In return for the North Korean coal, according to U.S. officials cited in the lawsuit, Chi’s companies allegedly sent back to North Korea an array of products: cellphones, sugar, luxury items and, perhaps most importantly, components of nuclear devices and missiles.
The alleged details of Chi's business network, laid out in a U.S. lawsuit seeking the forfeiture of funds that flowed through U.S. banks, suggest how one Chinese entrepreneur may have been able to evade the trade restrictions against North Korea and, more broadly, how important such trade has been in the development of North Korea's ever-more-fearsome arsenal.
Escalating trade sanctions enacted by the United States and the United Nations Security Council since 2006 have been accompanied at times by rhetoric suggesting that the regime of Kim Jong Un had been cut off from the world's economy. But the Chi case, and its allegations describing how porous the sanctions may have been, underscore how the North Korean weapons program has relied on the country's coal exports to China — which were booming until earlier this year.
One of Chi's companies, Dandong Zhicheng Metallic Material, was the largest importer of North Korean coal, bringing in $234 million in 2016, according to Panjiva, a global trade data analytics company. Despite worldwide scrutiny of the North Korean coal trade, transactions involving Chi's companies in China and North Korean coal continued into June of this year, the lawsuit alleges.
“Chi Yupeng’s companies represented almost 10 percent of Chinese imports from North Korea last year. That speaks to the scale of their operation,” said David Thompson, senior analyst at C4ADS, a nonprofit that researches global business networks and has focused on the Chi group.
Chi could not be reached for comment.
Based in part on the accounts of three confidential informants and two unnamed defectors, the U.S. lawsuit filed on Tuesday seeks the forfeiture of $4 million from Chi’s companies, as well as more than $100 million in other penalties. Chi could not be reached for comment.
One of the defectors that U.S. attorneys are relying on appears to have been very well-placed. According to the complaint, the defector had firsthand knowledge of “Office 39,” a group that maintains a reserve of money for Kim.
According to the defector cited in the complaint, the North Korean military controls the amount of coal produced and its exportation. Kim puts over 95 percent of the foreign currency earned from coal exports toward North Korea’s military and weapons programs, the defector said.
Any major coal importer would have been a point of contact for the North Korean regime.
The lawsuit alleges that, according to the defector, the regime relies on “a relatively small group of trusted individuals who have reliably provided the North Korean government with desired services” and that Chi is one of those trusted individuals.
A second defector, said to have intimate knowledge of North Korea's coal exports to China, corroborated much of what the first defector asserted, according to the complaint filed by the United States.
Chi founded a company, Dandong Zhicheng Metallic Material, in 2005 and in recent years it has become the largest importer of North Korean coal, according to Panjiva. His wife, Zhang Bing, is the company's manager, according to company filings.
Not much else is known about Chi, but he is listed as an alumnus of Bohai University, where he graduated in 1990. His biography on the university alumni site said he became an accountant in Dandong in 1990. In 2009, four years after forming his company, he was awarded a plaque from the “Dandong Municipal People's Government” for his role in foreign trade.
According to the alumni bio, Chi “always commands himself to inspire colleagues around him with the charisma of a leader; the overall professional ambiance of the company is very harmonious and the attitude of the employees very positive. In his management of the company, he delves deeply into the forces of sustained development of the enterprise.”
The lawsuit alleges that Chi's companies use a couple of different methods to avoid being caught for violation of trade sanctions.
One is that instead of sending money back and forth — a system that often requires the use of banking and risks detection — the Chi network instead sometimes allegedly used a system of barter: That is, North Korea would send coal to Chi, and Chi would send back desired goods — everything from sugar to weapons components.
The other method of evasion alleged in the lawsuit more directly involves the front companies. These allowed Chi’s network — despite repeated sanctions measures by the United States — to use U.S. banks in conducting business with North Korea. While banks can detect and block transactions involving sanctioned businesses, they often miss transactions involving related companies because they do business under a different name.
It was the alleged U.S. transactions involving Chi’s companies that led the Justice Department to seek on Tuesday the forfeiture of $4 million in funds. The money is being held in U.S. accounts.
“These front companies are supporting sanctioned North Korean entities, including North Korean military and North Korean weapons programs,” U.S. Attorney Channing Phillips said in a statement referring to the legal filings.