For three years, the Bush administration has waged a campaign to choke off North Korea’s access to the world’s financial system, where U.S. officials say the nation launders money from criminal enterprises to fuel its trade in missile technology and its efforts to build a nuclear arsenal.
That effort has started to pay off.
U.S. pressure forced Macao this year to freeze North Korean assets in one of its banks, then foiled North Korea’s panicky attempts to find friendly bankers in Vietnam, Mongolia, Singapore and Europe. And after North Korea’s Oct. 9 nuclear test, China ordered some of its major banks to cease financial transactions with the country.
The cash crunch appears to have played a key role in North Korea’s decision Tuesday to return to six-nation talks over its nuclear ambitions. North Korean officials said that as part of the talks, they wanted to raise the issue of lifting financial sanctions.
“They’re not coming back because they want to give up nuclear weapons,” said David L. Asher, the U.S. State Department’s point man on North Korea until last year. “They are feeling the financial pressure and the cutoff from the international financial system, so they are trying to make nice.”
But the U.S. effort still faces two enormous obstacles: Russia and China.
North Korea continues to have access to banks in both countries, according to current and former U.S. officials who say that without those nations’ cooperation, the U.S. effort will be largely ineffective.
Both major powers have historically been more concerned about protecting their strategic interests than in joining U.S. efforts to sanction their neighbor.
Stuart Levey, the U.S. Treasury undersecretary in charge of investigating terrorist financial webs, has traveled to Russia and China, including a trip to Moscow last week. Levey said he had “constructive discussions” with his Russian counterparts, but declined to say whether they would act. A Russian Foreign Ministry official said they had “agreed to further cooperation.”
U.S. officials believe that both countries will continue to resist American appeals for a further crackdown in part because of their “historic ties to North Korea,” said a senior counter-terrorism official, who spoke about the U.S. campaign on condition of anonymity.
Evidence gathered over the decades by Washington indicates that North Korea has become what some U.S. officials call a “Soprano state.” The government in Pyongyang used its embassies to coordinate illegal activities, its ships to move heroin and other contraband, and its factories to make counterfeit $100 bills and bogus brand-name cigarettes, U.S. officials say.
Kim Jong Il, the North Korean leader, used the profits to fund his nuclear program, U.S. officials say, but also to import Mercedes-Benzes, pricey cognacs and other luxury items to buy loyalty.
Washington fears that North Korea could decide to use its well-worn trafficking networks to sell Iran or others the hardware or know-how to make weapons of mass destruction.
So administration officials decided in 2003 to attack by unconventional means. They created the Illicit Activities Initiative, a classified, multi-agency effort aimed at curbing North Korea’s black-market networks.
A year ago, the United States moved on one of North Korea’s bankers, officially designating the small Banco Delta Asia in Macao as a “primary money-laundering concern” under the Patriot Act.
Pyongyang, U.S. authorities found, banked much of its criminal proceeds in the former Portuguese colony, a freewheeling gambling haven, which became an autonomously governed Chinese territory in 1999.
“Banco Delta was just a thumbtack against their skin,” said Asher, who headed the Illicit Activities Initiative. “We knew that behind the skin was a central artery. When we pricked it, blood was going to start coming out fast.”
The Treasury action created a run on Banco Delta, which lost a third of its deposits in six days, and forced the government to seize control, sending an unmistakable message to bankers about the consequences of dealing with the North Koreans.
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.
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.”