In the dead of night last month, two tanker ships pulled alongside each other in the East China Sea. One was a North Korean vessel, the other was the Belize-flagged Wan Heng 11.
Lights on both ships were blazing, arousing a Japanese surveillance plane’s suspicion that they were carrying out a “ship-to-ship” transfer banned under UN sanctions imposed over North Korea’s nuclear weapons program.
Records for the Wan Heng 11 and a number of other ships identified in recent UN and US sanctions blacklists and Japanese surveillance reports revealed ties to Hong Kong through front companies based there.
The findings underscore rising concern over the southern Chinese financial capital’s role as a nexus for North Korea’s underground business network, which has prompted the US government to urge Hong Kong authorities to crack down.
The corporate registration agents that set up these front companies “present a key vulnerability in the implementation of financial sanctions,” a report by the UN Panel of Experts on North Korean sanctions released on Friday last week showed.
Researchers have said North Korea relies on front companies acting as middlemen to mask its overseas trading links, many of which involve China.
Successively tighter rounds of sanctions aim to deprive North Korea of key sources of revenue by choking off its ability to smuggle exports, including through oil transfers between ships at sea.
Hong Kong, an Asian business hub, is “staying highly vigilant about activities and suspected cases” of sanctions violations and is “looking into the cases” involving Hong Kong-registered companies, the Hong Kong government said in a statement.
‘MONACO OF THE EAST’
The territory often tops business and economic freedom rankings, based on criteria that include ease of setting up business.
That can also facilitate illicit dealings.
The territory hosts a vast industry of company formation experts who can register corporations quickly and with minimum information from their clients.
Many operate out of anonymous, one-room offices with as little as a single employee.
They promise to set up a firm within a day for clients who can apply online if they are not in Hong Kong.
Out of 11 companies based outside North Korean named in a US Department of the Treasury sanctions list last month, two each were in Taiwan and China, and one each in Singapore and Panama. The remaining five were in Hong Kong.
The UN report said that separate investigations of a Singaporean company and Glocom, identified as North Korean military equipment supplier, found evasion tactics included the use of Hong Kong front companies.
Hong Kong has imposed new rules aimed at preventing money laundering that took effect this month that require licensing of corporate registration agents.
Companies also must now identify and disclose their beneficial owners, but only to law enforcement authorities.
It is not unusual in itself for a company to operate out of secretarial office, Hong Kong corporate governance activist David Webb said.
However, lax corporate disclosure rules give “Hong Kong a sort of Monaco of the East image, as a funny place for shady people,” he said.
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