Breaking the Sanctions Trap: Reinventing Enforcement

View of Pyongyang, North Korea. Source: Shih Tung Ngiam

By Moon Hwan Lee

I. Introduction

Rare earth minerals are the new oil, serving as strategic assets that power the modern world.[1] From cutting-edge defense systems to clean energy, these elements are indispensable.[2] Yet, they also fuel a dark undercurrent: rogue states like North Korea exploit illicit trade routes, laundering these critical materials into the global supply chain, financing nuclear ambitions while evading sanctions with impunity.[3]

This paper exposes a dangerous paradox: Western dependence on rare earths inadvertently bankrolls sanctioned regimes.[4] Through sophisticated trade-based money laundering and opaque corporate structures, North Korea transforms these minerals into covert revenue streams, bypassing global enforcement.[5] Unlike oil or steel, rare earth elements undergo intricate beneficiation and separation processes that chemically transform the material, erasing any physical indicators of origin. As the D.C. Circuit noted in Molycorp v. EPA, these processes “destroy the physical structure of the material,” making the resulting substances virtually untraceable.[6] Combined with highly fragmented pricing and opaque intermediary networks, rare earth trade becomes a uniquely fertile ground for sanctions evasion.[7] The problem is not just North Korea. It is a systemic failure in which financial opacity, weak regulatory oversight, and geopolitical blind spots create an environment where illicit trade can flourish.[8]

Sanctions alone are failing. To break this cycle, the global enforcement paradigm must be rebuilt. Only a fusion of financial crime frameworks, traceability systems, and binding trade controls can dismantle illicit networks and restore market integrity. What is at stake is not only economic security, but the credibility of international law itself.

II. The Evasion Network: North Korea’s Sanctions Loopholes

A. Trade-Based Money Laundering (TBML) Mechanisms

North Korea employs sophisticated trade-based money laundering techniques such as undervaluation, over-invoicing, and falsified trade documents to disguise illicit transactions and evade sanctions.[9] A striking example is the case of Dandong Hongxiang Industrial Development Co. (“DHID”).[10]

In 2016, the U.S. Department of Justice charged DHID and four executives with orchestrating a vast sanctions-evasion scheme.[11] DHID used a web of front companies in Hong Kong, the British Virgin Islands, Seychelles, and Anguilla to process illicit transactions for Korea Kwangson Banking Corporation (KKBC), a sanctioned North Korean bank.[12]

DHID further engaged in trade-based money laundering by generating fraudulent invoices and reclassifying North Korean-origin goods as products from legally compliant markets​.[13]This was accomplished by undervaluing commodities such as anthracite coal and urea fertilizer, manipulating payment flows, and using third-party guarantors to obscure the true origin of funds.[14] Through this layering, North Korean exports are reclassified as originating from intermediary jurisdictions, creating false trade histories that pass compliance checks while concealing the actual source of the goods.[15] By exploiting shell companies in multiple jurisdictions, DHID laundered over $74 million​.[16] Such deceptive practices not only hindered the enforcement of international sanctions but also exposed vulnerabilities within the global financial system. These include shell companies with obscured ownership, mismatched or falsified invoices, and weak anti-money laundering regimes, all of which have also facilitated terrorism financing, drug trafficking, and environmental crimes such as wildlife smuggling.[17]

B. China’s Central Role as a Laundering Hub

China's dominance over rare earth elements arises not merely from accounting for over sixty-nine percent of global mine production[18] but more critically from controlling nearly ninety percent of the world's processing capacity[19], which gives it effective command over the usable supply essential to modern industries. Combined with North Korea's ongoing attempts to circumvent sanctions on its mineral exports[20], this structural dependency creates serious vulnerabilities in sanctions enforcement efforts. In October 2019, the Association of China Rare Earth Industry reported that North Korea was considering a proposal to grant Chinese companies mining rights to its rare earth deposits in exchange for investment in a large-scale solar power plant. The proposed deal involved deposits in Cholsan, near the Chinese border, and pointed to continued trade engagement on rare earth elements despite United Nations (UN) sanctions prohibiting such transactions.[21] UN experts have repeatedly linked Chinese firms to illicit North Korean mineral flows. The opacity of rare earth supply chains makes it difficult to detect illicit shipments, allowing unauthorized materials into global markets.[22]

III. Structural Failures: Why Existing Sanctions Fall Short

A. Regulatory Arbitrage and Enforcement Gaps

North Korea’s evasion network thrives not only because of Chinese complicity but due to a wider architecture of regulatory arbitrage. Intermediary jurisdictions such as Hong Kong, the UAE, and Singapore offer financial infrastructures that, while legitimate on the surface, are riddled with exploitable loopholes. In Hong Kong, lax enforcement of beneficial ownership disclosure requirements creates a veil of financial opacity, permitting shell companies to obscure the true origins of rare earth transactions.[23] UAE free trade zones, operating with minimal oversight, permit rebranding of smuggled minerals by North Korean-linked firms.[24] Singapore, despite its global reputation for financial probity, has recognized vulnerabilities in trade finance mechanisms, such as letters of credit and multiple invoicing, which can be exploited for illicit financial activities.[25] These hubs, acting in concert, form a network of financial havens that shield North Korea’s evasion tactics from international scrutiny.

This fragmented regulatory landscape enables North Korea to shift operations across jurisdictions to exploit weak anti-money laundering standards, masking the provenance of rare earth minerals while maintaining access to global markets.[26] Unlike conflict diamonds, which are subject to rigorous certification protocols under the Kimberley Process that provide traceability from mine to market, rare earth minerals remain outside any comparable oversight framework. The Kimberley Process mandates standardized documentation and strict chain-of-custody measures to certify conflict-free origins; a system that effectively minimizes illicit flows in that commodity.[27] In contrast, the absence of analogous certification for rare earths permits illicit actors to commingle sanctioned and legitimate supplies, thereby evading detection.[28]

These laundering techniques reflect more than just isolated anomalies. They stem from deep structural weaknesses in the global financial system. Despite isolated efforts, significant gaps in beneficial ownership transparency and uneven anti-money laundering enforcement continue to allow anonymous shell companies to operate unchecked.[29] This legal fragmentation creates enduring vulnerabilities that North Korea exploits with precision, shifting operations across permissive jurisdictions to maintain access to international markets.[30]

B. The Geopolitical Dilemma: Western Dependence

Western economies’ reliance on rare earth elements (REEs) for high-tech manufacturing, defense systems, and renewable energy infrastructure creates a significant policy conundrum.[31] China’s near-monopoly allows it to intermingle illicit and legally sourced materials, complicating enforcement efforts.[32] This dependency generates a clear conflict of interest: policymakers must preserve access to these critical materials while attempting to enforce sanctions against regimes such as North Korea.[33]

Economic imperatives compel Western nations to tolerate regulatory blind spots to avoid destabilizing national security and industry.[34] Consequently, sanctions enforcement remains fragmented, with authorities reluctant to take actions that might threaten vital trade relationships.[35],[36] Meanwhile, the inherent interdependence between trade and finance in this sector enables sanctioned actors to exploit jurisdictional inconsistencies, further blunting the impact of sanctions.[37]

IV. Reinventing Sanctions Enforcement

To reinvigorate sanctions enforcement against North Korea’s illicit rare earth trade, a multi-pronged reform strategy that integrates trade controls with robust financial oversight is essential. This approach must address both the regulatory gaps exploited by sanctioned actors and the structural vulnerabilities inherent in global supply chains.

A. Enhancing Financial Crime Frameworks
The first recommendation is to formally designate rare earth smuggling as a high‐risk financial crime under Financial Action Task Force (FATF) guidelines.[38] The FATF, an intergovernmental body founded in 1989, sets global anti-money laundering standards. Its recommendations are binding on member states and central to compliance regimes. By doing so, regulatory agencies can require that financial institutions apply enhanced due diligence to transactions involving rare earths, thereby closing a critical gap in current anti-money laundering regimes.[39] In practice, this measure would impose stringent AML reporting requirements, obligating banks and trading firms to identify and report suspicious activities related to rare earth transactions. Moreover, institutions found to be facilitating such illicit flows should face secondary sanctions, which would serve as a strong deterrent against complicity in sanction evasion.[40]

B. Implementing a Legally Binding Supply Chain Traceability System
To combat illicit rare earth mineral flows, a legally enforceable certification and traceability framework should be established, modeled on the Kimberley Process for conflict diamonds.[41] This system must require meticulous documentation of a mineral’s origin, chain-of-custody, and handling, securing verifiable traceability from extraction to final processing. All firms operating in critical sectors such as technology, defense, and renewable energy should be subject to mandatory, independent audits conducted by internationally accredited inspectors to verify compliance.[42] Any misrepresentation of data or failure to maintain accurate records must trigger severe penalties under both national and international law, creating a strong deterrent against fraudulent practices.[43]

A centralized registry of all entities engaged in the rare earth trade must be established to provide full transparency of ownership and transactions and to monitor material flows across jurisdictions without blind spots. By systematically isolating illicitly sourced minerals from legally certified supplies, this framework would significantly narrow the pathways through which North Korea and other sanctioned entities launder prohibited materials into global markets. To maximize its effectiveness, these legal requirements must be harmonized through multilateral agreements among key trading nations.[44] Aligning documentation, verification, and enforcement standards across jurisdictions would enhance regulatory cooperation while closing opportunities for arbitrage–a practice that allows illicit traders to exploit regulatory discrepancies.

C. Establishing a Legally Enforceable Trade Compliance Mechanism

Enforcement must move beyond voluntary cooperation to legally binding compliance within multilateral trade agreements. This proposal deploys the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as a hard law enforcement tool, integrating mandatory import screening, export certification, and real-time trade monitoring into its trade enforcement mechanisms. Unlike World Trade Organization (WTO) frameworks, which rely on member-driven complaints, the CPTPP authorizes immediate trade penalties for violations of supply chain integrity. [45]

CPTPP members must establish a uniform rare earth certification regime, requiring third-party verification before exports can enter global markets.[46] This process should be integrated into automated customs enforcement. Fraudulent documentation or undisclosed sourcing should trigger automatic trade penalties, including suspension of market access.[47]

Additionally, the Automatic Identification System (AIS) tracking must be integrated into the CPTPP’s compliance framework, mandating continuous vessel monitoring as a condition for trade eligibility.[48] This would enable real-time detection of transshipment, illicit transfers, and deceptive shipping practices. Vessels engaged in suspicious activities should face immediate blacklisting from CPTPP ports and exclusion from preferential trade benefits.

V. Conclusion

Sanctions alone are no longer sufficient to curb North Korea’s illicit rare earth trade. As this paper demonstrates, systemic vulnerabilities in financial oversight, trade regulation, and geopolitical dependencies create persistent enforcement gaps that rogue actors exploit with precision. The integration of trade-based money laundering with opaque supply chains renders traditional sanctions enforcement ineffective. Although Western reliance on rare earth elements has historically weakened political resolve, recent legislative and multilateral initiatives indicate that momentum for reform is growing. Still, this dependency is not immutable. Legislative efforts such as the U.S. CHIPS and Science Act[49] and the EU Critical Raw Materials Act[50] signal a strategic shift toward diversifying supply and investing in domestic alternatives. Meanwhile, trade frameworks like the CPTPP[51] already incorporate enforceable provisions on sustainable sourcing and human rights, demonstrating that economic alignment and accountability can coexist. These models suggest that rare earth compliance, once considered too disruptive, can in fact be institutionalized through multilateral standards without fracturing global markets.

The future of sanctions depends not on declarations but on design. Intent must become infrastructure, through systems that detect evasion, demand accountability, and govern without compromise. What is built today will set the boundaries of impunity for generations.

About the author

Moon Hwan Lee is an LLM student at Northwestern University Pritzker School of Law. His broader interest areas are in addressing systemic challenges and advocating for fairness in labor and employment contexts. Moon interned at the Center for Disability & Elder Law and a Legal Content Editor for Illinois Legal Aid Online, where he has gained firsthand insights into systemic challenges faced by individuals and workers alike.

Endnotes

  1. Department of Energy, Critical Materials Strategy (2010), 13.

  2. Juan-Ramón Cuadros-Muñoz et al., “Contribution of Rare Earth Elements Is Key to the Economy of the Future,” Land 13 (2024): 1220, 1222.

  3. Bruce E. Bechtol Jr., “North Korean Illicit Activities and Sanctions: A National Security Dilemma,” Cornell International Law Journal 51 (2018): 57, 58–63.

  4. Barbara Kelemen and Alexander Stonor, “Can the West Shake Its Dependence on China's Rare Earths?” The Diplomat, September 17, 2022.

  5. Financial Crimes Enforcement Network, Advisory on North Korea’s Use of the International Financial System (2017), 4.

  6. Molycorp, Inc. v. U.S. Environmental Protection Agency, 197 F.3d 543, 545 (D.C. Cir. 1999).

  7. Financial Action Task Force (FATF) and Egmont Group of Financial Intelligence Units, Trade-Based Money Laundering: Risk Indicators (Paris: FATF, March 2021), 4–6.

  8. Comparable enforcement breakdowns have enabled illicit gold shipments to move from Chile through Miami refineries using forged documentation and layered corporate entities, while Italian waste exporters have transferred criminal proceeds across borders under the pretense of legal trade. These operations rely on a common architecture of evasion: obscured ownership structures, manipulated invoices, and fragmented customs oversight. The repetition of these vulnerabilities across jurisdictions reveals that illicit trade thrives not in isolation, but through a global system fractured by regulatory divergence and institutional inertia. See Financial Action Task Force and Egmont Group of Financial Intelligence Units, Money Laundering from Environmental Crime (Paris: FATF/OECD, 2021), 32–33; U.S. Government Accountability Office, Trade-Based Money Laundering: U.S. Government Has Worked with Partners to Combat the Threat, but Could Strengthen Its Efforts, GAO-20-333 (Washington, D.C.: April 2020), 14–16.

  9. Financial Action Task Force (FATF), Trade-Based Money Laundering: Trends and Developments (2020), 26; Navin Beekarry, “The International Anti-Money Laundering and Combating the Financing of Terrorism Regulatory Strategy: A Critical Analysis of Compliance Determinants in International Law,” Northwestern Journal of International Law & Business 31 (2011): 137, 145.

  10. U.S. Department of Justice, Verified Complaint for Forfeiture in Rem, United States v. All Funds in the Accounts of Blue Sea Business Co., Ltd., et al., No. 2:16-cv-01954 (D.N.J. filed Sept. 9, 2016).

  11. Ibid., 3.

  12. Ibid., 26–28, 36–38.

  13. Ibid., 45.

  14. Ibid., 25.

  15. Ibid., 5–6, 26–27; Financial Action Task Force (FATF) and Egmont Group, Trade-Based Money Laundering: Trends and Developments (Paris: FATF, December 2020), 22–24.

  16. U.S. Department of Justice, Verified Complaint, 43.

  17. Financial Action Task Force (FATF) and Egmont Group, Trade-Based Money Laundering: Risk Indicators (Paris: FATF, March 2021), 3–6; Financial Action Task Force (FATF), Money Laundering from Environmental Crime (Paris: FATF, July 2021), 27–29, 33, 51.

  18. U.S. Geological Survey, Mineral Commodity Summaries 2025 (Reston, VA: U.S. Geological Survey, 2025), 145, https://doi.org/10.3133/mcs2025.

  19. “Politics, Markets, and Rare Commodities: Responses to Chinese Rare Earth Policy,” Japanese Journal of Political Science 17 (2016): 28.

  20. S.C. Res. 2270, ¶ 30, U.N. Doc. S/RES/2270 (Mar. 2, 2016).

  21. U.S. Geological Survey, The Mineral Industry of North Korea in 2019, by Jaewon Chung, in 2019 Minerals Yearbook: North Korea [Advance Release] (June 2023), 14.3.

  22. U.S. Department of the Treasury, North Korea Sanctions & Enforcement Actions Advisory, November 2, 2016.

  23. Financial Services and the Treasury Bureau, Enhancing Transparency of Beneficial Ownership of Hong Kong Companies (2017), 3.

  24. A Global Hub for Illicit Trade and Sanctions Evasion, Terrorism, Transnational Crime and Corruption Center (TraCCC), George Mason University (November 2024).

  25. Monetary Authority of Singapore, Guidance on Anti-Money Laundering and Countering the Financing of Terrorism Controls in Trade Finance and Correspondent Banking (2015), 3.

  26. U.N. Panel of Experts, Report of the Panel of Experts Established Pursuant to Resolution 1874 (2009), U.N. Doc. S/2024/215 (Mar. 5, 2024).

  27. Kimberley Process, Information for Business; Security Council Report, Security Council Diamond Sanctions and the Kimberley Process, October 2006.

  28. But see ISO 23664:2021, Traceability of Rare Earths in the Supply Chain from Mine to Separated Products, International Organization for Standardization (2021).

  29. Carl Pacini and Nate Wadlinger, “How Shell Entities and Lack of Ownership Transparency Facilitate Tax Evasion and Modern Policy Responses to These Problems,” Marquette Law Review 103 (2020): 1121, 1123.

  30. U.N. Security Council, Res. 2270, ¶ 30, U.N. Doc. S/RES/2270 (Mar. 2, 2016).

  31. Congressional Research Service, An Overview of Rare Earth Elements and Related Issues for Congress, CRS Report R46618 (November 24, 2020), 9–10.

  32. University of Wyoming School of Energy Resources, An Analysis of the Current Global Market for Rare Earth Elements (2020), 14.

  33. Keith A. Preble and Charmaine N. Willis, “Trading with Pariahs: North Korean Sanctions and the Challenge of Weaponized Interdependence,” Global Studies Quarterly 4, no. ksae031 (2024): 10–12.

  34. Fabian Villalobos et al., Time for Resilient Critical Material Supply Chain Policies, RAND Corporation (2022), 2.

  35. Helen Taylor, All Bark and No Bite? Taking Stock of the UK’s Enforcement of Sanctions, Spotlight on Corruption (2024), 5.

  36. Weihuan Zhou, Huiqin Jiang, and Zhe Chen, “Trade vs. Security: Recent Developments of Global Trade Rules and China’s Policy and Regulatory Responses from Defensive to Proactive,” World Trade Review 22 (2023): 193, 209.

  37. Ibid.

  38. Financial Action Task Force, Money Laundering from Environmental Crime (2021), 14.

  39. Financial Action Task Force, International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, FATF Recommendation (2021), 14.

  40. U.S. Department of the Treasury, As Russia Completes Transition to a Full War Economy, Treasury Takes Sweeping Aim at Foundational Financial Infrastructure and Access to Third Country Support, June 12, 2024.

  41. Kimberley Process, Information for Business; Security Council Report, Security Council Diamond Sanctions and the Kimberley Process, October 2006.

  42. OECD, Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, 3rd ed. (2016), 20; Regulation 2017/821 of the European Parliament and of the Council of 17 May 2017, 2017 O.J. (L 130) 1 (EU).

  43. Dodd-Frank Wall Street Reform and Consumer Protection Act § 1502, 15 U.S.C. § 78m(p) (2012); Directive 2024/851 of the European Parliament and of the Council of 24 July 2024, 2024 O.J. (L 234) 12 (EU).

  44. Extractive Industries Transparency Initiative, The EITI Standard (2023); OECD, Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, 3rd ed. (2016).

  45. Comprehensive and Progressive Agreement for Trans-Pacific Partnership, art. 28.3, Dec. 30, 2018.

  46. Regulation 2017/821 of the European Parliament and of the Council of 17 May 2017, 2017 O.J. (L 130) 1 (EU).

  47. Comprehensive and Progressive Agreement for Trans-Pacific Partnership, art. 28.20, Dec. 30, 2018.

  48. International Maritime Organization, International Convention for the Safety of Life at Sea, ch. V, reg. 19, Nov. 1, 1974, 1184 U.N.T.S. 278.

  49. CHIPS" stands for "Creating Helpful Incentives to Produce Semiconductors." Enacted in 2022, the CHIPS and Science Act directs substantial federal investment toward expanding domestic semiconductor manufacturing, advancing research, and securing critical supply chains; CHIPS and Science Act of 2022, Pub. L. No. 117–167, 136 Stat. 1392 (codified in scattered sections of 15 U.S.C., 42 U.S.C., and 51 U.S.C.).

  50. European Commission, Proposal for a Regulation Establishing a Framework for Ensuring a Secure and Sustainable Supply of Critical Raw Materials and Amending Regulations (EU) No 168/2013, (EU) 2018/858, (EU) 2018/1724 and (EU) 2019/1020, COM(2023) 160 final (March 16, 2023).

  51. Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Dec. 30, 2018.

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ArticleYale Journal of International AffairsSpring 2025, Asia