The Shell Game

In response North Korea has continued to evolve its sanctions evasion tactics, critical amongst which is an extensive cross-jurisdictional network of front and shell companies that allows it to obfuscate illicit revenue-raising and procurement.

One interesting designation which shows how these networks operate came in June 2019 when the US Treasury’s Office of Foreign Assets Control (OFAC) designated a Russian entity, Russian Financial Society for providing financial services to North Korean linked companies. The designation alleges that Russian Financial Society offered services to US-designated Dandong Zhongsheng Industry & Trade Co. Ltd (Dandong Zhongsheng), an entity managed by UN-sanctioned Foreign Trade Bank (FTB), North Korea’s primary exchange bank.

OFAC claims that Russian Financial Society provided several bank accounts to Dandong Zhongsheng, which were then used to make transactions on behalf of the UN sanctioned Foreign Trade Bank. Dandong Zhongsheng is just another entity in a long list designated for being used by North Korea to gain access to the international financial system and evade sanctions. The Russian Financial Society is also alleged to have provided bank accounts to the OFAC and Japanese designated Korea Zinc Industrial Group, a group alleged to be involved in raising revenue for the North Korean government. While these examples show UN sanctioned entities like the Foreign Trade bank utilising front companies like Dandong Zhongsheng to gain access to the international financial system, this is not their exclusive use. Front companies can be used in a range of activity for North Korean illicit networks such as creating revenue and the procurement or transportation of goods.

Although only the third North Korea-related entity sanctioned by OFAC in 2019, the designation of foreign companies such as the Russian Financial Society is a continuation of the Trump administration’s pressure on companies which do business with, or on behalf of, North Korean affiliated entities. It is also not the first time Russian companies have been designated for providing financial services to North Korea. In August 2018 the Agrosoyuz Commercial Bank (Agrosoyuz) was designated by OFAC for allegedly conducting transactions on behalf of Han Jang Su, head of the Moscow office of the Foreign Trade Bank.

The use of front companies to obfuscate activity is a key tactic from the North Korean illicit trade handbook, best illustrated by the infamous Ma Xiaohong network, which used over twenty companies in Hong Kong, China, and the UK to conduct financial transactions on behalf of sanctioned entities. Ma used her company, Dandong Hongxiang Industrial Development Company (DHID), in much the same way as Russian Financial Society is alleged by OFAC to have acted, as an intermediary between sanctioned entities and financial bodies. In this case these entities were even twice removed, with UK-based company Carbuncle Business Company Ltd conducting transactions for DHID, which was ultimately operating on behalf of a UN-sanctioned DPRK financial institution, Korea Kwangsong Bank.

While blocking assets and access to the US financial system will make it harder for North Korean front companies to use Korea Zinc and Dandong Zhongsheng to access the financial system, these networks use several layers of entities to obscure the relationship between the end user and the dealings which create revenue for the DPRK regime. This is a highly effective method for reducing the scrutiny of their financial transactions in the international financial system. It also offers resilience: if a company is designated and blocked, a wide range of other entities can be used to continue conducting illicit activity.

What is also clear is the permeation of this illicit activity through many jurisdictions. The cases here outline how Russia, Hong Kong, China and the UK have all been targeted by networks looking to evade sanctions, but there are many other examples in other jurisdictions which could equally well have been used. The inherently difficult nature of spotting these activities leaves legitimate businesses more open to the risk of dealing with a company used in illicit activity or evasion of sanctions. All is not lost, though. North Korean front and shell companies often share patterns such as co-locating business addresses and beneficial owners. In the Ma Xiaohong network both UK companies were located at the same address in London and one was owned by Ma herself. This gives investigators such as Project Sandstone or C4ADS avenues that can be exploited to solve the North Korean shell game.

The designation of Russian Financial Society is the latest in the continued concentration of sanctions pressure being placed on the North Korean regime and the companies which act on its behalf. Yet without enhanced due diligence these illicit networks will continue to develop innovative ways to obfuscate relationships between front companies and the entity which ultimately receives the revenue of illicit activity. Highlighting typologies used by these networks can enhance the awareness of those who are conducting this due diligence in possible partner businesses. After all, it is the private sector that is in the front line of disrupting illicit activities. And with continued sanctions pressure the likely course for the foreseeable future, it is important for policymakers to understand the weaknesses in this strategy and how they can increase the effectiveness of enforcement.

 

Image Courtesy of Wikimedia Commons: DPRK flags in Pyongyang.