Transfer of fuel from South to North Korea reveals sanctions evasion.

A rare observation that sheds light on the dark world of the east Asian oil trade was the transfer of petroleum from a Russian tanker chartered by a South Korean corporation to a Chinese ship headed for North Korea.

A cargo of marine oil from South Korea's southeast coast into North Korea's exclusive economic zone was followed by a joint investigation by the Financial Times and the Royal United Services Institute think tank. The shipment was arranged by an unidentified Chinese shipping agency.

The movement of the consignment, which was tracked by satellite photos and transponder data, demonstrates how challenging it is to apply stringent international sanctions to nations like North Korea.

On November 20, the cargo departed from the South Korean port of Gunsan aboard the Mercury, a tanker owned by Russia and chartered by a South Korean business. On November 25, it made its way into the Yellow Sea, which separates China from the Korean peninsula, and on December 1, it anchored next to the Shundlli, a Chinese ship, for a while.

After the Mercury came into contact with the Shundlli, data from the autonomous tracking system of the ship showed a shift in the vertical distance between the water's surface and the vessel's lowest point, or draught change. The South Korean corporation that rented the Mercury later acknowledged that goods was indeed unloaded during the meeting.

Four days later, the Shundlli, a ship flying the flag of Togo, sailed into North Korea's exclusive economic zone and stopped there, according to RUSI, at a spot known to be utilized for smuggling oil.

The Shundlli is shown side-by-side with another vessel in the North Korean EEZ in satellite photographs taken by US Earth observation company Planet Labs. This was most likely a ship-to-ship transfer to a North Korean ship, according to experts at RUSI. Although the Shundlli did not broadcast its intentions, position data indicated it spent several days in the North Korean EEZ. It encountered a vessel that was not transmitting any data at all.

Ship-to-ship transfers serve legitimate functions, but they can also be used to hide the origin and path of cargo.

The UN Security Council imposed sanctions on North Korea in 2017, capping oil transfers to the regime at 500,000 barrels annually, significantly less than its energy requirements. Even though every single one of these transfers is required to be disclosed to a UN sanctions committee, very few actually are.

Niko, a business based in the far eastern Russian city of Vladivostok, which owns the Mercury, said that other businesses had chartered its vessels and that it had no control or visibility into what they conducted as part of their contracts.

As one of the Niko directors, Andrei Velikorodnyi, put it, "In simple terms, our vessel is rented out."  He said, referring to the practice of refueling ships at sea: "It loaded the cargo in South Korea and according to the charterer’s instructions, it is supposed to be bunkering South Korean and Chinese fishing vessels in the Yellow Sea."

A contract Velikorodnyi published with the Financial Times revealed that the Mercury had been chartered by the Eastern Pec business of South Korea. As part of a transaction arranged with a "Chinese agent" headquartered in South Korea to deliver fuel to Chinese fishing vessels, Eastern Pec acknowledged that it had rented the Mercury and carried out a ship-to-ship transfer with the Shundlli.

Eastern Pec said that this was their first time working with the Chinese shipping agent, but chose not to disclose their identity in light of South Korean data privacy regulations.

Eastern Pec further stated that the agent had denied transporting the shipment to North Korea's Exclusive Economic Zone (EEZ) but had not provided information on its whereabouts. The business claimed to have a letter of guarantee from the captain of the Shundlli stating that the cargo "will never be transferred" to a corporation with ties to North Korea.

Eastern Pec's counterparty was a Shanghai-based entity by the name of Met Ocean Co Ltd, according to a copy of the letter of assurance that Niko gave to the Financial Times and was signed on the day of the transfer between the Mercury and Shundlli.

Met Ocean "promises not to deliver to ships related to North Korea in shipping oil, and agree[s] to take legal responsibility in case of non-compliance," according to the letter.

Eastern Pec vowed to consistently follow the law and all penalties. "Despite our best efforts to avoid this situation, we are very sorry to have encountered [it]. We will co-operate faithfully should [an] investigation [be] conducted by [the] authorities ."  An inquiry on comments regarding the validity of the letter of assurance was not answered by Eastern Pec.

The Panama Papers, a leak of millions of documents from one of the biggest offshore legal firms, Mossack Fonseca, include information about a company called Met Ocean. With shareholders associated with addresses in Shanghai, Met Ocean is described as being registered in the British Virgin Islands.

Although it does not appear that Met Ocean has a website, requests for comment sent to two related email addresses went unanswered. 

The Shundlli's movements, according to Joseph Byrne, a research fellow at RUSI, closely matched those of other ships that had previously been implicated in smuggling oil goods to North Korea.

He continued by saying that due to a broad UN ban, all ship-to-ship transfers between North Korean and non-North Korean ships were forbidden. "It doesn’t matter if you are transferring oil or water, if you transfer any commodity to a North Korean flagged vessel, it’s a violation of UN Security Council resolutions," according to Byrne.

In order to avoid paying import taxes, the Shundlli was allegedly implicated in smuggling petroleum goods into China between 2017 and 2019 under prior ownership, according to Chinese court records.

The vessel is currently held by Hongkong Great Star Development, a company that is registered in the city and serves as its company secretary. Hongkong Great Star Development did not respond to a request for comment.

Byrne noted that illicit oil shipments to North Korea were typically provided by vessels operating out of Taiwanese ports, adding that North Korean vessels or those involved in sanctions-busting were frequently operated by intricate front company networks that made it difficult to determine who really owned them.

Transfers of oil products from South Korea to North Korea are "rare, but not unheard of," according to Go Myong-hyun, senior scholar at the Asan Institute for Policy Studies in Seoul.

The South Korean foreign ministry adopted a set of best practices for compliance in 2018, according to Hugh Griffiths, a former coordinator of the UN panel that monitors North Korea sanctions, but "small companies without proper standards" continued to trade fuel.

The Niko director, Velikorodnyi, expressed his shock at learning from the FT about the activities of its tanker. He claimed that Niko was still "working out what happened."

By fLEXI tEAM