March 07, 2013

U.S. House of Representatives Foreign Affairs Committee Hearing: “North Korea’s Criminal Activities: Financing the Regime”

Date: March 5, 2012
Time: 10:00 a.m. – 12:45 p.m. 
Location: 2172 House Rayburn Office Building Washington, DC 20515

Reporter: Grace Choi, HRNK Research Intern


The U.S. government must take a more proactive and comprehensive approach in its policy towards North Korea. North Korea’s illicit activities (counterfeiting, drug trafficking, selling of nuclear weapons materials, etc.) are funding the regime’s provocations and nuclear missile program. The U.S. must crack down on North Korea’s illicit activities with strict financial sanctions (similar to the Banco Delta Asia case) coupled with a discussion about North Korea’s continuous gross violation of human rights. The U.S. government needs further cooperation from China, and it needs to consider imposing financial penalties on countries and businesses directly investing in North Korean businesses related to the nuclear and missile programs. The United States should expand the definition of illicit activities to include luxury goods and fake goods. 

Expert Witnesses:

David Asher, Ph.D.
Non-Resident Senior Fellow
Center for a New American Security
(Former Senior Adviser, East Asian and Pacific Affairs, and Coordinator, North Korea Working Group, U.S. Department of State)

Sung-Yoon Lee, Ph.D.
Assistant Professor in Korean Studies
The Fletcher School of Law and Diplomacy
Tufts University

The Honorable Joseph R. DeTrani
Intelligence and National Security Alliance
(Former Director, National Counter Proliferation Center, Office of the Director of National Intelligence)

Present at the Hearing:
Chairman Royce
Representative Engel
Representative Holding
Representative Meng
Representative Frankel
Representative Gabbard
Representative Sherman
Representative Deutch
Representative Chabot
Representative Messer
Representative Brooks
Representative Ros-Lehtinen
Representative Weber
Representative Meadows
Representative Castro
Representative Rohrabacher
Representative Connolly
Representative Bera
Representative DeSantis
Representative Lowenthal
Representative Faleomavaega

Rep. Royce
North Korea’s February 12, 2013 nuclear test is its 3rd and strongest test to date that followed December’s launch of a 3-stage intercontinental missile. There has been a history of broken promises with North Korea. Since the 1994 agreed framework, NK has continued to violate the agreements it had entered, three nuclear tests later. Therefore, the United States must find a better alternative response. We cannot have a failed approach, because this is potentially disastrous.

North Korea’s illicit activities, such as the counterfeiting of U.S. $100 bills, are funding its missile and nuclear developments. Why is the country called the “Soprano State?” In 2007, U.S.-imposed sanctions on North Korea for laundering  money through Banco Delta Asia in Macau isolated the North Korean regime. It is important to examine how best to pressure North Korea’s ruling elite by systematically precluding its access to hard currency, rather than just relying on Beijing to do more. The United States must pursue and disrupt the Kim Jong-un regime’s illicit activities.

Rep. Engel, Ranking Member
Pyongyang poses a national security threat. North Korea (NK) engages in a wide range of illicit activities to support its illicit missile technology, including drugs and counterfeit money. NK exercises criminal sovereignty and violates international law and the domestic laws of other countries, with no regard for the international legal order. He hopes China will finally understand “it must do more in its role.” NK is a rogue state collaborating with rogue states such as Iran.

Dr. David Asher’s remarks:
There is a need for a fundamental and comprehensive approach to address this NK threat. NK’s global and regional threat will go from bad to worse (with its sophisticated missile force) since the probability it will export nuclear missiles to Iran is high. NK can acquire 21 nuclear weapons by the end of 2016 in addition to the 10-12 weapons it currently has. NK does need weapons as the young leader, Kim Jong-un, takes power and solidifies his position in North Korea. Iran needs enriched uranium and weapons, which North Korea can provide. On 9/1/2012, Iran and NK signed an agreement similar to the one with Syria.

The U.S. must organize a global, comprehensive targeting of Pyongyang’s foreign currency producing apparatus, interfere and sabotage the nuclear missile program, and needs to target Kim’s lifeline, including overseas bank accounts, especially in China, which provides direct access to money for North Korea’s illicit activities. There needs to be a top-down effort and an initiative similar to the one Dr. Asher was involved with under the Bush Administration.

Dr. Sung-Yoon Lee’s remarks:
North Korea is engaged in a systemic contest for pan-Korean legitimacy. NK cannot win against South Korea’s thriving economy so North Korea is engaged in nuclear blackmail. This is a necessary condition for its self-preservation. North Korea is “uniquely unique.”

NK’s defense spending is great relative to its national income. Pyongyang will not change its nuclear program unless the United States provides pressure, since NK is so dependent on its illicit activities to sustain its regime. The Treasury Department can apply this measure to 3rd country business partners, banks, and those financing North Korea’s shadowy economy.

The United States should expand the designation of prohibitive activity, such as luxury goods, lethal military equipment, and the perpetrations of crimes against humanity—such measures will debilitate the credible threat. Congress should pass a bill that gives investigative power to the Treasury to crack down on suspicious activity and clamp down on North Korea’s crimes against humanity. The U.S. should freeze North Korea’s assets.
Linking crimes against humanity and illicit activities combined with UN sanctions can be potent and effective on North Korea.

Ambassador DeTrani’s remarks:
On June 2003, NK pulled out of the NPT. U.S. mentioned to NK the U.S. is looking at NK’s denuclearization, human rights violations and its illicit activities (such as counterfeiting pharmaceuticals and U.S. dollar bills). On September 19, 2005, there was a joint statement committing NK to comprehensive and verifiable denuclearization in exchange for security assurances and normalization contingent upon stopping their illicit activities and transparency regarding its human rights record.

Based on 3.11 of the Patriot Act, involvement with money laundering could make one a target, and that made NK very upset. Banco Delta Asia provided a model, but unfortunately NK received its money ($25 million) back after proving it was in compliance with the applicable laws and regulations. However, four missile launches and three nuclear tests took place afterwards. In addition to addressing the human rights violations and UN sanctions in North Korea, North Korea’s illicit activities have to go to the wayside. The sanctions are biting, and NK is responding to it. The sanctions need to bite more significantly and should have more impact as we move further in response to the recent nuclear test.

There are two paths: 1) the present path, which is to impose further sanctions and make North Korea more of a pariah state or 2) NK should become a more legitimate nation-state by getting its economy back in shape through comprehensible, verifiable denuclearization, transparency and progress on the human rights issues, and the elimination of its illicit activities.

Questions in Response to the Expert Witnesses Testimonies:
Impact on Freezing Assets/Financial Sanctions North Korea
  • Prof. Lee:
    • Freeze assets to impact the regime’s financial lifelines, in a way similar to what happened in the Banco Delta Asia case.
    • NK is uniquely vulnerable to targeted financial sanctions because the regime is so dependent on these revenue streams. Therefore, this action would achieve secondary and tertiary effects along with the psychological threat. Prolonged sanctions will create an existential threat to North Korea.
  • Dr. Asher: Illicit and criminal activities represent up to one-third of the regime’s total trade. NK’s financial lifelines are centered outside of NK, in SE Asia, Austria, Macau, which are places the U.S. could get to. 
  • Amb. DeTrani:
    • Anyone dealing with the North Koreans should suffer sanctions-induced consequences.
    • Financial sanctions will have a significant effect on the NK leadership.
China’s role:
  • Amb. DeTrani: Should include a dialogue with Pyongyang.
  • Dr. Lee
    • Chinese Workers’ Party will never give up on the Korean Workers’ Party.
    • China won’t destabilize NK on its own initiative, so the United States will have to do so.
Does NK desire six-party talks or bilateral talks?
  • Amb. DeTrani: NK prefers bilateral talks with the United States over six-party talks
NK and Iran:
  • Dr. Asher: 
    • NK has a proven track record of exporting nuclear material. 
    • NK should not have been removed from the list of state sponsors of terrorism.
NK and Middle East/Rep Ros-Lehthenin, Middle East Chair
NK uses denuclearization talks as a bargaining chip, but never follows through because the Kims have always failed to respect their international engagements. It was the Bush Administration’s inability to see through this evil trick. North Korea is perfecting its nuclear capability and supports Iran and Syria. There is an Iran, NK, and Syria counter-proliferation act. The U.S. needs to impose NK Sanctions.

Another source of aid to NK is China—will China agree to meaningful measures against NK? How can the United States convince China to stop protecting NK? Need a comprehensive response? In regards to Dr. Lee’s recommendations on Treasury, can it be done through an Executive Order or action through Congress? Executive Orders 13382 and 13551 were signed by President Bush and President Obama. How do we exercise political will on NK?

Representative Faleomavaega
  • Is cultural diplomacy between the US and NK effective as seen in Dennis Rodman’s visit to NK?
  • Doesn’t believe any more sanctions will be helpful. The US owes China a lot—how can financial sanctions work? It seems hypocritical that US and permanent UN Sec Council members can keep nuclear weapons, but ask other countries to get rid of theirs.
Representative Chabot, Chair of Pacific Asia Committee
Executive Orders 13382 and 13551 were signed by Presidents Bush and Obama. What is the most effective way for China to work with the international community while also protecting its borders?
  • Dr. Lee: If China is given reasons to lose money, then it will be the most effective in gaining China’s attention rather than diplomatic action.
How important are the illicit/criminal activities in supporting the regime’s finances?
  • Dr. Asher: Cocaine/drug trafficking is part of the illicit activities NK is engaged in. Financial sanctions do truly help address the criminal activities.
Representative Sherman, Ranking member, Anti-Terrorism
  • There are similarities in NK and Iran, but striking differences too in intentions. Iran bombed a Jewish community center and NK wants luxury goods, such as scotch. 
  • How much money does North Korea make from illicit activities?
  • All panelists:  About $40 billion in total, but no one can be absolutely sure.
  • NK’s money comes from the following:
    • Military and nuclear exports
    • Kaesong industrial complex ($20 million)
    • Illicit activities (goods listed, including mislabeled ones)
    • Subsidies from China (over a $1billion of goods per year)
    • Precious metals from NK—a verification mechanism can be created
    • Aid to NK
Representative Marino
What countries and businesses within those countries do business directly and indirectly with North Korea? What do we do business with them?
  • Amb. DeTrani: China does trade and investment. The European Union in the past had some business, but not anymore. 
What ramifications will the US face in taking actions against NK and other countries involved with NK businesses?
  • Dr. Asher: There was no blow back in China from Banco Delta Asia in the past.
Representative Frankel
What’s the end game? What do we want to accomplish?
  • Dr. Asher: The complete and verifiable denuclearization of North Korea and getting rid of the WMDs.
  • Dr. Lee: Encourage and take action on the single free Korean state.  Have pragmatic policymakers for permanent peace on the Korean peninsula and deliver NK souls from the crimes against humanity.
  • Amb. DeTrani: The comprehensive denuclearization, and afterwards, unified peninsula.
Representative Weber
How do we give Treasury investigative authority?
  • Dr. Lee: The US should pass a bill that allows for the designation of prohibited activities, including actions regarding NK’s purchase of luxury goods, sales of military equipment and actions that further preclude crimes against humanity in North Korea. The bill should require the Treasury Department to take action and investigate the illicit activities and those tied to NK’s crimes against humanity.
Representative Gabbard, HI
What is the current estimate that NK could have a nuclear warhead that could strike the United States?
  • Amb. DeTrani: NK is a long way from having this capability.
  • Dr. Lee: NK’s end game is a single Korea under its own terms.
Representative Rohrabacher
Rep Rohrabacher is against donating to the NKs; we are being treated like “idiots” by the enemy. How much has the US donated to NK in total?
  • Dr. Lee: The US donated a little over $1 billion over the years.
Representative Meng
How can the new President Park help to reducing nuclear missile threats? Do you see Kim Jong-un (KJU) deviating from his father’s policies?
  • Dr. Asher: KJU is not the eldest and not in a strong position of power.
  • Dr. Lee: There is a misperception of NK that the NK regime merely reacts, but NK is a very proactive party; NK will provoke in a strategic way, since NK is not suicidal,but very keen on self-preservation. NK will continue provocations no matter how nice or strong we may seem to be towards the regime. We need to pursue a principled approach. The dynamics within the leadership is extremely opaque, but KJU made some important personnel decisions during his leadership. We’ve seen KJU’s playbook, and further dissensions will lead to further reactions. KJU has been cracking down on the North Korean/Chinese border. Fewer North Korean defectors have escaped NK since the power transition, which indicates KJU is even more repressive than his father.
Representative DeSantis
With respect to KJU and his recent decisions, has he solidified his power since he first came in?
  • Dr. Lee: There is a misperception that there are conflicting views between the military and the NK leadership. The Kim family made sure the Korean Worker’s Party controls the military. NK has borrowed this model from Chairman Mao.
Can there be disgruntlement and opposition to the leadership?
  • Dr. Lee: NK has gulags and they are very sensitive to the outside bringing attention to the human rights violations. 50% of defectors from NK coming across the border of the South have learned about the South.
Representative Deutch
There is little coverage of the fact that NK is the worst human rights violator in the world, which was unfortunately discussed by US media outlets during Dennis Rodman’s visit to North Korea. How do we change the narrative on North Korea so that the human rights discussion is at the forefront of all discussions? What can the UN do to help in the naming and shaming?
  • Dr. Lee: According to the Rome Statute on Crimes against Humanity, NK violates all crimes against humanity—except apartheid, as it is a homogenous state. There are details of gulags from many North Korean defectors, and an especially sad account from the only North Korean born in a political prison camp who escaped.
In response to Professor Lee and Representative Deutch’s discussion on understanding the human rights violations in North Korea, Chairman Royce strongly recommended to Representatives and the audience Shin Dong Hyuk’s book, “Escape From Camp 14.”

Representative Messer
Dennis Rodman’s visit to NK was trivializing the importance of the illicit activities and human rights violations. What is the current South Korean public sentiment regarding North Korea?
  • Dr. Lee: SK’s perception to NK has changed in the wake of NK’s two attacks in 2010 (the sinking of the Cheonan and the Yeongpyeong Island shelling). However, South Korea does not want to intensify problems on the Korean peninsula because of their comfortable stable life. The SK government should make North Korean human rights a higher priority issue. NK responded back harshly to ROK’s President Park Geun Hye’s remarks on the human rights violations in North Korea, which shows NK is sensitive to this.
Representative Connolly
Should we bring attention to NK? With China’s pragmatism and its continued support of the pariah regime, isn’t NK a liability rather than Chinese asset or buffer?
  • Dr. Lee: China will view NK more as a liability.
  • Amb. DeTrani: Agrees that China is seeing more that NK is a liability in the aftermath of the recent nuclear test and missile launch.
  • Dr. Asher: We must have more information. We need to change Chinese behavior to change North Korean behavior.  
Representative Bera
Are there folks in NK’s inner circle that are sympathetic to nuclear non-proliferation?
  • Amb. DeTrani: There are not sympathizers per se, but some in the leadership have been exposed to the outside world, and realize that NK needs to be moving in that direction, which is significant.
How do we unequivocally make sure that Iran doesn’t acquire nuclear technology from NK? Also, while making sure North Korea doesn’t sell nuclear tech to Iran, how can we know how China will respond to this?
  • Dr. Asher: Chinese businesses involved with NK entities need to be held accountable. The US needs to hold China to their actions, not their intentions.
  • Amb. De Trani: Currently, there is a robust and rich dialogue between the United States and China about non-proliferation and North Korea’s behavior. Hopefully more traction will take place.
Representative Faleomavaega’s Clarification on previous points: 
Not the U.S., but the whole concept of non-proliferation is hypocritical for members of the UN Security Council, including the United States. He commends President Obama is his attempt to lessen the number of nuclear weapons. He was criticizing the hypocrisy of the concept and not the United States, his country. Dennis Rodman does not represent President Obama or the U.S. government.