US makes arrests tied to NK IT workers; India signs contract on Chabahar port, with US possibly ending sanctions exemption; RUSI report on CPF challenges in banking
Prohibited Transactions for the week of 13 May 2024 (#48)
North Korea
According to covert reporting from inside North Korea, the country continues to illicitly import electronics via China, paying either in US dollars, or via fraudulent bank accounts. The DPRK smuggles in semiconductors for smart phones via Chinese companies based in Shenyang, Dalian, Tianjin, and Shandong province. Additionally, some North Korean smartphones are equipped with Taiwanese-made parts.
The US Justice Department announced indictments, arrests, and seizures aimed at disrupting North Korean information technology (IT) workers and their support networks, which conspired to raise funds for the DPRK by having North Koreans pose as US citizens and residents in order to secure remote jobs at US companies.
The arrested includes a US citizen who operated a “laptop farm” that allowed the overseas workers to appear to be based in the US, and who also moved money on behalf of the workers. This US citizen, along with three North Korean co-conspirators, earned at least USD6.8 million on behalf of Pyongyang.
The US government seized a number of websites used by the DPRK IT workers which gave the appearance of being legitimate US-based companies, and also arrested a US citizen who used his identity to get hired at a number of IT companies and then allowed overseas IT workers to perform his duties.
According to covert reporting from inside North Korea, banks in Sinuiju are under pressure from officials to improve their services, such as allowing customers to deposit or withdraw funds whenever they want. //Sinuiju sits across the Yalu River from Chinese city of Dandong, and the two cities are hubs for legal trade, as well as illicit smuggling that occurs between the PRC and DPRK. The North Korean government would like to improve trust in banks as a means to have more access to people’s “idle cash” (see Issue #26). Sinuiju’s significance as a cross-border trading hub may mean that the government is particularly interested in trying to draw in any excess funds being held by traders who operate in the city.
Stephanie Kleine-Ahlbrandt — a member of the UN Panel of Experts (PoE) on North Korea’s illicit activities from 2015 to 2019 — shed light on the accomplishments of the PoE during her tenure as finance and economics expert, and some of the political pressures the PoE faced. //Whole thing is a great read, lots of interesting details, such as:
By the end of my tenure on the Panel, in 2019, the independence of the Panel was increasingly being challenged by geopolitical pressures, particularly evident when the US attempted to hire someone who had previously represented the US at the Security Council, which was followed by the Chinese member of the Panel being replaced by an official reporting directly to the Ministry of Foreign Affairs (as opposed to an expert from a part of the Chinese government not accountable to the MFA). This change then led other countries to do the same, marking a shift towards greater adherence to national policy during Panel deliberations, diminishing the independence of the Panel’s work.
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A North Korean delegation from the border city of Rason is visiting the far eastern Russian region of Primorsky Krai. One outcome appears to be an announcement by the Russians that passenger trains connecting Vladivostok with the DPRK are set to resume. A North Korean science and technology delegation has also left for Russia.
South Korea’s intelligence agency is looking into claims that North Korean weapons produced in the 1970s are being supplied to Russia for use in their invasion of Ukraine.
The US and Australia sanctioned a number of Russians and Russia-based entities for facilitating weapons transfers between Russia and the DPRK.
Kim Yo-jong, sister of North Korean leader Kim Jong-un, denied claims of military cooperation between the DPRK and Russia, stating that Pyongyang’s weapons are meant to deter Seoul. Some experts said the denials may be an attempt to avoid tougher sanctions.
//This interview with Christopher Ahn — who was part of a group that broke into the DPRK’s embassy in Spain in 2019 — doesn’t have much to do with illicit financial issues, but is just a fascinating read about an odd situation.
Iran
Malaysia’s prime minister said there is no evidence of ship-to-ship (STS) transfers involving Iranian oil occurring off the coast of Malaysia. However, trade data shows that the Iranian oil is likely rebranded as Malaysian crude before being exported to the PRC. //There does not appear to be any real incentive for the Malaysian government to stop the STS transfer activity, especially as it’s the country’s middlemen and service providers making money by supporting these illicit activities.
India signed a 10-year contract worth USD370 million with Iran to develop and operate the Chabahar port, while a US spokesperson noted the risks of sanctions by doing business with Iran. Tehran announced they plan to connect the port with the country’s railway system by March 2025, and Chabahar will likely be connected with the International North-South Transport Corridor (INSTC) in the future. An Iranian official also said a joint shipping company would be launched by the two countries. //Iran continues its infrastructure push. As noted in Issue #34, Iranian media reported at the start of the year that the two countries had reached an agreement on the port. I wonder if the US will provide a bit more clarity on sanctions, as the spokesperson said:
MR PATEL: So we’re aware of these reports that Iran and India have signed a deal concerning the Chabahar port. I will let the Government of India speak to its own foreign policy goals vis-à-vis the Chabahar port as well as its own bilateral relationship with Iran. I will just say, as it relates to the United States, U.S. sanctions on Iran remain in place and we’ll continue to enforce them.
QUESTION: Does that mean including against Indian firms, potentially, about just —
MR PATEL: So broadly, Shaun, you’ve heard us say this in a number of instances, that any entity, anyone considering business deals with Iran, they need to be aware of the potential risk that they are opening themselves up to and the potential risk of sanctions.
QUESTION: So there’s not an exemption for this specifically?
MR PATEL: No.
Is this a change in policy or just a misstatement? My understanding is that there is a sanctions exemption for Chabahar. In 2019, a State Department official stated:
So we decided to adopt a narrow exemption of sanctions related to Iran to promote Afghanistan’s development. And as part of that effort, there was a decision to allow the continued use of Chabahar and for imports through Chabahar for development of the Chabahar port and for development of a rail line from Chabahar to the Afghanistan border…So that’s the current status of Chabahar. That exception remains.
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An official with the Central Bank of Iran (CBI) stated that Tehran is pursuing the use of offshore rial for trade with Afghanistan, Iraq and Russia, with a specific mechanism that will be operationalized soon to be used by Tehran and Moscow.
Iranian and Russian officials are discussing ways to expand and develop cooperation the field of gas technologies.
Iran is planning to launch sea passenger lines from Qeshem and Kish island to Oman and Dubai.
Other reads
The Royal United Services Institute released a report in early May on “Challenges for Counter-Proliferation Finance and Sanctions Control in Banking” noting that there are four challenges to effective counter-proliferation finance (CPF) and sanctions implementation for banks:
A disconnect between regulatory expectations and practical implementation.
Limited data quality and integrity.
Limited subject matter expertise.
Disparity across the banking sector with regard to PF and sanctions risk assessments.
The authors provide a number of recommendations to regulators and banks as to how to address these gaps. //The report is worth reading in full, and reflects my own experiences working at large international banks. In particular, the report notes (page 20) “A final element that was raised by experts is the fact that compliance teams operate in silos, which exacerbates FIs’ ability ‘to identify the nexus between ML [money laundering], TF [trade finance], PF and sanctions violations.’ ”
In my experience, even when looking at an individual issue such as PF, each compliance element (sanctions advisory, transaction monitoring, trade finance, etc.) identifies the risk in different ways, so on a practical level there isn’t a unified understanding of PF. You end up with the investigation teams saying that this network of unusual activity doesn’t have any connections to North Korea, the sanctions folks feeling that there is minimal risk because their screening isn’t triggering any alerts, while the line of business compliance teams say there shouldn’t be an issue because they don’t bank weapons manufacturers. No team is necessarily wrong — since they’re filtering their understanding of PF through their own risk lens — but the bank as a whole could end up missing the big picture.