“Maximum Pressure” in action? The U.S. Treasury’s new China-focused measures, explained
The U.S. message to Beijing is clear: “Get your house in order"
On Friday June 29th, the United States unveiled new measures against Chinese targets that are alleged to facilitate illicit financial flows into North Korea. The unprecedented move marks a turning point in Washington’s North Korea policy and one that could precipitate further tensions with Beijing.
Of greatest significance was the U.S. Treasury Department’s announcement that it had identified China’s Bank of Dandong as a financial institution of primary money laundering concern, alleging that it enabled the transaction of millions of dollars contributing to North Korea’s WMD programs.
With diverging strategic interests and a differing threat calculus, it will be harder and harder for the U.S. and China to remain on the same page when it comes to dealing with North Korea. This Treasury action is the opening gambit to a much larger game, in which both players will struggle to remain cooperative.
Both China and the U.S. want to see a peacefully denuclearized North Korea. But Beijing’s risk aversion will continue to wear on the patience of policymakers in DC.
Policy in context
This Treasury action is part of the Trump administration’s larger North Korea strategy. Dubbed “Maximum Pressure and Engagement,” the approach is designed to use sanctions and deterrence to induce North Korea to return to denuclearization talks. A core aspect of the strategy involves persuading China to do more to stem the flow of money flowing into the Kim regime’s coffers.
Trump walked away from his first bilateral summit with Chinese President Xi Jinping in February feeling positive about getting said buy in. Responding to questions about his softening position towards Beijing, Trump said, “What am I going to start a trade war with China in the middle of him working on a bigger problem with North Korea?”
But after a flurry of missile tests and the tragic demise of detained U.S. citizen Otto Warmbier, this patience looks to be running thin. On June 20th, Trump tweeted, “While I greatly appreciate the efforts of President Xi & China to help with North Korea, it has not worked out. At least I know China tried!” Since then, DC has pressed down on a variety of pressure mechanisms designed to change Beijing’s strategic calculus.
The Bank of Dandong is low hanging fruit
What the move means
The Treasury announced multiple separate actions on Friday. First, the Office of Foreign Assets Control (OFAC) designated two individuals and one entity. The designated parties are all Chinese, and have been found to have financial ties to the Kim regime and the country’s weapons programs. They include:
- Sun Wei – a Chinese national who runs a cover company for the Foreign Trade Bank, a designated North Korean financial institution responsible for moving money on behalf of the country’s WMD programs
- Li Hong Rui – a Chinese national who has cooperated with a North Korean banking official, Li Hong Ri, to procures items and money for the regime
- Dalian Global Unity Shipping Company – a Chinese firm that smuggled luxury items to North Korea in contravention of United Nations resolutions
These designations, while significant, are small potatoes compared to the other measure announced in the Treasury statement: for the first time ever, the U.S. government has punished a Chinese financial institution for assisting the Kim regime. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed a 311 measure under the PATRIOT Act to shut the Bank of Dandong off from the U.S. financial system. The action becomes official after a brief review period of 60 days.
The Bank of Dandong is low hanging fruit. For years, it has funneled money from front companies to the regime’s weapons programs. It was connected to an investigation last year that resulted in punitive U.S. measures against Chinese firms implicit in weapons sales to North Korea. As early as 2013, there were reports that the bank was being used as a hub for wire transfers into the North in violation of UN sanctions.
It moved $786 million through the American financial system between 2012 and 2015, with many of said transactions linked to sanctioned North Korean individuals and entities. 17% of the bank’s U.S. accounts are connected to North Korea, according to Washington officials.
The repercussions of this action will be severe for the bank and others like it. Western banks and businesses, eager to remain sanctions compliant, will shrink away from future dealings with the Bank of Dandong. There might also be a ripple effect, whereby other Chinese financial institutions along the border with North Korea become increasingly scrutinized for any connection to the regime. The designation can thus be seen as a shot across the bow. The U.S. message to China is clear: “Get your house in order.”
The Trump administration clearly prefers for China to police its own house. Trump discussed this very notion in a phone call with Xi Jinping on Sunday night and during the leaders’ summit meeting earlier this year. In describing the new FinCEN measure, Treasury Secretary Steven Mnuchin remarked that, “We are in no way targeting China with these actions.” Mnuchin pledged to continue cooperating with the Chinese government to stop illicit financial flows into North Korea.
Despite Mnuchin’s stated eagerness to continue cooperating with China, the unprecedented FinCEN action demonstrates clearly that Washington is frustrated with Beijing’s lack of progress. This financial action is part of a larger set of actions taken in the last week designed to ramp up pressure on Xi Jinping.
The U.S. message to China is clear: “Get your house in order”
Confluence of Pressure
It wasn’t exactly clear what President Trump meant with his June 20 tweet. At least I know China tried!” Since then, a series of pressure-inducing maneuvers have followed in short order:
- On Thursday, the State Department approved the Trump administration’s first batch of arms sales to Taiwan to the tune of $1.4 billion. The Chinese ambassador to the U.S. said the sale “will undermine mutual confidence.”
- On Sunday, the U.S. Navy conducted a freedom of navigation exercise in the South China Sea, a move that Beijing called, “a serious political and military provocation.”
- The Trump administration also plans to publish a report on Chinese steel dumping that could set the stage for future tariffs.
Responding to these developments, Xi told Trump that “some negative factors” are hurting the bilateral relationship during a phone call on Sunday evening. All of this comes ahead of a planned U.S.-China meeting on the sidelines of the G20 summit this week in Germany. Trump will look to use this leverage to secure more substantial buy-in from Xi on dealing with North Korea, but China will be limited in its ability to meet America’s expectations. As tensions heat up, some have suggested that South Korea could become caught in the middle.
Divergence between Seoul and DC?
It is possible that DC could push Seoul further than it is willing to go. South Korea’s new leader is given to conciliatory approaches, and aims to walk a fine line between China and the U.S. There are reasons to think that secondary sanctions of this nature will not produce that sort of clash, however.
Moon and Trump see eye-to-eye when it comes to corralling Beijing to help with the growing North Korea threat. When meeting with members of U.S. Congress last week, President Moon said, “China has room to play a bigger role, and I will discuss it when I meet with President Xi Jinping.”
One week prior to the Treasury Department’s announcement, Secretary Mnuchin called South Korea’s Minister of Finance Kim Dong-yeon to discuss, among other things, “coordinated efforts to increase economic pressure on North Korea.” The timing of the announcement is also significant; it came during President Moon’s first summit meeting with President Trump.
It is possible that DC could push Seoul further than it is willing to go
If the U.S. grows more assertive and its relationship with China sours significantly, however, there is a chance that South Korea could hedge. The Moon administration’s delayed installation of the Terminal High-Altitude Area Defense (THAAD) missile defense system due to Chinese pressure testifies to this possibility.
The road ahead
It is unlikely that China will step up and play the decisive role that the U.S. wants. That being said, there are varying levels of participation that Beijing can pursue. Each would invite a different U.S. response:
- In the first scenario, China could take steps to clean up financial compliance and increase the strength of regulation, similar to the way Chinese customs have stepped up inspections. A branch of China’s Industrial and Commercial Bank of China (ICBC) reportedly froze accounts belonging to North Koreans last year in response to U.S. pressure. It is worth mentioning that Chinese banks are also loathe to fall under the Treasury Department’s crosshairs, and could amplify compliance for purely business purposes. Though China’s interventions will fall short of expectations in this scenario, Xi will do enough to satisfy Trump in the short-medium term, thus preserving the cooperative status of the relationship.
- In the next scenario, Xi refuses to take meaningful action and Trump responds by looking for more targets. However, going after China’s larger banks for suspicion of money laundering on behalf of Pyongyang could have adverse effects on the U.S. economy. Actions against these larger banks – such as the Bank of China – would need to be more subtle and nuanced. On the other hand, there are a number of small-medium sized banks with suspected ties that make for easy Treasury targets. Effectively pursuing the agile and adaptive financial shops that serve Pyongyang in China will be much more difficult without Beijing’s cooperation.
No matter what China does, the U.S. will likely turn to third countries to help further isolate the Bank of Dandong and ratchet up compliance across the financial sector.
In all likelihood, China and the U.S. will become more willing to let strategic competition play out with respect to North Korea. It then becomes important to ask: to what extent does that rivalry seep into the larger relationship? If last week’s actions are any indicator, we could be in for a bumpy ride.
Despite these tensions, it seems as if Trump hasn’t yet given up hope that China will come to the rescue. On July 4, North Korea launched what South Korea has said may be an ICBM, prompting Trump to tweet: “Hard to believe that South Korea and Japan will put up with this much longer. Perhaps China will put a heavy move on North Korea and end this nonsense once and for all.”
This optimistic overture is actually somewhat foreboding: very few analysts who study China see any signs of a “heavy move” anytime in the near future.
Edited by Oliver Hotham
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