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In February, local officials froze at least $24 million in North Korean accounts at the bank. Pyongyang officials protested and have repeatedly cited the action as justification for abandoning the nuclear bargaining table for the last year.
But Treasury officials went further. Privately, they threatened to go after much larger banks in Macao, including the Bank of China, the second-largest Chinese bank, which eventually froze some North Korean accounts.
Pyongyang then looked elsewhere for a financial safe haven.
Using spies, cooperative bankers and law enforcement agents, Washington followed the North Korean money trail. Levey and other senior Treasury officials visited Vietnam, Hong Kong, Singapore and Mongolia this year. They say they persuaded government officials and bankers to shun financial relationships with North Korea.
"Because of the way North Korea operates, it's very difficult for financial institutions to differentiate between its licit and illicit activities. And so, a lot of banks have decided that as long as North Korea is engaged in illicit activity, they don't want to take any chances of being associated with it," Levey said. "As a result, the North Koreans have had a very difficult time."
Nonetheless, Russia and China have common reasons for treading softly with North Korea on the financial front. Both fear that a financial crackdown could destabilize or even bankrupt North Korea. And both are jockeying to someday collaborate with a friendlier North Korea on economic and military issues.
"They are willing to hold their nose and live with North Korea as it is in exchange for stability on the [Korean] peninsula," said Peter Brookes, the Bush administration's former deputy assistant secretary of Defense for Asian and Pacific affairs.
Also, North Korea is able to continue to deal with Russia and China because both countries are riddled with political corruption and organized crime, and because it is willing to pay huge commissions to banks, U.S. and Asian authorities have found.
Officials in Russia and China would not talk about North Korea's use of their banks. North Korean officials also declined to comment, but have called on the U.S. to "immediately give up its anachronistic hostile policy."
In recent months, intelligence has pointed to Russia as the place where North Korea has turned to stash its cash and tap into international financial markets, according to U.S. officials and money-laundering experts.
South Korea's intelligence service recently identified Sberbank, the biggest bank in Russia, as one of the institutions doing business with North Korea, according to lawmakers in Seoul who have seen the report. Russian and Japanese media have reported that at least 10 North Korean accounts have been opened in Moscow, including at state-owned Vnesheconombank, to circumvent U.S. sanctions.
Several current and former U.S. law enforcement and banking officials confirmed the broad outlines of those reports. Neither bank responded to requests for comment.
The senior U.S. counter-terrorism official said Russia was not being cooperative because Treasury officials had spent little time lobbying Moscow. "Russia, I think, is still very much up in the air. I genuinely think the jury is still out," he said.
By contrast, U.S. officials have lobbied the Chinese government for years. Levey and Daniel Glaser, a senior Treasury official who oversees anti-money-laundering efforts, have each traveled to Beijing this year to press authorities to cut off North Korea.
Within the last year, Beijing has started to respond.
But current and former U.S. officials say China's recent moves are not enough to stop the illicit money flow between the countries. "Are they doing everything that we want them to be doing on the targeted financial sanctions? No," said the U.S. counter-terrorism official.
'Window dressing'
Raphael Perl, a Congressional Research Service analyst, agreed.
"The efforts by Chinese banks in this regard are often privately referred to within [Bush] administration circles as more 'window dressing' than substantive," he said.
Some former U.S. officials also worry that completely uprooting North Korea's illicit financial network might be unwise, forcing the secretive nation to resort to tactics that could hamper U.S. efforts to spy on it.
"If you crack down in certain areas, it is like squeezing the balloon. It may pop up in an area we can't monitor," said John Cassara, a former Treasury and CIA money-laundering specialist.
The financial crackdown already appears to be forcing North Korea into closer arrangements with organized-crime syndicates with ready access to the international financial system.
That is particularly worrisome, the officials said, because these criminal outfits have a well-entrenched presence in the United States and are better at clandestinely moving money, illicit goods -- and, potentially, weapons of mass destruction -- than terrorists.
"That's why it's absolutely critical for us to crack down much harder on North Korea's ties to organized crime globally," Asher said. "It's going to be a much bigger challenge in my mind than even tracking terrorist finances."
josh.meyer@latimes.com
But Treasury officials went further. Privately, they threatened to go after much larger banks in Macao, including the Bank of China, the second-largest Chinese bank, which eventually froze some North Korean accounts.
Pyongyang then looked elsewhere for a financial safe haven.
Using spies, cooperative bankers and law enforcement agents, Washington followed the North Korean money trail. Levey and other senior Treasury officials visited Vietnam, Hong Kong, Singapore and Mongolia this year. They say they persuaded government officials and bankers to shun financial relationships with North Korea.
"Because of the way North Korea operates, it's very difficult for financial institutions to differentiate between its licit and illicit activities. And so, a lot of banks have decided that as long as North Korea is engaged in illicit activity, they don't want to take any chances of being associated with it," Levey said. "As a result, the North Koreans have had a very difficult time."
Nonetheless, Russia and China have common reasons for treading softly with North Korea on the financial front. Both fear that a financial crackdown could destabilize or even bankrupt North Korea. And both are jockeying to someday collaborate with a friendlier North Korea on economic and military issues.
"They are willing to hold their nose and live with North Korea as it is in exchange for stability on the [Korean] peninsula," said Peter Brookes, the Bush administration's former deputy assistant secretary of Defense for Asian and Pacific affairs.
Also, North Korea is able to continue to deal with Russia and China because both countries are riddled with political corruption and organized crime, and because it is willing to pay huge commissions to banks, U.S. and Asian authorities have found.
Officials in Russia and China would not talk about North Korea's use of their banks. North Korean officials also declined to comment, but have called on the U.S. to "immediately give up its anachronistic hostile policy."
In recent months, intelligence has pointed to Russia as the place where North Korea has turned to stash its cash and tap into international financial markets, according to U.S. officials and money-laundering experts.
South Korea's intelligence service recently identified Sberbank, the biggest bank in Russia, as one of the institutions doing business with North Korea, according to lawmakers in Seoul who have seen the report. Russian and Japanese media have reported that at least 10 North Korean accounts have been opened in Moscow, including at state-owned Vnesheconombank, to circumvent U.S. sanctions.
Several current and former U.S. law enforcement and banking officials confirmed the broad outlines of those reports. Neither bank responded to requests for comment.
The senior U.S. counter-terrorism official said Russia was not being cooperative because Treasury officials had spent little time lobbying Moscow. "Russia, I think, is still very much up in the air. I genuinely think the jury is still out," he said.
By contrast, U.S. officials have lobbied the Chinese government for years. Levey and Daniel Glaser, a senior Treasury official who oversees anti-money-laundering efforts, have each traveled to Beijing this year to press authorities to cut off North Korea.
Within the last year, Beijing has started to respond.
But current and former U.S. officials say China's recent moves are not enough to stop the illicit money flow between the countries. "Are they doing everything that we want them to be doing on the targeted financial sanctions? No," said the U.S. counter-terrorism official.
'Window dressing'
Raphael Perl, a Congressional Research Service analyst, agreed.
"The efforts by Chinese banks in this regard are often privately referred to within [Bush] administration circles as more 'window dressing' than substantive," he said.
Some former U.S. officials also worry that completely uprooting North Korea's illicit financial network might be unwise, forcing the secretive nation to resort to tactics that could hamper U.S. efforts to spy on it.
"If you crack down in certain areas, it is like squeezing the balloon. It may pop up in an area we can't monitor," said John Cassara, a former Treasury and CIA money-laundering specialist.
The financial crackdown already appears to be forcing North Korea into closer arrangements with organized-crime syndicates with ready access to the international financial system.
That is particularly worrisome, the officials said, because these criminal outfits have a well-entrenched presence in the United States and are better at clandestinely moving money, illicit goods -- and, potentially, weapons of mass destruction -- than terrorists.
"That's why it's absolutely critical for us to crack down much harder on North Korea's ties to organized crime globally," Asher said. "It's going to be a much bigger challenge in my mind than even tracking terrorist finances."
josh.meyer@latimes.com
