Two North Koreans abroad walk into a bank, open an account with access to U.S. dollars and euros, and go about conducting business with high-level politicians in their host country. Despite hundreds of sanctions actions against North Korea over the years, with numerous banks, businesses, ships, and individuals designated for supporting the country’s nuclear weapons program, this maneuver just two years ago to gain access to the international financial system was relatively easy.
How did this happen? For one, North Korean agents seem to have an ever-evolving ability to come up with sanctions-busting tactics, as reported by the United Nation’s own Panel of Experts and several civil society organizations like the Royal United Services Institute. These tactics are significantly easier to deploy in the weak regulatory and compliance environment in parts of sub-Saharan Africa.
The two businessmen from North Korea in this case (outlined in full in a recent report from my organization, The Sentry), had traveled to the Democratic Republic of Congo (DRC). As is the situation in many parts of the world, and especially in sub-Saharan Africa, weak enforcement in the DRC allows for a host of sanctions-evasion and money laundering tactics, undermining the effectiveness of international economic sanctions in achieving their intended goals.
For sanctions to work, the U.N., the United States, the European Union, and other international bodies must provide assistance to countries implementing sanctions on the front lines, and help build robust regulatory environments that support compliance in the banking sectors.
Banks on the Front Line of Sanctions
The United States has doled out record fines to major multinational banks failing to comply with sanctions, as seen in the case of the $8.9 billion fine levied on BNP Paribas for violating Iran-, Cuba-, and Sudan-related sanctions. Banks now spend tens of millions of dollars each year to bolster their due diligence capacities to detect and prevent sanctions violations. However, at the regional and local level in sub-Saharan Africa, active compliance in the banking sector is constrained by the lack of capacity and regulatory support, as well as by meddling from corrupt political leaders and their associates.
In this North Korea case, basic due diligence by the local bank involved, Afriland First Bank, would have thrown up red flags as the two men sought banking services. Local regulation, while poorly enforced, does require banks to ask for incorporation and identity documents from companies and individuals looking to create accounts.
According to The Sentry’s findings, the North Koreans furnished passports revealing their nationality but still managed to open an account without issue, pointing to a grave compliance failure at Afriland. The bank, headquartered in Cameroon, has been in the news recently in relation to another case. The bank was reportedly integral to the money laundering network of Israeli diamond-dealer Dan Gertler, an individual sanctioned by the United States under the Global Magnitsky Act.
Afriland had U.S. dollar and euro clearing access through its correspondent relationship with the Paris branch of London-headquartered BMCE Bank International. This allowed the North Koreans to deal in U.S. dollars and euros, potentially without BMCE’s knowledge.
Local and regional banks often rely on such global financial institutions to access western currencies. These correspondent banking relationships allow regional banks to conduct business internationally and provide global banks with a product line that expands their reach. Correspondent relationships, given their nature, come with a certain amount of inherent risk. While global banks can closely screen their own customers, they often do not have the same window into the risk profiles of their correspondent bank’s customers. So while due diligence at the global banking level might be increasingly robust, failures at the local and regional level can open a host of avenues for sanctions evasion. The problem is further compounded if the global bank is lacking in its own compliance measures.
Regulatory Support
Sound sanctions enforcement requires a country having adequate anti-money laundering measures in place, but, in many nations of sub-Saharan Africa, frameworks and laws to counter money laundering and the financing of terrorism (AML/CFT) are lacking. Financial Intelligence Units (FIUs), the national regulatory bodies providing compliance guidance to the financial community, receiving suspicious activity reports from banks, and investigating cases, often lack capacity and funding, as in the case of the DRC’s FIU, Cellule nationale des renseignements financiers (CENAREF). Additionally, a lack of political will, active political meddling, and corruption can undermine sanctions implementation.
This lack of regulatory support opens a host of possibilities for sanctioned entities to conduct business and pursue opportunities unavailable in jurisdictions with better enforcement. These same shortcomings also effectively allow for a range of financial crimes and corrupt activities to thrive; in countries like the DRC and Zimbabwe, corrupt political elites and their networks actually benefit from the lack of enforcement capacity.
Helping Build a Better System
Sanctions are only as good as their enforcement. The U.N., U.S., EU, and other international bodies such as the International Monetary Fund (IMF), the Egmont Group of FIUs, the Financial Action Task Force (FATF), and its regional affiliates known as FATF-style regional bodies (FSRBs), should play a stronger role in building capacity and assisting countries in sub-Saharan Africa in creating a more robust and independent regulatory and compliance environment.
This includes providing technical assistance to regulatory bodies, sharing intelligence and information where appropriate, and providing guidance on how to create adequate frameworks that close money-laundering and sanctions-evasion loopholes and allow for empowered, independent regulatory bodies. Often these regulatory bodies are reduced to paper tigers, beset by meddling from corrupt actors, with little operational funding or support for existing technocrats. U.N., U.S., and EU officials also should, therefore, engage with their counterparts in sub-Saharan Africa to build political will and consensus on sanctions and money-laundering enforcement. And herein lies the hard work. But access to dollars, euros, and the international financial system remain coveted and provides important leverage for diplomatic and other efforts, especially in highly dollarized economies like DRC.
Global banks have a role to play, too. Local compliance failures and shortcomings often lead global banks to end correspondent relationships and pull out of markets, a move known as de-risking. This effectively eliminates banking access for legitimate businesses and the general public, with far-reaching consequences for a country’s economy.
Instead of de-risking, global banks providing correspondent banking services should actively engage their regional partner banks to improve due diligence practices and foster a culture of compliance. Standard Chartered Bank’s “Regional Correspondent Banking Academy” is an example of one such effort.
Environments that allow for sanctions evasion are also susceptible to widespread financial crimes and corruption. Helping to build systems for better sanctions enforcement in pursuit of national security priorities and countering proliferation will also help stymie a host of other nefarious actors who exploit the same failures. The result could be a more sound international financial system overall.