WIREDGOV

A lack of awareness-raising by governments and misinterpretation by the private sector mean efforts to restrict North Korea’s finances are failing.

Standing atop the Marina Bay Sands hotel in Singapore, it is hard not to sense that you are close to ‘ground zero’ in the effort by North Korea to conduct the trade and financial activity required to service and advance its nuclear ambition.  The vantage point, 57 storeys up, affords a 360-degree view of many of the elements of the international sanctions regime abused by the government of Kim Jong-un, which is contravening the raft of UN Security Council Resolutions (UNSCRs) targeting the country and its weapons programme. On one side, Singapore’s harbour throngs with shipping.  Container vessels, cargo ships and oil tankers pause on their journeys between East and West. On the other, stand the gleaming towers of the central business district (CBD), decorated with the neon-lit names of both local and global banks, the institutions that represent the beating financial heart of Southeast Asia.  And, a bit further in the distance, beyond the CBD, lies Sentosa Island, scene of the first summit between US President Donald Trump and the North Korean leader, a summit that President Trump believed meant the world had ‘taken a big step back from potential Nuclear catastrophe’ and had underlined how giving up nuclear weapons would herald ‘a glorious new era of security & prosperity for his citizens’.

But until Trump’s confidence in his ability to make deals is realised – and based on the second summit in Hanoi in February this year, that may be further away than he thinks – the US president’s rosy scenario will not get any closer to reality either.  In the meantime, as emphasised by the UN North Korea Panel of Experts and previous RUSI research, these financial institutions, ships and associated elements such as commodity brokers and insurance companies not only represent the tools of circumvention and abuse exploited by North Korea; they also represent potential responses to this malign activity. 

As the Monetary Authority of Singapore – the country’s central bank and financial regulatory body – notes in its August 2018 publication ‘Sound Practices to Counter Proliferation Finance’, addressing this risk is an integral part of efforts to safeguard the integrity of the financial system. Such businesses, their owners and their staff, play an important role as gatekeepers, representing industries on the front line of the global response to North Korea’s nuclear ambition.

However, there is a long way to go if the potential of this front line, both in Singapore and around the world, is to be realised.  At the heart of this challenge lies awareness of both the risks posed by North Korea and the role the private sector can play in blunting that threat.  Simply declaring ‘we don’t do business with North Korea’ – as some do – is to misunderstand and misconceive the way in which North Korea manipulates the global lack of awareness of its activities for its benefit.  And even if governments understand the risks and vulnerabilities their financial systems represent, too often their transmission of this understanding and explanation of the expectations of the measures that should be deployed by their financial sectors to counter proliferation finance is absent.

In Singapore, a country with a sophisticated financial services industry, this lack of awareness was illustrated at a recent, well-attended bankers’ conference where in response to an audience poll posed by the author, 57% of participants were honest enough to admit they were not aware of the bi-annual reports published by the UN North Korea Panel of Experts.  Anyone who does read them will know that for a banking compliance officer – or anyone else responsible for ensuring that his or her company does not facilitate fundraising or the procurement of resources and commodities by North Korea – they are a goldmine of names and indicators of activity that can materially improve an employer’s understanding and awareness, and assist with the development of mitigation measures.

The picture in Singapore is repeated in many places around the world to a more extreme extent.  In some countries on a recent trip this author made to East Africa, awareness of sanctions related to North Korea was virtually absent.  And for those who were aware, the hugs and handshakes at the Trump–Kim summits in Singapore and Hanoi were interpreted as an indication that sanctions were no longer required.

Over the past two years, the international community has, belatedly, set about seeking to raise awareness in this field.  Financial crime conferences that previously focused exclusively on money-laundering and terrorist-financing, but overlooked proliferation financing, have started to include the topic on their agendas; the Financial Action Task Force (FATF), the global standard setter for anti-money-laundering, combating the financing of terrorism (CTF) and counter proliferation-financing (CPF) has realised that merely including CPF in its standards is no guarantee of activity by countries – the focus brought to the issue by the US during its current 12-month presidency of the FATF is therefore welcome.

But there is a long way to go.  The extent of the lack of awareness of many governments and – in particular – their private sectors is starkly drawn into focus by the evaluation process run by the FATF and its global network of regional bodies.  The FATF evaluates countries on technical compliance with its 40 Recommendations and the effectiveness of their implementation of its global standards (the so-called 11 Immediate Outcomes).  As relates to CPF, the two key measures are Recommendation 7 – determining whether UNSCRs related to proliferation finance are implemented ‘without delay’; and Immediate Outcome 11 that assesses whether ‘Persons and entities involved in the proliferation of weapons of mass destruction are prevented from raising, moving and using funds, consistent with the relevant UNSCRs’ and that policies and activities are being developed to combat proliferation finance.

The FATF provides a useful summary of the results of these assessments of the integrity of national financial systems. It makes grim reading.  As of 17 April 2019, of the 75 countries that have been assessed since the current round began in 2014 (with some also having undergone follow-up assessments to determine their response to their initial evaluation), over three-quarters of assessed countries need fundamental or major improvements to their responses to CPF (as measured by Immediate Outcome 11). 

Furthermore, nearly two-thirds are non-compliant (or only partially) compliant with the requirement to implement UNSCRs related to proliferation finance without delay. The latest laggard to be revealed is China, the evaluation report for which was published in mid-April and revealed that it is non-compliant with Recommendation 7 and has a low level of effectiveness on Immediate Outcome 11, although the evaluators do note that China has taken some steps that may have a positive impact on the fight against North Korean proliferation finance in China.

Although it is hard not to conclude that the global CPF regime has been all but neutered, since FATF member states grudgingly agreed to add CPF to its framework in 2012, some progress has been made.  Countries such as Singapore and Malaysia have reacted to their shortcomings and are working hard to address these gaps; global banks have hired CPF expertise as they become aware of their vulnerabilities; and third-party tools such as RUSI’s Model Law seek to provide countries with support.

All that said, the global ambition to counter proliferation finance continues to suffer from a lack of awareness and sparse implementation and remains a poor relation to AML and CFT.  The view from atop the Marina Bay Sands hotel is unlikely to change any time soon.

Tom Keatinge is Director of RUSI’s Centre for Financial Crime and Security Studies.

The views expressed in this Commentary are the author's, and do not necessarily reflect those of RUSI or any other institution.