The Evolution of Financial Sanctions on North Korea

IntroductionIn recent years, financial sanctions have become an increasingly important tool of U.S. foreign policy, playing a central role in efforts to prevent or counter nuclear proliferation and other illicit international activities such as money laundering or terrorist financing. In the case of North Korea, the imposition of financial sanctions has been a key part of both the George W. Bush and Barack Obama administrations' strategies for pressuring the country to abandon its development of weapons of mass destruction and adhere to international norms. By impeding North Korea's access to the international financial system, these sanctions have had a disruptive effect on its international commercial activities, both legitimate and illicit. Should North Korea's proliferation activities stay on their current trajectory, the further implementation of such sanctions will likely continue to be a major part of efforts to degrade North Korea's WMD programs and pressure it to return to the bargaining table on terms acceptable to the United States.Financial sanctions, which aim to deny targeted entities such as proliferationlinked banks or enterprises access to the international financial system, are a fairly novel tool, relying on the risk calculus of private financial institutions as much as on direct actions by governments. Because of the importance of the dollar in the international financial system, U.S. policymakers have been able to pressure third-country banks doing business with "bad actors" such as North Korea into applying greater scrutiny in their transactions, or cutting offtheir relations altogether. This dynamic has allowed the U.S. to apply economic pressure even when direct trade or financial ties with the target of sanctions are minimal.1To many global financial institutions, the risks of bad publicity, increased regulatory costs or fines, or the possibility of losing access to the U.S. financial system outweigh the potential profits to be made from doing business with an entity that may be linked to proliferation, terrorism, or other illicit activities. Some financial institutions may go beyond avoiding entities specifically linked to such activities and avoid business with a country such as North Korea altogether if the risk of facilitating illicit transactions, or the cost of implementing a due diligence framework to ensure that all transactions are legitimate, outweighs the potential profit to be made. While a third-country business engaged in commerce with North Korea but not the U.S. may be able to shrug offthe threat of secondary sanctions,2 such as the loss of access to the U.S. market, ready access to the U.S. financial system is the lifeblood of most global financial institutions.Lacking easy access to a foreign bank account, an entity affected by financial sanctions may therefore find it difficult to conduct international transactions or remit hard currency. Resolving this problem may be as simple as finding a new banker willing to stomach the risks (perhaps in return for receiving premium rates), but a hardpressed entity may have to resort to more costly measures such as bartering, laundering money through front companies, or using bulk cash. When such an affected entity is a vital node in a country's economy, such as a major bank, the disruptive effects can spread far, complicating commercial activities and creating inflationary pressures. Both legitimate and illicit commerce may therefore be affected by financial sanctions, creating an incentive for legitimate businesses to step into the financial netherworld, and for illicit ones to delve further underground.3From the perspective of U.S. policymakers, financial sanctions are a significant addition to the more traditional sanctions toolbox of trade embargos, interdictions, and targeted "smart" sanctions. These measures fit well within the context of the overlapping objectives of why states implement sanctions: to coerce a target regime to change its behavior; to undermine its leadership; to deter it from future actions; to degrade its capabilities; to warn international audiences against undertaking similar behavior; and to satisfy domestic audiences demanding that something be done. …