Frozen funds en route to N. Korea

Bush administration officials awaited confirmation Thursday of the long-delayed return to North Korea of about $25 million in allegedly tainted assets, a move that potentially clears the way for the communist nation to shut its chief nuclear weapons facility.

The expected financial transfer follows months of false starts and foul-ups as officials from the U.S. State and Treasury departments struggled to coordinate strategies aimed at persuading North Korean leader Kim Jong Il’s regime to abandon nuclear weapons production.

Officials said the U.S. Federal Reserve Bank of New York would act as a conduit for the electronic transfer of almost $25 million from a small bank in Macao through Russia’s central bank to a commercial bank in Russia’s Far East, where North Korea apparently holds an account.

“Basically all of it has been transferred.... For Macao, this incident has come to a conclusion,” the Chinese territory said in an official statement.

White House, State and Treasury officials said they were still seeking to confirm the transfer late Thursday and hoped to announce progress today.

The convoluted transaction caps a bizarre chapter in the effort to rein in the North Korean government’s nuclear program.

President Bush announced Feb. 13 that the regime in Pyongyang had agreed in six-party talks to shut down its main nuclear reactor at Yongbyon within 60 days as the first step in a multiyear disarmament process. In exchange, Washington agreed to provide crucial fuel oil and to start the process of normalizing relations.

But the deal immediately ran aground on a provision of the Patriot Act aimed at curbing financial transactions that could assist terrorists. Congress passed the law after the Sept. 11 terrorist attacks.

In this case, the Treasury Department blacklisted the Macao-based Banco Delta Asia in September 2005 for allegedly laundering proceeds from North Korean criminal enterprises, including counterfeiting and drug smuggling.

The move so angered Pyongyang that it refused to participate in nuclear arms talks for more than a year and raced ahead with its weapons program.

The regime tested a small nuclear device in October and is believed to possess enough weapons-grade plutonium for eight to 10 warheads.

In January, State Department negotiators agreed to approve the return of the frozen North Korean funds to help persuade the regime to stop producing plutonium.

But in March, the Treasury Department moved to enforce its earlier ruling by barring U.S. financial institutions from dealing with the Macao bank. At that point, North Korea walked away from talks aimed at implementing the February accord.

The result was an impasse. North Korea made it clear that it wanted the money returned through normal banking channels. But the blacklisting caused financial institutions in Asia and Europe to sever ties with North Korea, and private commercial banks refused to handle the tainted funds for fear they would violate U.S. law and lose their access to the global financial system.

While Bush administration officials sought to untangle the morass, North Korea was free to continue operations at Yongbyon, though U.S. nuclear experts say it was out of commission at times for maintenance.

The decision to use the Federal Reserve Bank to return the money to the original account holders came after government lawyers concluded that the Federal Reserve was not subject to the same legal provisions as the commercial banks. U.S. officials said the Russian government also played a key role.

Christopher R. Hill, the State Department envoy who negotiated the disarmament accord, departed Wednesday for meetings in Beijing, Seoul and Tokyo aimed at reviving the six-party talks, which involve China, Japan, South Korea and Russia, as well as the United States and North Korea.

Sean McCormack, the State Department spokesman, said Thursday that “we all look forward” to getting the Macao bank case “behind us so we can get back to the real business of the six-party talks.”

North Korean officials have said “both in public and in private” that they intend to honor the Feb. 13 agreement, he added.

Asked whether the agreement was back on track, he replied, “Well, let’s see. We’ll see what the coming days bring.”

This week, six Republican lawmakers asked the Government Accountability Office to investigate whether the transfer of the $25 million violated U.S. law.

“If history is any indication, I have little confidence that the North Korean regime will adhere to any agreement despite our good-faith efforts to honor our side of the bargain,” said Rep. Ileana Ros-Lehtinen of Florida, the ranking Republican on the House Foreign Affairs Committee.

Jon B. Wolfsthal, a nonproliferation expert at the Center for Strategic and International Studies, said, “We’re essentially helping the North Koreans launder money. But if that’s what it takes to get them to freeze plutonium production, it’s worth it.”

bob.drogin@latimes.com