One of the key questions in any attempt to strengthen sanctions against North Korea is whether Chinese banks and other entities can be persuaded to enforce them. North Korea’s economic dependence on China is well known, but also critical since Pyongyang conducts much of its financial activity through Chinese banks. Therefore, if Chinese banks can be made to cooperate with the U.S. on sanctions, North Korea will take a serious hit.
The focus of U.S. financial sanctions is on blocking transfers of money which support North Korea’s illegal activities. Therefore, the U.S. government is planning to get banks to freeze accounts held by companies and individuals which do illegal deals with North Korea.
Robert Einhorn, U.S.’ point man on North Korea sanctions, told a press conference in Seoul on August 2nd that the U.S. "will target entities engaged in the export or procurement of conventional arms by or for North Korea, the procurement of luxury goods for North Korea, and other illicit activities, which are often conducted by or for North Korean officials,” and added that the U.S. intends to urge international banks to uphold the sanctions.
It was recently revealed that the U.S. has been closely tracking 200 North Korean bank accounts held in third countries since mid-June, and has allegedly begun freezing the capital in approximately 100 of them. Allegedly, a considerable number of those accounts are held with Chinese banks, indeed, according to Voice of America (VOA), 17 of the 37 North Korean accounts targeted by the U.S. so far are held by Chinese banks.
Therefore, the general point in diplomatic circles is that financial sanctions on North Korea will be effective only if they garner the cooperation of China. As Einhorn himself commented, "China is a very important country in North Korea sanctions," and added, "We want China to be a responsible stakeholder in the international system.”
"And that means cooperating with the UN Security Council resolutions, and it means not backfilling, not taking advantage of the responsible restraint of other countries,” he added.
Experts point out that part of the success of financial sanctions is because they are about capital flows in the international community, and therefore economic logic tends to trump political logic; i.e. Chinese banks have no choice but to cooperate with the U.S. Experts assume that Chinese entities will not do business with North Korea if it means halting trade with not only the U.S. but also with western companies and banks, which are also tied to U.S. Treasury policy, in world financial markets.
Thus, while obtaining Chinese government support for sanctions on North Korea is not easy, economics experts generally agree that getting the participation of Chinese banks in blocking illegal funds through the financial markets is possible.
Indeed, it is well known to all banks that when Banco Del Asia (BDA) was discovered and named for its role in laundering North Korean money in 2005, it caused a run on the bank.
Dong Yong Seung of Samsung Economic Research Institute said during a phone interview on August 3rd, "When North Korea’s funds in BDA were frozen in 2005, the Chinese central bank and big banks halted foreign exchange trade with North Korea. If the United States reveals the existence of these North Korean accounts, private banks will stop trading with North Korea, even without the cooperation of the Chinese government."
"The fact that North Korea’s illegal funds are being dealt with by a given bank will be a considerable blow to the bank."
Especially, he emphasized, "There are almost no Chinese banks which do not do business with the U.S. Above all, the dollar is a key currency and, since most banks make payments in dollars, if they cannot deal with the U.S., great losses will result."
Yoon Duk Ryong, a senior fellow with Korea Institute for International Economic Policy, agreed, saying, "If the U.S. singles out Chinese banks holding North Korean accounts, there is a high possibility that the banks will stop doing business with North Korea for fear of losing trade with the U.S. Above all, China will cooperate with the U.S. for its economic benefit."
An anonymous North Korean expert also agreed, adding, "China is the factory of the world, and conducts business with many nations around the globe. If they cannot deal with American banks, the matter of managing the bank itself could become difficult."
"Even the banks of a socialist nation are freer than in South Korea. In Chinese banking, economic logic is more important than political logic. They will not maintain North Korean accounts if that halts trade with the U.S."
On this, a high ranking official in the South Korean government commented, "There are many North Korean accounts with Chinese banks, and if solid (i.e. related to illegal trade) evidence is presented, China will need to take steps. Since any bank has to deal with the U.S., this will be effective."
However, experts also agree that, in the long term, North Korea is likely to try and find cunning ways to continue its illegal trade.