too directly. I think that calculus has to change. In many ways, China 

becomes the linchpin for these efforts, and as we see with all of the 

illicit networks that are exposed, there is inevitably a Chinese link, 

Chinese facilitation, Chinese networks, Chinese agents. 

Any effort, whether it is to apply secondary sanctions, which 

would apply to those actors that are not doing business directly 

with the U.S., do not have a U.S. nexus, or other financial measures, has to put at risk Chinese interests, or at least make clear 

that Chinese interests are going to directly or indirectly be impacted by their relationship with North Korea and the illicit activity engaged in. And I would argue, as my testimony lays out in 

greater detail, that secondary sanctions are only one part of a panoply of steps that can be taken to sensitize the environment, to 

make the reputational risk and the real risk of doing business with 

North Korea ever more dangerous, ever more difficult for the Chinese. The more the Chinese realize that their interests are directly 

impacted by what North Korea is doing, be it on the nuclear file, 

on the missile testing program, on the illicit financing activity, the 

more likely it is that the Chinese will change their behavior and 

change their calculus. 

As I said, China has the opportunity to prove its role as a great 

power and to use its influence with Pyongyang. The clock is ticking 

in many ways, and an effective financial pressure campaign with 

China on side is one way of potentially helping to slow, if not stop, 

the clock. 

Thank you, Mr. Chairman. 

Chairman SASSE. Thank you, Mr. Zarate. 

Senator Donnelly has agreed to temporarily defer to Senators 

Heitkamp and then Cortez Masto. Senator Heitkamp. 

Senator HEITKAMP. Thank you so much, Mr. Chairman. This is 

a Committee that I had the honor of being the Ranking Member 

on last Congress, and I will tell you it tends to be incredibly biparVerDate Nov 24 2008 15:08 Aug 31, 2017 Jkt 046629 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\05-10 ZZDISTILLER\26242.TXT JASON
5 

tisan. And I want to pledge to both of you my support and anything 

that I can do as you advance this discussion and this agenda, because nothing is more important. Really, it is incredible that the 

Banking Committee has this responsibility, and it is a responsibility that is absolutely critical to national security. 

I want to turn to Mr. Szubin and Mr. Zarate. I want to say just 

on the record that for some reason the job that you two have held 

attracts absolutely the best and brightest in public service in America, people whose intellect and capability could be earning riches on 

Wall Street, but yet you serve our country in this very strategic 

and absolutely essential role of monitoring and implementing sanctions. And I want to thank both of you from the bottom of my heart 

for your public service. You are true patriots, and your appearance 

today reinforces that. 

I think there is a lot of cynicism—Mr. Szubin, I am going to start 

with you. There is a lot of cynicism about whether you can, in fact, 

achieve this result without China participating and a lot of cynicism about whether China will play the role of, yes, we are on 

board, yes, we are on board, but yet we do not see the kind of activity that we need to see given the regional threat that North Korea 

presents. 

North Korea’s interest is obviously in preventing regime change. 

You know, that probably is pretty consistent across the board in all 

of world Governments. But this is a very dangerous regional development, and I am wondering, how do you assess the likelihood of 

success that China will, in fact, play a critical and important role 

going forward? 

Mr. SZUBIN. I think that is the question of the hour, Senator 

Heitkamp, and—— 

Senator HEITKAMP. But I wanted an answer, not a repetition of 

the question, Mr. Szubin. 

[Laughter.] 

Mr. SZUBIN. I am not going to be repeating the question. I would 

not dare. 

I think we have a chance, and as I put forward in my written 

statement, China does not start with an opposing set of interests 

to our own here. China, I think, is made quite nervous by the behavior of this young dictator in Pyongyang. He has gone out—— 

Senator HEITKAMP. Can I ask you, do you think they feel the urgency that we feel at this point? 

Mr. SZUBIN. Probably not quite, and Kim Jong-un has called out 

the U.S. as his leading enemy and has a stockpile of nuclear weapons. So, of course, we feel that urgency in a different way from 

China. 

But China, I think, would be very glad to see a solution to the 

nuclear threat to global security. It comes with a lot of headaches 

for China, including the deployment of THAAD in South Korea and 

a lot of military attention from the U.S. right off of China’s shores. 

On top of that, I think China would be happy to see a more stable 

leadership posture out of Pyongyang. 

So we have a lot of shared interests, but right now the key impediment, I think, to further Chinese cooperation is their fear of a 

regime collapse. And a regime collapse is a much greater threat to 

China given the level of poverty in North Korea, the level of chaos 

6 

that would unleash right on their border, than anything else that 

we are talking about today. 

So this is the key conversation to be had between really senior 

members of our Government and China’s Government, is not just 

how do we turn the pressure up, how do we start pushing toward 

nuclear negotiations, but what does that pressure look like and 

what are the next three steps after the pressure gets that high, because China is not going to head into this without knowing those 

answers. 

Senator HEITKAMP. Do you think secondary sanctions will be viable in this situation? 

Mr. SZUBIN. I think secondary sanctions ought to be considered 

if the need arises, and the reason I put it that way is they are just 

a sanctions tool like any other. We saw in the Iran context how 

powerful they could be, but they were marshaled to a broader strategic efforts with diplomacy that was really substantial over a period of years, and they followed on to a serious of primary sanctions 

moves that really had Iran quite isolated. 

So at the right time, as part of a strategic diplomatic campaign, 

secondary sanctions may be needed in this context. But I do not 

think that time is now. 

Senator HEITKAMP. OK. 

Mr. SZUBIN. I think they need to be—they need to be linked to 

a campaign and not be set out in advance of a campaign. 

Senator HEITKAMP. Mr. Chairman, I want to be respectful of your 

great generosity, so I will close there. But I can expect that we will 

be able to file some written questions. 

Chairman SASSE. Absolutely. Thank you. 

Senator HEITKAMP. Thank you, Mr. Chairman. 

Chairman SASSE. Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you, Mr. Chairman and Ranking 

Member. I appreciate that. 

Can I follow up then? Because this was a similar line of questioning that I had as well with respect to secondary sanctions. I am 

going to pose this to both of you. What do you both understand to 

be the Trump administration’s strategy to halt North Korea’s missile program and the role that the secondary sanctions should play? 

Mr. SZUBIN. I cannot speak, Senator, to the Trump administration’s strategy here. Obviously, I am now on the outside and am 

not a part of those discussions. I was a part of the last two Administrations’ discussions on North Korea, and typically there is a 

focus on how do we turn the pressure up to a level where North 

Korea is forced to the table in a way that they have not yet been 

to date to engage in multilateral negotiations over their nuclear 

program. That is obviously a very tall order. 

Senator CORTEZ MASTO. And part of that is making sure we, like 

you said, completely staff up the State Department and putting 

that pressure on through diplomatic channels. Isn’t that correct? 

Mr. SZUBIN. That is absolutely right. And it was essential in the 

Iran context. There is a lot of attention that is given to the work 

of our former office, the Treasury Department, the intelligence 

agencies, in terms of getting really effective, crippling sanctions in 

place on Iran. And what is sometimes neglected is how much diplomatic outreach was needed to make those sanctions work and to 

7 

make them stick. That was hundreds of thousands of hours of visits to different capitals, everywhere from Azerbaijan to Singapore, 

to ensure that bankers, traders, and regulators were enforcing the 

sanctions in a tough, meaningful way. And it was a huge effort 

that requires diplomacy. 

Senator CORTEZ MASTO. OK. Mr. Zarate. 

Mr. ZARATE. Senator, obviously I am not part of the Administration, but I think you can divine two core themes and changes in 

the Trump administration policy in North Korea. The first is a 

sense of urgency with respect to this issue. You have heard Director Pompeo from the CIA talk about this. This is now an urgent 

direct problem that is being treated as a front-burner national security issue, which is adding diplomatic attention and urgency to 

the issue. 

The second is placing the onus squarely on China to try to resolve these issues. Even the President’s tweets have been, I think, 

an attempt to do that in perhaps a clever way. But, in any event, 

I think the overarching theme is, Can you persuade China in a cooperative way to influence North Korea in a way that they have 

not to date? And I think that is the overarching thematic change. 

How they go about doing that, whether or not secondary sanctions should be a part of that, I think is yet to be seen. I have not 

seen an articulation of this from the Administration. 

Where I would agree with Adam, but then also disagree, is there 

is no question this has to be part of an overarching strategy. It has 

to fit into a strategy. We have to understand what we are trying 

to achieve with the financial and economic measures and use the 

full complement of them and choreograph them properly. 

Where I perhaps disagree slightly is I do think this is a moment 

to actually have the secondary sanctions in place, not to necessarily 

apply them, but to have the authority available both to signal to 

the marketplace that this is a potential risk of doing business directly or indirectly with North Korean entities, and also to begin 

a signaling mechanism, a financial diplomatic message to Beijing 

that we are upping the ante, that this is a more urgent, a more 

serious dimension of how we are going to do this. This is not going 

to be how we have treated the Chinese dimension of North Korea 

in the past. 

And so I think, at a minimum, as a signaling mechanism, it is 

incredibly powerful, and it begins to open the aperture for diplomacy, for discussions with the private sector, for targeting of actors, and we see over and over again—the Wall Street Journal just 

this past weekend revealing ties between known Chinese entities 

with a presence in the U.S. and North Korean agents and networks. Those are the kinds of things that will be accelerated and 

exposed if you have secondary sanctions plus other measures in 

place. 

Senator CORTEZ MASTO. And following up on that, and I just 

have a minute left, but as we talk about secondary sanctions, do 

you see a difference between applying that pressure on smaller 

Chinese banks versus the larger Chinese financial institutions and 

what implications that means for our financial market? 

Mr. ZARATE. I think secondary sanctions applied to the Chinese 

banking system, it is very difficult, for three reasons, and Adam 

8 

lays this out very neatly in his testimony. But I think the first is 

the Chinese learned a lesson after 2005 when we applied Section 

311 authorities against Banco Delta Asia where the major Chinese 

banks, to include Bank of China, had exposure to North Korea. 

And so after that lesson, they realized it was probably not a good 

idea for the four major banks in particular to have exposure to 

North Korea. 

And so what you have seen since then has been a concentration 

of the kind of financial and commercial activity with North Korea, 

especially in the northeastern part of the country, concentrated 

with smaller institutions, smaller brokers, money service businesses, in a way that has isolated that activity from the major 

banks. That means there is less connectivity to the U.S., and secondary sanctions are most helpful when there are entities being 

targeted that want access to U.S. markets or facilities. 

The fact that that is the case, though, does not undermine the 

credibility and strength of the potential secondary sanctions for two 

reasons. One is you have unknown connections to North Korea 

still, and even these institutions, these big four Chinese banks, 

may not understand or may not even see the exposure that they 

have to elements of the North Korean network. So that is one 

issue. 

The second is secondary sanctions are going to apply not just to 

banks but to other commercial actors, and at a time when China 

is very much trying to expand the reach of its banks—I just got 

back from the Southern Cone where, you know, you see the big 

towers of the Chinese banks in places like Buenos Aires and 

Santiago, Chile, and they are worried about their commercial 

brands around the world, Huawei and others. The reputational risk 

attached to what North Korea represents across the board is quite 

significant. 

Maybe if I can leave you with this one thought: We have consistently underestimated the power of these tools, leveraged properly 

and appropriately with diplomacy and strategy, but I think we 

have to test and probe whether or not these tools can be used in 

a more aggressive form to change the Chinese calculus, because I 

actually think we can. And I think if it is done well and smartly, 

we can change the dynamics. 

Senator CORTEZ MASTO. Thank you. Thank you very much. 

Thank you, Mr. Chair. 

Chairman SASSE. Thank you. Senator Donnelly and I will return 

to opening statements at this time. 

Just very briefly, we are obviously here because of new threats 

from an old foe. Since 1950, North Korea has been an aggressive 

and disruptive player in Asia, and its new leader, Kim Jong-un, appears committed to continuing and extending this tradition. 

After assuming leadership of the hermit kingdom in 2011, Kim 

Jong-un has oppressed his own people, killed his real or perceived 

opposition both inside and outside North Korea, provoked and attacked our South Korean allies, and even threatened to strike the 

United States with a nuclear weapon. To the comments that have 

been made, there is not a more critical global national security 

issue than this. This is crazy and cannot be allowed to continue. 

9 

Earlier this week, Pyongyang even referred to our colleague Senator Cory Gardner as ‘‘human dirt’’ and accused him of having lost 

not only all human judgment but also all body hair. I have no idea 

what that meant. 

Kim Jong-un’s patrons in Beijing have him on a very long leash. 

His behavior, at least in part, is enabled by numerous Chinese institutions and individuals who allow North Korea to bypass the 

international sanctions regimes that exist by providing them with 

both direct and indirect access to international markets via shadow 

banks, illicit networks, and other illegal mechanisms. 

That brings us to the point of today’s hearing and I think the two 

central questions before us, and they are: Is it possible and is it 

advisable to employ secondary sanctions against these Chinese institutions and individuals in an effort to further turn the sanctions 

screw against North Korea? And as the three of us discussed prior 

to today’s hearing, I think we will probably toggle across three different topics. One of them is that most narrow proximate question 

of should the U.S. Government move toward secondary sanctions, 

and should the Senate and the Congress be moving to give new 

tools to the Administration to advance that agenda, to take action 

against these Chinese institutions that are enabling North Korean 

behavior? Bucket one. 

Bucket two, where does North Korean international money come 

from? What percentage of that is Chinese? And what do we know 

about the decision-making processes inside China, which would 

then further enable the Senate and the Congress and the Administration to make calculations about whether or not North Korean 

behavior could be influenced via secondary sanctions against these 

Chinese institutions? 

And then third, and more broadly, a whole range of questions 

that the two of you, given the expert positions you have held in the 

past, might be able to bring to bear and use to tutor us on analogous situations in the past about how secondary sanctions regimes 

work in situations that might be analogous in some way to this? 

So I look forward to both of your testimony. 

Senator Donnelly. 

STATEMENT OF SENATOR JOE DONNELLY 

Senator DONNELLY. Thank you, Chairman. 

I want to start by thanking the Chairman for calling this hearing. North Korea poses one of the most dangerous and pressing 

threats to the United States’ national security. We have to dramatically increase our diplomatic and economic pressure on the regime to abandon its nuclear weapons. 

I also want to join the Chairman in welcoming our witnesses. 

You are extraordinary leaders for our country. You have done 

amazing work to keep our citizens safe, and that is why we have 

turned to you today, is because of the faith we have in both of you. 

You have an admirable record of public service and formidable expertise on the subject at hand. 

Today’s hearing will tackle the critical question of whether and 

how we can reverse decades of failed efforts to counter the North 

Korean threat. There are two key points we should emphasize, I 

think. 

10 

First, the common perception that North Korea is just a hermit 

kingdom, cutoff from the global economy and international financial flows. That is deeply misleading. North Korea does billions of 

dollars in international trade, and North Korean exports nearly tripled in value in the last 9 years after the first U.S. sanctions were 

imposed. As those sanctions have escalated, North Korea has responded by developing evasion techniques that are increasing in 

size and sophistication. 

Second, China is the linchpin. They are the key to any international sanctions efforts. They account for more than 90 percent 

of North Korea’s trade. While there has been some limited progress 

in China’s participation in international sanctions, they must do 

more if we hope to have an impact on Kim Jong-un’s strategic calculus. 

Secondary sanctions are a logical tool for pressuring China to do 

more, but a tool that must be wielded carefully, and I look forward 

to hearing your views and recommendations on that topic. 

I will close by saying that as the Ranking Member of this Subcommittee, which deals with U.S. and foreign nuclear forces as 

well, I have studied the situation in North Korea closely and been 

briefed on options for U.S. military action. Those have been some 

of the most sobering briefings of my career, and I pray for the sake 

of our armed forces and, frankly, the world that we will never have 

to put those plans into action. 

I am concerned that we need to focus on this critically, as we are 

trying to do today, and I hope this hearing will help lay the 

groundwork for cooperation between Congress and the White 

House that we tackle this threat together, not as Democrats and 

Republicans but as Americans making sure that everyone in our 

country and all of our friends and allies are safe as well. 

Thank you, Mr. Chairman. 

Chairman SASSE. Thank you, Senator Donnelly, and I would like 

to publicly thank you as well for the work that we did in preparing 

for this hearing. There is a long tradition that this Subcommittee 

has been very bipartisan and nonpartisan. One of the places that 

the Senate works much more effectively that is not always that 

visible to the public is when we are in the SCIF together getting 

briefings. There is much less awareness of people’s partisan labels 

when they are in there being briefed on national security and global security issues. And the Ranking Member and I have been 

briefed on these topics both here on the Hill and in a SCIF at the 

White House on some of these topics. And when you are there, they 

are not really Republicans and Democrats. They are American patriots who are worried about the future and whether or not we 

have a clear enough strategy. 

So I know that both of you have conducted yourselves that way 

across the last two Administrations, and so we are grateful for your 

time. 

Earlier we gave you truncated opportunities for opening statements. I want to give each of you the opportunity to expand a little 

bit if you would like and if you do not have anything that you want 

to pull directly from your statement. And, again, thank you for 

both of them. They were long and meaty and helpful tutorials for 

us. 

11 

I think it would be useful then maybe for you to also give us a 

sense of if you were going to give us—for our colleagues who either 

were here briefly or will not attend today’s hearing, if you were 

going to give three or four takeaways of what you would like Senators on the Banking Committee to understand about the sanctions 

options before us with regard to North Korea, I think we would 

love to have your takeaway insights as well as anything you want 

to extract from your opening statement. Mr. Szubin. 

Mr. SZUBIN. Well, thank you very much, Chairman Sasse, and 

thank you to both of you for the kind words and, to Ranking Member Donnelly, for your support. I was a recipient, a beneficiary of 

the bipartisan support of this Subcommittee and the Committee as 

a whole in my years at Treasury, and that bipartisan support unquestionably made for a stronger sanctions posture and allowed our 

sanctions to have a massive impact abroad. It was not seen as a 

wedge issue; it was seen as a united front. And I very much hope 

that continues. 

I do not need to pull more from my written testimony, but I do 

want to come back to, I think, the central issue of the day. I think 

Juan and I are actually extremely close across the board on the 

need, first, to put this issue front and center with China. There are 

so many issues that we deal with when it comes to that bilateral 

relationship, whether they are economic, trade, currency, whether 

they have to do with geopolitical issues, the South China Sea. And 

I think it is time, if not past time, to put this issue as our paramount priority. China needs to understand that this is not one 

among many. This is first. And an intensified sanctions campaign 

I think has to be part of that. It is not that I think we need to be 

cautious when it comes to sanctioning Chinese entities. The caution 

I was talking about was before deploying a new stage, which is secondary sanctions, but there is quite a lot of authority and heft to 

the tools that the U.S. Administration has right now thanks to 

Congress to go after North Korea’s activity in China and elsewhere, 

just using the current authorities on the books. And I would like 

to see that stepped up, and I would like to see the diplomacy and 

the high-level diplomacy with China stepped up. 

In terms of the when, to my mind, we need to be guided by Secretary Tillerson, and when there is a signal from the Secretary of 

State that these tools would be net more helpful at this point to 

unsheathe than damaging, then I think that is the right time. And 

it is going to be very difficult for me as an outsider or for any outsider to judge where we are in the conversation with China. 

But I do agree that it is not just going to be a carrot conversation. There is going to have to be both carrot and stick. 

Chairman SASSE. Mr. Zarate. 

Mr. ZARATE. Mr. Chairman, thank you, and I want to thank the 

Ranking Member as well for the kind thoughts and echo Adam’s 

thanks. 

I do think Adam and I are closely aligned. There may be some 

nuance in opinion here as to how to think about this, but, you 

know, maybe I can provide three insights, pulling a bit more from 

the testimony. And, Senator Donnelly, you pointed to this. 

I think one thing this Committee needs to continue to be an 

evangelist for is the idea that the orthodoxy that North Korea canVerDate Nov 24 2008 15:08 Aug 31, 2017 Jkt 046629 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\05-10 ZZDISTILLER\26242.TXT JASON
12 

not be impacted by financial and economic measures is just not 

true; in addition to the idea that we have sanctioned ourselves out 

of doing things to North Korea, that is not true either. 

And so just the very notion that we should be thinking creatively 

about what those tools and strategies could look like is really important. It is the point of this hearing, and I commend the Chairman and Ranking Member for calling this. 

At the same time, these measures are not silver bullets, and I 

think one of the follies of some of the literature and discussion 

around these issues and the role of sanctions, especially in the 

wake of the relative success on Iran, which credit Adam and Stuart 

Levey and Danny Glaser and Chip Poncy and others, is the fact 

that when you are dealing with fundamental issues that relate to 

regime survival, which is really what we are talking about with 

Pyongyang, sanctions alone and as a stand-alone strategy and campaign will not do it. There has to be a collection of tools and influence that are brought to bear, including with respect to the Chinese calculus. The Chinese calculus is not going to be altered simply because one of the Chinese banks is threatened with a sanction 

by the U.S. That is not going to alter fundamentally their position. 

So it has to be a collective set of strategies and tools that are 

brought to bear. 

Where I maybe differ with Adam a bit—and this is where I have 

been somewhat critical with sanctions policy in the past—is I think 

we have got to get away from the idea that sanctions need to follow 

neatly from the diplomacy we are engaged in, and the financial 

pressure campaign has to be sort of geared toward moments of diplomacy. I think one of the problems of our North Korea policy to 

date has been that we have been in start and stop mode. At every 

moment of a new test, every moment of North Korean belligerence, 

we then impose new sanctions. We then think about a new stage 

of pressure. 

I think we have to think differently about this. I think we have 

to have a constant and consistent pressure campaign that in some 

ways is parallel and complementary to our diplomacy, but independent from those stages of diplomatic discourse. And part of the 

reason you want to do that is to make these tools effective, you actually have to condition the environment. They have to be used 

consistently. You have to weed the garden at all times, and you 

have to continue to up the pressure. That is in part what the success of the Iran campaign demonstrated. It was a consistent set of 

actions that over time constricted the Iranian economy. That is 

what works. In this case, you have less time. In this case, the dynamics are different. But, in any event, you need a consistent pressure campaign. 

And, finally, I think the one thing that this Committee could 

help drive is creativity and imagination around how you change the 

Chinese calculus. I think one of the orthodoxies we have had all 

along is that the interests are too divided, that the Chinese cannot 

be influenced. I do think there were glimmers in the past of Chinese interests changing or their calculus being altered by their own 

self-interest. This is not a matter of getting them to want to advance U.S. interests. It is a matter of affecting fundamental Chinese interests. And when it comes to the health and security of 

13 

their banking system, their economy, this is critical. The Politburo 

just last month held a study group, issued a study group on financial security. This matters to the Chinese. They worry about 

human rights and human rights blowback and reflection on them. 

That is a connection to the North Koreans that they do not like. 

They worry about corruption and the taint of corruption tied not 

only internally but also to North Korean activity. That is a lever 

to use. 

And so there is a whole dimension of things that the Chinese 

care about fundamentally that we can then use as levers, not to attack the Chinese but to demonstrate we are going to pressure the 

North Koreans. And if it happens to affect the Chinese and Chinese 

interests, so be it. And I think this Committee can help, especially 

with this hearing, to drive the opening of that imaginative aperture 

to think about what those tools are. 

Chairman SASSE. Thank you. Very helpful. 

We are going to go to Senator Rounds. 

Senator ROUNDS. Mr. Chairman, first of all, thank you for holding this Subcommittee hearing today, and thank you for the courtesy of allowing me to step up in line in the timing. 

As you know, gentlemen, in 2012, the U.S. Treasury sanctioned 

the Bank of Kunlun, a Chinese bank, which was one of two foreign 

banks subjected to secondary sanctions under the Comprehensive 

Iran Sanctions and Divestment Act, or CISADA, which was due to 

significant transactions with sanctioned Iranian banks. 

My question is: Did the U.S. Treasury action adversely affect the 

U.S.–China relationship? 

Mr. ZARATE. Senator, based on my knowledge, not at all. There 

were certainly diplomatic objections from the Chinese, but at the 

end of the day, based on what I know from the outside, based on 

what David Cohen, the former Under Secretary of the Treasury, 

has written, the Chinese actually told Kunlun Bank to stop its activities. Kunlun Bank remains designated under that authority. I 

do not know what the current status of its activities looks like, but 

the Chinese certainly objected diplomatically, but they reacted the 

way that we would have hoped. That also matched the activities 

and their reaction in 2005 when the Treasury designated Banco 

Delta Asia in Macau as a primary money-laundering concern, 

where there was a lot of diplomatic objection and tension and arguments that this was an infringement on their sovereignty based on 

a unilateral U.S. action. But at the end of the day, they wanted to 

protect their reputation; they wanted to protect the perceived integrity of their major banks; and they cleaned up the North Korean 

activity that was at least present obviously in places like Bank of 

China and some of the other major banks. 

Senator ROUNDS. Mr. Szubin. 

Mr. SZUBIN. Thank you, Senator. Having been on the inside—and 

I do not want to talk about internal diplomatic conversations—certainly it was a sensitive issue in the run-up to that. It is an issue 

that we broached with the Chinese repeatedly to share our concerns about what was going on with Bank of Kunlun, such that 

when the sanction was actually taken, it did not come as a surprise. And I think there were steps then taken by China to be able 

to address the conduct, as Juan has said. 

14 

But we also have to distinguish between a bank like Kunlun, 

which is a tiny regional bank that had next to no dealings with the 

U.S. markets and the U.S. dollar, and, you know, one of the largest 

banks in China at the other end of the spectrum. Right now, the 

four largest banks in China are also by assets the four largest 

banks in the world. And their dealings in the U.S. dollar, their investments in the U.S. and in the international markets are substantially different from what we are talking about with Bank of 

Kunlun. And the evidence for that is Bank of Kunlun continues to 

exist even having been subjected to secondary sanctions. It was not 

a death sentence for Kunlun Bank. Kunlun Bank was happy to tailor its services to Iran and other secondary or tertiary players. 

I do not think we need to shy away from pressuring Chinese 

banks over conduct with North Korea. To the opposite, I think we 

need to very much hold their feet to the fire. And I think we need 

to hold the feet of the Chinese Government to the fire. 

One of the other differences, though, from the Iran campaign to 

the North Korea situation is Iran conducted and still conducts its 

banking business like a country. It opens correspondent accounts 

for its major banks in other major banks, and then it routes its 

commerce in foreign exchange through those correspondent accounts. 

And so you had a pretty easily identifiable set of access points 

that could be turned off and that we were going around the world, 

frankly, urging countries to turn them off. And Kunlun did not 

comply. Kunlun faced secondary sanctions. 

North Korea does not conduct its banking business like a country 

anymore. It conducts its financial business overseas like a criminal 

cartel, frankly. It uses front companies, so there is no correspondent account for the second bank of North Korea that is 

open that a Chinese bank could just turn off. What is required is 

sort of a criminal forensic and intelligence full-court press to ferret 

out who those front companies and agents are and to shut them 

down and then to continue to turn the screw, because North Korea 

will not sit still to just watch its access points cut. It will find new 

access points. 

For that reason, I am not only describing what will need to be 

a very intensive push by our Government, but also by China on the 

enforcement side, and by Chinese banks. We need to somehow enlist their cooperation, and that might involve some arm-turning, 

twisting. It might also and I think necessarily will involve discussions about where this is all headed. 

But through a combination of devices, we need to get China to 

care about this issue nearly as much as we do. Otherwise, we are 

not going to succeed in that cat-and-mouse game of forcing North 

Korea’s dirty money out of China. 

Senator ROUNDS. Thank you, gentlemen. 

Thank you, Mr. Chairman. 

Chairman SASSE. Senator Donnelly. 

Senator DONNELLY. Thank you, Mr. Chairman, and I want to 

thank both the witnesses. 

You had talked about getting their attention, that this is critical 

to us. And if you had two or three key ideas that you said here are 

15 

the two or three that I would say do most, to each of you, what 

would they be? 

Mr. SZUBIN. If I were advising the Secretary of State, I think the 

conversation that we are having today, the focus of Congress and 

this Committee on secondary sanctions, could be an extremely useful opening to the type of very serious conversation that I think 

they want to have and that we need to have. 

Senator DONNELLY. And what do you think would be the first 

secondary sanctions that you would say this would be critical and 

this would be critical? 

Mr. SZUBIN. I am talking here about the threat on the horizon 

that Congress seems to be headed in this direction, that we, the 

Administration, may not be able to stop them, and there is always 

this sort of good cop/bad cop routine that plays out with diplomacy. 

When those secondary sanctions come into effect, we want to see 

major Chinese banks with clean hands, not having any North Korean dirty accounts on their books, so that this is really going after 

the small rogue actors as opposed to the international-facing, most 

reputable, first-tier banks in China. 

So, to me, that is a conversation that I think could bear real fruit 

right now, and you do not need to enact secondary sanctions to 

have it. 

Senator DONNELLY. Mr. Zarate. 

Mr. ZARATE. I think Adam is absolutely right. I think the mere 

threat of secondary sanctions and the potential to have a conversation with the Chinese to say, ‘‘Look, this is not intended to attack 

your entire banking system, nobody wants that.’’ What we are trying to do is identify rogue, illicit financial behavior, activity that 

violates international norms and principles, to which China subscribes, at a time of heightened expectations globally about what 

the banking world is supposed to be doing. We have all seen the 

billion dollar fines of the major global banks around the world. This 

is a time of heightened expectation with respect to transparency 

and accountability and traceability in the international financial 

system. This is a demand of the Chinese system, and to Adam’s 

point, I think putting that conversation to them is very important. 

And I would say that could be amplified and suggested to them in 

very material ways. 

So I think in addition to potential secondary sanctions, you could 

use Section 311 of the PATRIOT Act yet again. Section 311 has 

been used against the jurisdiction of North Korea and financial institutions from North Korea. But as Adam said, it is very hard to 

play Whack-A-Mole with the North Koreans. They are changing 

names, they are changing shipping registries, they are changing 

agents all the time. So that is difficult, and that is not the most 

efficient way. 

Senator DONNELLY. A lot of the times in our country, some of the 

smaller banks work with the larger banks as—they are kind of like 

the fortress bank for them. Does that go on in China as well? And 

is that the kind of thing that we can look and say, look, you have 

this bank, this one, this one that are all involved in North Korea, 

and you are the ones that they work through? Is that something 

that would help? 

16 

Mr. ZARATE. Absolutely. And, in fact, when I mentioned the indirect risk to the major Chinese banks, the four major global banks, 

that is exactly what I was referring to, which is their own 

counterparty and affiliate risk that exists given their connectivity 

within the Chinese system, again, that they may not even be aware 

of. We have seen this with responsible Western banks that often 

do not understand what risk even exists within their systems or 

their account holders. So there may be this risk. 

And so the conversation to be a legitimate one, to say, look, you 

need to understand as a responsible international player, as a responsible bank, where you have this risk. And whereas going with 

the 311 was exactly this, Senator, which is to have a Section 311 

action that designates all North Korean financial and commercial 

activity as a class of transactions that is a primary money-laundering concern. This is not about a particular financial institution. 

It is about anything that touches the North Korean system or any 

potential transaction. 

What that does is it forces responsible banks to actually have to 

do a lot more due diligence, a lot more investigation around what 

their risk looks like, and that in some ways is marshaling then the 

major Chinese banks which have an interest in doing this right, or 

at least not being affected by the reputational taint, to do this. 

Two other quick ideas, though, I think are important. I think we 

should launch an anti-corruption initiative using the antikleptocracy resources that the prior Administration put in place, 

some of the efforts that the Bush administration put in place when 

I was at the White House, to actually make the issue of corruption 

on the part of the North Korean regime something that is somewhat dangerous and potentially revealing on the Chinese side. 

That would get the Chinese attention given Chinese internal dynamics on corruption. So having a focus on corruption itself in the 

North Korean context has a potential to impact Chinese thinking 

about their threats. 

The last thing I would say on shipping, I think we can do a lot 

more—and you have seen this from the private sector—to map the 

networks that are used by North Korea to proliferate and to engage 

in activity. The reason that is interesting and important is that inevitably reveals the financial networks, the conduits that they are 

using throughout Asia, especially in China. It also raises the specter of a more aggressive interdiction campaign, perhaps by the 

U.S., South Korea, Japan, Australia, where maritime resources are 

going to be in places that the Chinese are not going to be very comfortable with. And so my argument here is let us use elements of 

international norms and principles that the Chinese and Chinese 

responsible entities are going to be sensitive to to actually begin to 

shift Chinese calculus and behavior. And if you did things like 

that—and there are other ideas in my testimony, and I know Adam 

has other ideas, too—I think you could begin to reshape the way 

the Chinese think about this. This is actually more of an existential risk to them as a responsible global player than ever before. 

Senator DONNELLY. OK. Thank you. 

Chairman SASSE. Senator Perdue. 

Senator PERDUE. Thank you. And thank you, guys. I think this 

is an extremely critical topic at a really tough time right now. 

17 

I have got a question about the validity of the sanctions, and I 

am concerned about that the game has changed. Mr. Zarate, you 

brought up Banco Delta Asia in your testimony, and you talk about 

it being an example of how sanctions work. My question is that 

things have changed since that time. You know, China is seeking 

an alternative to the U.S.-created global system. And so with their 

growth and our debt and our negative current account, their trade 

conversations over there with their consortium they are trying to 

build, do you think that these sanctions today would have the same 

pressure on these financial institutions that it did in the past? Or 

would this begin to accelerate their effort to find alternatives to the 

U.S. model and the dollar as a reserve currency? I mean, we have 

taken sanctions for granted for so long that, of course, the U.S. is 

the biggest 800-pound gorilla in the world and sanctions will work. 

Well, I am not so sure that that is going to be forever true, and 

I am really concerned about the intransigence that we perpetrated 

on our financial balance sheet is putting that in jeopardy. 

Would you both respond to that quickly? 

Mr. ZARATE. Senator, you raise a really important and fundamental point. You are right, this is not 2005, and the Chinese have 

adapted to the Banco Delta Asia action. I think the Chinese have 

a dual strategy. One is to play in the existing economic and financial order and to become big players in that, and they are doing 

that. In that context, they have to play by international norms and 

rules, and in many ways, we are still the largest proponent of that. 

They are in theory cooperative partners in that. And in that realm, 

that is where we can affect them most. If they want to—— 

Senator PERDUE. Would you agree that that is changing over 

time? It has changed since 2005, as you just said. It is going to 

change over the next decade as well. 

Mr. ZARATE. Absolutely. And it is not static, of course. And their 

leverage over us in many ways, their size, not just of their banks 

but of their economy, their ability to dictate new rules of the road, 

leads to the second strategy, which is your point: Can they begin 

to change the rules in a way that puts China at the center or at 

least allows them to dictate better what the rules are? You have 

seen this with intellectual property, with our technology companies. You have seen it certainly with alternate payment systems, 

UnionPay. They do not rely on Visa and MasterCard. They have 

got their own. 

And so they are trying to develop a parallel structure, and you 

are right, there is a potential that anything we can do can accelerate that. But for now, they are still trying to play in the existing 

structure, and they want to be seen as legitimate players. And it 

is based on those principles and norms that they have subscribed 

to that I think we have the greatest strength. And that was the 

linchpin with BDA. 

Senator PERDUE. Right. 

Mr. ZARATE. The reason they could not object was they realized 

that what BDA was doing was anathema to international norms 

and principles, their own laws. And if we can continue to drive that 

kind of a theme and that kind of a strategy, I think we are likely 

to be more effective than not. 

Senator PERDUE. Mr. Szubin. 

18 

Mr. SZUBIN. Senator, I think you raise a really important point, 

and it is obviously not a point just about North Korea on sanctions 

in this context, but the broader threat horizon and how sanctions 

are used over the coming decades. 

For now, our leverage is still supreme, and China does not have 

an alternative, no country has an alternative to the international 

financial system as it is set up where the U.S. dollar is the primary 

currency and the U.S. banking system is the most pivotal, it is the 

fulcrum. 

So I do not think our sanctions leverage has today, in 2017, diminished in a material way from where it would have been a decade ago. But I think our use of sanctions over the last decade has 

certainly prodded and prompted a change in thinking on the part 

of countries like China, non-aligned movement countries, about, 

wait a minute, how dependent can we afford to be on this Western 

framework? And the more we use secondary sanctions as a tool— 

and I do see a line between secondary sanctions and primary sanctions, and I can explain why if there is interest. But the more we 

use secondary sanctions as a tool, where we are in the most blunt 

way saying to countries around the world you do business with X, 

or you do business with us, period. It is not about conduct. It is 

not about hosting missile transactions or terrorist transactions. 

You are going to do business with a bank in that country, you are 

done. The more we are going to be seen as using our financial primacy as a weapon and cramming our foreign policy down the 

throats of other countries by force of that weapon. 

So I think we need to be very, very careful in the use of that tool. 

That does not mean we do not ever use it. It just means we have 

to be deliberate. 

Senator PERDUE. But the way we use it today is different than 

the way we have used it in the past because of all the things you 

both have said. 

One last question. I am out of time. But the shadow banking system really concerns me. I think at the end of last year, the public 

banking system had about $33 trillion directionally. I think that is 

correct. The shadow banking system estimates are as high as $9 

or $10 trillion, so it is a significant part of their overall banking 

system that I do not think we can get to. 

So the question is: Is North Korea playing in that shadow banking area today? 

Mr. SZUBIN. North Korea, as I mentioned earlier, Senator, is 

going to use any opening it can find to move money. 

Senator PERDUE. Are they in it today? 

Mr. SZUBIN. Yes. I mean, depending on how you want to define 

shadow banking, absolutely. They are using cash couriers. They are 

using ancient ways of moving money that predate the banking system. But they are also using and, frankly, dependent on modern 

banks, and the reason I say that is they have got billions of dollars 

of import needs every year. In order to pay for that, you are not 

going to be able to have a cash courier or a shadow bank arrange 

for a payment to a reputable exporter. The reputable exporter 

wants to see a wire payment show up from a bank, and they are 

not going to be paid in North Korean currency. I can assure you 

19 

there is no exporter anywhere in the world who wants to be paid 

in North Korean currency. 

So that is a vulnerability for North Korea. It means it has to be 

earning foreign currency, reputable currency, into reputable bank 

accounts, and that is a vulnerability that, as Juan was saying earlier, I think we have yet to fully exploit. That leverage is there, and 

so this myth that North Korea is somehow isolated, a pariah kingdom, and, therefore, sanctions-proof is not the case. 

Senator PERDUE. Right. Thank you both. 

Thank you. 

Chairman SASSE. Thank you. 

Could we go back and get a little bit of a level set on the North 

Korean economy more generally? Let us talk about GDP and about 

essentially imports and exports. And I understand, I think, some 

of your testimony said that about 90 percent of their trade is with 

China. But help us understand all the ways that they are using an 

international banking system for so that we can sort of tailor down 

our understanding of how targeted these secondary sanctions 

against Chinese financial institutions might be. And both of you 

having a discussion and to the degree you differ on anything, that 

would help flesh out stuff for us as well. So I will throw it to both 

of you. 

Mr. SZUBIN. Of course, Senator. So the estimates here are pretty 

rough, and I think the best economists who are looking at this 

issue acknowledge that the estimates are going to vary pretty wildly. This is not, you know, a country like Mongolia or Belgium 

where you might have regular IMF visits, who are doing metrics, 

and as I said earlier, North Korea’s banking system and import– 

export system sometimes looks more like that you would see of a 

criminal organization than that of a country. 

But with all of those caveats, the estimates I have seen are between $3 and $5 to $6 billion a year in imports and something 

around that level in terms of their exports. That is pretty significant. The major imports are petroleum, coking coal, and textiles. 

Their major exports are minerals, with coal being No. 1, but a 

number of other minerals both more high value, like rare earth 

type, and then more basic minerals being right behind it. And 

North Korea, of course, is also selling its weapons to a number of 

countries around the world, and that is dangerous both as a source 

of revenue but, of course, the missile technology that they are peddling itself. 

For all of these sales, and anytime you are getting above the tens 

of millions of dollars, you need access to the banking system. So 

that is that reliance that we have been talking about, and that presents a vulnerability. 

When you talk about China, I have seen estimates of more than 

50 percent, estimates of 75, estimates as high as 90 percent in 

terms of how much trade. Certainly when you look at their largest 

source of export revenue, coal sales, the portion that is derived 

from China is over 75 percent. And China we have seen suspend 

those purchases temporarily, sometimes for a few months, sometimes for a few weeks, or just bring those imports down. But that 

leverage is in China’s hands, and China is aware of that. I do not 

think that is a point that is lost on China. 

20 

So the truth is not that North Korea is sanctions-proof but, in 

fact, that North Korea has, to its own detriment, put all of its eggs 

in one basket or many of its eggs in one basket, and that is China, 

which makes it very much vulnerable to sanctions pressure. 

All of this comes back, though, to the key question we have been 

discussing earlier, which is: How do you get China to exert that 

pressure in a far more meaningful way than they have to date? 

And they have played with the dial. They have turned it up. They 

worked with us on not only drafting but sponsoring U.N. Security 

Council resolutions to sanction North Korea. So they have not been 

immovable on this, but they also have not come anywhere close to 

the level of pressure that it is going to take. 

And to my mind—and I am not a foreign policy expert, but to my 

mind, the central hesitation on their point is stability. They like 

the status quo, as bad as it is, as unpleasant as it is, more than 

they are willing to deal with these very ugly scenarios of regime 

collapse. And that is a conversation that we need to have with 

China. What is our end game here? What is our, the U.S. Government’s, end game? Yes, we know we want to put pressure on North 

Korea to bring Kim Jong-un to the table. But let us say we turn 

the heat up very, very high and he refuses to come to the table. 

Let us say he is committed to this to his death. What does the 

pressure campaign look like then? And how are we ensuring that 

we are not looking at a total regime collapse? If we are looking at 

leadership change, which is different from regime collapse, how are 

we navigating those waters? And how are we going to work with 

China to ensure that their nightmare scenario is not realized? 

I think we have overlapping interests here, or at least reconcilable interests. I think there is room for that conversation to be 

fruitful. But that is going to be a sine qua non of any successful 

campaign involving real China cooperation on turning these screws 

up. 

Chairman SASSE. Very helpful. 

Mr. Zarate. 

Mr. ZARATE. Mr. Chairman, I think one way of thinking about 

the North Korean economy is in three buckets. One is their sort of 

what would be called ‘‘normal trade’’ with China; that is to say, 

trade in coal, largely, but as Adam said, more and more with other 

minerals being extracted. I gave the estimate in the testimony 

based on one expert that 90 percent of trade with North Korea is 

China-dependent. As Adam says, that is an approximation, and I 

do not think we have an exact number. But there is a form of formal elements of the economy that are functioning. In fact, if you 

look at the first quarter numbers for this year, it appears that you 

have an increase in trade with China, according to some of the experts, by over 35 percent. And so that trade is real. It uses agents 

and companies and financial institutions to actually do the trade, 

as you would imagine normal trade. And so there is kind of an ecosystem around that. 

There is the ecosystem around the illicit financing and the sanctions evasion and the smuggling, which we all know about. As 

Adam said, North Korea is known as the ‘‘Mafia State,’’ you know, 

the ‘‘Sopranos State,’’ and very much acts in that way. And so they 

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21 

istries. The recent U.N. Panel of Experts report indicates that they 

are growing more sophisticated in terms of how they are engaging 

in these network operations and moving money, materiel, and arms 

around the world, to include in Africa now. And so there is an entire illicit economy that feeds the regime and gives it sustenance. 

And then there is a third element that is important, especially 

from a human rights perspective, which is their use of slave labor 

or forced labor, both within the country and then outside of the 

country. And most people who do not concentrate on North Korea 

would not realize that there are estimates of maybe over 50,000 

forced laborers working around the world, being paid but where the 

pay is actually going straight back to the North Korean regime. 

Some of the estimates is that this goes up to $2 billion per annum, 

per year, worth of income. These are laborers of all sorts in places 

that you would not anticipate, places like China, of course, but also 

Qatar, Poland, other places where these are forced laborers, and 

their pay is going right to the regime. 

And so there are these ecosystems of an economy in which the 

North Korean regime uses all elements of the financial system, to 

Adam’s point, formal and informal, as a way of moving money in 

and out of the country as needed and largely trying to pull capital 

in so that the regime can strengthen itself, strengthen its own 

economy, and ensconce the regime. 

A final point that is important and interesting is recent articles 

about sort of the flourishing of more of a private sector in North 

Korea. There is a bit more of what we could call a private sector 

economy in North Korea. That is interesting to watch because I 

think a lot of that is being amplified and affected by some of this 

cross-border trade with China. And so China maybe could impact 

some of those developments as well if they understand how that is 

evolving. But as Adam indicated, it is a difficult question as to how 

you think about Chinese touch points in each of those ecosystems. 

But that is one way of thinking about it. 

Chairman SASSE. Thank you. Very helpful. In a subsequent 

round, I want to come back to this. It was in your testimony as 

well as the slave and forced labor. But one more thing before we 

go to Senator Donnelly. You said maybe we have not had a level 

set at any point in this hearing on the extant primary sanctions 

regime that exist. And so when you distinguish among the three 

buckets of trade that they have, first of all, the $3 to $6 billion estimate—and I know that we do not really have great numbers on 

this, but what share of GDP would we think their import–export 

number is? How large is the total North Korean economy? 

Mr. SZUBIN. I am not sure. I believe the estimates are $20 to $30 

billion. 

Chairman SASSE. OK, so a significant share of their economy is 

import–export. And given the current sanctions regime—and I understand all the caveats that both of you have given, and I think 

you have tried to be delicate, and I think we are not trying to beat 

anybody up here that a new Administration does not have clarity 

of a long-term strategy vis-a-vis North Korea and that you could 

try to bring the Chinese along at this stage, but it is perplexing to 

think that the Chinese are worried about these same set of problems, and yet your point about the four large banks and the way 

22 

that you would insulate them from potential exposure to a sanctions regime by allowing the smaller banks to do this and that not 

necessarily being something that we could target in a way that 

could affect larger decision making, is any of the extant trade that 

is cross-border something that is potentially violative of the primary sanctions regime? So besides the financial institutions question that are the subject of this hearing, at the level of primary 

sanctions, is there already cross-border Chinese–North Korean 

trade issues that should also be on our docket for discussion here? 

Mr. SZUBIN. Yes, absolutely. And that is what I was alluding to, 

perhaps too indirectly, in my testimony, talking about existing authorities providing a lot of leverage right now. And it is not just 

U.S. sanctions, U.S. primary sanctions. Interestingly, the U.N. Security Council resolutions provide a lot of leverage. If those were 

being implemented as they are written, you would see massive impacts, massive pressure on North Korea. 

So, you know, sometimes it is not a question of what new tool 

do we need, but how do we use the existing tools which are binding 

on countries? And China is not just a member State of the U.N. 

They are a co-drafter of these resolutions. How do we get better implementation? And the resolutions target each one of North Korea’s 

major sources of export revenue, which you have been asking about 

today. They target their coal sales. They target forced labor, as 

Juan was talking about. They target banking access. And, of 

course, as with any resolution, there is room to interpret it more 

expansively and room to interpret it more narrowly. So when a 

U.N. Security Council resolution says there is a prohibition on offering correspondent banking services to North Korea, you could interpret that in a very narrow way and say, well, North Korea does 

not use correspondent banking, and so there is nothing here. Or 

you could interpret it in a robust and meaningful way and say, 

What are the de facto access points that North Korea is using as 

its correspondent banking beachheads in China, and how do we cut 

them off? And there is a lot of room to enlist China’s help, forgetting about any U.S. sanctions, just under the U.N. Security Council 

umbrella. 

Mr. ZARATE. It is a really important point that Adam just made. 

The interpretation of existing sanctions is really a critical question, 

and the Chinese have traditionally viewed these Chapter 7 obligations in the context of the U.N. sanctions in a very limited way. 

The other good example is in the shipping context where suspect 

cargo and shipping moving in and out of North Korea, especially 

that tied to weapons of mass destruction programs, are subject to 

interdiction. The Chinese read that very narrowly. What is suspicion? How do you define it? How do you evidence it? That is an 

area where a more robust interpretation, as I was indicating to 

Senator Donnelly, in terms of shipping interdiction could be incredibly powerful and based on international existing sanctions that 

the Chinese have agreed to. 

There is also the role—and we have seen this with some of the 

revealed networks that have touch points with China. There is also 

a role for greater just investigation and analysis around what these 

corporate structures and networks look like. There is a lot of work 

23 

being done in the private sector. Sayari Analytics has been cited 

in the press. C4ADS has put out important reports. 

Just looking at ownership and control interests, that alone has 

been very revelatory, and that is based on existing sanctions. And 

as Adam indicated, the last Executive order signed—he probably 

fashioned it himself when he was at the Treasury—in 2016 was 

sort of a potpourri of delicts that North Korea was being targeted 

for: human rights, cyber, other activities. And so we do have authority. The question is: How amply and aggressively do we apply 

it? And can we draw that to the international obligations and then, 

frankly, compel the Chinese to come along with us? 

Chairman SASSE. Yes, thank you, and how we rank order those, 

back to Senator Donnelly’s great opening questions about if you 

were doing two or three things, how would you rank order the narrow or broader interpretations of extant primary sanctions and this 

new secondary sanctions bucket we are considering today. 

Senator Donnelly. 

Senator DONNELLY. Thank you, Mr. Chairman. 

One of the things you hear about North Korea is that they would 

rather have their people eat grass than give up any part of their 

nuclear program, any part of their weapons program. So when you 

look at this, how do you change their calculus? If China cooperates 

more with us, that they look and they go—is there a push point 

for North Korea where they say, you know, now we probably have 

to come to the table a little bit more? Or do they look and go we 

just do not care? And basically the only way you stop them is having them run out of resources. Mr. Szubin. 

Mr. SZUBIN. You know, to an intelligence analyst, I think that is often the $64,000 question, the leadership decision-making calculus. And I personally suspect that Kim Jong-un may be immovable on this, by which I mean, yes, he would rather see his people 

eat grass, starve, see widespread famine before he relinquishes his 

nuclear weapons. And it is not entirely irrational if you put yourself in his shoes. He believes that they are the guarantor of his survival, and that if he gives up the program, he will be done away 

with. 

The truth, though, is because of the vulnerabilities, the reliance 

that he has on international export earnings—and one of the best 

examples of this is the patronage system—that keeps him in 

power. His ability to buy off other North Korean elites in the military and the intelligence services, just the sort of aristocrats or 

oligarchs, as you will, of North Korea, he needs access to foreign 

export earnings for that and foreign luxury goods for that. 

But what if that dries up? How dedicated are those people to 

their beloved leader? I do not think very. And so he faces a real 

vulnerability, a real risk of losing his control over the leadership. 

That may be what is required before a North Korean Government 

comes to the table. 

But I do believe that a North Korean Government, not necessarily this North Korean leader but a North Korean Government, 

a person who might succeed him, would see the tradeoff as not only 

necessary but compelling, the tradeoff being your question: giving 

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change for allowing them some form of access to international 

trade and international currency and, therefore, survival. 

Senator DONNELLY. Mr. Zarate. 

Mr. ZARATE. Senator, you ask the fundamental question with respect to what is the strategic purpose of a financial pressure campaign, and I think there are several answers here that do test the 

proposition that this can be an effective tool to change Pyongyang’s 

decision making. And I think ultimately this is a regime, as Adam 

said, that is focused on its own survival; it is focused on the development of a nuclear and missile program that ensconces its internal power as well as its deterrent capability externally; and it is 

not going to give that up unless there is a sense of existential 

threat to the regime itself. 

But I think sanctions, and effective sanctions, and a financial 

pressure campaign can do several things. There is a material dimension. You can make it harder for them to actually acquire the 

things that they need to advance in their programs. Very hard to 

do, but if done effectively, you can at least slow the progress and 

clock. And we have seen that with other sanctions programs. 

Second is you can affect the decision making. These leaders have 

budgets to deal with. If they have less income coming in because 

the sanctions are proving more effective, they are going to have to 

make a decision, whether it is feeding their people or developing 

the next version of the nuclear program. And so forcing them to actually make these hard decisions and to stress them internally is 

part of the goal. 

Affecting their sense of regime stability, to Adam’s point, the patronage system regime stability, it is part of the reason one of the 

recommendations I have is we should announce that we are going 

to engage in a leadership asset hunt from the get-go. It may not 

be that there is much we can actually find, but just signaling that 

we are willing to do that, to use the elements of the international 

system that we have built over time, that we usually reserve for 

when a bad regime collapses or when there is a failed State or 

something, let us use that ex ante, let us use it before the fact to 

say we are going to try to find where the leadership is stealing assets from its people, we are going to try to capture it and preserve 

it as a way of dealing psychologically with this issue, and perhaps 

even affecting the Chinese, and then having the Chinese actually 

change their behavior. That could have an impact in Pyongyang. 

The Chinese are the lifeline, the backstop for North Korea, diplomatically, economically. If that begins to change in more dramatic, fundamental ways, that could impact what happens in 

Pyongyang. We just do not know. And I think Adam’s caution 

about being careful about where we go is right. I also think we 

have to explore what we can potentially do, because if we continue 

to wait, I think we know where we are going to end up. We are 

going to end up with a North Korean regime that has a nuclear capability, has potentially intercontinental ballistic missiles, has multiple missile platforms by which they can potentially threaten and 

attack U.S. interests, not just in Guam and Hawaii but in San 

Francisco and New York. And that is an unacceptable position to 

be in. 

25 

And so I think we have got to be a little bit of risk takers here 

and a bit more aggressive than we have been in the past in terms 

of what we try to do influence their decision making. 

Senator DONNELLY. Thank you. 

Chairman SASSE. Could we go back to this question of slave or 

forced labor, both inside and outside the regime? Tell us a little bit 

more on how it works inside the regime for sure, but also abroad, 

how do they have certainty that they will get these assets back? 

What is the command-and-control structure of those remittances? 

Mr. ZARATE. Mr. Chairman, the internal dynamics I do not pretend to know well. The reality is the North Korean regime uses different types of forced labor internally—prison labor, forced labor, 

for generating billions of dollars of product, commerce, revenue internally to the North Korean economy. I do not have details as to 

how they actually run that from a security perspective, but it is not 

a pleasant regime in that regard, and certainly it is a command 

economy in all the senses that that means. 

I have a bit more familiarity with what is happening on the outside, which is that the North Koreans have purposefully in essence 

sold their labor into foreign markets cheaply to serve across the 

board in terms of a variety of labor and service sectors, everything 

from working in shipyards to construction to even a little bit higher-end kind of labor in pockets around the world. Part of that is 

to not only sort of gain revenue, but also gives them some influence 

and allows them to operate in countries around the world where 

they otherwise would not have a presence. 

And so there has been recent news reports, for example, of the 

North Korean workers’ presence in Poland, workers that are working in the shipyards. Vice News did a big report on this. And, in 

essence, what is done is these are forced laborers; they work in 

what are considered to be inhumane conditions. They are paid for 

their labor. That pay does not go straight to them, straight to their 

bank account, straight to their family members. It is not part of 

some remittance scheme where they send it back to their wife or 

grandmother or whomever. The payment actually goes back into a 

North Korean account, back into North Korea. And in some cases, 

based on what I have read, there are additional commissions paid 

for purposes of payment to the Government. So it is not just the 

pay for the labor. It is a commission for the State itself that then 

goes back into the coffers. 

Mr. Chairman, in fairness, I do not pretend to know how some 

of that is financed, but I imagine, as Adam indicated, there are elements of the financial system that are used as a way to facilitate 

the movement of the money back into North Korea. And, again, as 

I indicated earlier, this is to the tune of $1 billion, some estimates 

over $2 billion worth of revenue, and it is why I think we should 

have a concerted effort—we have had sanctions on the books to 

date on this, but a concerted effort to tie the forced labor and 

human rights abuses to their financing as a way of understanding 

what the financial networks are and as a way of adding to the 

international taint of doing any business with the North Koreans. 

It is almost unimaginable that you would have this scheme operating in legitimate countries around the world. There should be an 

end to it. The labor should not be exploited, obviously. And cerVerDate Nov 24 2008 15:08 Aug 31, 2017 Jkt 046629 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\05-10 ZZDISTILLER\26242.TXT JASON
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tainly there should not be payments and commissions being paid 

back to the North Korean regime. That is an area of focus that I 

think not just people like us who care about sanctions would focus 

on. This is something the human rights community around the 

world should be heavily focused on as well. 

Chairman SASSE. Mr. Szubin. 

Mr. SZUBIN. The only thing I would add is my understanding is 

they typically are sending one member of a family only in situations where family members stay behind so that there is leverage 

to ensure that that person does not defect or run away, and it is 

that leverage that incents the enforcement mechanism to keep the 

forced labor in place and to keep them earning. 

I think that the more knowledgeable, sophisticated human rights 

people who have looked into this have come away with the conclusion that it is, as Juan says, an appalling practice. It is not a situation where you can really argue both sides, that this is a financial 

lifeline for these families. Far from it. 

The other thing I would note is North Korea does not need to repatriate these funds. It actually needs money located in third countries for its imports. And so oftentimes it can just accumulate 

money, whether in the Gulf, whether in Eastern Europe, whether 

in China, whether in Southeast Asia, and then use that to finance 

its imports. But as Juan says, those are funds, those are accounts, 

those are front companies that we and our allies should be targeting. 

Chairman SASSE. Really helpful. We are under constraints because of some Senate objections on the floor that we have to conclude the hearing at this time. But I think there are a number of 

us on this Committee who would like to return to you and ask 

those targeted questions about what you would rank order, if Secretaries Mnuchin and Tillerson came together and asked your 

counsel, and how nuanced the new Under Secretary’s team will be 

as they are getting stood up. I think there are a number of people 

in both the Article I and Article II branches that are grateful for 

your past work, but would also benefit from your present and future counsel. 

So thank you both for being here today. This hearing is concluded. 

Mr. SZUBIN. Thank you, Chairman. 

Mr. ZARATE. Thank you, Mr. Chairman. 

[Whereupon, at 11:27 a.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 

27 

PREPARED STATEMENT OF ADAM J. SZUBIN 

DISTINGUISHED PRACTITIONER-IN-RESIDENCE, JOHNS HOPKINS UNIVERSITY, SCHOOL

OF ADVANCED INTERNATIONAL STUDIES; OF COUNSEL, SULLIVAN & CROMWELL; 

AND FORMER ACTING SECRETARY OF THE TREASURY AND ACTING UNDER SEC- RETARY OF THE TREASURY FOR TERRORISM AND FINANCIAL CRIMES

MAY 10, 2017 

Chairman Sasse, Ranking Member Donnelly, and Members of this Subcommittee. 

In my years at Treasury, I testified before Members of this Committee more than 

any other, and I am honored to present my first testimony as a private citizen before you today. Thank you for convening this hearing on such an important and 

timely topic and for inviting me to testify today. More broadly, thank you for your 

longstanding bipartisan support to my former office, Treasury’s Office of Terrorism 

and Financial Intelligence (TFI). On that note, I would respectfully urge that you 

move deliberately but quickly to confirm Sigal Mandelker, who has been nominated 

to serve as under secretary overseeing this office, including Treasury’s intelligence, 

sanctions, and money laundering authorities. It is critical that TFI have a confirmed 

under secretary in place, and I know Sigal to be an exceptionally intelligent, experienced, and strong leader. 

I am often asked whether—as with Iran—the international community could generate enough sanctions pressure to force the North Korean Government to the table 

to negotiate a peaceful and verifiable end to its nuclear weapons program. It is of 

course an intensely difficult question, as it requires assessments of notoriously 

opaque issues, such as the internal thinking of North Korea’s leadership, its internal power dynamics, and possible succession scenarios. That said, I believe the answer is a qualified ‘‘yes.’’ Whether new secondary sanctions legislation is needed or 

advisable at this stage is a related but separate question that I will take up in turn. 

My topline assessments are as follows: 

1. North Korea is not self-reliant or ‘‘sanctions proof.’’ Its leadership depends 

upon access to foreign goods and international banking services, the denial of 

which would quickly build substantial pressure on its leadership. 

2. Unlike in Iran’s case, which enjoyed diverse access to the international marketplace, sanctions leverage over North Korea is concentrated in one country— 

China. If China is prepared to take a qualitatively tougher stance on sanctions 

against North Korea, sanctions have a real chance to succeed. If not, they have 

none. 

3. Despite years of high-level international attempts, China has resisted more 

than incremental enhancements to its sanctions posture. China is risk averse 

when it comes to North Korea, and for understandable reasons. 

4. U.S. sanctions alone will not force China to adopt a qualitatively tougher approach, no matter how draconian and costly those sanctions become. China is 

exponentially more concerned about the fate of North Korea than it is about 

Iran, and China will not be strong-armed into a course of action that it believes 

imperils its national security. 

5. 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 enabling nuclear diplomacy not regime collapse; (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. 

6. As part of a stepped up sanctions effort around targeting North Korea’s activities around the world, the U.S. will almost certainly need to sanction complicit 

Chinese entities, both to combat sanctions abuse and to demonstrate our seriousness of purpose. The Administration has ample authorities to do so already. 

If new legislative authorities become necessary down the road, it is important 

to introduce them only once the strategic and diplomatic groundwork has been 

laid. 

To begin, all experts agree that the threshold of pressure that will be needed to 

even bring North Korea to the negotiating table is extraordinarily high. Kim JongUn doesn’t just see his nuclear weapons program as one pillar of his country’s national security. He sees it as the primary guarantor of his regime and his personal 

survival. The only conceivable scenario in which Kim Jong-Un would consider negotiating over his nuclear weapons program is if he believes that—unless he does so— 

he is at risk of a near-term loss of power. This means that the required threshold 

28 

of sanctions pressure will be high and cannot be expressed as an incremental addon to the status quo. I will return below to what the requisite level of pressure 

would look like in practice. 

Some experts believe, however, that even if the sanctions pressure reaches the 

point where Kim Jong-Un fears for his hold on power, he would persevere and risk 

being deposed rather than give up his nuclear weapons and, in his mind, guarantee 

his demise. That assessment may well be correct. If so, the global community needs 

to see a different leader in Pyongyang, one who is willing to address the security 

concerns of the international community. Either way, it will be necessary to build 

international pressure to the point where it threatens leadership change. 

Because I am unable to predict Kim Jong-Un’s internal calculus, I framed my central question not around his personal decision making, but rather whether international pressure could force a North Korean Government to the table to negotiate 

a verifiable end to its nuclear weapons program. Faced with suffocating international pressure, I do believe that a North Korean leader would be willing to negotiate the disposition of the country’s nuclear weapons in exchange for survival and 

some form of diplomatic and economic re-integration. 

It is vital to remember here, as elsewhere, that toughened sanctions in and of 

themselves are not a strategy. Massive diplomatic investment and multilateral engagement will be needed to marshal a successful effort, and it will require enlisting 

likeminded and resistant countries. Having participated in a comparable campaign 

with respect to Iran, I would urge the Administration and Congress to staff leadership positions at the Treasury and State Departments quickly. And I believe that 

it would be counterproductive in the extreme to deplete our foreign service corps at 

a time when we need them so urgently—both on this issue and the whole range of 

national security and foreign policy threats we face. 

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 highly 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 imports 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 to import foreign luxury goods such as cars, technology, and high-end consumables. In the aggregate, these imports and purchases are estimated at approximately $5 billion a year. 

None of them can be bought using North Korean currency; no exporter outside of 

North Korea will accept payment in North Korean won. All of this means that the 

leadership of North Korea must (a) continuously generate new foreign currency 

earnings through the sales of minerals, weapons, counterfeit goods, etc.; (b) receive 

payment for those exports in foreign bank accounts via the international banking 

system; and (c) pay for and arrange for the delivery of needed imports. 

A North Korean leader depends on all three of these elements, both to stave off 

a broader economic collapse and to maintain the loyalty of his inner circle. The first 

two elements are the most exposed to sanction pressure. I assess, then, that a 

stepped up sanctions campaign would need to target North Korea’s foreign currency 

earnings—for example by dramatically reducing North Korea’s sales of coal and 

other minerals—and would need to disrupt North Korea’s access to the foreign bank 

accounts it currently enjoys. 

Multiple U.N. Security Council resolutions, binding on all U.N. member States, 

have already targeted North Korean exports, imports, as well as its financial activity and now prohibit the purchase of North Korean coal and minerals and the maintenance of correspondent accounts for North Korean entities. 

In terms of implementation, the key question is and has always been China. 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. This is not a hopeless task. China is not comfortable with either Kim JongUn or with North Korea’s burgeoning nuclear and ballistic missile capabilities. Indeed, the North Korean leader has at times gone out of his way to provoke China’s 

leaders, snubbing Chinese diplomats, timing provocative missile launches to the 

Chinese New Year celebration, and murdering senior North Korean officials who 

had good relations with China. China would also strongly prefer that North Korea 

not have a nuclear weapons program, both because of the instability it engenders 

in the region and because it has justified a robust U.S. military presence just off 

China’s shores, including the recent deployment of the THAAD anti-missile system 

in South Korea. I believe that China would breathe a huge sigh of relief if it could 

29 

successfully resolve the world’s concerns over North Korea’s nuclear weapons program. 

We have seen China act on those concerns, including in the realm of sanctions. 

China has not just acquiesced in the last two U.N. Security Council resolutions targeting North Korea, it has co-sponsored them with the United States. The resolutions have had real teeth, including new mandatory sanctions against North Korea’s 

exports of coal, its import of luxury goods, and its ability to bank. And China has 

periodically acted against individual agents and entities in China, when pressed 

firmly by the United States. This includes Ma Xiaohong and the Dandong 

Hongxiang Industrial Development Company, an important North Korean facilitation network that was targeted by the U.S. Justice Department, sanctioned by the 

Treasury Department, and ultimately investigated by Chinese authorities for ‘‘serious economic crimes.’’ 

That said, China’s implementation of the U.N. sanctions has been spotty and decidedly incomplete. Time and time again, we have seen China pull back from implementing the toughest measures, whether at the level of broad economic measures 

or targeting specific sanctions evaders in China. 

The problem is that, as much as China may dislike Kim Jong-Un and his nuclear 

program, there is an alternative that is far worse from China’s perspective, which 

is North Korean regime collapse. Even an erratic Kin Jong-Un is preferable to a regime implosion, which could immediately 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’’ when it comes to the fate of its impoverished, nuclear-armed neighbor, and 

concerns over stability will be paramount. 

Threatening and/or imposing U.S. secondary sanctions against Chinese targets 

may change the conduct of individual Chinese entities or banks from afar, then, but 

it will 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 will only be obtained 

when the Chinese Government agrees to apply it. 

I want to pause here to address two counter-arguments that I hear. First, we 

forced China to cut its oil imports from Iran using secondary sanctions, so secondary 

sanctions should work in this context as well. Second, even if the Chinese Government doesn’t agree, Chinese businesses and banks will comply with secondary sanctions because, given a choice between doing business with the United States or 

North Korea, all banks and businesses will choose the United States. 

The arguments are flawed for a few reasons. First, the stakes for China were dramatically lower in the Iran case. If the sanctions pressure worked and an international solution to Iran’s nuclear program was reached, that would be good for 

China. If the sanctions fell short, China had played a responsible role in the international community. If sanctions over-achieved and provoked instability in Iran, 

China was not a primary or even secondary stakeholder. Put simply, Iran plays a 

minimal role in China’s geopolitical outlook compared to North Korea. 

Second, while it is true that we won grudging Chinese acquiescence to curtail imports of Iranian crude oil, months of painstaking diplomacy were needed and what 

China did was easier and more limited than what we will need them to do here. 

China reduced its crude oil imports from Iran by a certain percentage every 6 

months as it lined up alternate sources for its crude oil. And it escrowed Iran’s oil 

earnings for use in bilateral Iran–China trade only—notably, a restriction that hurt 

Iran but benefited Chinese exporters. We will need far more extensive and proactive 

cooperation here. Iran was conducting its business with China largely in the ordinary way. Iran’s correspondent accounts were easily identifiable and oil tankers cannot be smuggled across a border. North Korea conducts its banking activity and 

trade more like a criminal organization than a country—through cut-outs and 

agents, such as front companies posing as ordinary Chinese trading or business enterprises. This means that a large bank in China may be hosting millions of dollars 

of North Korean financial activity without any direct relationship with a North Korean person and, potentially, without knowing it. The type of rigorous investigative 

and enforcement effort that will be required to police North Korean covert banking 

activities and smuggling far outstrips what China did in the Iran context. 

Third, secondary sanctions are a blunt and unpredictable instrument and their 

application carries broad risks for the U.S. and our allies. To focus on the banking 

30 

arena, as noted above, North Korea generally conducts its financial activities surreptitiously through cut-outs. As such, the Chinese banks involved fall along a spectrum of awareness. In some cases, they may indeed be complicit, and looking to facilitate North Korean activity for a profit. In many cases, they may be hosting North 

Korean transactions without knowing it, but where we would assess that they could 

be doing more to detect and prevent this activity. Finally, there are instances where 

Chinese institutions are practicing all due care and are nevertheless still being 

abused, as large and careful U.S. and European banks will have criminal proceeds 

moving through their institutions under the names of agents and front companies. 

Secondary sanctions are an extremely blunt instrument to respond to such a spectrum of conduct. In practice, their use means that a target is completely severed 

from the U.S. financial system, a condition that—for an internationally active 

bank—is generally tantamount to a death sentence. That power and lack of 

adjustability is both a strength and a limitation. 

In this context, we should note the types of entities we are discussing. 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 is not something to be trifled with. 

It would send shock waves through the international financial system and trigger 

large and unpredictable fall-out. And none of this is to consider the inevitable response and counter-sanctions from China. 

The fourth error made in assessing the viability of secondary sanctions is that, 

with some targets, they may have little to no impact. A trading firm or coal importer in Dandong province that does tens of millions of dollars of business with 

North Korea may do no business with the U.S. or Europe. Forcing a choice between 

doing business with North Korea or the United States may be an easy one for that 

firm, and not in the direction that we would like. 

For all of these reasons—and other longer-term costs and risks that time does not 

allow me to address here—we need to be exceptionally judicious in our use of secondary sanctions. And creating the authority just to have it available carries risks 

as well. As a sanctions practitioner, I believe that we do ourselves and our credibility major harm if we unsheathe this powerful weapon without understanding if 

and how we are prepared to use it. America has had major successes in its use of 

sanctions in the last decade, but one of the reasons for those successes is that we 

do not bluff. Were we to depart from this practice, we would see our sanctions credibility undercut, not just in this context, but across a whole range of vital national 

security and foreign policy portfolios. 

A comparison with the use of secondary sanctions vis-a-vis Iran is instructive. In 

that context, the Bush and Obama administrations had aggressively deployed primary sanctions for years to target those entities colluding with Iran, and brought 

costly enforcement actions against global banks that were evading our sanctions. 

The Administrations coupled these actions with an extensive outreach campaign, 

approaching Governments, banks, and businesses to ensure that they understood 

the gravity of Iran’s conduct, the primacy of this issue for the United States, and 

the risks of a lax approach to Iran. In response, the world’s first-tier banks exited 

their Iran business and every relevant jurisdiction began to subject its Iranian trade 

to careful scrutiny and diligence. 

Congress then turned the heat up considerably in 2010, with a series of secondary 

sanctions bills. The Administration worked with Congress to refine those bills, ensuring that they included aggressive but attainable thresholds and sufficient discretion and waivers to allow the Administration to use them effectively across a range 

of countries and circumstances. And the Administration was staffed and ready to 

immediately deploy senior officials to every corner of the world upon passage. The 

result was the most effective sanctions campaign the world had ever seen, as 

Congress’s secondary sanctions dramatically amplified the work that the Administration had underway. Second- and third-tier banks that had picked up the Iran 

business as it was shed by their larger competitors suddenly exited. Iran’s crude oil 

exports dropped by 40 percent. And Iran’s leadership saw only one way out— 

through negotiations over its nuclear program. The outcome is remembered clearly, 

but we also need to remember the preparation and work that allowed it to succeed. 

That groundwork has not yet been laid in the case of North Korea. 

My conclusion then, is that we cannot unilaterally sanction China into imposing 

the type of sanctions pressure necessary to change North Korea’s course. We will 

need to win China’s cooperation. This will require serious diplomacy, and both carrot and stick. As part of that effort, I suspect that we will need to sanction Chinese 

31 

entities that are knowingly doing business with North Korea, both to show China 

that we are serious and to combat sanctions evasion. The Administration has the 

authorities to do that already. But the key to success will be high-level diplomacy 

to take up and work through China’s interests and reconcile them with our own. 

There is enough overlap between China’s interests vis-a-vis North Korea and our 

own concerns with North Korea’s nuclear program to allow for a mutually acceptable approach. And there are many incentives and irritants in our bilateral relationship with China that could be used to facilitate this diplomacy. But China must 

know that we have thought through the steps that follow after crippling pressure 

is applied, and that China’s core national security interests will be protected. From 

China’s side, it would be helpful if China identified one or two senior officials who 

could speak for President Xi on addressing the North Korean nuclear threat, across 

the range of diplomatic, strategic, and financial facets involved. 

Against such a diplomatic backdrop, a range of sanctions approaches could be 

drawn up. As noted earlier, I see the primary targets as North Korea’s access points 

to the international financial system and its export earnings, primarily from the 

sale of coal, minerals, and weapons. A campaign plan could be structured and 

staged in various ways to dramatically increase the pressure against North Korea. 

If the international community were to fully cut off North Korea’s coal exports 

alone, it would drop the country’s foreign revenue earnings by more than one-third 

immediately. 

The U.S. Administration is already well-armed with sanctions authorities to play 

a leading role in such a global sanctions effort. The Treasury Department has broad 

and flexible authorities to sanction businesses, trading firms, and banks anywhere 

in the world that are facilitating North Korea’s activities or providing North Korea’s 

banks with surreptitious access to the global financial system. What the effort will 

require, though, is senior leadership in the Administration to lead the charge and 

the resources and bodies to sustain it. Those resources will be needed at State, at 

Treasury, and in the intelligence community—an effort of this scale and sophistication will necessarily require a full-court, sustained interagency press. As such a 

campaign progresses, the Administration may need additional authorities from Congress—including potentially secondary sanctions—but such authorities should be deployed to advance a strategy not in advance of one. 

Of course, even with a concentrated and strategic effort, 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 and absent a better alternative, I believe that it is our duty to put all of our energies into this effort. 

Thank you again for inviting me to testify. 

PREPARED STATEMENT OF JUAN C. ZARATE 

CHAIRMAN AND COFOUNDER, FINANCIAL INTEGRITY NETWORK; CHAIRMAN AND SENIOR COUNSELOR, CENTER ON SANCTIONS AND ILLICIT FINANCE; FORMER DEPUTY

ASSISTANT TO THE PRESIDENT AND DEPUTY NATIONAL SECURITY ADVISER FOR

COMBATING TERRORISM; AND FORMER ASSISTANT SECRETARY OF THE TREASURY

FOR TERRORIST FINANCING

MAY 10, 2017 

Chairman Sasse, Ranking Member Donnelly, and distinguished Members of the 

Senate Banking, Housing, and Urban Affairs Subcommittee on National Security 

and International Trade and Finance, I am honored to be with you today to discuss 

the urgent need to pressure North Korea and the utility of secondary sanctions 

against Chinese institutions in such a strategy. 

This is a timely and important hearing. The international security challenge from 

North Korea has grown more dangerous and direct for the United States. The regime in Pyongyang remains intent on developing ballistic missile and nuclear capabilities that will allow it to reach and threaten the United States directly. In defiance of international sanctions and pressure, North Korea has quickened the pace 

of missile and nuclear tests, demonstrating ever-expanding capabilities and claiming 

to have the ability to place a nuclear warhead on the tip of an intercontinental ballistic missile. Despite recent missile launch failures, the regime continues its march 

toward these capabilities. 

What was once seen solely as a threat to peace and stability on the Korean Peninsula and our regional allies has now become a looming, direct threat to the U.S. 

homeland. 

All the while, North Korea proliferates its technology for profit, engages in illicit 

financial and commercial activity, exploits forced labor to make money for the reVerDate Nov 24 2008 15:08 Aug 31, 2017 Jkt 046629 PO 00000 Frm 00035 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\05-10 ZZDISTILLER\26242.TXT JASON
32 

gime, and has deployed cyber tools to attack adversaries and the private sector, including U.S. companies and the banking system. North Korea remains a threat to 

international security and to the integrity and stability of the financial system. 

The threats from North Korea require a sober, more comprehensive, and urgent 

response, including the use of financial and economic tools and pressure. This in 

turn requires a more aggressive and imaginative approach leveraging new tools and 

mechanisms, including secondary sanctions against Chinese and other businesses, 

entities, and networks still doing business with North Korea. 

China is North Korea’s economic and diplomatic lifeline, and its principal interest 

is ensuring the stability of the North Korean Government and avoiding regime collapse. As a result, China has maintained ties with North Korea and been unwilling 

to bring overbearing pressure on its ally in Pyongyang. Over the years, North Korea 

has found outlets and connectivity to the financial and commercial system through 

Chinese banks, companies, and agents—to circumvent sanctions, serve their economy, and enrich the regime. 

Because China remains the regime’s backstop, the United States needs Chinese 

cooperation and support to slow and stop North Korea’s missile and nuclear programs. The Chinese calculus has not changed in the past and will not change unless 

its own interests are fundamentally threatened or affected. Chinese and American 

interests do not yet align with respect to North Korea. 

This is a moment for China to assume its role as a great power and to influence 

its North Korean ally to stop its nuclear and missile programs and contain the 

threats from proliferation. This Administration and Congress will need to grapple 

with how best to obtain, coerce, and sustain Chinese cooperation in order to maximize pressure on North Korea. Ultimately, the United States must find a way to 

change Pyongyang’s calculus and the trajectory of their nuclear program. This testimony addresses how to leverage financial and economic pressure, including secondary sanctions, to increase the chances of changing the calculus in North Korea 

and China and avoiding conflict. 

My testimony has benefited directly from the ongoing work and contributions of 

Anthony Ruggiero at the Foundation for Defense of Democracies, along with the 

scholarship of Victor Cha and Bonnie Glaser at the Center for Strategic and International Studies, John Park at the Harvard Kennedy School of Government, and the 

Council on Foreign Relations’ Task Force on North Korea led by Chairman Mike 

Mullen and Senator Sam Nunn, on which I served. 

Core Principles for a Financial and Economic Pressure Campaign 

There are fundamental principles that should drive any serious financial or economic pressure campaign. These principles should inform the design, choreography, 

and strategy deployed before launching any type of sanction or form of economic coercion. 

Strategy Matters. To be effective, an attempt to use sanctions or financial measures of any sort must nest within a coherent strategy and cannot stand alone. Too 

often, sanctions have been seen as either the only retreat for action to address a 

thorny national security issue or as a silver bullet that can bend behavior and alter 

a threat landscape on its own. For any financial pressure campaign to work, it must 

be in service of an understood strategy and complemented by other tools of 

statecraft, power, and coercion. In this case, the strategic objective must be to slow, 

stop, and ultimately reverse the North Korean nuclear program and ensure that the 

regime never has the ability to threaten U.S. territory with nuclear weapons. The 

financial strategy must then follow and be crafted to achieve this core goal, in aid 

of diplomacy, coercion, and material disruption of the targeted programs. 

Coercive Tools in Concert. The sanctions and economic toolkit must be seen as 

part of a broader set of coercive tools that are more effective when deployed in concert to shape the environment. Interdiction of suspect North Korean shipping, arrests of those involved in North Korean illicit financial activity, broad-based information campaigns to weaken the regime’s control of the information environment, 

and an aggressive focus on the regime’s human rights abuses are all complementary 

and functional parts of any campaign to isolate the North Korean economy. These 

are also tools that should target, impact, and deter those who do business or finance 

the regime’s activities. Sanctions must be seen as part of a broader effort to disrupt 

the regime’s ability to resource its nuclear and missile ambitions and access the key 

elements of the financial and commercial system. 

Constant, Consistent Pressure. For a financial pressure campaign to work, it must 

be applied constantly to identify and isolate North Korea’s rogue behavior. U.S. and 

international sanctions and pressure in the past have suffered from applying an 

escalatory model based on reactions to North Korea’s provocations, tests, and violations of existing sanctions. Such sanctions have been perceived as important simply 

33 

in aid of diplomacy. Although that is a critical use of these tools, in order to be effective, they must be seen as their own form of pressure, coercion, and disruption that 

complements our diplomacy. As a result, the sanctions approaches of the past have 

been dictated more by what the regime in Pyongyang does as opposed to what an 

effective financial and economic pressure campaign looks like. Any use of sanctions 

must be part of a broader campaign to sensitize the international community and 

markets to exclude rogue actors involved with North Korea from the legitimate financial and commercial system. Like weeding a garden, such work has to be consistent and constant, to shape market and Governments’ behavior. 

Conduct-Based Focus. A successful campaign against North Korea that enlists 

China and our allies would focus intently on conduct-based sanctions and measures 

that target the illicit, dangerous, and suspicious activities that violate international 

norms and principles and put the financial system at risk. A fundamental vulnerability for North Korea is that it is not only developing nuclear weapons capabilities 

in violation of international sanctions, but it is a criminal State. It is engaged in 

proliferation, massive human rights abuses, money laundering, corruption, sanctions 

evasion, counterfeiting, smuggling, drug trafficking, and other nefarious and suspect 

activities. 

These activities are interwoven in how North Korea does business and should be 

isolated by the international community—Governments and the private sector 

alike—regardless of the state of diplomacy. Such activities are the subject of sanctions, criminal laws, and financial regulations. At a time of heightened concern over 

transparency and accountability in the financial system, there should be no objection to doing so, especially in major economies like China, Japan, and South Korea. 

As long as the efforts to target North Korean networks and their financial and commercial infrastructure remain focused on the activities that violate accepted international norms and principles, they will prove more effective and be amplified by 

the actions of the private sector and actors concerned about real and reputational 

risk. 

Altering the Chinese Calculus. China must play a central role in pressuring North 

Korea, but its interests do not align with those of the United States and it has not 

been willing to exert existential pressure against the regime to force it to stop its 

nuclear program. For the United States, for too long, trying to coerce China to exert 

more pressure on North Korea has appeared as the third-rail of the sanctions debate. But we have reached a moment where we need to align U.S. and Chinese interests with respect to pressuring North Korea. We cannot ignore the role that Chinese actors are playing to evade sanctions, enrich the leadership, and enable the 

regime to develop its dangerous capabilities across the board. 

If this is an urgent international security issue, the Chinese dimension cannot be 

spared attention, and the Chinese calculus must be altered. Chinese interests and 

standing will have to be put at risk directly and indirectly. Of course, this needs 

to be a balanced approach, understanding direct financial and economic confrontation with China through sanctions will likely prove counterproductive. This balance 

can be drawn if China sees itself as a partner in these efforts and if the campaign 

is geared toward targeting and isolating rogue financial and commercial activity and 

those flouting legitimate authorities and international norms. Getting the Chinese 

to realize that the continued, current path with North Korea is itself creating regime and regional instability—and putting its own reputation and economy at risk— 

will be a difficult but essential element of any campaign. 

U.S. sanctions against North Korea have lacked both a comprehensive approach 

of this nature and a willingness to put China’s interests on the table. The U.S. Government’s recent strategy of strategic patience and a prior pattern of lessening financial pressure or rewarding the regime in Pyongyang in the face of provocation 

have not forced the Chinese to make hard choices. The idea of pressuring China to 

alter its calculus is difficult, but if the problem of a nuclear armed and threatening 

North Korea is growing acute, then we need to apply a more aggressive approach. 

It is in this context that the question of whether and how to use secondary sanctions and other types of financial tools and measures arises. Before treating the 

issue of secondary sanctions, it is important to understand the nature of North Korean financial activity and its dependence on the Chinese economic and financial 

system. 

North Korean Financial Activity and Chinese Connectivity 

For years, the North Korean regime has found creative and often devious ways 

to run its economy. They have raised and moved capital into the Hermit Kingdom 

in order to prop up the regime and develop an expensive nuclear and missile program. It has adapted to sanctions and attempts to isolate the regime financially and 

commercially—relying on the Chinese economy, including Chinese banks, networks, 

34 

1 United Nations Security Council, ‘‘Reports of the Panel of Experts Established Pursuant to 

Resolution 1874 (2009)’’. (https://www.un.org/sc/suborg/en/sanctions/1718/panellexperts/reports) 2Financial Action Task Force, ‘‘Public Statement—24 February 2017’’, February 24, 2017. 

(http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/ 

public-statement-february-2017.html) 3 U.S. Department of the Treasury, Financial Crimes Enforcement Network, ‘‘Finding That 

the Democratic People’s Republic of Korea Is a Jurisdiction of Primary Money Laundering Concern’’, 81 FR 35441, June 2, 2016. (https://www.fincen.gov/sites/default/files/shared/2016- 

13038(DPRKlFinding).pdf) 4 U.S. Department of the Treasury, Financial Crimes Enforcement Network, ‘‘Finding That 

the Democratic People’s Republic of Korea Is a Jurisdiction of Primary Money Laundering Concern’’, 81 FR 35441, June 2, 2016. (https://www.fincen.gov/sites/default/files/shared/2016- 

13038(DPRKlFinding).pdf) 5 United Nations Security Council, ‘‘Report of the Panel of Experts Established Pursuant to 

Resolution 1874 (2009)’’, S/2017/150, February 27, 2017. (http://undocs.org/S/2017/150) 6 Ibid. 

7Steven Borowiee, ‘‘North Koreans Perform $975 Million Worth of Forced Labor Each Year’’, 

Los Angeles Times, October 6, 2016. (http://www.latimes.com/world/asia/la-fg-north-koreaforced-labor-20161006-snap-story.html) 8 Christian Vonscheidt and Miriam Wells, ‘‘Cash for Kim: How North Koreans Are Working 

Themselves to Death in Europe’’, VICE News, May 23, 2016 (https://news.vice.com/article/ 

cash-for-kim-how-north-koreans-are-working-themselves-to-death-in-europe); Edith M. Lederer, 

‘‘U.N. Investigator: North Koreans Doing Forced Labor Abroad To Earn Foreign Currency for 

Country’’, AP, October 28, 2015. (https://www.usnews.com/news/world/articles/2015/10/28/ 

un-investigator-north-koreans-doing-forced-labor-abroad) 9 VICE News discovered that 14 Polish companies have used North Korean workers between 

2010 and 2016. The workers were supplied to Polish companies Armex and Alxon by the Korea 

Rungrado General Trading Corporation. Working conditions in these shipyards meet the definiand brokers, for most of its trade and connectivity to the commercial and financial 

world. The North Korean regime has consistently leveraged commercial relationships to its advantage and worked around existing sanctions and restrictions. Much 

of this has involved illicit financial activity and schemes to raise money for the Government. 

The North Korean schemes outside their borders rely heavily on front companies, 

layered transactions, opaque ownership structures, and trusted or corrupt relationships, making it difficult for legitimate banks and compliance systems to detect and 

stop its nefarious activities. The United Nations has issued annual reports that detail North Korea’s aggressive efforts to evade financial sanctions. 1 In 2011, the Financial Action Task Force called for its members to impose countermeasures on the 

Kim regime due to its significant lack of anti-money laundering and counter-terrorism finance controls. 2 Last year, the United States Treasury labeled North Korea 

a jurisdiction of ‘‘primary money laundering concern,’’ ordering that the country be 

cut off from the U.S. financial system and prohibiting foreign banks from providing 

indirect access. 3 In the designation, the Treasury Department described North Korea’s financial activities as a ‘‘threat to the integrity of the U.S. financial system.’’ 4

The U.N. Panel of Experts has investigated Pyongyang’s financial activities, noting that ‘‘circumvention techniques and inadequate compliance by Member States 

are combining to significantly negate the impact of the resolutions.’’ 5 The Panel reported that North Korea generates ‘‘significant revenue’’ from its financial networks 

with most denominated in U.S. dollars, euros, and renminbi. 6

The regime generates profits from all forms of illicit activity—from counterfeit cigarette smuggling to proliferation. The U.N. Panel of Experts noted that North Korean proliferation networks are expanding and blending to include arms trafficking 

in Africa and the manufacture and trade of military technologies. Such networks 

rely on trusted and sophisticated agents able to move people, goods, and money undetected across borders. Those networks and agents are growing more sophisticated 

in masking and layering corporate identities and records and play within the seams 

of the international system. 

The North Koreans are profiting from their human rights abuses. Within the 

country, unpaid labor earns around $975 million for the Government each year, according to Seoul-based NGO Open North Korea. 7 The report estimates that 400,000 

people make up the lowest class of forced laborers, or dolgyeokdae, who are put to 

work on construction projects throughout the country. 

The regime also profits handsomely from forced labor outside its borders. U.N. 

Special Rapporteur on Human Rights in North Korea Marzuki Darusman estimated 

that there are approximately 50,000 North Koreans abroad, earning between $1.2 

billion to $2.3 billion per year for the DPRK. 8 Countries like China, Poland, Qatar, 

and others allow their companies to use such labor and to make arrangements to 

pay North Korea. 9

35 

tion for forced labor, as laid out in the European Convention on Human Rights and the International Labor Organization. (Christian Vonscheidt and Miriam Wells, ‘‘Cash for Kim: How 

North Koreans Are Working Themselves to Death in Europe’’, VICE News, May 23, 2016. 

(https://news.vice.com/article/cash-for-kim-how-north-koreans-are-working-themselves-to-deathin-europe)) 10 Christian Vonscheidt and Miriam Wells, ‘‘Cash for Kim: How North Koreans Are Working 

Themselves to Death in Europe’’, VICE News, May 23, 2016. (https://news.vice.com/article/ 

cash-for-kim-how-north-koreans-are-working-themselves-to-death-in-europe) 11 Jethro Mullen, ‘‘North Korea Believed To Earn a Fortune From Forced Labor Overseas, 

U.N. Says’’, CNN, October 29, 2015 (http://www.cnn.com/2015/10/29/asia/north-korea-unforced-labor-overseas/); Edith M. Lederer, ‘‘U.N. Investigator: North Koreans Doing Forced 

Labor Abroad To Earn Foreign Currency for Country’’, AP, October 28, 2015. (https:// 

www.usnews.com/news/world/articles/2015/10/28/un-investigator-north-koreans-doing-forcedlabor-abroad). The Leiden Asia Center estimates that between 70–100 percent of the earnings 

go directly to the DPRK. 12 Eleanor Albert, ‘‘The China–North Korea Relationship’’, Council on Foreign Relations, April 

26, 2017. (http://www.cfr.org/china/chinanorth-korea-relationship/p11097) 13 Jeremy Page and Jay Solomon, ‘‘Chinese–North Korean Venture Shows How Much Sanctions Can Miss’’, Wall Street Journal, May 7, 2017. (https://www.wsj.com/articles/chinesenorth-korean-venture-shows-how-much-sanctions-can-miss-1494191212) 14 Ibid. 15 Ibid. 16 Jeremy Page and Jay Solomon, ‘‘Chinese–North Korean Venture Shows How Much Sanctions Can Miss’’, Wall Street Journal, May 7, 2017. (https://www.wsj.com/articles/chinesenorth-korean-venture-shows-how-much-sanctions-can-miss-1494191212) 17The four individuals are: Ma Xiaohong, a Chinese national who resides in Dandong, China, 

and was the majority owner (80 percent) of DHID; Zhou Jianshu, a Chinese national who also 

resides in Dandong and was the general manager of DHID working directly for Ma; Luo 

Chuanxu, a Chinese national who is the financial manager of DHID and an assistant to Ma 

and Zhou; and Hong Jinhua is a Chinese national who also resides in Dandong and was the 

deputy general manager of DHID working for Ma. U.S. Department of Justice, Press Release, 

‘‘Four Chinese Nationals and China-Based Company Charged with Using Front Companies To 

Evade U.S. Sanctions Targeting North Korea’s Nuclear Weapons and Ballistic Missile ProContinued 

The workers are used in industries like shipyards, surface construction, furniture 

production, agriculture, metalworking, medicine, and finance. Wages are paid in foreign currency directly to the DPRK as a method of bypassing U.N. sanctions. 10

Workers are paid between $120 and $150 per month, but the employers ‘‘pay significantly higher amounts’’ directly to the North Korean Government. 11

With all this, China remains North Korea’s most important economic and trading 

partner. China accounts for approximately 90 percent of North Korea’s total trade 

volume, and Chinese–North Korean trade was up 37.4 percent in the 1st Q of 2017 

when compared to 2016. 12 China has benefited from access to North Korean coal 

and minerals while North Korea has used Chinese networks and its economic system, in particular broker relationships and access to financial institutions, as a way 

of accessing hard capital and driving its economy. 

Unfortunately, China has allowed its economy to be used by North Korea to evade 

sanctions and engage in illicit activity. In most cases when a new North Korean 

sanctions evasion network is revealed, inevitably it has a nexus to or in China. 

Given Beijing’s robust security services and sensitivities to exposure to North Korean activity, it is hard to believe the Chinese leadership is not aware of such exposure to North Korea and the Kim regime’s activities. 

Recent examples of how North Korea’s financial and commercial activities are 

intertwined with the Chinese economy and financial system are illustrative: 

• Limac–Ryonbong Joint Venture: This past weekend, the Wall Street Journal reported that Limac Corp, a Chinese State-owned company, has maintained a 

joint venture since 2008, with a North Korea’s Ryonbong General Corp, which 

has been under U.S. sanctions since 2005, for its involvement with weapons of 

mass destruction. 13 The North Korean firm has reportedly ‘‘tried to procure 

chemicals for solid-fuel for rockets’’ in the past, and several of its employees 

were sanctioned as recently as 6 weeks ago by the Treasury Department. 14

Meanwhile, the Chinese firm maintains a U.S. affiliate, and records show that 

in 2013, it shipped Canadian nuclear-power equipment to China via the U.S. 15

This represents just one node of the China–North Korea nexus. Sayari Analytics (which discovered the link) ‘‘says it has identified more than 600 Chinese 

companies that trade with North Korea.’’ 16

• The Dandong Hongxiang Network: Dandong Hongxiang Industrial Development 

Co., Ltd and four Chinese individuals created a mechanism to help North Korea 

evade financial sanctions. 17 The network was exposed in August 2016, in a 

36 

grams’’, September 26, 2016. (https://www.justice.gov/opa/pr/four-chinese-nationals-and-chinabased-company-charged-using-front-companies-evade-us) 18 ‘‘In China’s Shadow’’, The Asan Institute for Policy Studies and C4ADS, August 2016. 

(https://static1.squarespace.com/static/566ef8b4d8af107232d5358a/t/ 

57dfe74acd0f68d629357306/1474291539480/In+Chinas+Shadow.pdf) U.S. Department of Justice, Press Release, ‘‘Four Chinese Nationals and China-Based Company Charged With Using 

Front Companies To Evade U.S. Sanctions Targeting North Korea’s Nuclear Weapons and Ballistic Missile Programs’’, September 26, 2016. (https://www.justice.gov/opa/pr/four-chinese-nationals-and-china-based-company-charged-using-front-companies-evade-us) 19 U.S. Department of Justice, Press Release, ‘‘Four Chinese Nationals and China-Based Company Charged With Using Front Companies To Evade U.S. Sanctions Targeting North Korea’s 

Nuclear Weapons and Ballistic Missile Programs’’, September 26, 2016. (https:// 

www.justice.gov/opa/pr/four-chinese-nationals-and-china-based-company-charged-using-frontcompanies-evade-us) 20 U.S. Department of the Treasury, ‘‘Press Release: Treasury Imposes Sanctions on Supporters of North Korea’s Weapons of Mass Destruction Proliferation’’, September 26, 2016. 

(https://www.treasury.gov/press-center/press-releases/Pages/jl5059.aspx) 21 United Nations Security Council, ‘‘Report of the Panel of Experts Established Pursuant To 

Resolution 1874 (2009)’’, S/2017/150, February 27, 2017. (http://undocs.org/S/2017/150) 22 United Nations Security Council, ‘‘Report of the Panel of Experts Established Pursuant To 

Resolution 1874 (2009)’’, S/2017/150, February 27, 2017. (http://undocs.org/S/2017/150) 23 Ibid. 24 U.S. Department of the Treasury, ‘‘Press Release: Treasury Sanctions Agents Linked to 

North Korea’s Weapons of Mass Destruction Proliferation and Financial Networks’’, March 31, 

2017. (https://www.treasury.gov/press-center/press-releases/Pages/sm0039.aspx) 25 U.S. Department of the Treasury, ‘‘Press Release: Treasury Sanctions Syrian Regime Officials and Supporters’’, May 8, 2014. (https://www.treasury.gov/press-center/press-releases/ 

Pages/jl2391.aspx) U.S. Department of the Treasury, ‘‘Press Release: Treasury Sanctions Agents 

Linked to North Korea’s Weapons of Mass Destruction Proliferation and Financial Networks’’, 

March 31, 2017. (https://www.treasury.gov/press-center/press-releases/Pages/sm0039.aspx) 26 United Nations Security Council, ‘‘Report of the Panel of Experts Established Pursuant to 

Resolution 1874 (2009)’’, S/2017/150, February 27, 2017. (http://undocs.org/S/2017/150) 

ground-breaking study, In China’s Shadow, published by the Center for Advanced Defense Studies (C4ADS) and the Asan Institute for Policy Studies. 18

The Justice Department filed an indictment against the company and four individuals shortly after the publication of the C4ADS–Asan study. 19 From 2009 to 

2015, the network allegedly routed at least $75 million through the U.S. financial system, and from June to August 2016, the network routed $8 million 

through the U.S. financial system. The Treasury Department also designated 

the four Chinese nationals and Chinese companies in September 2016, in coordination with the public unsealing of the indictment. 20

• Global Communications Co (Glocom): Pan Systems Pyongyang, a North Korean 

branch of a Singapore-based company, created Glocom claiming it was a Malaysia-based company to sell prohibited military equipment. The U.N. Panel of Experts reported that the company used bank accounts in China to transfer funds 

to suppliers located in mainland China and Hong Kong. 21 The Panel noted that 

a ‘‘series of transactions by Glocom initiated by companies registered in Hong 

Kong, China, and cleared through several United States correspondent banks 

in New York.’’ 22 The U.N. noted that Pan Systems Pyongyang is controlled by 

the U.S.-designated Reconnaissance General Bureau (RGB), North Korea’s intelligence agency, and also received funds from U.S. and U.N.-designated Korea 

Mining Development Trading Corporation, a key proliferation entity. 23

• March 31, 2017 U.S. Designations: The Trump administration’s actions against 

North Korea’s financial facilitators provided insight into the workings of 

Pyongyang’s financial network. The designations included the following: Han 

Jan Su, the Moscow-based representative of U.S.-designated Foreign Trade 

Bank; Jo Chol Song, the Dandong, China deputy representative of U.S. and 

U.N.-designated Korea Kwangson Banking Corporation; Kim Tong Ho, the Vietnam-based representative of U.S. and U.N.-designated Tanchon Commercial 

Bank; Kim Mun Chol, the Dandong-based representative of U.S. and U.N.-designated Korea United Development Bank; and Kim Nam Ung and Choe Chun 

Yong, the Moscow-based representatives for Ilsim International Bank. 24 These 

representatives were engaged in a variety of conduct including working with 

RGB on financial transfers, working with Moscow-based Tempbank that was 

designated by the U.S. for its activities with the Syrian regime, and weapons 

and missile-related sales. 25

• North Korean Banks in China: The U.N. Panel of Experts reported that U.S.- 

designated Daedong Credit Bank (DCB) and U.S.-designated Korea Daesong 

Bank (KDB) are operating in China using representative offices in Dalian, 

Dandong, and Shenyang. 26 The U.N. reported that U.S.-designated Kim Chol 

37 

27 Ibid. 

Sam operated a financial network inside China, including millions of U.S. dollar 

transactions, without apparent repercussions from Beijing. 27

These are some examples of how the North Koreans continue to engage in illicit 

commerce and financing by leveraging their ties, facilities, and agents in China. 

More research attention and disclosures of these kinds of networks will continue 

from the media and scholars like Anthony Ruggiero at the Foundation for Defense 

of Democracies and our Center on Sanctions and Illicit Finance and analytic firms 

like C4ADS and Sayari. The dependency of the North Korean economy on the Chinese system raises the difficult question of what more can be done to pressure 

China to crack down effectively on the regime in Pyongyang. 

Killing the Chicken To Scare the Monkey: Secondary Sanctions and Beyond 

This Subcommittee has asked to focus on the potential use of secondary sanctions 

to impact those entities in China that continue to do business with North Korea. 

Secondary sanctions are not a common tool in the various U.S. sanctions regimes, 

but they have been employed or implicated recently in sanctions programs against 

Iran, Hizballah, and in the Russia/Ukraine context. 

Secondary sanctions entail imposing sanctions or restrictions against third-country parties for transactions with no U.S. touch points or traditional nexus. The goal 

of secondary sanctions with jurisdictions or regimes is to force a foreign third-party 

to choose between doing business in the United States or doing business in the targeted jurisdiction. Such sanctions apply to all persons (natural and legal) on a global 

basis, regardless of the person’s connection with the United States. Those sanctioned are then subject to various potential penalties that restrict their ability to 

access the U.S. market. 

In the Iran context, U.S. secondary sanctions primarily targeted certain sectors 

and exports directly relevant to the Iranian economy and prohibited foreign financial institutions from conducting any significant transactions in Iranian currency. 

The United States used these sanctions to restrict Iran’s activities and squeeze their 

economy. Their greatest effect may have been in the potential application of such 

sanctions and the resulting chilling effect on market and commercial activity—even 

absent designations. 

Secondary sanctions are not without problems or controversy. Other countries and 

foreign parties see them as the most aggressive extra-jurisdictional application of 

American economic power and influence—leveraging access to U.S. markets as a 

tool of coercive economic statecraft. They are also effective only if they can be 

credibly threatened and applied. This is not the case when those engaged in the activity of concern have no desire to deal with the United States and no potential exposure making them subject to sanction or financial or economic isolation. These can 

also appear to be toothless sanctions if the categories of potential institutions or sectors targeted are ‘‘too big to sanction.’’ 

To the Chinese, the potential application of primary or secondary sanctions to 

their citizens, companies, or interests will be seen as a challenge to their sovereignty. Consistently, the Chinese have objected to any form of unilateral sanctions 

that fall outside of the auspices of the United Nations, and any financial or commercial measure that has the effect of sanctioning a Chinese party will engender a negative reaction. In addition, China has tended to defend against more aggressive application of Chapter 7 U.N. sanctions, and it has often been lax in enforcing sanctions regimes when Chinese interests are at play, as in the case of North Korea. 

In the current context, North Korea appears to rely less on major Chinese global 

banks and financial institutions directly for access to financing and banking services. North Korean financial and commercial activity has tended to concentrate in 

recent years with smaller Chinese banks and entities to facilitate financial and commercial activity and with many entities with little to no connectivity to the United 

States. Even so, more research and analysis is uncovering deeper and more entangled commercial, transport, and financial ties between the Chinese and North Korean economies. The direct and indirect exposure by major Chinese companies and 

banks to North Korea may not be fully known or appreciated, perhaps not even to 

those institutions. 

Though Chinese sensitivities have to be kept squarely in mind to ensure greater 

cooperation, there needs to be a more comprehensive set of tools that attempt to 

squeeze the Kim regime’s access to financing and commercial outlets, sensitizes the 

markets to the risks of doing business with North Korea, and begins to demonstrate 

a willingness to expose and target key nodes and conduits of North Korean financial 

and commercial activity. 

38 

In that context, it is appropriate to consider creating secondary sanction authorities that target those entities—of whatever country of origin that continue to do 

business with North Korea in certain sectors of concern. The mere threat of secondary sanctions—regardless of sectors identified—would condition Governments 

and the private sector to engage in deeper due diligence to understand better where 

North Korean agents, networks, and entities are accessing capital and resources. It 

would result in North Korean accounts being shut down, activity locked out of the 

financial system, and agents attempting to recast their businesses and identities to 

avoid scrutiny. 

The risk from direct or indirect exposure to North Korea would be a serious concern for the major Chinese banks—the Industrial and Commercial Bank of China, 

Bank of China, China Construction Bank, and Agriculture Bank of China—trying 

to establish legitimate and sustainable footholds in the United States and other 

Western markets. Even if these banks did not have direct business ties with North 

Korea, they would have to ensure that their counterparties, correspondents, and clients did not expose them to the threat of secondary sanctions or enforcement actions 

in the United States. The risk of being cut off from U.S. markets would be too great 

a risk to ignore for legitimate actors in the banking, shipping, and commercial 

worlds. 

The mere existence of the authority does not mean it has to be used in each instance of a violation. The authority would open up economic and diplomatic dialogue 

with concerned actors that could result in changed behavior, more information, and 

the cut off of commercial relations with North Korea—even without designating any 

entities. The use of such authority may ultimately be shaped or constrained by diplomatic considerations, but this tool could provide diplomatic leverage that does not 

currently exist with North Korea and China. 

Secondary sanctions authority, though important, would not be the only step the 

United States could take unilaterally and in concert with international partners and 

the private sector to pressure North Korea, including in and through China. As with 

any effective sanctions program, there needs to be a commitment of analysis, investigations, targeting, and follow-up—constantly undertaken to counteract the evasion 

and masking techniques used by nefarious actors. And such efforts cannot be left 

to the United States alone, though it will need to lead any such effort. 

The following are other steps that should be taken to address the risks from 

North Korea and catalyze Chinese and other actors to do more to prevent North 

Korea from accessing the financial and commercial system. 

• North Korean ‘‘Class of Transaction’’ 311 Designation. On November 9, 2016, 

the U.S. Treasury designated North Korea a ‘‘primary money laundering concern’’ and prohibited any correspondent accounts with North Korean financial 

institutions or the facilitation of any transaction from a North Korean financial 

institution. This was a very important step and a signal to the financial community of the seriousness of the risks to the integrity of the financial system and 

international community posed by North Korea. This step should be amplified 

by designating any North Korea financial and commercial transaction or activity as a class of transaction of ‘‘primary money laundering concern’’ and requiring specific enhanced due diligence, information collection, and reporting tied to 

any transactions touching North Korean activity—inside or outside of the country. This would put the onus on financial institutions, in particular Chinese 

banks with exposure to the United States and Western banking systems, to determine if they have direct or indirect exposure to anything that touches North 

Korea. This scrutiny goes beyond designated North Korean banks or entities— 

whose names and affiliations may change—and more broadly to the suspect nature of any transaction that touches North Korea. 

• Dynamic Financial Information Sharing With Private Sector. The U.S. Government, in concert with Japan, South Korea, Australia, and other allies in Asia, 

should establish a dynamic information sharing mechanism with key private 

sector actors to explain and share where potential exposure to suspect North 

Korean activity lies. Financial intelligence units could be tasked with compiling 

data and reports that could be disseminated, with a goal of targeting and exposing more North Korean financial and commercial activity more quickly. Banks, 

shipping companies, and the insurance sector would welcome more information 

that would allow them to comply with relevant sanctions and understand where 

risk lies within their businesses. This could follow other models and platforms 

being created in the banking industry to share more specific information about 

specific risks and threats. 

• Regulatory and Enforcement Attention to Chinese Banks. Authorities in the 

United States, Western, and Asian countries have begun to devote more reguVerDate Nov 24 2008 15:08 Aug 31, 2017 Jkt 046629 PO 00000 Frm 00042 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\05-10 ZZDISTILLER\26242.TXT JASON
39 

28 Anthony Ruggiero, ‘‘Severing China–North Korea Financial Links’’, Center for Strategic and 

International Studies, April 3, 2017. (https://www.csis.org/analysis/severing-china-north-koreafinancial-links) 29 Anthony Ruggiero, ‘‘Don’t Let North Korea’s Nukes Overshadow Human Rights Abuses’’, 

The Hill, April 28, 2017. (http://thehill.com/blogs/pundits-blog/foreign-policy/331061-dont-letnorth-koreas-nukes-overshadow-human-rights-abuses) 

latory and enforcement attention to Chinese banks operating abroad for failure 

to have adequate financial crimes and sanctions compliance risk management. 

This is an important shift in attention, as Chinese banks seek to meet international global standards for transparency, sanctions compliance, and financial 

crimes risk management. Billions of dollars of fines against European, American, and other Western banks have focused the attention of banks to improve 

their sanctions compliance. Scrutiny over Chinese banks’ lack of adequate financial controls and a culture of compliance—as has happened with other global 

banks—would further sensitize Chinese institutions to the risks presented by 

exposure to North Korea. 28

• Anti-Corruption Initiative. The United States should launch an anti-corruption 

initiative to investigate and build public cases against corrupt North Korean actors and those who are colluding with them, perhaps using a new executive 

order to focus targeted sanctions on North Korean kleptocracy. Such sanctions 

and any related cases exposed would focus attention on the amount of wealth 

and corruption within the regime leadership and the ties that they have with 

others outside of North Korea. The Chinese would be concerned about North 

Korean corruption bleeding into their system and implicating Chinese actors. 

This would likely prompt greater attention to North Korean ties and lead to 

more Chinese actions to shut down illicit or corrupt networks of concern. 

• Leadership Asset Hunt. In conjunction with this, the United States should declare that it is launching a leadership asset hunt for assets stolen and held by 

the Kim leadership, using the tools and resources of the intelligence community, 

law enforcement, and regulators and working with international institutions 

like the World Bank’s Stolen Asset Recovery Initiative. The goal would be to 

determine how the senior leadership of the regime in Pyongyang holds and 

stores its money outside of North Korea and with whom it is dealing and operating. This could have direct implications for China and could expose where 

North Korea and China maintain existing financial relationships. This would 

further shine a spotlight on suspect ‘‘Politically Exposed Persons’’ requiring additional due diligence and attention by the Chinese and other banking systems. 

• Human Rights and Sanctions. The United States should expand the list of companies and entities subject to sanctions under Executive Order 13722 (March 

15, 2016), including considering designating those companies employing North 

Korean workers and paying their fees directly to the North Korean regime. It 

should call on countries currently allowing this practice to shut it down and 

push for human rights designations at the U.N. and a prohibition on paying 

North Korea for overseas laborers. 29 This should be matched with a Treasury 

advisory to financial institutions warning against facilitating or engaging in any 

transaction related to this forced labor. 

• Shipping: Mapping and Interdictions. The United States in concert with Japan, 

South Korea, Australia, and other allies should coordinate the sharing of North 

Korean shipping and transport data—along with private sector actors to track 

and map shipping interests doing business with or in North Korean ports or 

waters. The mapping and investigation of shipping tied to North Korea would 

allow for more robust information sharing and understanding where the proliferation and trafficking risks lie and would expose networks and business interests of concern. This would also enable more robust maritime interdiction 

strategies, which would put pressure on those countries or entities that continue to do business with North Korea. 

• North Korean Illicit Activities Enforcement Initiative. The law enforcement and 

intelligence communities—in concert with the U.N. Panel of Experts and the 

private sector—should concentrate on understanding and exposing North Korea’s continuing illicit commercial and financial activity. Smuggling, money 

laundering, arms trafficking, and sanctions evasion should all be subject to intense investigation and exposure and should be a priority for law enforcement 

in Asia and wherever North Korea engages in commercial activity. An illicit activity initiative would allow for more disruptions, designations, and identification where illicit networks are operating with impunity. This could be done in 

40 

30 James Pearson, ‘‘China Probes North Korea Bank Suspected of Nuclear Link—South Korea 

Paper’’, Reuters, September 26, 2016. (http://www.reuters.com/article/us-northkorea-nuclearbank-idUSKCN11W049) 31 Jane Perlez and Chris Buckley, ‘‘China Announces Inquiry Into Company Trading With 

North Korea’’, New York Times, September 20, 2016. (https://www.nytimes.com/2016/09/21/ 

world/asia/north-korea-china-inquiry-hongxiang.html?lr=0) 32 John Ruwitch and Meng Meng, ‘‘North Korean Ships Head Home After China Orders Coal 

Returned’’, Reuters, April 11, 2017. (http://www.reuters.com/article/us-china-northkorea-coalexclusive-idUSKBN17D0D8) 33 Jane Perlez, ‘‘U.S. Sanctions Expected To Hit Small Banks’ Business With North Korea’’, 

New York Times, June 3, 2016. (https://www.nytimes.com/2016/06/04/world/asia/us-sanctions-expected-to-hit-small-banks-business-with-north-korea.html) 

concert with the Chinese to underscore the need to attack illicit financing networks. 

• Cyber Litigation—Private Rights of Action. To match existing sanctions targeting those involved in undermining cybersecurity, Congress should consider 

providing victims of North Korean cyberattacks the right to sue and seek damages from entities and actors that have facilitated or knowingly benefited from 

North Korean cyber activity. This is important as North Korea expands its 

cyber footprint and attacks. Though this may not reach into Pyongyang, this 

right of action would put private sector actors that deal with North Korean or 

other cyber belligerents on notice that they could be subject to private litigation 

and suits. 

These are just some of the ideas that can be woven into a strategy that includes 

secondary sanctions. These tools—if leveraged and choreographed wisely and in concert—would not only squeeze the North Korean regime but also compel the Chinese 

to consider its own ties and the risks of exposure to North Korea. 

Changing the Chinese Calculus 

There is reason to believe that the Chinese calculus and behavior can be affected 

if North Korean actions and taint threaten the fundamental interests and reputation of the Chinese economy, leadership, and system. There are hopeful signs in recent months and past episodes that provide a window into Chinese thinking and can 

be guideposts for any pressure campaign. 

China has been willing to exert pressure and crack down on its trade with North 

Korea when it has faced public scrutiny over such ties, or when it wishes to express 

selective disapproval over North Korean actions. In September 2016, it was reported 

that China had opened an investigation into the Chinese citizen, Ma Xiaohong, who 

was indicted by the United States. She ran the Dandong Hongxiang Network, which 

had allegedly undertaken half a billion dollars in trade with North Korea between 

2011 and 2015, 30 some of which ‘‘included materials that can be used in the production of nuclear weapons.’’ 31 China has reportedly frozen her assets. 

In February and April of this year, China curbed its imports of coal from North 

Korea, likely in response to recent multiple missile tests Pyongyang carried out and 

in the wake of the assassination of Kim Jong-Un’s half-brother in Malaysia via a 

VX nerve agent. 32 Furthermore, in May 2013, the Bank of China closed the account 

belonging to Foreign Trade Bank, ‘‘North Korea’s most important financial institution’’, which had been sanctioned by the U.S. in March of that year. 33 These actions 

do not necessarily signal a fundamental shift in Chinese policy, but it reflects a willingness to take actions against North Korean interests and connections in China. 

In addition, the Chinese Politburo held a study group last month focusing on ‘‘financial security,’’ signaling that the Chinese leadership is attaching a high priority 

to this topic. The United States could work with the Chinese to focus on protecting 

the Chinese, U.S., and broader financial system from the collective threats of illicit 

activity, cyberfinancial attacks, and corruption that North Korea represents, especially to Chinese banks. 

In the past, there have been key episodes that demonstrate the Chinese system’s 

sensitivity to the risks North Korea represents to its own economy and reputation— 

and a willingness to cooperate and change their risk calculus as a result of a 

changed landscape. 

Banco Delta Asia (BDA). In September 2005, as part of a strategic pressure campaign, the Treasury Department ordered U.S. financial institutions to close correspondent accounts for a private bank in Macau—Banco Delta Asia (BDA)—pursuant to Section 311 of the Patriot Act. This bank—designated as a ‘‘primary money 

laundering concern’’—was facilitating money laundering, proliferation, and counterfeiting on behalf of the North Korean regime. 

41 

34 ‘‘Treasury Sanctions Kunlun Bank in China and Elaf Bank in Iraq for Business With Designated Iranian Banks’’, Department of the Treasury Press Release, July 31, 2012. (https:// 

www.treasury.gov/press-center/press-releases/Pages/tg1661.aspx) 35 ‘‘Exclusive: Iran Uses China Bank To Transfer Funds to Quds-Linked Companies—Report’’, 

Reuters, November 18, 2014. (http://www.reuters.com/article/us-iran-sanctions-china-exclusiveidUSKCN0J20CE20141119) 36 ‘‘China Hits Back at New U.S. Sanctions Over Iran’’, Kelly Olsen, AFP, August 1, 2012. 

(https://www.yahoo.com/news/china-hits-back-us-sanctions-over-iran-063058172.html) 37Wayne Ma, ‘‘China Scolds U.S. Over Iran-Related Bank Sanctions’’, Wall Street Journal, 

August 1, 2012. (https://www.wsj.com/articles/SB10000872396390444320704577 

562330527832056) 

The regulation cut the bank off from the U.S. financial system. More important, 

the unilateral regulation unleashed a wave of financial isolation against North 

Korea. Banks in China, Asia, and Europe stopped doing business with North Korea, 

denying it access to the international financial system. North Korean bank accounts 

were closed, its transnational commercial transactions were canceled, and officials’ 

financial activities were carefully scrutinized. 

This hurt Pyongyang. The North Korean regime scrambled to regain access to 

money and accounts around the world while trying to undo the official damage done 

to its reputation in the international financial community. Key State actors, including China, had no incentive to block the full effect of the market reaction. On the 

contrary, they did not want their banks or financial reputations caught up in the 

taint of North Korea’s illicit financial activity. 

This pressure became the primary leverage for the United States to press for 

North Korea’s return to the six-party negotiating table. Once the six-party talks reassembled, the financial pressure campaign against North Korea ended, resulting 

in a loosening of the financial squeeze. 

Unlike traditional State-based sanctions, this kind of financial leverage relies 

more on the risk-based calculus of global financial institutions than the policy decisions of Governments. For legitimate financial institutions, there are no benefits to 

the risk of facilitating illicit transactions that could bring high regulatory costs and 

damage to their reputations if uncovered. If financial institutions act according to 

their own interests, targeted actors and their suspected fronts will be denied access 

to the facilities of the international financial system. In this case, the Chinese financial institutions defended their own interests and reputations, not putting themselves at risk on behalf of the North Koreans. 

Kunlun Bank. On January 31, 2012, the U.S. Department of the Treasury sanctioned Bank of Kunlun Co. Ltd., a Chinese bank under the Comprehensive Iran 

Sanctions, Accountability, and Divestment Act of 2010 (CISADA) for providing ‘‘significant financial services’’ to at least six Iranian banks designated by the Treasury. 34 Bank of Kunlun transferred nearly $100 million from accounts it held for 

Bank Tejarat and made at least one payment for an affiliate of the Iranian Revolutionary Guard Corps. 35 At the time, Chinese Foreign Ministry Spokesman Qin Gang 

urged the U.S. to lift sanctions against the Bank of Kunlun, stating that the imposition of U.S. sanctions ‘‘violates the norms of international relations and damages 

China’s interests.’’ 36 37 Despite the protestations and fears of Chinese backlash, the 

Chinese quietly dealt with Kunlun Bank and directed it to stop such activities. 

Chinese Position Shift on Sudan ICC Indictment. At a recent Harvard Law School 

panel discussion, the first Chief Prosecutor of the International Criminal Court 

(ICC), Jose Luis Moreno Ocampo, provided an instructive example of a Chinese policy shift during his tenure. Ocampo noted that the Chinese position regarding the 

ICC’s investigation of the Bashir regime in Sudan had always been to support and 

defend it because President Bashir guaranteed the stability of Sudan. The Chinese 

position changed in the face of the Bush administration’s forceful support of the 

ICC’s indictment of President Bashir of Sudan, leading the Chinese to conclude that 

Bashir no longer represented stability and began to explore other options. According 

to Ocampo, the Obama administration’s consolidation of Bashir’s stability led to the 

consolidation again of China’s support to the regime in Sudan. 

Indeed, the Chinese will not want to react directly to pressure, but they will understand when their interests are directly affected by the taint, attention, and illicit 

activity of the North Koreans. We have seen this already with the discomfort China 

has felt and expressed with the deployment of the THAAD missile defense system 

in South Korea and the increased U.S. maritime presence in Asian waters. If the 

Chinese see that their interests and credibility will be undermined fundamentally 

by connectivity and support to North Korea, the less likely they are to allow those 

financial and commercial ties to exist. If they understand that exposure to North 

Korea will bring greater scrutiny to issues like corruption, human rights abuses, 

42 

38Tom Miles and Krista Hughes, ‘‘China Loses Trade Dispute Over Rare Earth Exports’’, 

Reuters, March 26, 2014 (http://www.reuters.com/article/us-china-wto-rareearthsidUSBREA2P0ZK20140326); Andrew Higgins, ‘‘In Philippines, Banana Growers Feel Effect of 

South China Sea Dispute’’, Washington Post, June 10, 2012 (https://www.washingtonpost.com/ 

world/asialpacific/in-philippines-banana-growers-feel-effect-of-south-china-sea-dispute/2012/ 

06/10/gJQA47WVTVlstory.html?utmlterm=.493ab5719154); Elizabeth Shim, ‘‘China Sanctions, Hacking Threats Eclipse South Korea THAAD Deployment’’, UPI, March 7, 2017. (http:// 

www.upi.com/ToplNews/World-News/2017/03/07/China-sanctions-hacking-threats-eclipseSouth-Korea-THAAD-deployment/9311488902166/) 39 Jim Finkle, ‘‘Cyber Security Firm: More Evidence North Korea Linked to Bangladesh 

Heist’’, Reuters, April 3, 2017. (http://www.reuters.com/article/us-cyber-heist-bangladeshnorthkorea-idUSKBN1752I4) 40 Jim Finkle, ‘‘North Korean Hacking Group Behind Recent Attacks on Banks: Symantec’’, 

Reuters, Mar 15, 2017. (http://www.reuters.com/article/us-cyber-northkorea-symantecidUSKBN16M37J) 

and financial crimes in China and Chinese institutions, then the Chinese calculus 

will have to change. 

This is a moment of growth and expansion for the Chinese banks and commercial 

brands, with many establishing footholds in Western economies. If protecting the 

North Korean economy or regime represents a real threat—direct or indirect—to the 

credibility and strength of the Chinese banking sector and the future stability and 

growth of the Chinese economy, the Chinese may not elect to maintain suspect commercial and financial ties with North Korea. The potential application of secondary 

sanctions could affect this calculus and move the Chinese to place more serious 

pressure on Pyongyang. 

Caution and Caveats 

When considering secondary or other types of sanctions with respect to China, policymakers and national security strategists have to take into account the size and 

significance of the Chinese economy. The second largest economy in the world, growing to become the leading economy in this century, with its deep trading and investment ties in the United States and the West cannot be isolated or treated as a target of a maximalist financial and commercial pressure campaign. In addition, our 

need to cooperate and compete with—as well as confront—China in many other arenas, including in the South China Sea and cyberspace, limits how far we may go 

with our financial and economic toolkit. 

There are too many costs to U.S. interests if a maximalist approach were attempted, with boomerang effects on the U.S. economy, trade, and U.S. and allied 

interests in China and Asia. China could always retaliate with sanctions of its own 

against U.S. interests, as they have threatened recently after the announced sale 

of U.S. high-end military equipment to Taiwan. And China can use its own resources and economic power to express its diplomatic displeasure, as it has done in 

the recent past with Japan by restricting the export of rare-earth minerals in 2010, 

allowing bananas from the Philippines to rot in port in 2012, and placing sanctions 

on South Korean companies for allowing the deployment of the THAAD missile defense system in early 2017. 38 The Chinese dragon knows how to bite and to use 

financial and economic tools—in the physical and virtual worlds. 

In addition, any new pressure campaign has to consider the potential for asymmetric attacks from North Korea, especially attacks on the financial system. North 

Korea has increased its capabilities and increased the pace of its probing 

cyberattacks. The North Korean hacking group Lazarus has reportedly targeted organizations in 31 countries, including the November 2014 Sony hack in the United 

States, the $81 million heist from the Bangladesh Central Bank, 39 and banks and 

broadcasting companies in South Korea. 40 North Korean hacking activity has increased this year, with reports that banks in the United States, Poland’s biggest 

bank lobbying group ZBP, and banks throughout the world have been targeted by 

North Korean entities. 

This is not an attempt to give credence to a heckler’s veto. Instead, this is a cautionary note that any effective action taken in the financial and economic domain 

may result in reactions by those targeted or affected by U.S. actions. The United 

States—and the private sector—must be prepared for such a reaction. In addition, 

there will be limits to what can be done in this domain, but the United States 

should always try to use the most effective and appropriate means to pressure the 

North Korean regime. The United States and her allies should not pull punches just 

because the effects of those actions may implicate China. If secondary sanctions can 

help squeeze the North Korean regime and help shift the Chinese calculus, then 

they should be authorized and used, in concert with other tools. 

43 

Conclusion 

It is time to test if China and the United States together can influence the North 

Korean regime—and stop its march toward nuclear weapons capabilities that 

threaten the U.S. homeland. China has the opportunity to prove its role as a great 

power and to use its influence with Pyongyang. The clock is ticking, and an effective 

financial pressure campaign with China on side is one way of helping to slow, if 

not stop, the clock.