Target Pyongyang's Palace Economy

The Far Eastern Economic Review

The notion that sanctions are ineffective on “rogue” regimes does not apply to Kim Jong Il’s North Korea. Because Pyongyang's palace economy is overly dependent on illicit financial gains, it lies uniquely vulnerable to a comprehensive policy of financial sanctions. To target such a weakness would serve the interests and values of the Republic of Korea (ROK), the nation most threatened by North Korea.

The ROK should form its own Inter-Agency Task Force on Financial Crimes that targets North Korea. The Task Force would not only target North Korea’s criminal financial activities, but overhaul all dubious aspects of Seoul’s financial relations with Pyongyang, including transfers of hard currency to the North via the Kaesong Industrial Complex and admission fees paid by South Korean individuals and civic groups. The Task Force shall establish a uniform and non-negotiable standard of practice in this regard, especially in the implementation of United Nations Security Council Resolution provisions prohibiting the transfer of financial resources into and out of North Korea that may be diverted toward Pyongyang’s nuclear weapons and missiles programs.

The time is right for Seoul to assert itself in pressuring Pyongyang. The continual acts of provocation by North Korea in 2009, punctuated by the long-range missile test on April 5 and the nuclear test on May 25, follow a long pattern of testing the new U.S. administration and putting maximum pressure on it to “resolve” the problem; i.e., reward Pyongyang for simply stating that it will cease its acts. At present, the Obama administration seems tired of “buying the same horse twice,” as Secretary of Defense Robert Gates said in Singapore in late May. Indeed, the new administration is actively calling for sanctions—both UNSC Resolution 1874 and unilateral U.S. sanctions led by the Department of the Treasury.

The U.S. has had success with financial sanctions against North Korea in the past, from September 2005 to late 2006. The Treasury's Financial Crimes Enforcement Network (FinCEN) in September 2005 designated Banco Delta Asia in Macau an entity of "primary money laundering concern" under Section 311 of the U.S. Patriot Act. The result was a freeze on about $25 million in North Korean assets and, more importantly, noticeable aversion on the part of international financial institutions to engage in transactions with North Korea.

On June 18, the FinCEN issued an Advisory on North Korea’s illicit activities and singled out 17 North Korean banks and front companies engaged in such activities. In late June the White House formed an interagency team to coordinate sanctions efforts against Pyongyang. These moves signal a new initiative by the Obama administration to empower the Treasury Department and punish Pyongyang for its ongoing financial crimes.

At the same time, the political wind may change once again if Pyongyang maneuvers to alter the “atmospherics” surrounding the Korean peninsula and signal intentions to sign another (third) nuclear “accord” with the U.S. Such a move by Pyongyang will come in the wake of another nuclear test, when political pressure to reach a negotiated settlement reaches its peak. If and when that time comes, the test for the U.S. and its allies will be to remain firm on principles until their legitimate demands for verifiable denuclearization are met.

Against sustained financial sanctions, North Korea will bristle. It will provoke Seoul to revert to its old policy of appeasing Pyongyang. Within South Korea, the pressure to settle for political expediency will grow strong, all the more as North Korea presents a comprehensive problem to which a clear timeline for resolution is not readily available. But, even in the face of military provocations and nuclear blackmail, Seoul must not repeat the mistakes of the past.

The advent of the multilateral forum called the six-party talks in 2003 gave South Korea for the first time in history an equal seat among the great powers in determining the future of the Korean peninsula. That contraption was the first opportunity for the Korean nation to play a proactive role in shaping its future within an institutionalized regional security forum shoulder-to-shoulder with the world’s greatest powers.

However, the South Korean administration in 2003 chose to support Pyongyang instead, in the pattern of the flawed “sunshine policy” of its predecessor. For several years, South Korea managed to “seize the initiative” only in appeasing the North. The outcome of such an uneven policy has been the advancement of Pyongyang’s weapons of mass destruction programs and the continued brutalization and impoverishment of the North Korean people.

The current ROK government now has its own chance to play a crucial role in determining the future of the Korean nation. As the self-professed sole legitimate government representative of the Korean people, Seoul must pursue a vigorous, coordinated policy of clamping down on North Korea’s financial transactions and illicit activities within its jurisdiction and in the territories surrounding the Korean peninsula.

At the very least, constricting Pyongyang’s palace economy would give Seoul leverage in managing the comprehensive North Korea problem that appeasement demonstrably did not. In the long-term, such a principled policy would affirm the fundamental values and interests of the ROK, a democratic government based on the rule of law. For, in the end, the South Korean leader of today is ultimately judged not on the merits of his trade policy or method of coping with scandal, but on his policy toward the North Korean regime—the gravest threat that the Korean nation faces.

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