It's time to deploy the US financial system against North Korea

In dealing with North Korea, the Trump administration should look to Iran. Specifically, it should take a page out of the Obama administration's Iran sanctions playbook and apply against North Korea the tool used successfully to bring Iran to the nuclear negotiating table - "secondary sanctions" on those who do business with the regime.

North Korea is not, by any stretch, "sanctioned out". Despite a broad set of international and US sanctions, North Korea has got off relatively easy, especially as compared with Iran.

That is largely because the United States has historically been reluctant to impose secondary sanctions to isolate North Korea, particularly against China, the regime's principal legitimate trading partner. Certainly, the Trump administration should do its best to bring the Chinese government on board. But if China drags its feet, President Donald Trump should proceed anyway.

Secondary sanctions are both simple and enormously powerful.

They work by presenting a stark choice to a foreign bank: It can process transactions for a bank already facing sanctions (for example, one of the many North Korean banks that have been listed by the US) or it can maintain its access to the US financial system, but it cannot do both. That presents an easy choice, because access to the US financial system, which also means access to the US dollar, is a practical necessity for almost any bank anywhere in the world.

Adopting secondary sanctions against North Korea could cut the last tendrils of its access to the international financial system. As a recent assessment by a special US committee reportedly concluded, North Korean banks and trading companies operate in China through China-based front companies. These front companies, in turn, have accounts at Chinese banks, from which they are able to do business globally, including in the US.

Imposing secondary sanctions would send a strong message to North Korean leader Kim Jong Un that the financial noose is tightening in a way that could drive a wedge between Mr Kim and the Pyongyang elite critical to his continued hold on power.

If the US were to adopt secondary sanctions against North Korea, that move would almost certainly force some Chinese banks to choose between facilitating the regime's international banking capacity and maintaining their own access. Some observers fear that this move would so irritate the Chinese government as to make secondary sanctions inadvisable.

History teaches that we should not worry too much about an adverse Chinese reaction.

When I was serving in the Treasury Department during the Obama administration, we employed secondary sanctions to significantly ramp up pressure on the Iranian government. Hundreds of foreign banks that had been transacting with sanctioned Iranian banks voluntarily severed those relationships, thereby isolating much of the Iranian banking system.

But two banks in particular continued to work with sanctioned Iranian banks. One was China-based Kunlun Bank, a mid-sized institution that, our financial intelligence told us, "provided hundreds of millions of dollars' worth of financial services" to a half-dozen sanctioned Iranian banks. Despite repeated warnings to the Chinese government, Kunlun refused to stop such activity. So in August 2012, the Treasury Department used the secondary sanctions tool and cut off Kunlun from the US financial system.

What happened next is instructive. The Chinese Foreign Affairs Ministry issued a relatively tepid and formulaic protest - and, behind the scenes, the Chinese government directed Kunlun to stop. Despite what some had feared, employing secondary sanctions against Kunlun neither led China to stop cooperating on Iran nor soured our relations with Beijing in any other respect. China reacted this way for several reasons - all of which have parallels with the current situation with North Korea.

First, we had made clear to the Chinese authorities our intention to close loopholes in the sanctions against Iran. Likewise, for several years, the US government has complained to the Chinese authorities that North Korean front companies' access to Chinese banks weakens financial sanctions against North Korea. So there would be no surprise if we took action to close that loophole.

Second, the Chinese understood that our financial pressure campaign against Iran was designed to spur negotiations over its nuclear programme. By the same token, the Trump administration's "maximum pressure" policy towards North Korea also appears designed to produce a negotiation over the regime's ballistic missile and nuclear programme. And, as with Iran, the Chinese have been pressing the US to seek a negotiated resolution of concerns with North Korea's nuclear threat.

Finally, as with Iran, China is worried about the alternative - military action to destroy North Korea's nuclear and missile programmes. Whatever sanctions pain China was willing to endure to avert a military strike by the US (or Israel) against Iran, its deep-seated fear of a military confrontation on the Korean Peninsula means its pain tolerance for secondary sanctions against North Korea would be even higher.

The Trump administration should start by applying secondary sanctions against mid-sized Chinese banks that aid North Korean front companies, leaving the larger ones for later, if necessary.

Imposing secondary sanctions would send a strong message to North Korean leader Kim Jong Un that the financial noose is tightening in a way that could drive a wedge between Mr Kim and the Pyongyang elite critical to his continued hold on power.

And the move would demonstrate, to North Korea and China alike, that the US is serious about generating the leverage necessary for a successful negotiation.


•David S. Cohen served as deputy director of the Central Intelligence Agency and undersecretary of the Treasury for terrorism and financial intelligence during the Obama administration.

A version of this article appeared in the print edition of The Straits Times on April 24, 2017, with the headline 'It's time to deploy the US financial system against North Korea'. Print Edition | Subscribe