US plans to squeeze N Korean bank deals

PUBLISHED : Friday, 23 July, 2010, 12:00am
UPDATED : Friday, 23 July, 2010, 12:00am

US officials are preparing to unleash a fresh crackdown on North Korea's offshore banking activities in an echo of its controversial squeeze on Macau's Banco Delta Asia five years ago.

The measures - part of tighter sanctions announced by US Secretary of State Hillary Rodham Clinton on Wednesday in the wake of North Korea's sinking of a South Korean warship in March - will see Washington seek fresh co-operation from Beijing, North Korea's chief ally, US officials said.

That co-operation could involve targeting specific Chinese banking transactions and enforcing broader measures against Pyongyang's elite.

'That Banco Delta Asia crackdown hurt Pyongyang ... it really made them feel pressure and we want to find ways of exerting that kind of heat again,' one official said.

Specific actions have yet to be detailed.

The delegation of Foreign Minister Yang Jiechi , now visiting Hanoi along with Clinton for annual regional security talks, has yet to comment on the news of fresh US sanctions. The measures are expected to send shivers down the spines of bankers across the region, with the US Treasury Department's unprecedented squeeze on Banco Delta Asia fresh in the minds of many.

The small, family-owned bank was left a virtual shell after the US blacklisted it from involvement with US institutions after describing it in a September 2005 statement as a 'willing pawn' in three decades of North Korean money-laundering. Local account holders panicked, rushing to withdraw more than US$130 million in a single day. Government receivers in Macau were forced to take control of the institution.

A further US$23 million in about 50 accounts linked to Pyongyang was frozen indefinitely - but eventually given back to North Korea to draw it into international negotiations following its first nuclear test a year later.

The bank is now back in the hands of its shareholders, headed by chairman and largest shareholder Stanley Au, and is fighting to rebuild its business.

An Ernst & Young audit noted a long-standing relationship between the bank and North Korea but cleared the lender of specific money-laundering allegations.

It faced no criminal action in Macau but it remains on the US Treasury's blacklist.

While other banks in Macau handled North Korean-linked funds, the US Treasury homed in on Banco Delta Asia, believing this would create less disruption.

The US and other governments have been seeking to locate and track North Korean financial bolt-holes for months.

Stuart Levey, the George W. Bush-era official who led the action against Banco Delta Asia, was deliberately kept in his role by the Obama administration.

Levey's squeeze on Banco Delta Asia, taken under the US Patriot Act, was backed by an intelligence-gathering operation that tapped bank communications and scrutinised thousands of documents.

It sparked extensive internal debate among US officials, and some feared it may have sparked a harder line from the hermit state, noting the nuclear test within a year. But it is still seen as a success by many officials in both administrations.

While the US$23 million involved was relatively small, Macau was one of the few places North Korea could do its banking, and it had long done so; the hermit communist state is so isolated financially that it still cannot transfer funds electronically. From the mid-1970s onwards, strongboxes of cash and gold were shipped to Macau.

The US and other Western and allied Asian nations have since been trying to track how North Korea has rebuilt its banking networks. They have been looking for illicit funds linked to illegal arms trades and a range of suspected criminal activity, including drug dealing and counterfeiting.

Levey and other US Treasury officials have visited the region's financial hubs, including Hong Kong, and smaller centres with fraternal links to Pyongyang, such as Phnom Penh, Ulan Bator and Hanoi, to keep up the pressure.

'The message has been clear for some time ... you don't want to risk one of your banks becoming the next Banco Delta Asia,' one Asian diplomat said. 'It is a message that the US Treasury has spread very effectively down to the banking level, especially for banks in developing nations.'

Beijing officials are expected to be tougher to convince. They will demand watertight proof of illicit funds before agreeing to co-operate.

Another Asian diplomat involved with tracking North Korean funds said various North Korean enterprises appeared to have left Macau, some shifting to the Pearl River Delta.

Banks in China, Singapore and Switzerland were believed to have been targeted by North Korean enterprises in recent times, he said, and Mongolia, Vietnam and Cambodia had taken action under recent US pressure. Hong Kong, which hosts one of North Korea's few overseas diplomatic missions, was also a potential bolt-hole, with several North Korea-linked trading firms and occasional shipping traffic.

A 'willing pawn'

On September 2005, the US Treasury announced that the privately owned Macau bank, Banco Delta Asia, had been a 'willing pawn' in three decades of North Korean state-sponsored crime, including counterfeiting and drug trafficking.

Panicked account holders withdrew more than US$130 million in one day, forcing Macau government receivers to take control of the institution.

More than US$25 million in some 50 accounts was frozen, prompting outrage from North Korea.

The bank cut ties with North Korea, as did other international banks.

In 2007, the US unfroze the BDA accounts to encourage Pyongyang to return to six-party talks.