Oil traders and insurers are the latest weapons in UN efforts to enforce North Korea sanctions

Key Points
  • North Korea has evaded United Nations trade sanctions by making offshore trades with ships that turn off their tracking beacons.
  • The UN is now asking insurance companies and commodity traders to add clauses to their contracts that require certain ships to keep their tracking systems on at all times.
  • The UN also wants the companies to require supporting documents that would prove deliveries of certain petroleum products have not been diverted to North Korea.
Oil traders and insurers are the latest weapons in UN efforts to enforce North Korea sanctions

The United Nations is tapping private companies to aid in its fight against North Korea's efforts to evade trade sanctions at sea.

A panel of experts from the UN Security Council is asking that insurers and commodity traders involved with certain trading ships alter their contracts to prevent illicit trades with North Korea.

The UN has ratcheted up sanctions on Kim Jong Un's rogue regime in response to its nuclear tests in recent years. In 2017, the intergovernmental body banned all North Korean exports of coal and limited imports of crude oil and petroleum products, among other punitive trade rules.

But the UN says North Koreans have found ways around the sanctions, behaving at times like "pirates" and making trades on the high seas of sanctioned goods worth hundreds of millions of dollars since January 2017.

How North Korea continues to evade sanctions

For some deliveries to the Far East, the UN now wants the companies to require supporting documents that would prove deliveries of certain petroleum products have not been diverted to North Korea.

The so-called end-use verification requirement would give some sanctioned products the same treatment as arms shipments.

"It's just like with weapons," Hugh Griffiths, coordinator of the UN's North Korea panel, said in an exclusive interview with CNBC. Griffiths said that the few extra contract clauses would be "a simple thing any company can handle."

Another UN proposal asks the companies to ensure through their contracts that the vessels keep their tracking systems switched on at all times.

The tracking beacons, known as "automatic identification systems," play a crucial role in monitoring illegal trades at sea. To circumvent the UN's strict quotas on deliveries of petroleum products to North Korea — or the outright ban on buying North Korean coal — vessels will turn off their AIS beacons when they rendezvous with North Korean ships for offshore trades.

In every case of ship-to-ship trades with North Korea, Griffiths said, "the vessels switch off their AIS just before they meet at sea, meaning that they cannot be tracked any longer." Griffiths called the blackouts "an immediate risk indicator."

He added: "If a vessel switches off its AIS at sea, there is a heightened risk that it's doing something clandestine or illegal."

Targeting incentives

The UN is targeting insurance companies and commodity traders in these transfers for effectiveness and simplicity.

Griffiths said only about 10 insurance and reinsurance companies and a similar number of commodity traders connected to the ships are making hidden trades with North Korea.

More importantly, Griffiths said, "All the ships that have been involved in these illicit ship-to-ship transfers ... have Western reinsurance." Ship captains, who need insurance to operate, would be placing their careers at risk if they defied their insurance contracts by switching off their AIS trackers.

CNBC’s Michelle Caruso-Cabrera views maritime intelligence software programs with United Nations North Korea panel coordinator Hugh Griffiths at Two United Nations Plaza on May 4, 2018.
Kevin Breuninger | CNBC

The entities skirting the sanctions on North Korea have taken advantage of an increasingly globalized trade landscape, prompting the UN to seek solutions that create incentives for companies to comply with new restrictions, Griffiths said.

He said the sanctions "are working better than they've ever worked before" — but even still, ships are going dark.

Among the only reason that a vessel's tracker could be appropriately disabled, Griffiths said, would be to mitigate the threat of alerting pirates of its position.

That loophole could create problems when targeting North Korea because the country's vessels "are now behaving a bit like pirates," Griffiths said, by disguising their ships, sailing under false names and hiding their tracking numbers.

"So it's just possible in theory that a captain approaching a North Korean tanker might think he's dealing with a vessel belonging to another country," Griffiths said.

Going dark

Even as Kim's authoritarian regime appears to be taking steps to thaw its hostile relations with other world powers, Griffiths said UN member states have been able to monitor five to 10 sanction-defying trades each month.

As long as the ships continue to switch off their trackers, it's extremely difficult for the UN to monitor the petroleum product trades.

"It's impossible to physically detect these transfers because they switch off their AIS and they go dark and we can no longer see what they're doing," Griffiths said.

As for North Korea itself, Griffiths said the country still regards the Security Council as illegitimate.

"North Korean tankers are now always dark," Griffiths said.

The most recent report from the council's panel of experts on North Korea concluded that the country made $200 million in ship-to-ship transfers in the first nine months of 2017.

Griffiths said that despite North Korea's sudden warmth toward its southern neighbor, the transfers have continued. He said his team has witnessed a $40 million transfer in just one network within the past six months.

And even with an increase in talk of peace initiatives — including the prospect of a face-to-face meeting between Kim and President Donald Trump — Griffiths isn't so sure that denuclearization is on the way.

The UN coordinator noted that Kim, in his 2018 New Year's address, said that sanctions were indeed having an effect. "But another thing he talked about was the mass production of nuclear weapons. And that is something that is extremely difficult for our panel to track, and it's something I'm concerned about," Griffiths said.

Nuclear missile launch tests are understandably easy to track. But the assembly of nuclear weapons, which could be taking place in covered or underground facilities, is far more difficult to monitor.

"Some of this is above my pay grade," Griffiths cautioned, "but I think [with] the statements made by chairman Kim Jong Un about mass production, it would be very important to get into these sites and to see what's happening there."