The UN Security Council is calling for digitisation of shipping documents, stricter know-your-customer requirements and restrictions on individual vessels, after uncovering North Korea’s extensive ability to evade sanctions on petrol, coal, sand and other commodities.
A UN report finalised in March and seen by GTR says satellite imagery has revealed North Korea was able to import vast quantities of petrol in 2019 – far beyond its quota permitted under the Security Council’s sanctions regime – using a combination of ship-to-ship transfers and direct port calls.
The pariah state has also been seen exporting coal to China, which the UN warns is likely supporting funding for its nuclear weapons programme. Its access to the global banking system is facilitated by the use of shell companies and third-party intermediaries.
Part of the difficulties legitimate firms face in stopping sanctions evasion is a reliance on paper documentation, which can be easily forged, allowing illicit trade to take place unnoticed by the wider shipping industry.
“Flag states and the maritime industry should consider developing and adopting electronic document management systems to enable rapid, on-site checks for authenticity, validity or cancellation (for sanctions reasons), using a mobile phone application or by accessing the flag state website online,” the report recommends.
It also says UN member states should consider adopting new guidance aimed at commodity traders, suppliers and brokers, including a requirement to “know-your-customer’s customer”. That would also include requiring certificates of ultimate origin and destinations for commodities being sold.
Petroleum and coal trade continues
North Korea is subject to an annual cap of 500,000 barrels of refined petroleum exports per year under the Security Council’s sanctions regime. However, the UN says evidence provided by the US shows that figure was “exceeded many times over” during the first 10 months of 2019.
It estimates that in that period, foreign vessels made 64 deliveries totalling up to 1.5 million barrels. At the same time, at least 157 port calls were spotted following offshore ship-to-ship transfers.
Satellite imagery included in the report shows tankers calling at the port of Nampo, south of capital city Pyongyang, as well as photographs of offshore cargo transfers.
Earlier interim reports also found the supply of petrol to the country is facilitated by ship-to-ship transfers and direct deliveries, but findings for last year show “a notable increase in the number of these larger foreign-flagged tankers directly delivering to the country on multiple occasions”.
Vessels involved often change ownership just months before making deliveries, the report says, and many are registered to companies that have dissolved or been struck off company registers. Others do not update details held in specialised databases as “a tactic to obfuscate information”.
In response, the UN recommends sanctions are imposed against 14 individual vessels, many of which operate under the flag of Sierra Leone. Other vessels are flagged to Togo, Vietnam, China and Saint Kitts and Nevis.
The report also relays information from one member state that North Korea has exported as much as 3.7 million ton of coal in the first eight months of last year, with a total value of around US$370mn. The total volume increased by around 191%between May and August compared to the first four months of the year.
Exports are facilitated by self-propelled ocean-going barges and ship-to-ship transfers, with deliveries to barges and ports photographed at several sites on the Yangtze River in China. At least 37 different barges of Chinese origin were involved in exporting North Korean coal, the report says.
Project Sandstone, a separate investigation by London-headquartered think tank RUSI, has also collected satellite imagery that shows vessels loading coal and other resources at North Korean ports and islands around Zhoushan before entering Chinese waters.
“Despite this, North Korean vessels loaded with coal and other resources continue to sail to the area without being stopped or detained by Chinese authorities, thereby likely enabling them to raise revenue for North Korea’s nuclear and ballistic missile programmes in violation of UN Security Council resolutions,” RUSI says.
The UN report says representatives from China have “requested more conclusive evidence to make a judgment”.
Financial institutions at risk
North Korea’s ability to evade sanctions creates several different risks for the financial services sector, with the report warning that the country “continues to access international banking channels in violation of United Nations sanctions, mainly by using third-party intermediaries” and shell companies.
Part of that risk comes from the US, where the government’s Office of Foreign Assets Control (OFAC) has a fearsome reputation for taking enforcement action against firms linked to illicit trade. OFAC has the power to issue penalties to companies even if they have no presence in the US, if they are found to interact with the US financial system in any way – for instance through the use of the dollar.
The US Department of the Treasury issued an advisory to the shipping, insurance and financial services industries last year emphasising that its domestic sanctions regime prohibits “any transactions or dealings” tied to officials in North Korea.
It said banks must investigate fully any potentially suspicious activity by vessels operating around the Korean peninsula, the East China Sea or the Gulf of Tonkin before processing payments linked to their activities.
That includes carrying out due diligence on a ship’s oil providers, captains, crew, brokers, owners, managers, operators and insurers. Red flags prior to entering into contractual arrangement include whether a ship appears to have switched off or manipulated automatic identification systems.
Oil companies should carry out thorough supply chain due diligence, the Treasury says, as well as perform end-use checks on goods transferred ship-to-ship, plus a review of all relevant documentation, including proof the underlying goods were delivered as intended.
“Individuals and entities engaged in shipping-related transactions should be aware of the potential consequences for engaging in prohibited or sanctionable conduct,” it warns.
“Persons that violate US sanctions with respect to North Korea may face civil monetary penalties and criminal prosecution. Each violation of US sanctions on North Korea is subject to a civil monetary penalty of up to the greater of US$295,141 or twice the value of the underlying transaction.”
In terms of how rogue ships access the financial system, maritime analytics firm Windward advises firms look out for “the use of front companies, transhipments, dark operations and identity changes”.
“[These techniques] create new risks for the entire maritime supply chain – ports and terminals, traders, bunkering services providers, financial institutions, and even governments – which are now required by OFAC to go beyond existing vessel tracking and list-based screening,” it says.
The UN also reiterates earlier warnings to financial institutions that North Korea is adept at cyber-warfare, hacking banks in order to obtain supplies of fiat currency. It also targets cryptocurrency exchanges to steal vast quantities of virtual assets such as bitcoin.