Main Image Credit The North Korean-flagged cargo vessel Dai Hong Dan, which was – ironically, perhaps – rescued by the US Navy after it was hijacked by pirates off the coast of Somalia. Courtesy of US Navy/USS James E. Williams
The tight economic noose around North Korea is being weakened by the regime’s use of flags of convenience by sanctions-evading ships.
The US Treasury announced last month its ‘largest North Korea-related sanctions tranche to date’, which included 56 firms and vessels with links to Pyongyang, all of which are subject to asset freeze and remain prohibited from dealing with Americans.
While most of the new designations are North Korea-owned and flagged companies or vessels, nine of the 28 tankers and cargo ships on the list fly foreign flags. Such figures might be small, but what they convey is nonetheless significant – ships registered in countries other than that of their ownership (flying what is known as ‘flags of convenience’) are or have been involved in illicit activities on behalf of the North Korea.
This violates UN sanctions, which since March 2016 have demanded that member states to strike off vessels ‘crewed, owned, or operated’ by North Korea from their national ship registers.
International shipping’s nature has enabled Pyongyang to flout the law by exploiting the vulnerabilities of a sector characterised by uneven regulatory enforcement. If sanctions are to achieve their intended objectives, that must change.
Vessels normally must be listed in a national ship register and fly that country’s flag in international waters. The flag state has jurisdiction over the vessel and is responsible for carrying out inspections. By preventing North Korean vessels from flying foreign flags, it was expected that Pyongyang would be forced to fly its own flag, with all the heightened scrutiny that entailed.
North Korea has been increasingly involved in ship-to-ship transfers to illegally import petroleum products
This, it was hoped, would stem the flow of maritime trade and illicit transactions to and from North Korea, and ultimately deprive regime of an essential source of revenue. Although there is some evidence that this is happening, North Korea continues to use front companies incorporated in offshore locations to register its ships in third countries that offer such services, hence concealing any links with Pyongyang.
North Korea has been increasingly involved in ship-to-ship transfers to illegally import petroleum products clearly exhibit this pattern, as evident in the latest report by the UN Panel of Experts that monitors sanctions implementation.
Acting on behalf of North Korea, ships flagged in Dominica, Hong Kong, China, Panama and Sierra Leone – but tracing back to Taiwan-based networks and affiliated companies registered in the Marshall Islands and the British Virgin Islands – have been involved in costly transfers of petroleum products in the high seas.
As Andrea Berger of the James Martin Center for Non-Proliferation Studies and a RUSI Associate Fellow has noted, Pyongyang has proved itself adept at tactical rebranding exercises, hiding the finger it has in every proverbial pie through complex networks of front companies, false end-users, foreign owners and managers.
As a result, countries allowing foreign-owned vessels into their national shipping registers and issuing flags of convenience are sometimes unwittingly complicit in North Korea’s attempts to evade sanctions.
The situation is made worse by the fact that countries operating these ‘open registers’ often have limited enforcement capacity. Lured by the easy money that comes with registering ships under flags of convenience and often lacking a sufficient bureaucratic apparatus to police their own system, some small states have outsourced the management of their ship registers to foreign companies. This is a problem, as it adds a further layer of obfuscation that Pyongyang can exploit or subvert.
First, outsourcing national ship registers exposes these countries to the risk of having their flag ‘hijacked’ by rogue agents. Tanzania’s ship register – open to foreign vessels until January 2018 – has been affected by this practice.
In August 2012, it emerged that Philtex, a Dubai-based company managing the semi-autonomous Tanzania Zanzibar International Register of Shipping, had allegedly issued Tanzanian flags to Iranian oil tankers that had been struck off from the Tanzanian register, apparently without the knowledge of the authorities.
So long as open registers exist and continue to be profitable enterprises that can be used for illicit activities, deregistered vessels will be re-registered elsewhere
More recently, the UN Panel of Experts noted that deregistered vessels associated with Pyongyang increasingly tended to be reflagged with the United Republic of Tanzania. It is unclear whether this is systematic ‘flag hijacking’ by rogue agents, or just the unfortunate result of inappropriate due diligence. So, even in the absence of official registration on a national ship register, North Korean vessels have been able to fly foreign flags, by simply falsifying their records without the knowledge of the flag state.
Second, agents contracted by national ship registers that normally issue flags to North Korean vessels have sometimes shown uncanny proximity to Pyongyang. In 2015, media reports suggested that two Singapore-based firms with close connections to North Korea were involved in the management of the national ship registers of Mongolia, Kiribati, Tuvalu and Niue, possibly facilitating North Korean efforts at evading sanctions.
While at the time UN Security Council resolutions did not specifically prohibit member states from registering North Korean ships, it is indicative of the vulnerabilities of the flags of convenience system that Pyongyang might have managed to exert some degree of control over these open registers.
But that opportunity may now be closing for North Korea. In its September 2017 report, the UN Panel of Experts noted a sharp decline in the number of North Korean vessels sailing under foreign registers, accompanied by an increase in registrations to the country.
Panama – whose Maritime Authority operates the world’s largest open ship register – has revoked the registration of 20 North Korean vessels flying its flag. This is reassuring, but does little to address the inherent problems of flags of convenience.
So long as open registers exist and continue to be profitable enterprises that can be used for illicit activities, deregistered vessels will be re-registered elsewhere. Tanzania has emerged as a flag state of last resort (although this might change with the recent closure of the country’s open register), and there is evidence that two North Korean-linked ships that Panama de-registered in February are now sailing under the Sierra Leonean flag.
For all the vessel designations and provisions prohibiting the registration of North Korean vessels, some countries might still decide to incur the heightened risks that come with breaching sanctions if rewards outweigh risks.
And the continued existence of open ship registers, with the easy money they guarantee, does little to change these countries’ cost-benefit analysis. So, smart sanctions need to smarten up and effectively target the underlying structures that sustain North Korea’s murky transactions on a global scale.
This would mean introducing significant restrictions and enforcing regulation on open registers used for illicit purposes, and, in turn, rethinking the paradigm of international shipping. After all, despite its reputation as the ultimate hermit kingdom, North Korea does not act like a recluse when it comes to exploiting existing networks of offshore capital for its own benefit. The international community must respond in kind by fixing those networks.
The views expressed in this Commentary are the author’s, and do not necessarily reflect those of RUSI or any other institution.