Eric A. Sohn at Dow Jones Risk & Compliance discusses what is needed for the US to agree to a mechanism for humanitarian trade with North Korea.
On 25 October 2019, the US Treasury Department’s Office of Foreign Assets Control (OFAC) published Financial Channels to Facilitate Humanitarian Trade with Iran and Related Due Diligence and Reporting Expectations, a guidance document establishing the transparency required for the United States to be comfortable that exports of humanitarian goods to Iran are not improperly benefitting sanctioned parties.
Subsequently, on 27 February this year, the Trump Administration and the government of Switzerland announced that the Swiss Humanitarian Trade Arrangement (SHTA), a humanitarian Iran trade mechanism compliant with this guidance, was operational.
The justifications given for the need for such significant due diligence and documentary evidence in order to provide humanitarian goods are not dissimilar from pronouncements made in relation to the sanctions imposed on other countries, most notably Venezuela and the Democratic People’s Republic of Korea (DPRK).
What would be necessary for a similar arrangement providing humanitarian goods and services to North Korea to pass muster with Washington?
The Iranian Example
Iran has, in the eyes of the US, no justification for claiming suffering during the global coronavirus pandemic. In a Fact Sheet published on 6 April, the US documented what it claims is underfunding of the Iranian health system, despite increases in funding for military and civilian control purposes. This led Iran’s Health Minister to resign in protest in January of this year.
The Fact Sheet also noted the broad licensing exemptions available for the commercial export of foodstuffs, medicine and medical goods, including the recently-added ‘General License 8’, which permits humanitarian exports involving the sanctioned Central Bank of Iran. It is clear, however, that OFAC’s guidance was driven by the reticence of third parties to conduct even permissible commerce because of the spectre of being sanctioned or otherwise penalised.
In 2018, OFAC designated Tadbir Kish Medical and Pharmaceutical Company, which despite its name, was not involved in trade involving those products. The firm was allegedly part of an elaborate scheme which funded Hamas and Hizballah, two US-sanctioned terrorist organisations. That designation (referred to in the Fact Sheet) likely expanded companies’ reluctance to engage with Iran to even include humanitarian goods and services.
By requiring a high standard for due diligence of proposed trade transactions, the US hopes that potential exporters will feel more confident that they could act without regulatory liability, as stated plainly in the guidance:
Provided that foreign financial institutions commit to implement stringent enhanced due diligence steps, the framework will enable them to seek written confirmation from Treasury that the proposed financial channel will not be exposed to US sanctions.
The Situation in the DPRK
Between 2016 and 2017, the United Nations Security Council (UNSC) passed six Resolutions which increased the scope and severity of sanctions on North Korea, while noting the substandard living conditions for the average citizen.
These resolutions repeatedly noted DPRK spending on its military and its nuclear programme while neglecting the “unmet needs” of its populace, which was facing “grave hardship.” The last of these noted that well over one-half of the population faces major food and medical insecurities, with 41 percent considered to be malnourished.
Under UN sanctions, North Korean imports of food and medicine are permitted. While US sanctions are somewhat stricter, imports of humanitarian goods are still permitted if performed by non-governmental organisations (although the food or medicine must not be of US origin), or under a specific licence from OFAC.
As has occurred in the US Iran sanctions programme, in the last few years, a number of third country firms (e.g. two subsidiaries of COSCO Shipping) have been placed on OFAC’s Specially Designated Nationals (SDN) sanctions list for being involved in trade prohibited under US regulations.
While it is not clear that reluctance to conduct permitted commerce with the DPRK is actually impacting permissible trade, having a trade mechanism as outlined by OFAC could produce the other desired effect – of humanitarian goods reaching the common North Korean citizen without being diverted to the North Korean government and military.
Asking for Volunteers
Ultimately, in order for the US to agree to a trade arrangement for humanitarian trade with North Korea, Washington must find a government that can be trusted to faithfully execute, and provide proper oversight of, the underlying trade transactions. Additionally, the sanctioned country, its allies, and other interested nations must find the country acceptable as the arrangement’s administrator.
Switzerland, which hosts the trade channel for Iran, is a non-aligned neutral country, which makes it acceptable to the US, Iran and the European nations likely to be the primary trading partners using SHTA. Additionally, the country is considered to be particularly corruption-free. This is reflected in its 2019 score of 85 on the Transparency International Corruption Perceptions Index (CPI), which ties Switzerland in fourth place among all countries.
If we look at Asian jurisdictions, we find a number of potential candidates to serve as administrator for humanitarian trade with North Korea:
- Hong Kong (CPI score: 76, rank: 16)
- Taiwan (CPI score: 65, rank: 28)
- Japan (CPI score: 73, rank: 20)
- Singapore (CPI score: 85, rank: 4)
Evaluating these nations, not all will be acceptable to all parties:
- Hong Kong being part of China, which has had multiple companies sanctioned for conducting trade with North Korea, and whose ports have permitted North Korean vessels to stop and conduct prohibited trade, may make it unacceptable to the US and its allies. (not to mention current tensions over China’s national security law)
- Similarly, Taiwan is likely not acceptable to China, an ally of North Korea, because it is not considered a sovereign nation by China.
- Japan is probably not acceptable to North Korea (or South Korea) because of Japan’s former occupation of the Korean Peninsula and links to the sexual exploitation of Korean women from the early 20th century through the end of World War II.
- Singapore’s hurdles to hosting a humanitarian trade channel are mostly due to recent lapses in compliance. Taken together, the 1MDB corruption scandal that involved financial firms located in Singapore, and the Financial Action Task Force (FATF)’s most recent Mutual Evaluation Report highlighting the city-state’s lack of enforcement may give the US pause as to the city-state’s suitability as a host. Of these nations, however, Singapore, which prizes its status as a trusted financial centre, is the most capable of addressing such concerns.
Another possibility would be to have New Zealand (CPI score: 87, rank: 1) or Australia (CPI score: 77, rank: 12) host the trade arrangement. Both countries already have significant trade ties with much of Asia (according to the Observatory of Economic Complexity), which means that fewer supporting mechanisms like foreign exchange would need to be built or significantly enhanced. In addition, both countries’ low levels of perceived corruption would make them acceptable to the US and its allies.
But should any of these nations be willing to administer an arrangement that needs to conform to purely US needs for transparency? Doing so would actually be quite advantageous for the host nation in two regards.
Firstly, the overall level of economic activity would increase, although the amount of additional trade is unclear.
Secondly, and perhaps more importantly, being seen as a trusted party by all involved, and helping to alleviate a known pressing humanitarian need, burnishes one’s reputation globally, which can only be of benefit at any kind of negotiating table.
Eric A. Sohn, CAMS is global market strategist and product director at Dow Jones Risk & Compliance in New York.