Summary: Through the use of front companies and shell companies, the UN suspects North Korea is using the South China Sea port of Hong Kong to launder money and evade the current sanction regime. The prime suspect is Hong Kong based company¬†Unaforte Limited, which appears to be a front company. Unaforte appears to have owned a North Korean bank and other ties to that regime. The use of front and shell is essential to North Korea, as it uses these companies to launder funds and obscure ownership in order to access the international goods markets in defiance of sanctions. The UN Panel of Experts on North Korea has identified Hong Kong as having the largest share of North Korean front companies, likely due to the port city being the closest international financial center to the Hermit Kingdom. Through collaboration with illicit mainland Chinese operations operating in Hong Kong, and by abusing the Clearing House Automated Transfer System to obtain currency conversions to US dollars without being targeted for sanctions, North Korea is able to utilize the relatively laissez-faire nature of Hong Kong’s banking infrastructure and incorporation rules to their own benefit.

Analysis: While not dealing with the South China Sea conflict directly, the issue deals with US interests in the region. If North Korean and illicit Chinese operations are able to continue operating effectively out of Hong Kong, it weakens not just the efforts of the US and UN to reign in North Korea at a time when the situation is particularly tense, but helps disincentivize any firmness on China’s part to enforce strict sanctions on North Korea, or consider expanding them. It also helps underline the connection between US opposition to China’s SCS policy while simultaneously trying to co-opt their cooperation in reigning in North Korea. Leaving the situation as it stands is problematic, but targeting Chinese interests in Hong Kong is always a politically sensitive topic for the government in Beijing. Perhaps all the more so when the economic connections are illicit ones, and exposing them causes them to lose face for being unable to stop such activity.