Trade Based Money Laundering in North Korea in a NUTSHELL

North Korea is one of those 10 Countries who have sanctions imposed by all World Authorities i.e. UN, EU and US. Yes this is the truth which is also accepted by North Korea. Such sanctions are on oil exports to, Textile exports to, and supply of natural gas to North Korea. So now this is the reason to call its leader a mysterious personality. Even after such heavy sanctions imposed, North Korea talks about nuclear deals, nuclear missiles. In 2017 North Korea also conducted a nuclear test.

Talking about economy of North Korea it is one of the chronic economies. Industrial capital stock is nearly beyond repair as a result of years of underinvestment, shortages of spare parts, and poor maintenance. Large-scale military spending draws off resources needed for investment and civilian consumption. Many other problems include- Stagnated power outputs, chronic food shortages, Lack of arable land etc.

North Korea in a NUT “SHELL”

North Korea is alleged to have its network of Shell Companies in various countries. One of the most prominent networks is in Beijing, China. These networks are very complex layers of connections and used for illegitimate money transfers. Firstly let us know-

What is Shell Company?

Shell Company is the company on paper. It does not own any office. It does not have any employees. It does not produce any products. Mostly such types of companies are used to avoid tax, siphon off funds and carry illegitimate activities.

Let us put some light on various techniques of Trade based laundering in North Korea-

Shell Companies Created in Singapore

This technique is used to hide the relation between Russia and North Korea. In this case Russian company supply gasoil illegally to North Korea. For payment of such supply both Countries create shell companies in a country like Singapore or Malaysia and then carries further transaction, Because direct transaction between Russia and North Korea and that too in US dollars will create suspicion. So the process goes like this-

  1. Russian Company supply gasoil to North Korean company.
  2. Russian Company then transfer funds to its front company in Singapore.
  3. Further Russian Front Company settles transaction with North Korean front company in Singapore.
  4. Then the money is siphoned out to North Korea from Singapore.

Hence such illusion of transactions is created by Singapore and Russian companies to evade sanctions imposed on North Korea.

Alternate Payment Method

This method is used Chinese and North Korean companies. Here it is doubtful whether these companies are shell or real. But this method does definitely create camouflage of transactions between these two countries. Method when understood is simple-

  1. One Chinese company ‘A’ supply to North Korean company ‘B’.
  2. Simultaneously North Korean company ‘X’ supply to Chinese company ‘Y’.
  3. Then this companies use each other’s credit to pay opposite party’s debt.
  4. Company ‘B’ instead of paying company ‘A’ pays company ‘X’.
  5. Similarly company ‘Y’ instead of paying company ‘X’ pays company ‘A’.

Here payment amount of both the companies must be similar. But they are not paid in similar amounts to avoid suspicion. The problem here is the supply of goods and not the payments. These payments seem legit as they are intra state payments. So the chances of scrutiny are rare.

Method Three

The scheme begins with North Korea shipping a commodity to a Chinese company – in these examples, coal is used. The Chinese company sells the item and pockets a significant profit. The money owed to the North Korean exporter remains in China, which allows North Korea to use it to purchase goods. Each side keeps a ledger that tracks debits and revenue, which allows North Korea to purchase goods from its Chinese trade partner’s accounts; the Chinese partner receives additional profit from facilitating these sales. Most sellers want payment in U.S. dollars, which requires hiding Pyongyang’s role to continue the transaction. This is the point at which Chinese firms and individuals use accounts in Chinese banks to transfer money to front companies in China and other jurisdictions to create the illusion of a transaction between the seller and China, when North Korea is the real destination. This fraudulent scheme tricks U.S. banks into processing the transactions, and Chinese banks are either complicit or fail to ask about Chinese companies’ business with North Korea.

Hong Kong’s appeal may stem from a service it offers front companies that potentially gets around US oversight when using the dollar: the Clearing House Automated Transfer System (CHATS) for certain transactions involving US dollars for payments between banks.

Though CHATS is used for legitimate purposes in most cases, it is outside the purview of US federal law enforcement.

Hong Kong has become a gateway for North Korea, a place where North Korean front companies can turn the foreign currencies they earn from selling formerly licit exports like coal or textiles (now banned by UN sanctions), or the illicit ones like weapons and drugs, into US dollars.