WASHINGTON, Aug 24 (Reuters) - The U.S. government is turning the screws on companies that do business with North Korea in violation of U.N. sanctions but has stopped short of taking the more aggressive, and riskier, move of targeting Chinese banks that facilitate Pyongyang's trade in arms and other banned goods. On Tuesday, the Trump administration blacklisted 16 Chinese, Russian and Singaporean companies and individuals for trading with banned North Korean entities, including in coal, oil and metals. The campaign to pressure North Korea's trading partners is aimed at eventually forcing Pyongyang to give up its nuclear and missile programs. The latest measures did not, however, sanction the Chinese banks that experts and former U.S. officials say enable North Korea's international trade, often by laundering funds through the United States. Targeting those banks with measures known as "secondary sanctions" could effectively bar them from making U.S. dollar transactions or moving money through U.S. banks, a death knell for most financial institutions, or subject them to huge fines like those levied on European banks accused of failing to follow sanctions on Iran's nuclear and missile programs. China hawks within the Trump administration who have been frustrated by Beijing's perceived inaction on North Korea have been pressing for secondary sanctions. But a more moderate, pro-business faction, including Treasury Secretary Steven Mnuchin and Trump's chief economic adviser Gary Cohn, is concerned about the impact such sanctions would have on the economic relationship with Beijing. "I am not surprised they held off on (sanctioning) Chinese financial institutions," said Joseph DeThomas, a former State Department official who worked on Iran and North Korea sanctions, referring to Tuesday's actions. "Once we go down the road of hitting a Chinese bank that is deeply connected to the U.S. financial system, things will begin to move very fast and be quite unpredictable." China, the world's second-largest economy, is the United States' largest trading partner in terms of goods and an enormous market for American businesses, making the United States vulnerable to any retaliation by Beijing. Earlier this month, China signed on to new U.N. sanctions on North Korea that banned the export of coal, iron, seafood, and lead. Previous U.N. resolutions had restricted, rather than banned, some of those exports. Chinese and Russian support for the new sanctions was a major diplomatic win for the Trump administration. Dan Fried, the State Department's sanctions coordinator until February, said "as a general rule," Washington should warn China before blacklisting Chinese banks, though that may not always be possible. Sanctioning Chinese companies violating U.N. sanctions by dealing with blacklisted North Korean firms would be a good step before going after banks broadly, he said. "Coal and seafood exports from North Korea are now banned," Fried said. "So we should go after any and all companies importing them." He said Washington should also consider "naming and shaming" companies, particularly in textiles, that use North Korean labor, adding that this could include both Chinese and Western firms. Around 5,200 Chinese companies traded with North Korea from 2013 to 2016, according to an analysis by the non-profit research group C4ADS, a relatively small number that could be vulnerable to enforcement measures, experts said. But David Cohen, a former deputy director of the CIA, said implementing U.N. resolutions likely would not entirely address financial relationships North Korean front companies in Hong Kong or China have with Chinese banks and which are "used to funnel funds back to the regime, particularly from illicit sales." "So that's an area where secondary sanctions could be effective," Cohen said. A broad campaign to cut off North Korea's financial links would have a successful recent precedent: the intensive U.S. effort to halt Iran's nuclear program, which included levying $12 billion in fines against European banks that facilitated Iranian trade. Both the George W. Bush and Barack Obama administrations limited Iran's access to financial channels, and eventually went after Iran's broader trade links. That effort was backed by strong Congressional sanctions. The measures worked. Iran's oil exports dropped by more than half, inflation spiked, the currency plummeted, and economic output shrank 5.6 percent in 2012 and 1.7 percent in 2013, according to the International Monetary Fund. Iran agreed to negotiate over its nuclear program, and eventually reached a deal with the United States and world powers. In a warning shot against North Korea, the U.S. Treasury Department in June targeted a small Chinese bank, the Bank of Dandong, accusing it of laundering money for Pyongyang. Also in June, the Department of Justice said a China-based company was laundering U.S. dollars through American banks for a sanctioned North Korean bank. And a handful of other recent U.S. measures have targeted North Korea's international trade and finance networks. But Washington has not targeted Chinese banks working with North Korea in a broad way, and Congress has not yet imposed the kinds of mandatory secondary sanctions that strengthened the hand of U.S. negotiators when dealing with Iran. Anthony Ruggiero, a former U.S. Treasury official now with the Foundation for Defense of Democracies think tank, believes fears of Chinese retaliation for action against Chinese banks are overblown. "There's a way to do it," he said. "You don't have to freeze their assets; you don't have to cut them off from the United States. You can basically declare that their compliance procedures are not appropriate and that they can get significant fines. "(Then) they will start to ask the right questions." Congress is due to consider legislation requiring U.S. measures against any banks that deal with North Korea. The bill is based loosely on the same Congressional sanctions that were imposed on Iran. "You've seen a series of administrations, Republicans and Democrats, who believed that China would cooperate when it came to applying economic pressure to North Korea," Senator Chris Van Hollen, a Democrat and one of the bill's lead sponsors, said in an interview last week. "We have to move from quiet requests for cooperation to very clear demands that China enforce these sanctions that it signed up for."
(Editing by Kieran Murray and James Dalgleish)