Talks with North Korea? Better to apply financial pressure

Twenty years of negotiations with North Korea have not produced a more cooperative regime. North Korea continues to brutalize its citizens and engage in missile and nuclear proliferation. It threatens countries near and far with destruction and periodically attacks South Korea. Most troubling, the North is now dangerously close to an effective nuclear missile capability.

South Korea is pushing for dialogue with the North, and the North this week signaled interest – accompanied by unrealistic preconditions, such as a cessation of American-South Korean military exercises. One has to be skeptical about future talks, not least because North Korea appears to have no incentive to change. Aid offers have never improved regime behavior. And a show of US military force has its limits since the North seems to believe it can hunker down and out-wait the Americans.

However, North Korea is vulnerable financially. Applying financial pressure has worked before and is more likely to create conditions for useful negotiations than the methods tried to date. Its demand that the United Nations lift newly imposed sanctions as a condition for talks illustrates its financial vulnerability.

North Korea is ruled by a family-based regime that resembles an organized crime group. The regime’s major income sources are via illegal activities – nuclear and missile exports, illicit drug dealing, and counterfeiting cigarettes and US dollars for export. And the entire racket is run by a ruthless boss who rules by violence, manipulation, and intimidation.

Take away any organized crime group’s financial lifeblood and it will fragment or implode – a point well recognized by US anti-organized crime statutes. 

Money is everything to the North Korean regime. When North Korea modified its currency system in 2009 it caused such turmoil, even in the country’s moribund economy, that the government – not known for publicly admitting fallibility – reversed itself and executed the official deemed responsible.

In 2005, under the administration of George W. Bush, the US Treasury sanctioned Banco Delta Asia in Macau for assisting North Korean money laundering. The Treasury declared the bank – at that time family-owned – off-limits for US companies and financial institutions. The Macao government then froze $25 million in North Korean money.

Banco Delta Asia severed its ties with North Korea, causing perhaps more fear within the regime than at any time since the Inchon landing of 1950, when UN forces reversed a string of North Korean victories and then moved to recapture the South Korean capital of Seoul. The crackdown on the Macao bank greatly worried other financial institutions cooperating with North Korea, some of which cut their ties with the North.

Yet, the Bush administration later inexplicably revoked the sanctions and returned North Korea’s money – apparently in exchange for a North Korean promise to reenter negotiations, and nothing more.

Nonetheless, the Banco Delta Asia case shows what is possible. The US Treasury Department’s financial intelligence capability is often excellent. A greatly expanded effort against North Korea’s illicit finances would demonstrate that there are serious consequences to the regime’s behavior.

The effort must be comprehensive and not rely on so-called “targeted sanctions,” which have little effect. Any competent despot can evade them, especially if he doesn’t mind abusing his own people, something at which North Korea’s leaders excel. Besides financial sanctions, the US and allies can aggressively crack down on the North’s other illegal activities, particularly illicit drug and counterfeit cigarette exports – major money-spinners for the regime.

This forceful effort against the underpinnings of the Kim Jong-un regime is not risk free. North Korea’s leadership is mercurial, putting it mildly, and most of Seoul, South Korea’s capital, is within North Korean artillery range. 

But a far greater risk is a North Korea that has developed reliable missiles and nuclear weapons (obtained by brazenly flouting UN mandates). Then it can genuinely threaten Japan, South Korea, the United States and other nations it dislikes, and sell this technology to other unsavory regimes or terrorists. Preventing this is an objective that trumps everything.

Given the long-standing role of Chinese banks in handling North Korean money, a US Treasury-led effort against the regime’s finances will require pressure on a normally reluctant Beijing. However, even China should be frightened over events in North Korea.

China was content for years to have North Korea as a buffer on the Korean peninsula –  useful, too, for bedeviling the US and Japan. However, a nuclear armed North Korea with accurate delivery systems becomes as much China’s problem as anyone else’s. Beyond provoking a Japanese defense build-up that possibly includes a nuclear capability, any outbreak of violence in the region will interrupt China’s foreign-investment and export-driven economy. The Chinese Communist Party depends on this economy to maintain tenuous internal stability.

Although no tears would be shed if the North Korean regime collapsed, this should not be the goal of pressuring the North Korean regime. Rather it should be to prod the regime to behave like a responsible country, obey UN sanctions on missile and nuclear development, and stop brutalizing its citizens. Do so and aid will follow, along with greater respect.

Until something is done to give the North an incentive to modify its behavior, another round of talks will accomplish little. Banco Delta Asia is a model worth revisiting.

Grant Newsham is a former US Foreign Service officer and is a long-time resident of Japan. In 2011-2012, he was a member of the World Economic Forum’s Transnational Organized Crime Global Agenda Council.