By the time financial authorities cracked down on North Korea's dealings here, it was like the classic moment of feigned ignorance in "Casablanca" when Capt. Louis Renault declares, "I'm shocked, shocked to find that gambling is going on in here."
For decades, the former Portuguese colony was renowned as the favorite haunt of counterfeiters, drug runners and spies, a kind of real-life "Casablanca" whose old-world cobblestone sidewalks and smoke-filled baccarat parlors probably hatched more intrigues than any script could contain.
Banks here handled millions of dollars on behalf of North Korea's isolated communist government, which has been long accused by the United States of selling illegal drugs to raise hard currency. The nation's founder, Kim Il Sung, and his son, current leader Kim Jong Il, allegedly kept their ill-gotten gains in Macao. And a North Korean terrorist confessed to plotting the 1987 bombing of a South Korean airliner from a hotel here overlooking the South China Sea.
But now the welcome mat has been rolled up, and the North Koreans, who didn't have many friends to begin with, find themselves distinctly unwelcome in this autonomously governed Chinese territory.
In February, Macao's banking regulators froze $25 million worth of North Korean accounts in the Banco Delta Asia, a bank the U.S. Treasury Department had accused in September of helping the North Korean government launder money and distribute counterfeit U.S. currency.
A North Korean company, Jokwang Trading Co., long believed to be a front for illicit activities, closed its headquarters on the fifth floor of an office building near the bank. Most of its personnel have relocated to Zhuhai, just across the border in China proper, business sources here say.
"You used to see the North Koreans around here all the time with their Kim Il Sung badges, but suddenly they're gone," said Seok Yeong Chong, a South Korean businessman living here. He said their numbers had dropped from more than 100 to only a handful. "They gave the Macao government too much of a headache."
Businesspeople here say the North Korean presence became a liability at a sensitive time. The North Korean government in Pyongyang is more unpopular than ever internationally because of its pursuit of nuclear weapons. At the same time, China is trying to develop Macao into a gambling destination to rival Las Vegas.
After Macao reverted to Chinese control in 1999, the Chinese government busted the casino monopoly of billionaire Stanley Ho, a long-standing friend of the North Korean government and the owner of a casino in Pyongyang.
The first U.S.-owned casino in Macao, the Sands Macao, opened in 2004, and a $1.2-billion casino operated by Las Vegas mogul Steve Wynn is scheduled for a September opening. Even Ho's family -- he has passed many of his casino interests to his daughter, Pansy -- has struck a deal with MGM Mirage for another new casino.
"Today people here want to do business with the Americans, not the North Koreans," said Jose Rocha Dinis, director of the Jornal Tribunal de Macau, a Portuguese-language newspaper, as he drove along a waterfront cluttered with construction cranes. "When they are seeking investment from the outside, they can't let the North Koreans get in the way."
There is still a cloak-and-dagger feeling to Macao, an hour from Hong Kong by high-speed ferry. When you walk into the downtown Watson's, the local equivalent of a Rite Aid, prominently displayed for sale are paper shredders.
At the pink colonial Club Militar, where members of the business establishment convene for multi-course lunches accompanied by red wine and cigars, one banker arriving for his Friday lunch explained, "We bankers in Macao are very busy, so we don't have time to ask questions about other people's business."
But Americans are bringing with them not only Las Vegas glitz but also more modern notions about transparency and accounting.
"Macao had to clean up its act," said David L. Asher, a former State Department official who specialized in North Korea and was one of the architects of the action against the Macao bank. "There are $5 billion in annual gaming revenues at stake. They have to work with the United States."
The freezing of the $25 million in the Banco Delta Asia has been a particularly big blow for a government scraping by for lack of hard currency. North Korean banks kept large sums of money in the Macao bank. Now, with those accounts suspended and other banks frightened off by the Treasury Department action, North Korea has been largely cut off from international trade.
"The impact is severe," said Nigel Cowie, a British banker based in Pyongyang who is general manager of the Daedong Credit Bank, serving mostly the tiny foreign community in the North Korean capital.
In a telephone interview from Pyongyang, Cowie said that North Korea, because it had no credit and a weak banking system, dealt almost exclusively in cash, which might have created the appearance that it was laundering money when it was not.
"I can't speak for what everybody was doing, but I can say that in our case, a lot of legitimate business has been hurt," Cowie said.
The North Koreans blame the U.S. for their woes in Macao. A senior North Korean diplomat, Li Gun, visited Washington last month on what appeared to have been a futile attempt to get the Macao freeze lifted. He left angry, declaring that North Korea would boycott negotiations on its nuclear program until the banking situation was resolved.
"Under this continuing U.S. pressure, we can't go back to the negotiation table," Li said.
U.S. officials protest loudly that the crackdown in Macao is unrelated to the prolonged struggle over nuclear weapons. In a news release issued in response to the North Koreans' accusations, the Treasury Department said it wished to clarify that its actions against Banco Delta Asia were "intended to protect American institutions and not serve as sanctions against North Korea."
Denials notwithstanding, the Bush administration has been angling for ways to apply pressure without seeking full-fledged United Nations sanctions -- which almost certainly would be opposed by North Korea's traditional allies in China and Russia, nations that have veto power -- since Pyongyang pulled out of the Nuclear Nonproliferation Treaty in 2002. Until now, China has staunchly refused to apply any pressure to North Korea.
What's happening in Macao has been the result of a delicate diplomatic dance involving the United States, China and the government of Macao.
U.S. officials had been complaining to local authorities about North Korean activities in Macao and getting little response, people involved with the case say. Then last year, the Treasury Department decided to use the Patriot Act.
In September, the department published a notice designating Banco Delta Asia as a "primary money-laundering concern" under a section of the post-Sept. 11 law that is designed to cut off funding to groups that present a security risk.
Panicky banking customers lined up in front of the silverfacaded headquarters in downtown Macao. In a matter of six days, they had withdrawn $133 million out of $390 million in deposits. The Macao government intervened and took control of the bank.
Victor Chan, the lead spokesman for the Macao government, said there wasn't much choice in the matter. "There was a withdrawal of such large proportions that it triggered a takeover of the bank," he said.
However, Macao's financial authorities have reacted very aggressively since. They have drawn up new money-laundering laws. They have frozen without interest 50 accounts belonging to North Korean banks, trading companies and individuals.
According to a letter sent in February by their lawyers to the Treasury Department, there is likely to be a criminal investigation into the bank and the money will be confiscated if Macao courts determine the accounts were involved in illegal activities.
Banco Delta Asia was a small, family-owned bank headed by a portly and colorful local politician, Stanley Au. Businesspeople who know him here say he was an easy target because he was not particularly well connected in Beijing and, unlike the better-known Stanley Ho, not vital to Macao's economy.
"It was just a shot across the bow to go after Banco Delta Asia," said David Green of the Macao office of PricewaterhouseCoopers, the auditing firm. "They could pick on a bank that had an obvious relationship with North Korea that everybody could afford to lose."
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