By Kyle Ferrier
The Panama Papers have already exposed a number of national leaders in schemes to hide personal wealth in shell companies and will be of greater consequence in early May when the full list of businesses created through Mossack Fonseca are made available. Most of those implicated have utilized the services of the Panamanian offshore law firm to evade taxes, sparking public contempt in a number of countries, with some governments working to address the issue at the national and international levels. While global tax reform may continue to be the most publicized outcome of the Panama Papers, the documents have already shed more light on how shell companies have been and could be used for more illicit activities, including the circumvention of sanctions. In anticipation of the disclosure of all 214,000 businesses in the papers next month, there are three ways this new information can help to strengthen efforts to pressure North Korea.
Expose Connections to North Korea
The first and most obvious means would be if the documents were to expose an organization or individuals that were previously unknown to have ties with the North Korean regime. Both the U.N. and U.S. sanctions against the DPRK blacklist a number of individuals and entities with ties to the nuclear program, but given the complete lack of financial transparency in the rogue state it is plausible that we may be missing information to ensure these measures are comprehensive.
From the papers released on April 3 the only known organization to have a link to North Korea is DCB Finance, set up in the British Virgin Islands in 2006 by British banker Nigel Cowie as a subsidiary to North Korea’s first foreign bank. In 2013 the U.S. Treasury eventually discovered the company had been used to finance the nuclear and rocket programs since its inception and sanctioned it. Despite Cowie’s exit from the firm in 2011 it seems fairly unlikely for the U.S. Treasury to not know about his involvement, so this disclosure is nothing new in one sense. Yet what is most notable is that Mossack Fonseca did not realize legally Cowie should not have been a client of theirs until DCB Finance was sanctioned. During this period from 2006 to 2013 they facilitated transactions worth millions of dollars for the North Korean regime.
There may still be other companies that the U.S. has not identified with links to the regime and that this offshore law firm has not scrutinized enough. However, the closer examination of the papers may also reveal other connections such as those to North Korea’s mining industry discovered by the Australian Broadcasting Company.
Disincentivize Business with North Korea
The second way the Panama Papers can augment sanctions is through disincentivizing business with North Korea. Even if the sources released in May do not directly relate to the DPRK, the revelations will raise public attention on tax havens, invariably decreasing their attractiveness as a means to discreetly move funds for any current or would-be business partners. Some argue this would only perpetuate a futile cycle wherein the U.S. and others attempt to end an illegal market activity, only to displace it to another plane. As long as there is profit to be made it is hard to disprove this line of thinking, yet driving illicit financing to older ways of moving money is much less efficient. Additionally, new sanctions on North Korean shipping and jet fuel should make the physical transfer of cash as an alternative to shell companies substantially more difficult.
Assuming Nigel Cowie’s pleas of ignorance are at least somewhat plausible, the case also reveals that individuals conducting what they believe to be legitimate business with Pyongyang may actually be in violation of sanctions. Cowie claims he had no knowledge of DCB Finance supporting the illegal nuclear and rocket program through transactions with sanctioned state organizations, namely the Korea Mining Development Corporation. Consequently, he would not have known of the connection until his company was sanctioned in 2013, two years after he left. For those still interested in doing business legally in North Korea this story might be a sobering one. Doing formal business with North Korea involves a government partner and no matter which organ you may be transacting with, your money may be used to further illicit programs, only to be realized at a later date. Cowie sold his assets before they would have been frozen, but is the risk worth the reward for would-be partners?
Learning and Adapting Policies
Lastly, the Panama Papers present a momentous opportunity for governments to make the processes of obscuring money more transparent. Although the vast majority of reforms will be born out of tax evasion and avoidance concerns, these will simultaneously encompass the same means used for any illicit financing, including for skirting sanctions. Moreover, among the documents released thus far are details of how the Assad regime circumvented sanctions to purchase fuel. Unlike the scenario for DCB Finance, the U.S. government was not aware of this until the documents were leaked. The Syria case and potential similar ones may not only help provide useful information for the parallel situation in North Korea, but help foster greater demand for financial transparency policies. This may be particularly important for countries where there have been prominent leaders linked to amassed hidden wealth and limited public backlash to catalyze reform, such as China and Russia, both of which play a critical role in ensuring sanctions on North Korea are fully implemented.
The Panama Papers are likely only the tip of the iceberg. Mossack Fonseca is only the fourth largest provider of offshore legal services and there are certainly many smaller firms. What is revealed in early May will be of great consequence for limiting any possible gaps for sanctions on North Korea, but if the release of documents can be sustained and how widespread reactions are in the coming months will be key factors determining the papers’ degree of utility for sanctions.
Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone.
Photo from dronepicr’s photostream on flickr Creative Commons.