High seas shell game: How a North Korean shipping ruse makes a mockery of sanctions

High seas shell game: How a North Korean shipping ruse makes a mockery of sanctions
Joby Warrick March 3 High seas shell game: How a North Korean shipping ruse makes a mockery of sanctions

The rusting seaport called Kholmsk is one of the sleepiest harbors in Russia’s Far East, a place that sees more full moons than coal ships in a typical year. Yet for a few weeks late last summer, this tiny port was chockablock with vessels hauling outlawed North Korean coal.

At least four ships of different flags showed up in August and September to dump North Korean anthracite onto a pile near the harbor’s southern tip, maritime records show. Then, six other ships arrived to pick up coal from the same spot and deliver it to foreign markets. Between the voyages, the harbor was witness to a kind of magic trick: Illicit North Korean coal was transformed into Russian coal, which can be legally sold anywhere.

Some of it ended up in the most unexpected of places: South Korea and Japan, two of Pyongyang’s main rivals.

“They literally ‘laundered’ the coal,” said a Western diplomat, speaking on the condition of anonymity to describe new details from a confidential U.N. investigation of the incident. “It’s the same tactic criminals use to launder ill-gotten cash.”

It was hardly the first time that North Korea has used subterfuge to fool its adversaries and flout international trade restrictions. But independent analysts say the movement of coal through Russia’s Kholmsk port last year was remarkable, because of the timing — it came just as the U.N. Security Council imposed new sanctions on the sale of North Korean coal — and because of the ruse’s elaborate, multilayered deceptions.

To get around the ban, North Korea developed a complex scheme that depended on stealth, falsified documents and the heavily choreographed participation of officials and businesses in at least three countries, according to documents and records compiled by private investigators and a team of U.N. experts.

Ultimately, North Korea was able to sell the coal — a crucial export commodity that accounts for about 40 percent of the country’s foreign income — in an episode that experts say illustrates the limits of U.S. policies intended to force changes in Pyongyang’s bellicose behavior. Confronted with new obstacles to its vital commerce, North Korea consistently adopts new tactics, with the help of an ever-shifting array of front companies and partners eager to make a profit.

“It’s a shell game that constantly changes,” said David Thompson, a North Korea specialist and senior analyst at the Center for Advanced Defense Studies, a nonprofit organization in Washington that tracks illicit networks. In the case of the Kholmsk affair, he said, “you’re looking at adaptation taking place in real time.”

It is precisely these kinds of sanction-busting schemes that prompted the Trump administration to impose new economic sanctions last month on North Korea-related shipping. The measures announced by the Treasury Department specifically targeted dozens of shipping companies, individuals and vessels suspected of past involvement in practices such as transshipment, or the movement of illicit goods between vessels to conceal the identities of the original suppliers.

Ships registered in nine countries were blacklisted in a move that Treasury Secretary Steven Mnuchin said would hobble North Korean leader Kim Jong Un’s ability to buy and sell the commodities most essential to his country’s economy. “This will significantly hinder the Kim regime’s capacity to conduct evasive maritime activities that facilitate illicit coal and fuel transports, and erode its abilities to ship goods through international waters,” Mnuchin said.

But while such measures will make it harder for North Korea to conduct foreign trade in the short term, the effects will last only until Pyongyang and its business partners develop new methods for circumventing them, experts say. Despite decades of economic isolation, North Korea nearly always finds a way to get what it needs, because there are always companies willing to take the risk, said Andrea Berger, a London-based specialist in proliferation networks and export controls with the James Martin Center for Nonproliferation Studies in Monterey, Calif.

“We spend so much of our time trying to put obstacles in the way of North Korea, and in making the obstacles higher and wider,” Berger said, “but the North Koreans are simply very practiced at getting around whatever we put in their path.”
Flag of convenience

How North Korea managed to launder its coal in Russia — and then sell it to two of its biggest adversaries — is essentially a tale of two ships. The Togolese-flagged Yu Yuan and the Panamanian-flagged Sky Angel, both Chinese owned, were among two separate sets of cargo vessels that passed in and out of Kholmsk harbor in late summer and early fall of last year, carrying coal that at least partly originated in North Korean mines.

A chronology of the operation was pieced together by researchers from the Center for Advanced Defense Studies, using data supplied by Windward, a private company that analyzes ship-tracking data collected by satellites and at ports around the world. The essential narrative also is contained in a confidential report by the United Nations Panel of Experts, a technical committee appointed by the world body to investigate alleged sanctions-busting activity. The draft of the U.N. report, due for release this month, was reviewed by The Washington Post. Other news outlets, including the Wall Street Journal and Reuters, also have reported some details of the coal transshipment schemes.

Before last summer, there is no record of recent visits to Kholmsk by any of the ships involved. Indeed, no North Korean cargo vessels of any kind are known to have docked there since at least 2015. The interest in the obscure port appears to have begun in early August, just as the U.N. Security Council was meeting to consider new sanctions punishing North Korea after its July test of a new intercontinental ballistic missile capable of striking the United States.

U.N. sanctions banning all exports of North Korean coal were formally approved Aug. 5. That week, two North Korean-flagged ships entered Kholmsk to deposit coal in an outdoor bin near the harbor entrance, according to maritime records and the U.N report. There would be seven such voyages over the following month by four different ships, three North Korean and the Chinese-owned Yu Yuan, which arrived Sept. 9.

The 305-foot-long Yu Yuan is managed by Rich Mountain Trading and is owned by Maple Source Shipping, both based in China. Both companies use the same office suite as Chang An Shipping, which was among the Chinese companies listed in the North Korean sanctions announced by the Trump administration last month. Company officials in China did not respond to requests for comment delivered by email and text message.

While the Yu Yuan is Chinese-owned, it sailed under the flag of the West African nation of Togo. There is no record of any connection to Togo among the ship’s owners or managers. Analysts say the Yu Yuan’s operators appear to have adopted the common practice of registering the vessel under a “flag of convenience,” which in some cases allows ship owners to enjoy advantages in taxes, fees and labor rules.
Loitering offshore

Since the dawning of the GPS age, concealing the location of a large cargo ship on the open sea is no longer a simple matter. In addition to government spy agencies, at least a dozen commercial companies plot the movement of vessels traveling the world’s shipping lanes, using data from satellites and harbor masters as well as from the ships’ transponders, which broadcast unique electronic signals pinpointing individual vessels’ precise locations. The operators of the Yu Yuan, like those of any other cargo ship, would have been aware that their vessel’s movements were being tracked.

Commercial shipping data obtained by the Center for Advanced Defense Studies — commonly known by its acronym C4ADS — show the Yu Yuan leaving northeast China’s Wangjia Bay in early August and traveling around the Korean Peninsula into the Sea of Japan. Then, on Aug. 6, as the vessel was steaming north along the South Korean coast, its transponder signal appears to vanish from the maritime record. There is no indication of its whereabouts until Aug. 17, when its transponder signal reappears at Nahodka, a port about 100 miles from Vladivostok in Russia’s Far East, the data shows. The temporary silencing of the transponder is a common practice among North Korean-flagged vessels moving sensitive cargoes. Indeed, at least two of the other ships that visited Kholmsk in August and September also appear to have stopped broadcasting their signals for several days before arriving at the Russian port, maritime records show.

What the Yu Yuan was doing during those 11 days — and what cargo it carried — might have remained a mystery, except that a satellite photographed the vessel in mid-August. The image, provided to U.N. investigators and included in their confidential report, shows the Yu Yuan docked at the coal terminal in the port city of Wonsan on North Korea’s east coast.

The evidence from the photograph is buttressed by a second source: Harbor master records from port authorities in Nahodka. The Russian-language documents, also obtained by C4ADS, record the arrival of the Yu Yuan, a vessel reported to have traveled from Wonsan with a cargo of coal.

The Yu Yuan did not discharge its cargo in Nahodka. In fact, it did not enter the harbor but remained anchored just beyond the sea wall, the Russian port documents show. A common practice among contraband runners is to linger outside a port terminal for several days — sometimes called “loitering” — to throw investigators off their trail, said Thompson, the C4ADS analyst. While the Yu Yuan crew’s intentions can’t be deduced from the maritime record, anyone examining the ship’s movements might conclude that the Yu Yuan had docked at Nahodka and perhaps received its cargo there. Neither was true.

“It sat anchored outside Nahodka for three days,” said Thompson, citing the Russian records. Then it left, he said, “headed for Kholmsk.”
Back to the Korean Peninsula

The rest of the Yu Yuan’s voyage was relatively straightforward. On Sept. 2, transponder records show, the cargo vessel arrived in Kholmsk, a town of 30,000 people on Sakhalin island, a former part of the Japanese archipelago seized by the Soviet Union at the end of World War II. The town, a collection of Soviet-style apartment buildings clustered on green hills above the harbor and rail terminal, has lost nearly half of its population since the fall of communism, but it still operates a small port with terminals for timber and, on the harbor’s southern lip, coal.

A second satellite photo shows the Yu Yuan berthed at Kholmsk’s coal terminal. Port records would later reveal that the Yu Yuan reduced its draft — a measure of a ship’s weight determined by how low it sits in the water — by about 10 feet, indicating an offloading of cargo at the Russian port. Its decks were empty, documents show, when the ship briefly returned to Nahodka a few days later to pick up a load of timber before resuming its southward trek along the Korean Peninsula.

Separately, on Sept. 21, just over two weeks after the Yu Yuan’s visit, the cargo ship Sky Angel arrived at Kholmsk and docked at the same coal terminal, maritime records show. The Sky Angel left Kholmsk harbor on Sept. 26 after reporting to harbor officials an increase in its draft almost identical to the reduction in the Yu Yuan’s — about 10 feet. On Oct. 2, it discharged its coal at Incheon, South Korea’s bustling harbor a few miles west of the capital city of Seoul. A customs certificate shown to The Washington Post states only that the coal originated in Kholmsk.

The pattern was repeated by five other ships that picked up coal from Kholmsk between August and October and delivered it to South Korea or, in one instance, to Rumoi, Japan. None of the ships had previously visited Kholmsk in at least two years, shipping records show.

Investigators say the Sky Angel broke no laws in hauling coal from a Russian port to Incheon, although South Korean officials might have viewed the transaction differently if they had known of the coal’s true origins.

“You could argue that some of the coal at the Kholmsk terminal was of Russian origin,” said the Western diplomat briefed on the evidence, “but once you’re dumping North Korean coal into that pile, does it make a difference? Especially if you’re dropping off a scoop of North Korean coal and then picking up an equivalent scoop a few days later?”

Shipping records shed no light on what is perhaps the biggest remaining mystery: whether, and how, the transactions were coordinated. Who, or what, caused so many ships to converge on an obscure port in Russia around the same time, to move a few thousand tons of coal that could no longer be sold legitimately on the open market?

“Who is facilitating the transactions? How high up does it go?” said Thompson, the North Korea analyst. “What is without doubt is the fact that this is North Korean coal and that obfuscation tactics are being used to get around very specific restrictions.”

“The most egregious thing,” he added, “is that in spite of everything we’re doing, the coal ends up in the very places that would least want to have it.”

Luna Lin and Liu Yang in Beijing contributed to this report.