If an investment, shareholding, credit or other financing tool benefits an enterprise or an individual that is somehow violating a United Nations arms embargo or is committing atrocities, terrorist acts or proliferating weapons of mass destructions, is such an involvement contravening sanctions regimes and therefore breaking international law?
Checking past and current UN Security Council sanctions responses that are often but not always influenced by China and Russia, the answer is surprisingly uncertain. Given such political decision-makers’ ambiguity on the question, it should come as no shock that attitudes and practices of companies — and their owners and creditors — are equally opaque on their responsibilities and obligations in adhering to international sanctions.
To avoid implications of criminal acts or money laundering, banks — as one group of potential financial sources of sanctions violators — have long accepted their industry’s KYC obligation (Know Your Customer). But when it comes to UN sanctions, a different realm than government sanctions, their attitudes turn slippery.
Indeed, the practices of company owners, including shareholders, pension funds and similar institutional investors who pool trillions of dollars’ worth of shares across most stock-exchange traded companies worldwide, get to be downright oily.
Given the purpose of UN sanctions — to stop criminal and other networks or individuals from breaking international laws — shouldn’t shareholders exercise their ownership responsibilities at the slightest hint of their companies’ lax compliance with UN sanctions?
Conflict-sensitive practices seem not only a self-evident obligation but are also echoed in the widely accepted 31 principles of the “Protect, Respect and Remedy” framework of the UN.
Yet corporate and investor laissez-faire seems a consistent response aided and abetted by the UN Security Council’s own inconsistent responses to violations of international laws: sanctions are imposed against anyone entangled financially with terrorist organizations with few exceptions, but they are not imposed when somebody is intentionally or inadvertently helping to finance inter- and intra-state conflicts.
Take, for example, some diamond sellers and traders who were targeted by sanctions during the separate civil wars of Angola and Sierra Leone decades ago. Yet, buyers of illicit diamonds in the diamond-processing capital of Antwerp, Belgium, were not.
Liberian timber entrepreneurs were sanctioned for allegedly supporting Charles Taylor, the president of Liberia at the time, with their tax payments. (Taylor eventually was convicted as a war criminal). The Firestone rubber plantation, car and foodstuff importers operating in Liberia who also paid taxes were never seriously considered for sanctions designations by the UN.
Exporters of timber and European brokers of commodities and minerals from the Democratic Republic of the Congo dodged sanctions too, but not two gold-trading companies, Machanga Limited and Uganda Commercial Impex Limited, who traded Congolese so-called conflict gold and enabled “tax payments” to warlords.
By contrast, the A.M.M. Middle East General Trading company in Dubai sent an invoice for $1.4 million on March 6, 2015, for 26.7 kilograms of gold bars and jewelry to a North Korean diplomat, Son Young-Nam, but that activity went untouched by sanctions. While it is not contested that the trade indirectly helped to finance North Korea’s program of weapons of mass destruction, neither UN experts nor members of the UN Security Council’s sanctions committee appear to have pursued designating the Dubai gold seller.
Similarly, no sanctions resulted for the delivery of a P-750 XSTOL airplane and spare parts to North Korea — although it is a violation of the UN luxury items’ ban on North Korea. Yet neither the Chinese seller, the New Zealand-based manufacturer nor the banks that handled the transactions were subject to UN sanctions.
UN investigations, media reports and academic research papers released over the past year have revealed how North Korea is attracting interest among international traders, high-risk investors and banking service providers, even where the dangers of sanctions violations lurk. The reason for such risk-prone investments is explained in a New York Times article from March 2017: the above-average 3.9 percent GDP growth of North Korea in 2016.
“It’s very exciting,” Jim Rogers, an investment adviser, told The Times. “The kid has been opening up North Korea.”
Rogers was referring to Kim Jong Un, North Korea’s leader. The article further described how a Hong Kong-based investment company, Unaforte, has attracted investors to the First Eastern Bank, a venture in North Korea’s special economic zone of Rason. While Unaforte investments have been made as recently as one year ago, outside the sanctions perimeter, rapidly expanding UN restrictions have caught up with most investments, including those having nothing to do with nuclear weapons proliferation.
Investors, bankers and compliance officers of many companies know that business with North Korea has not shut down. The High Court of Singapore recently delivered a clear delineation for conditions under which, according to Singaporean law, financial services can be permissible.
Singapore’s prosecutor had brought a case against the Chinpo Shipping Company, which started in the late 1990s to be a front for the North Korean Ocean Maritime Management Company as its Singapore-based shipping agent. As the court would note in its verdict, Chinpo also performed 605 remittances, amounting to “a staggering US$40,138,840.87” over a period of about four years.
The maritime company’s role as ship owner and manager of North Korea’s proliferation projects is undisputed, which is why it is now sanctioned. But its front company, Chinpo, along with its house bank, the Bank of China, have avoided this fate.
Their enabling role has never led to any serious consideration for sanctions designations, even after Chinpo and the Bank of China were caught facilitating a Cuban shipment of SA-2 and SA-3 surface-to-air missile systems, two MiG-21 aircrafts, ammunition, miscellaneous rifles, night-vision binoculars and other military equipment. On appeal, the High Court of Singapore confirmed a lower court’s verdict for the remittances.
In rejecting that the Cuban arms could “reasonably be used to contribute to the nuclear-related programs of the DPRK” [Democratic People’s Republic of North Korea], the judges asked provocatively whether a ” . . . transfer that goes to the payment of the passage of a ship carrying conventional weapons that could possibly be used in defence of the facilities in which the NRPA [nuclear related program and activities] of the DPRK” be carried out?
Leaving evidentiary quarrels aside, the temporary imposition of UN sanctions or corporate governance standards that investors and banks could apply voluntarily to such situations do not seem to kick in. Indeed, the spokesperson for the Bank of China ignored my request to explain its sanctions compliance practices. And neither the UN experts nor the UN sanctions committee on North Korea proposed such designations on Chinpo or the Bank of China.
The lack of repercussions can be partly explained by the almost certain veto that would be exercised by China as a permanent member of the UN Security Council against sanctioning the Bank of China or other Chinese entities.
The same explanation does not address the lack of sanctions or any responsible institutional investor actions regarding a subsidiary of the well-known Danish shipping and logistics enterprise, the Maersk Group.
The roots of this case begin with a front company of a North Korean export business of conventional arms, involving the handling and shipment of Scud missile parts to Egypt. The seller, a group called the Korea Rungrado General Trading Corporation, is an affiliate of the Workers’ Party of Korea, the country’s ruling party, which hired a Beijing-based firm, BLH Global Cargo Company, to act as agent and freight forwarder. That entity, in turn, contracted Maersk’s subsidiary, the New Times International Transport Service Company. New Times was to arrange for aircraft cargo transfers of the Scud components to Egypt.
When the shipment was discovered and the results of the investigation reported to the UN Security Council in early 2016, neither Korea Rungrado nor its agent, BLH Global Cargo, was sanctioned, despite the UN experts’ recommendations to the contrary. New Times also escaped Council scrutiny, regardless of the shoddy compliance practices that had come to light during the investigation by UN experts.
New Times had accepted the order from BLH Global Cargo for 11 packages, based simply on the generic information “MACHINE SPARE PARTS/RELAY.” It had neglected to seek clarification what machines the transported parts would serve and who originated the items. Such due diligence would be consistent with international shipping practices, yet BHL Global Cargo and its representatives provided scant information about their operation and identity.
More scrutiny and due diligence should also have been expected from New Times, which is part of Damco China Limited, a member of the Maersk group. A spokesperson for Damco did not reply to my request for information on its Chinese subsidiary’s compliance policies and practices. Maersk has about $38 billion in revenue and a $250 billion market capitalization, with its shares widely held by institutional investors.
How such apathy from corporations and their investors regarding clearcut sanctions violations can still prevail should be subject to intense scrutiny by the Security Council, its sanctions committee on North Korea and the compliance departments of the entire private sector.
Such a vital gap became apparent during my recent consultations with institutional shareholders on how they and their investees could better support compliance with UN sanctions. Some reactions revealed ennui on the matter, while others conveyed deep misunderstanding, with one participant saying, “The private sector does not need to do this but can help or even lead to make UN sanctions work more effective[ly] if there are the right incentives.”
Enrico Carisch is the co-author of the just-released book “The Evolution of UN Sanctions: From a Tool of Warfare to a Tool of Peace, Security and Human Rights.” He is also a co-founder and partner of Compliance and Capacity Skills International (CCSI), a New York-based group specializing in all aspects of sanctions regimes (http://comcapint.com).
Among other organizations, Carisch has worked for the UN Security Council as a financial and natural-resources monitor and investigator on sanctions violations by individuals and entities in Africa and elsewhere. Previously, he was an investigative journalist for print and TV for 25 years.