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Proposed Inter-Korean Projects Could Violate UN, US Sanctions

South Korean President Moon Jae-in and North Korean leader Kim Jong Un wave during a car parade in Pyongyang, North Korea, Sept. 18, 2018.
South Korean President Moon Jae-in and North Korean leader Kim Jong Un wave during a car parade in Pyongyang, North Korea, Sept. 18, 2018.

As South Korean President Moon Jae-in meets with North Korean leader Kim Jong Un for their third summit, there is increasing concern that the inter-Korean economic projects Seoul envisions could violate sanctions and fracture the U.S.-South Korean alliance.

“The South Korean government appears to be headed in the direction of, or inclined to violate bans on joint ventures with North Korea, support for trade with North Korea, and infrastructure projects with North Korea, all of which require the permission of the U.N. committee,” said Joshua Stanton, a Washington-based attorney who helped draft the North Korea Sanctions Enforcement Act that former President Barack Obama signed in February 2016.

For South Korea to carry out joint economic projects with North Korea, it would need to seek exemptions on sanctions from the U.N. Security Council Sanctions Committee on North Korea.

However, “the mandate of the committee does not include the authority to modify existing terms specified in various resolutions,” said William Newcomb, a former U.S. Treasury official who is on the U.N. Security Council’s Panel of Experts on North Korea.

Disruption of relationship

If South Korea does not ask for exemptions from sanctions, Seoul will face a risk of rupturing its relationship with the U.S., Stanton said.

“It would be an extinction-level event for the U.S.-South Korean alliance,” he said. “This is an absolutely incomprehensible betrayal by a nation that calls itself our ally that Americans have defended with [their] blood and with their money.”

And if sanctions are willfully violated, Stanton said South Korea would be, “in its own way, a rogue nation.” The roster of rogue nations includes North Korea, Iran, Sudan, Syria and others.

South Korea has been planning several joint economic projects with North Korea since April’s inter-Korean summit. As the U.S. and North Korean relationship has thawed in the aftermath of the Singapore summit held in June between President Donald Trump and Kim, Seoul stepped up its plans, and a third inter-Korean summit began Tuesday in Pyongyang.

Days before Moon and Kim met, however, the U.S. announced new unilateral sanctions against North Korea. On Thursday, Washington targeted North Korea’s China-based company, Yanbian Silver Star Network Technology, its North Korean CEO, Jong Song Hwa, and its Russia-based subsidiary, Volasys Silver Star, which sells IT services and products.

There is also talk of the U.S. using military force to curb North Korea from evading sanctions at sea by monitoring ship-to-ship transfers by coordinating its efforts with countries like Australia, Japan, New Zealand, Canada, France, and the U.K. as well as South Korea.

The projects South Korea has been planning with the North include constructing an inter-Korean railway, which Moon has publicly backed, reopening the Kaesong Industrial Complex, and resuming the tours to Mount Kumgang, a landmark of great natural beauty with a special hold on the Korean soul. The tours and the complex appeal to South Korean companies.

Possible sanction violations

Each could violate sanctions that were imposed on North Korea in 2016 in response to its fourth nuclear weapons test and a long-range missile launch.

“In the absence of waivers and exemptions from the United Nations, which the U.S. as one of the Security Council members would have to support, Mount Kumgang and Kaesong would violate sanctions,” said Troy Stangarone, senior director of the Korea Economic Institute, who is a specialist on South Korea trade and North Korea.

Under U.N. Resolution 2375 issued in September 2017, “forming joint ventures or cooperative entities, new and existing, with DPRK (North Korean) entities or individuals” is prohibited.

Additionally, any products manufactured using North Korean labor, potentially including items fabricated in the Kaesong Industrial Complex, will be banned from U.S. commerce. The Countering America’s Adversaries through Sanctions Act (CAATSA) adopted in August 2017 stipulates that manufacturers purge any parts made with North Korean labor from their supply chains.

While Moon is expected to attempt to broker a denuclearization deal between the U.S. and North Korea at the summit and continue Seoul’s rapprochement with Pyongyang aimed toward eventual unification, South Korea must make sure that it does not violate sanctions as it pursues inter-Korean projects, Stanton said.

“I don’t think they actually did read the sanctions,” he said. “When you look at Moon Jae-in, he will go out and make all of these promises” and when it’s pointed out that “that there’s a provision that you’re violating here … they will respond by saying it’s not sanctions violation because it’s good for everyone to have peace.”

One of the projects is the construction of a railroad to connect Seoul and Sinuju, the North’s northeastern border near the Chinese city of Dandong, via Pyongyang, eventually linking to Beijing and then venturing toward Europe via the Trans-Mongolian and Trans-Siberian railways.

Railway project concerns

William Brown, a former U.S. intelligence official who is currently a professor of North Korean economy at Georgetown University, said for the railroad project to move forward, South Korea would have to finance the construction, which could end up funding the North Korean government.

“A big railway project wouldn’t work without severe pullback of U.N. sanctions and probably U.S. sanctions as well,” said Brown.

According to Stanton, providing both public and private financial support to North Korea is banned under U.N. Resolution 2321 adopted in November 2016.

However, plans for the railroad and the other projects are being formulated. Although South Korean officials said they do not expect to make any agreements on joint economic projects, top business leaders from Samsung, LG Group and Hyundai accompanied Moon to the summit.

Since Moon’s first summit with Kim, Hyundai has been developing a task force to prepare for restarting the Mount Kumgang tours and Kaesong factories.

When Mount Kumgang initially opened in 1998, Hyundai Asan had the exclusive right to operate tours. The company agreed to pay Pyongyang a fixed monthly sum, which was subsequently changed to a percentage of monthly profit when the attraction proved less profitable than anticipated, said Bradley Babson, an advisory council member of the Korea Economic Institute of America.

The tours ended in 2008 after a North Korean guard shot and killed a South Korean tourist.

Resuming the tours under an arrangement similar to the original deal would violate current sanctions.

Initially, the Kaesong Industrial Complex was mostly financed by the South Korean government and major South Korean companies. The complex that opened in 2004 included factories where South Korean manufacturers could employ inexpensive North Korean workers.

Each North Korean worker was supposed to be paid $70 a month, but they received a fraction of that from their government, Brown said.

Wages likely diverted

In February 2016 during the administration of Park Geun-hye, Seoul’s Unification Ministry said wages were paid in U.S. dollars to the North Korean government and not directly to the laborers, and most of the money is believed to have been diverted to the North’s Office 39, which is thought to finance Pyongyang’s nuclear and missile programs.

The Treasury Department sanctioned Office 39, describing it as “a secretive branch” of the North Korean government that provides critical support to the regime’s leadership “in part through engaging in illicit economic activities and managing slush funds and generating revenues for the leadership.”

Moon, who was elected in May 2017 after Park’s impeachment, revived the “sunshine policy” of building ties with North Korea through aid and exchanges.

In July 2017, Moon’s office said that there was no proof that money from Kaesong funded North Korea’s weapons program. But Stangarone said the money would have indirectly supported the North’s weapons program even if it did not directly finance it.

“The primary issue,” he said, “is even if North Korea were … to only spend that money on other things rather than nuclear program or its military in general, that funding then frees up other funding they would have had to use and allow them to spend it on those weapons program.”