Assessing the risk of doing business with North Korea and its business partners
In March 2014 the United Nations (‘UN’) published a report assessing the Democratic People’s Republic of Korea’s (‘DPRK’) engagement in developing its nuclear activities, weapons of mass destruction, ballistic missiles and its trade in arms dealing and other prohibited activities.
The report provides useful guidance for industry, to assist in assessing the risk of doing business with North Korea, as well as its trading partners. It highlights certain locations, products and practices in the region as ‘red flags’, which may trigger the need for additional due diligence by Lloyd’s market participants.
Whilst this guidance will be of particular relevance to marine and aviation cargo and hull underwriters, it is useful for any managing agent who does business in the Southern Asian region. Lloyd’s has summarised the key ‘red flags’ in the table, which will be useful when undertaking due diligence on risks domiciled or with links to North Korea or its trading partners.
To illustrate the use of ‘red flags’, we have summarised two ‘case studies’ outlined by the UN, at the end of this article.
Areas of concern identified by the UN
The report shows that the DPRK is highly experienced in evading sanctions and using multi-layered circumvention methods. Additionally, it analyses the DPRK’s shipping capability (both marine and aviation) and use of containerised freights combined with certain strategies to circumvent sanctions. The evidence contained in the report reinforces the need for a prudent approach not only when presented with any North Korean business but also with regard to business related to certain jurisdictions and or products, some of which are highlighted in the attached table of ‘red flags’ . The report covers key areas of concern, including:
- The nuclear development agenda of the DPRK, highlighting gaps in their infrastructure and manufacturing capability.
- Ballistic missile and related programmes, including a number of tests of missiles and increased development activity.
- Chemical weapons, including the possibility that the DPRK was responsible for providing Syria with chemical weapons used to attack civilians.
- Increased import and export activity by the DPRK and into related ports, raising concerns of increased circumvention of sanctions.
- Arms refurbishment capabilities, which is considered to be a major source of revenue for the DPRK, by refurbishing arms and selling them to countries who are subject to an EU arms embargo.
- The luxury goods ban, which was implemented by the UN, and concerns that it is not being implemented uniformly by member states.
Case Study 1 – Ballistic missile-related shipment seized by the Republic of Korea
In May 2012, South Korea seized a shipment of ballistic missile related graphite cylinders originating from the DPRK which are a prohibited export. The consignor of the goods was the Dailan Liaosin Trading Company Ltd, based in Dailan, China, acting on behalf of a North Korean entity, the Korea Tangun Trading Corporation, an entity which the UN has designated as subject to sanctions.
The consignee was Electric Parts Com, which shares the same address, telephone and fax number as entities in Syria already identified by member states as being involved in the acquisition of items related to the Syrian Arab Republic’s programmes of ballistic missiles and weapons of mass destruction.
This case demonstrates the DPRK’s use of Chinese intermediaries and partnership with Syrian entities which the UN has designated subject to sanctions.
Case Study 2 – Arms Shipment seized by Panama
In 2013 a Panamian inspection of a DPRK vessel, the Chong Chon Gang, found a consignment of arms and related material under a cargo of sugar, in contravention of various UN embargoes.
The route of the voyage was via Russia, to Cuba via the Panama Canal. Apparently, the arms were picked up from the port of Mariel, Cuba, later docking in Puerto Padre, Cuba to pick up the sugar. The vessel was stopped on its return journey to the DPRK.
The transaction was between Cuba and the DPRK. The Cuban authorities advised that they owned the arms and were shipping them for repair and return. The DPRK advised that the goods were of Cuban origin and were being transported for “overhaul” in a contract between the two countries.
The vessel was DPRK owned and flagged but the ship manager also played a key role in arranging the shipment from its offices in North Korea and Russia and used its Dalian, Chinese office for arranging spares. It also used a Singapore based company for the payment of costs related to the voyage. Evidence of phone records shows that the Captain was working in collusion with North Korean embassy staff in Cuba, who were involved in arranging the shipment and payment. The shipping agent in Singapore was also co-located with the North Korean embassy in Singapore. The documents found on board evidence that the ship was under the control of the DPRK government, the Ministry of Land and Maritime Transportation.
The cargo was accepted by the ship without standard shipping documents including cargo survey reports and false declarations omitted the hidden cargo from the manifest with no bill of lading for the illicit cargo. False pre-stowage plans had also been created for the cargo giving the impression the ship was only carrying sugar. The records within the ship’s log were also falsified in that a list of ten previous ports of call were recorded but the log omitted to record the ship calling at the port of Mariel.
This case highlights a number of contravention methods that the DPRK used to circumvent sanctions such as the concealment of cargo and communication techniques to conceal its true nature, collaboration between the DPRK and overseas embassy staff, the use of alternate names or aliases for DPRK government entities, concealment of the ship’s location and falsified documents.
Red Flag Matrix
This matrix highlights some typical ‘red flags’ which could be used by underwriters when considering insurance risks to alert them to a possible link to the DPRK.
|Yongbon, North Korea||Location of a uranium enrichment workshop|
|Pungye- ri, North Korea||Nuclear test site where new construction is occurring|
|Dalian, China||A port in China is renowned as being a popular location for the transhipment of DPRK goods|
|Vostochny, Russia||A port in Russia renowned as being a popular location for the transhipment of DPRK arms|
|Pilger milling machines and their mandrels||Related to nuclear development|
|Dies and lubricants for zirconium alloy tubes production||Related to nuclear development|
|Ultrasonic test equipment for inspection||Related to nuclear development|
|Graphite cylinders||Can be ballistic missle related product|
|Items in components rather than assembled||Activities to circumvent sanctions and arms embargoes|
|False declaration of cargo|
|Inconsistency between company's stated line of business and cargo|
|Transhipment from a DPRK port (e.g. Nampo) via a Chinese port (e.g. Dalian)|
|Use of third country intermediaries|
|Concealment of cargo|
|DPRK governmental agencies using alternate names or aliases for doing business abroad|
|Communication techniques to conceal goods|