Note to banks: beware of your clients
by Avi Jorisch
Last week, the United States blacklisted the North Korean Bank of East Land, also known as Dongbang Bank, for facilitating weapons-related transactions and supporting a well-known arms manufacturer. This is the latest in a series of steps taken by the United States in recent years to pursue financial institutions that are operated by rogue regimes, including Iran, Syria, Sudan and Venezuela.
South Korean banks are either wittingly or unknowingly assisting Iran, and to a lesser degree, North Korea, to circumvent international financial sanctions in their attempts to obtain weapons of mass destruction. Given the important regional role South Korea plays and its relationship with the United States, Seoul should take action to prevent abuse of its financial sector.
The United Nations and the United States have taken steps to isolate both North Korean and Iranian entities suspected of facilitating the purchase of illegal goods via the international financial system. The U.N., for example, has blacklisted North Korean Tanchon Commercial Bank and four Iranian banks for their role in proliferating weapons of mass destruction - the Sepah, Melli and Mellat banks, and the First East Export Bank.
The U.S. has taken additional measures and has blacklisted virtually the rest of the North Korean and Iranian banking sector for engaging in money laundering, weapons proliferation, narcotics trafficking and terrorism.
Most banks around the world have exited the North Korean and Iranian financial markets for fear of facilitating illicit activity or facing U.S. government fines. North Korea is finding it difficult to conduct any kind of financial transaction. In 2005, after the U.S. blacklisted Macau's Banco Delta Asia for its connection to North Korea's illicit activity, the world's financial institutions distanced themselves from Pyongyang.
Elsewhere around the world, more than 80 financial institutions, including giants such as Credit Suisse and Deutsche Bank, have reportedly completely cut off or significantly reduced their relationship with the Islamic republic. More specifically, major international financial institutions that once provided credit lines to Iran's commodities industry have reportedly stopped. In particular, Iran is finding it increasingly difficult to get banks to process oil and gas payments, which represents about 80 percent of the Islamic republic's export revenue.
Traditionally, South Korea has walked a tightrope in its connection to Iran and North Korea, balancing its own economic interests with a desire to please the West and ultimately choosing to act as a responsible member of the international community. The U.S. and South Korea have long been allies and Seoul has tried to satisfy Washington's policy objectives vis-a-vis rogue regimes.
But now, it appears that South Korea is helping both Tehran and Pyongyang circumvent sanctions. For example, South Korean Hana Bank, which is on a U.S. Treasury Department list of entities facilitating North Korea's illicit activity, is operating openly in Seoul.
South Korea also maintains a healthy economic relationship with Iran, valued at about $10 billion per annum. According to reports, there are 2,000 small and medium-sized South Korean businesses operating in Iran, and 25 mega-corporations. Iran remains South Korea's fourth-largest supplier of crude oil.
According to the international press, South Korean Woori Bank and the Industrial Bank of Korea are clearing South Korean oil payments on behalf of Iran. In order to avoid a trade war, these banks reportedly are not conducting business directly with Iran but are dealing instead with non-Iranian banks in Asia and the UAE who do maintain such a relationship. In Seoul there is also a branch of Bank Mellat, which, as mentioned earlier, is blacklisted by the UN and the U.S.
Those doing business with Iranian banks are on notice. The United States in particular has cracked down hard. All international banks operating in the U.S. must choose between the American financial market and its Iranian counterpart.
South Korean policy makers may wish to consider closing the loopholes that enable certain banks to provide illicit actors with the means to conduct their activities and maintain their infrastructure. Washington is watching closely Iran's march toward becoming a nuclear power and doing everything in its power to stop it from succeeding. While the U.S. greatly values its relationship with South Korea, those facilitating Iran's nuclearization should choose wisely.
In 2009, the U.S. Treasury Department blacklisted Hana Banking Corporation Ltd., a North Korean Bank, for its role in supporting illicit activity. In my article entitled 'Note to Banks: Be Aware of Your Clients' dated 28 April 2011, I mistakenly listed this entity as "South Korea Hana Bank." This was inaccurate.
The Hana Financial Group, based in Seoul, has assured me that it has no association with North Korea's Hana Banking Corporation Ltd., despite the very similar name.
Financial institutions should note that Pyongyang may conduct business under others' established trademarks to cause such confusion and divert attention from their criminal behavior. Given the financial sanctions in place against rogue regimes like North Korea and Iran, South Korean financial institutions should ensure they are not conducting any business, including providing correspondent banking services, with any entity blacklisted by the international community or the United States Treasury Department. Such due diligence may protect a bank from both reputational harm and the danger of being denied access to the US financial sector.
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