[USFK Forums] N. Korea's Nuclear Push May Be Stymied by U.S. Banking Rules[Bloomberg

[C. Y. Lee]

Uploaded by C. Y. Lee on Tuesday, March 7, 2006

North Korea's Nuclear Push May Be Stymied by U.S. Banking Rules

March 7 (Bloomberg) -- U.S. law enforcement actions that are hobbling North Korea's financial system may be as important as diplomacy in persuading the country to give up its nuclear weapons program.

U.S. efforts to cut off funds from counterfeiting and drug trafficking may move dictator Kim Jong Il to trade warheads for development aid, says David Asher, coordinator of the State Department's North Korea working group from 2003 to 2005. U.S. officials plan to present evidence of North Korea's money- laundering to Kim's representatives today in New York.

``There's no doubt this is the most powerful reverberation we've ever had on North Korea,'' Asher says. ``Cutting into the illicit foundations of their regime should provide an incentive for them to start opening up and cooperating.''

The Treasury Department in September said Macau, China-based Banco Delta Asia SARL helped North Korean officials make ``surreptitious'' deposits and withdrawals. The bank responded by freezing all accounts linked to North Korea, blocking access to millions of dollars. Last month, Banco Delta said it would no longer accept business from North Korean customers.

The crackdown had an immediate effect on Daedong Credit Bank, the only foreign-run bank in North Korea, which used Banco Delta as its primary correspondent for overseas transactions. General Manager Nigel Cowie says banks in Germany and Singapore also severed their links to Daedong.

``Banks with any kind of U.S. ties are just terrified to have anything to do with any North Korean bank,'' says Cowie, 43. Daedong represents international account holders and has nothing to do with money laundering, he says.

No Official Link

Officially, the U.S. State Department says there is no link between the financial clampdown and the effort to dismantle North Korea's nuclear weapons program through negotiation.

U.S. law on illicit financial transactions ``is not targeted against any one regime,'' State Department spokesman Adam Ereli said at a Feb. 23 briefing in Washington. Five days later, North Korea denied any involvement in criminal activities.

``The U.S. argument is quite childish and nonsensical,'' the official Korea Central News Agency said, citing an unidentified Foreign Ministry spokesman.

Under provisions of the USA Patriot Act of 2001, the Treasury Department may prohibit U.S. financial institutions from doing business with banks designated as money-laundering concerns. At a minimum, the act requires U.S. banks to know the customers with whom they do business.

The U.S. opened another front in the financial war on June 28, when President George W. Bush signed an executive order directing Treasury to freeze the assets of those that help distribute weapons of mass destruction, including three North Korean companies. Investigators later froze the U.S. assets of eight more North Korean entities it said were involved in illegal activities.

`Raised the Scrutiny'

Stuart Levey, Treasury undersecretary for terrorism and financial intelligence, says the U.S. can take further steps against North Korea. The Patriot Act permits labeling an entire country a ``money laundering concern,'' effectively isolating it from access to U.S. financing of any kind.

``We do have a number of tools, and we have used two of those tools recently with respect to North Korea,'' Levey says. ``It's raised the consciousness and raised the scrutiny of financial institutions of the world.''

The Treasury designated Ukraine as a money laundering concern in December 2002. The label was rescinded four months later after Ukraine strengthened laws against illegal transactions and pledged greater financial transparency.

Heroin and Viagra

North Korea typically uses trading companies to pass counterfeit $100 bills, and earns hard currency by selling fake Viagra pills and trafficking heroin, in addition to culling cash from illegal trade in weapons, Asher says.

``Nukes, crime, repression -- these are the key aspects of support for the North Korean leadership,'' says Asher, a researcher at the Alexandria,

Virginia-based Institute for Defense Analyses, which advises the U.S. government on national security issues. Financial pressure on North Korea is growing as diplomats step up efforts to curb the proliferation of nuclear weapons.

The U.S., South Korea, Japan, China and Russia have been negotiating with North Korea for the past 2 1/2 years in an effort to get Kim to dismantle his weapons program. Though all six parties called in September for a nuclear-free Korean peninsula and economic cooperation in energy, trade and investment, the next round of talks ended Nov. 11 with no further agreement.

On Feb. 4, the International Atomic Energy Agency, an arm of the United Nations, called on Iran to halt uranium-enrichment and open its military sites to inspection. Iranian President Mahmoud Ahmadinejad said his country would continue its nuclear research.

Isolated Society

North Korea's government has isolated its citizens for almost 60 years, under founder Kim Il Sung and his son Kim Jong Il, who has ruled since 1994.

Under the Kim regimes, the country pursued a nuclear weapons program, even as its 20 million citizens suffered from a famine in the late 1990s. Food shortages killed as many as 2 million people, according to the U.S. Agency for International Development.

Lee Dong Bok, a former South Korean lawmaker who has negotiated with North Korea, says the Kim regime dispatched officials from the ruling party to try to reverse Banco Delta's decision to stop doing business with North Korea.

``Apparently, it was unable to win the support of China because of China's own interest,'' Lee says. He adds the government of the world's fastest-growing economy wants to maintain its access to western finance. ``China relies heavily on transactions with New York.''

Primitive State

Daedong's Cowie, a former HSBC Plc banker who has been in Pyongyang for a decade, says the U.S. actions are likely to reduce North Korea's financial system to a primitive state, hurting law-abiding businesses as well as the government.

``Everybody doing trading business is just going to be carrying cash into China,'' he says, noting that Chinese traders provide most of the consumer goods sold in North Korea.

Daedong has about $10 million in assets and has only foreigners as customers, mostly Chinese, Japanese and Western individuals and institutions, Cowie says.

Wendy Sherman, President Bill Clinton's special adviser on North Korea, says a crackdown on criminal activities at this stage may hurt chances for success at the six-party talks.

``If indeed one wants to say to North Korea, `We have a way to slow down your access to capital and we're prepared to use it,' that becomes part of the negotiation,'' Sherman says. ``But to do it in advance of negotiation loses benefit.''

Sherman is now a principal at the Washington-based Albright Group LLC, run by former Clinton administration Secretary of State Madeleine Albright.

Australian Setback

The U.S. case against Kim's government was set back on March 5, when a Melbourne jury acquitted the captain and three crew members of the North Korean freighter Pong Su of drug trafficking. Australian police said they discovered 275 pounds (125 kilograms) of heroin on the Pong Su after seized the ship in April 2003. U.S. officials had cited the case as evidence of North Korea's involvement in drug smuggling.

A face-off with the Bush administration may even shore up domestic support for North Korea's government, says Kim Myong Chol, a resident of Japan who encourages reporters to refer to him as an unofficial spokesman for the regime.

``The crackdown gives North Korea time and pretext to continue nuclear weapons production,'' Kim says. ``The North Korean government's legitimacy only comes from standing up to America.''

Increased Activity

While the U.S. has known about North Korea's illegal activities for years, they have accelerated recently, says Michael J. Green, a former senior director for Asian affairs at the National Security Council who left that post in December.

Many of the efforts appeared to be tied to Rooms 35 and 39 at the North Korean Workers' Party headquarters, says Green, who is now a senior adviser at the Washington-based Center for Strategic and International Studies. The Room 39 unit is charged by Kim Jong Il with bringing in foreign currency, and Room 35, formerly known as the Overseas Intelligence Department, has been linked to the abductions of foreign nationals.

North Korea is making tentative moves toward the sorts of change that have transformed China's economy. The country has designated special economic zones, and Kim visited China in January to see its booming southern region.

Meeting With Hu

In a suggestion the visit may have been related to concerns about the Banco Delta crackdown, Japan's Kyodo News reported that Kim told Chinese Premier Hu Jintao that continued U.S. financial pressure could cause his regime to collapse. The news service cited unidentified people close to the six-nation talks.

U.S. policy can be characterized as ``squeeze, but keep the talks going,'' Green says. In the end, Kim may return to the negotiating table only when there is no other way to guarantee his continued rule.

``Their main goal is to ensure continuation of their regime and their country,'' Green says.

Last Updated: March 6, 2006 20:57 EST


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