Exposed: How North Korea Secretly Funds Its Nuclear Weapons

June 16, 2017 Topic: Security Region: Asia Blog Brand: The Buzz Tags: North KoreaNuclear WeaponsFinanceDefenseTechnology

Exposed: How North Korea Secretly Funds Its Nuclear Weapons

The hermit kingdom has an economy the size of Laos. How can it build nukes?

A new report details the extensive illicit overseas network North Korea maintains to fund its nuclear-weapons and missile programs.

Despite being under some of the most draconian international sanctions to date, North Korea has continued to demonstrate that is capable of funding its effort to build a nuclear warhead and the necessary systems to deliver one. If anything, funding for these systems seems to have increased in recent years: since the beginning of last year, Kim Jong-un has tested more ballistic missiles than his father and grandfather tested in twenty-seven years combined. All of this costs a lot of money in terms of material and manpower.

After promising to prevent North Korea from acquiring an intercontinental ballistic missile (ICBM) capable of delivering a nuclear warhead to the U.S. homeland, President Donald Trump has largely turned to China to increase the economic pressure on the Kim regime. To do this successfully will require first understanding how the North Korean regime pays for its weapons program.

Fortunately for the Trump regime, one organization has provided a modicum of hope. In a new report entitled, “Risky Business,” C4ADS, a DC-based nonprofit dedicated to providing data-driven analysis and evidence-based reporting on security issues, provides a stunningly thorough examination of the globe-spanning enterprise the Kim regime uses to fund its illicit activities.

C4ADS begins by disputing the notion that North Korea is an “isolated” hermit kingdom, declaring that “in truth, the North Korean regime, far from being isolated, is globally active through its overseas networks,” which extend as far as the United States. The report states that North Korea’s networks “have grown into a complex overseas financing and procurement system over the past decade, earning hard currency through reported schemes as diversified as sales of military equipment, cybercrime, printing of counterfeit currency, rhino horn smuggling, and narcotics trafficking.” It goes on to say, these “networks have shown a deep understanding of how the systems of international trade, finance, and transportation work and, thus, how to nest their illicit activities within them.”

North Korea has been so successful at establishing these networks partly because its operators have been able to obscure illicit activity within legitimate economic businesses. The report quotes one former senior U.S. official: “The line between North Korea’s licit and illicit money is nearly invisible.” North Korea disguises most of its illicit trade by moving it through China—unsurprising, as Pyongyang conducts 85 percent of its total trade with Beijing.

There is hope, however, as C4ADS “finds that the North Korean overseas regime financing and procurement system is centralized, limited, and vulnerable, and thus ripe for disruption” (emphasis in original). With regards to being centralized, the report writes that North Korea’s networks “are comprised of a limited number of commercial facilitators and regime agents, who freely conduct business within the licit commercial system.” One such facilitator is Fan Mintian, a Chinese national whom C4ADS identifies as a key node in North Korea’s network. Fan was in charge of the ship Jie Shun, which was seized in the Suez Canal in 2016 with thirty thousand PG-7 rocket-propelled grenades hidden under over two thousand tons of iron ore. Another of Fan’s companies also worked with Chinpo Shipping, which provided financial assistance to the ship Chong Chon Gang, seized in the Panama Canal while transporting weapons to North Korea from Cuba. Another company Fan owned reportedly operated the ship MV Light, interdicted while transporting missiles to Myanmar.

Nor is Fan an anomaly. According to the report, North Korea continuously uses the same limited number of commercial facilitators. This potentially makes its networks vulnerable to disruption if international authorities are able to apprehend these individuals. The issue, C4ADS notes, is that the UN Security Council has not effectively enforced its sanctions. Indeed, the report suggests that, as in the Fan case, many of North Korea’s facilitators continue to operate even after facing repeated seizures.

Another strategic choke point the report identifies as vulnerable to disruption is North Korea’s reliance on a centralized financing system. Although the facilitators often use shell and front companies to do business with unwitting companies, North Korea cannot purchase anything without access to the international financial system, which entities operating inside North Korea are denied. Instead, Pyongyang has relied on a select number of “gateway firms” that allow “sanctioned North Korean entities to conduct financial transactions that would appear to US and European correspondent banks as coming from companies based in the British Virgin Islands, Seychelles, England, Wales, or Hong Kong.” The U.S. Treasury already acted against one of the biggest gateway firms when it imposed sanctions on the Liaoning Hongxiang Group and its parent company, Dandong Hongxiang Industrial Development Co. Ltd.

A further vulnerability of North Korea’s overseas network is the limited number of companies involved. Overall, only 5,233 Chinese companies did business with North Korea between 2013 and 2016, compared to the 67,163 Chinese companies that export goods to South Korea. Moreover, many of these 5,233 companies are owned by the same parent company, and “a disproportionate share of that trade is centralized among an even smaller number of large-scale trading firms.” In fact, a single company reportedly purchased over 9 percent of North Korea’s total exports to China last year.

The level of detail in C4ADS’s report makes it a valuable resource in the growing body of work of North Korean regime’s economic networks, which also includes the invaluable studies done by the UN Security Council’s panel of experts on the subject. C4ADS’s conclusion—that the centralized and limited nature of North Korea’s overseas networks make them vulnerable to disruption—is true on its face. However, the core issue is not identifying these networks, but enticing China to take meaningful action to disrupt them. And as long as China believes that the collapse of the North Korean regime is worse than living with Kim Jong-un, it’s hard to see that actually happening, no matter how much information about the networks is exposed.

Zachary Keck is the former managing editor of the National Interest. You can find him on Twitter: @ZacharyKeck.

Image: Pyongyang Victory Day parade. Flickr/Creative Commons/@rapidtravelchai