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Shell Companies Enable North Korea To Dodge Economic Impact Of Sanctions


Now we're going to talk about one reason sanctions against North Korea have not worked so far. The country uses shell companies to avoid the rules that the international community tries to impose. Anthony Ruggiero is a former State Department and Treasury official who now tracks this issue for the right-leaning think tank the Foundation for the Defense of Democracies. Welcome to the program.

ANTHONY RUGGIERO: Thanks for having me.

SHAPIRO: Give me an example of how one of these shell companies works.

RUGGIERO: So North Korea usually will have - either it will happen with their own representatives or they'll have - and the best example we have is of a Chinese company and individuals that will set up front companies for North Korea's operation. And in that example, North Korea provided a commodity - in this case coal - for sale and then it was sold likely within China. And that money was held inside China after a profit taken by the Chinese companies. And then what North Korea essentially had was a pool of money that it could draw from to purchase materiel or luxury goods or whatever it needed. But one thing it did not purchase, of course, was food or medicine or other types of material for their own people.

SHAPIRO: Shell companies are not in and of themselves illegal, right?

RUGGIERO: Right. Front companies - it depends. Obviously there are some other restrictions involved. But in most cases the setting up of that company would not be illegal. It's the activity that they're undertaking that could be against sanctions or against national laws or international laws.

SHAPIRO: How big a part of North Korea's economy is this? Do we have any way of knowing?

RUGGIERO: Well, it's hard to know because North Korea does not report its own trade statistics. So - and there's this whole - there's an illicit part of their economy as well where they're engaged in illicit activities, whether that's cyber activities or counterfeiting our currency at one point or counterfeit drugs or actually drug smuggling. So they have a lot of different counterfeit activities that are hard for us to track.

SHAPIRO: Are these shell companies for the most part run by people who just want to make a buck, who might be associated with organized crime? Or are they run by high-up government officials who could stop this on a wide scale if they wanted to?

RUGGIERO: Well, there are certainly people who are doing it to make a profit. And we've seen some of those are making a hefty profit. And it is an open question when it comes to China, Russia and other countries, is whether some of the leadership or some of the senior officials are complicit. But they're definitely not asking the right questions to ferret out what's going on. Even though they're not - they're not the ones that everybody sees, North Korea has overseas representatives. This resolution goes after nine representatives overseas. Interestingly enough, four of them are in Russia and five of them are in China. It really sort of reinforces where the problem really lies.

SHAPIRO: The Justice Department has indicted people who ran these shell companies. Is that ultimately effective, or do new ones just spring up all the time?

RUGGIERO: Well, there's a lot of - the game of whack-a-mole comes to mind when you're looking at North Korea, shell companies and front companies. But what we saw with Iran is that you just have to keep designating them. You have to keep identifying them. And at some point, the costs for North Korea are so high that it becomes just an untenable situation for them.

SHAPIRO: When you look at this latest set of sanctions, do you see anything in there that says to you, ah, this is going to tackle the shell companies in a way that sanctions up until now have not?

RUGGIERO: Well, no. I think that it's the - it's unfortunately the reverse because the individuals that are named are North Korean representatives overseas in Russia and China, but their Russian and Chinese counterparts are not named. That's where U.S. sanctions are probably going to have to come in. The United States could name those persons and those companies, and then banks will abide by that. You can go for a one-two punch here. The Russians and the Chinese are unlikely to support that at the U.N.

SHAPIRO: That's Anthony Ruggiero, senior fellow at the Foundation for the Defense of Democracies. Thanks a lot.

RUGGIERO: Thank you. Transcript provided by NPR, Copyright NPR.