Financial Transparency Coalition

Photo: Russian Presidential Press & Information Office, Wikimedia Commons

A few weeks ago, the U.S. upped its economic sanctions on North Korea, trying to block the rampant illegal activities taken by, or on behalf of, the political elite of the state. Kim Jon Il manages his regime, in part, by using government resources to funnel exotic, luxury goods – jewelry, cars, yachts – to his large ring of cronies. This abuse falls directly under the broad definition of illicit financial flows (IFFs) as unrecorded funds and goods promoting illegal activity.

Serious corruption and continued illicit activity within North Korea is becoming a larger threat to global security. These new economic measures are largely in response to the sinking of the South Korean ship Cheonan which killed 46 South Korean sailors. North Korea has also expanded its nuclear and missile program and is suspected of conventional arms sales as well as the trafficking of nuclear technology.

The under secretary of the Treasury for terrorism and financial intelligence explained in a briefing, “The North Korean government also benefits from illicit activities including drug trafficking, counterfeiting U.S. currency, and selling counterfeit cigarettes. All of this activity makes up a crucial portion of the North Korean government’s revenues. These activities are carried out by a global financial network that generates this income and procures the luxury goods for the government of North Korea.”

Often people discussing illicit financial flows (IFFs) focus on tax evasion. While this is an important issue, less is understood and discussed about the role IFFs play in facilitating corruption, terrorist activities, and dictatorships. While in power, dictators will employ any means necessary to maintain their position. The easiest, and often only, way to do that is by raising funds illegally and then illegally funneling those illicit funds towards people and things (i.e. weapons and luxury goods for bribery) that can keep them in power.

Worse still, this entire process takes place off the radar in the underground economy, making it difficult to trace and track, let alone stop. The Administration’s sanctions on North Korea are a direct foreign policy move to indicate unity and support for South Korea, struggling to stave off Kim Jong Il’s power and influence in the North. The fact that the sanctions are directed toward the goods intricately wedded to illicit flows from the state does indicate that the Administration is focused on the power IFF’s can offer a dictator. While a good sign, we can do more.

Illicit flows are toxic to global financial stability. They undermine efforts at multi-lateral financial communication and coordination. IFF’s also allow the corrupt of the world, like Mr. Kim, to continue to conduct their activities with ease and with complete disregard for international norms and regulations.

North Korea has a growing economic and political dependence on China, through which most of North Korea’s luxury goods flow. China’s role in U.S.-North Korea relations is potentially an influential one. While China is generally unenthusiastic about sanctions, last week it imposed a steep import tax on U.S. poultry. So, we see North Korea building passive support for its continued illicit activities.

A good sign of support for curtailing illicit flows out of North Korea is the current wariness among international banks and companies to do business with North Korean enterprises. This is good news, but work towards a more transparent financial system would make propping up a dictatorship with illicit activities much more difficult.