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Latest US action against North Korea to increase risk for Malaysian banks.

In 2008, the USA removed North Korea from its list of State Sponsors of Terrorism. But as relations between KIM Jong Un and the rest of the world reach worrying levels of tension, the USA is getting ever closer to putting it back on the list. What does it mean and why are Malaysian banks exposed to a particularly high level of risk?

It is easy to see the increasingly frantic noises from Washington about Pyongyang as sabre rattling and the desire of a new President to be hard. It would be easy and wrong. The threats are real.

While has people starve, KIM spends thousands of millions of dollars on the development of weapons which can easily reach across the border into South Korea or across the strip of water into Japan. He has always assumed that he would have the unstinting support of China against capitalism, wherever it is found. Recently, China told him he was wrong and applied sanctions under which it will no longer buy coal. We understand that other products are also under threat, cutting NoKo off entirely from its primary source of foreign currency.

NoKo's already has major problems in relation to the purchase and delivery of goods. One of the funniest things in Kuala Lumpur a decade ago was the exodus of intelligence agents from more countries than one might imagine had spies on hand to Port Klang every time a ship was reported to be docking with goods from or destined for NoKo.

The USA, Japan and South Korea have long been the prime movers and with good reason, and never moreso than now. NoKo has shut down almost all contact with non citizens outside its embassies. It is pulling up every available draw-bridge and settling in for more trouble.

NoKo is a major example of a country that uses foreign aid to feed its people (badly, unless you include rats, we are reliably informed). There are currently the beginnings of rumblings that countries are planning to cut food aid: the World Food Programme is under heavy pressure and there are four famines starting around the world. It faces hard choices and a country that it threatening nuclear attacks on donors is slipping down the list. WFP has confirmed that shipments have been reducing and, in March, cereal bars which nourish almost 200,000 NoKo children were cancelled. WFP has since said that unless its funding is in place by the end of this week, its shipments will cease entirely.

UK based charity Save the Children is reportedly using funds from Germany to deliver some half-a-million Euros worth of aid across the country. But that is a one-off deal, apparently.

The USA already applies extensive sanctions to NoKo (see our Sanctions in Action section ) and to many individuals and companies associated with the NoKo government. That is, almost by definition, every NoKo citizen who is not a defector but those sanctions systems require there to be named persons.

By returning NoKo to the State Sponsors of Terrorism list, the USA effectively cuts NoKo off from any and all dealings, directly or indirectly, in US dollars, even if the parties are outside the USA and their own countries have not issued any sanctions against NoKo or individuals.

It is in this way that banks and trading companies around the world will be at risk of action in the USA if it is discovered that they are doing business with any NoKo entity or agent.

Which brings us to why Malaysia banks will be especially at risk.

Malaysia has been one of only a handful that maintained commercial and diplomatic relations with NoKo, much to the chagrin of the USA which might have been part of the point. But after the (almost certain) murder of KIM's half-brother by the use of a chemical agent in a busy airport terminal, even Malaysia got fed up. Then KIM showed just how far from reasonable he is by refusing to provide Malaysia with evidence to prove the identity of the murder victim who was travelling under a false name and then, because in the absence of proof, Malaysia said it could not release the body, KIM ordered that Malaysians working in NoKo be detained and held hostage until the body was released.

To say that Malaysia was shocked would be an understatement, as would it to say it was angered. But even so, it did not break off diplomatic relations and it did not institute a ban on trade or trans-shipments.

That latter business would now come under serious scrutiny. A decade or so ago, paid for by the USA, powerful container scanners were put in place at Port Klang specifically to search for weapons that might be in transit.

Now there are statements in the USA every couple of days from the most senior politicians. Rex Tillerson, the US Secretary of State, said last week that serious consideration was then being given to the action. Then several reports arose overnight last night saying that more and more people were trying to encourage a listing.

At the same time, military action has been stepped up: SoKo has undertaken live firing exercises, the USA has put a battle fleet off the Coast of SoKo and Japan. China has launched its biggest ever aircraft carrier which, even during the planning stage, was giving everyone with South China Sea exposure the willies, given the land grabs (and water grabs) China has executed in recent times. China has also built military airfields on atols and man-made islands within striking distance of NoKO. Reports that China had "amassed" a large border force next to NoKo have largely been discounted as troop replacement rather than new or enlarged forces.

Almost the only voice raised in dissent is The Cato Institute. It says "North Korea isa bad actor but not a state sponsor of terrorism." It points out that the original listing was in 1988 after NoKo put a bomb aboard a SoKo airliner "classic terrorism, intended to instil fear prior to the Seoul Olympics." Cato says that the USA's biggest problem is that NoKo is not committing terrorism.

But the Cato Institute is wrong, or would be anywhere except the USA and the problem arises out of the USA's failure to properly define terrorism. In the rest of the world, in summary, terrorism is defined as action or threats of action pursued for e.g. ideological reasons, intended to influence government policy.

Yet the USA has a singular policy: remember the Korean War? So does NoKo and, in particular, the fact that there is only a ceasefire, not a treaty terminating all hostilities. Technically, the USA and NoKo are still at war. And war isn't terrorism. So, ironically, hitting the USA or its assets (but not its allies) with any form of aggression would not, absolutely would not, be an act of terrorism.

But that won't stop the US State Department from making an Order if it thinks it might help defuse tensions, which, of course, it won't.

For banks and trading companies doing business with NoKo and its agents, none of that will make any difference. If State makes the order, then all assets held by anyone who trades with a sanctioned entity and their bankers or other money transmitters will face the risk that assets will be frozen in the USA. All US dollar deposits, worldwide, are fair game if the USA makes an order against a person for dealing with a sanctioned entity.

The only point at which there is some prospect of the sanction standing up is if the rumours of sales of weapons to proscribed organisations such as Hamas and Hizbollah stack up. Those are already defined as terrorists and providing material support to them is, under US law, an act under counter-terrorism laws.

In the meantime, Malaysian banks and traders should prepare to shut down, at a moment's notice ,all payments into, out of or for the benefit of any NoKo entity or agent.

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