December 14, 2016
On November 30, 2016, CNS Senior Researcher Melissa Hanham testified to Canada’s Standing Committee on Foreign Affairs and International Development in the House of Commons at a session examining the “Freezing Assets of Corrupt Foreign Officials Act and Special Economic Measures Act.”
Thank you very much for having me, Mr. Chairman. I am deeply honoured, as a Canadian living in the U.S. now, to be part of this committee hearing. I hope I can be of use.
Unlike my previous colleagues, I am not a lawyer or a legal scholar. I’m a researcher at the Middlebury Institute of International Studies at the Center for Nonproliferation Studies, and my expertise is North Korea and how it procures different items, particularly dual-use items, that can be used in its WMD—weapons of mass destruction—program as well as in its delivery devices.
I hope I can shed some light on how North Korea maintains networks and launders money to procure these items. I looked through FACFOA and SEMA, and I also took a stab at making some suggestions there. I hope you’ll be patient with me, as I am more of a layperson than my previous colleagues.
From my study of the Financial Action Task Force’s recommended guidelines, I find that FACFOA is clear, coherent, and well designed. It may be yet another instrument in addition to many other instruments, but it’s a very important loophole we need to close.
North Korea is among one of the most notorious money launderers when it comes to proliferation. The Financial Action Task Force itself has only been looking at the issue of proliferation finance for the last few years, so I really am impressed that Canada has been on the forefront. Not all countries have adopted recommendation seven in their guidelines yet, so Canada should be proud of doing so.
I saw two areas that may be useful to mention. One is the term “foreign state”. In both FACFOA and SEMA, the term “foreign state” is frequently used. I understand that there is a political reason for doing so, but I would recommend perhaps using the language “jurisdiction” instead to capture areas such as Taiwan, which have high-technology exports and trade with Canada but are not recognized as foreign states by Canada.
This type of activity has been exploited in the past by North Korea. Although the jurisdiction of Taiwan has worked hard to improve its own laws to handle export controls, North Korea will likely continue to exploit Taiwan, potentially as a transshipment country for goods coming from elsewhere, including, potentially, Canada.
A second point, which I think is really interesting to look at, is the reference to NGOs. I work for an NGO, and I’m very proud to work for an NGO. In particular, I have a lot of respect for NGOs that help in development, human infrastructure, agriculture, and life-saving activities in crisis situations. I’m very pleased to see that Canada has been included in an exception for them, particularly with regard to medical equipment. However, I recommend that this also be accompanied by some guidance on how NGOs interact with these particular activities in North Korea.
North Korea is an area that has previously exploited foreign NGOs to receive dual-use goods, particularly biological dual-use goods. An example of this is the United Kingdom’s CABI. This organization has been exploited in the past. They offer to provide training and equipment on producing biopesticides for use on crops. The equipment by itself falls below the threshold of what would be controlled according to export control laws. However, the training they’ve provided is a dual-use good. In this case, they were teaching them how to make a bacteria called bacillus thuringiensis, which is equally useful when making bacillus anthracis, which is the bacteria that causes anthrax.
These equipment and training activities were later found related to North Korea’s biological weapons program in a facility known as the Pyongyang Biotechnical Institute.
On the subject of how sanctions should be used as a tool in foreign policy, I had a few comments there. First, sanctions cannot prevent a WMD program alone. They are not a single tool in the pallet of tools we have. In fact, they may not even be the best tool. I do not believe personally that they are useful as a punishment or as some kind of inducement to encourage a state to return to diplomatic negotiations. However, in this case, particularly with North Korea, I find that sanctions are a somewhat useful tool in slowing the development of the WMD and delivery system programs that North Korea has. It is perhaps mild solace to people who are concerned about the state of North Korean citizens who are impoverished; however, particularly for military or dual-use items that can be used in nuclear, chemical, and biological weapons programs or delivery systems such as missiles, I believe it is important enough that sanctions are used as a way to slow the development of those programs.
North Korea has a very complicated system of evading sanctions, and it has been very successful in evading U.S., EU, Canadian, and UN sanctions in the past. They have advance money-laundering techniques as well as very simple “suitcases full of money” techniques. They have used flags of convenience in the past. They have used front companies located within and outside of their own borders. They have even used their own diplomatic embassies as locations for receiving goods that can be used in WMD programs. That makes your job extremely difficult, and it makes me very sympathetic to Canadian businesses that must contend with these types of tactics.
I agree with my previous colleague who said that additional guidance is very useful to companies in meeting those types of recommendations. While working here at the Middlebury Institute, I have done quite a few industry outreach programs with my colleagues in our export control department, and I find that companies welcome these types of activities. If the Canadian government does not want to participate in these activities alone, you may want to rely on civil society and academia to assist you in doing outreach on these types of topics.
North Korea’s WMD program is now very advanced, with five nuclear tests, and increasing missile tests. I don’t think diplomatic activities should be focused on denuclearizing the peninsula anymore. Now we need to focus on preventing additional nuclear tests, additional missile tests, and the additional production of fissile material. The way that sanctions may be useful would be to focus on those choke points that provide equipment, training, and knowledge that support those particular programs. I recommend in particular that the export regulations, which I understand are separate from what we are talking about today, focus on the use of computer numerical control machines, electronics, and ball bearings that are too expensive for North Korea to make in its own industry; chemical reagents, fuel and oxidizer; heavy machinery such as construction equipment and logging trucks; metal alloys that can be used in centrifuges or missiles; in addition to biological equipment such as bioreactors, fermentation, spray dryers, and safety equipment that would be used in a WMD program like level three safety cabinets or suits that protect scientists.
In addition, cyberwarfare is becoming a very important component of our fight against WMD. To this extent, encryptions software, both defensive and offensive, should be looked at by companies that are intending to export to the region or even to a third party that may transfer that information to North Korea.
I believe some of the recent export control cases that have popped up in Canadian media are largely around cases where a company has exported to a third party, perhaps an unknown party, likely in China, and that export has been re-exported to North Korea. That is, of course, not Canada’s issue alone, but I do believe that by working together in enforcement, we can better improve the relationship between the enforcement mechanism and the legal mechanism. Enforcement is, perhaps, the most challenging part of the whole process, but I understand that is beyond the scope here, so I will leave it at that.
Thank you very much for having me here, and I welcome all your questions.