Archive for Counterfeiting

Review: Treasury’s War, by Juan Zarate

Let me begin with an apology for the lack of posting lately. While tossing a football around with some friends, I took a direct head-on hit to that finger you need for typing words that contain the letters “l” or an “o,” which turn out to be less dispensable than you might think. The time I didn’t spend typing, I spent reading instead:

Treasury's War cover

[clicking the image takes you to Amazon]

If you want to understand why the Banco Delta Asia action worked so well, how financial sanctions bankrupted al Qaeda, and how they’re bankrupting Iran today, you have to read this book. If you’re reading this site, however, the odds are you’re interested in what Zarate has to say in chapters 9 and 10, where he writes about North Korea, Banco Delta Asia, and Chris Hill.

Zarate, who is usually effusive in his praise for the people he worked with in government, clearly has no use for Hill. Hill comes off looking like a boorish, incompetent asshole who, despite repeated explanations of how Section 311 worked, either didn’t grasp the concept or didn’t care. According to Zarate, Hill’s minions reduced Daniel Glaser to tears by bullying him into simply switching off the section 311 action–and its downstream effects–almost instantly, which is a lot like asking Treasury to instantly give North Korea a new reputation for honest financial dealings with a banking “ecosystem” that’s extremely concerned about reputations and access to correspondent accounts in U.S. banks and dollar-clearing through New York.

Readers of this site already know that I’m no fan of Chris Hill. I’ve written extensively about how Hill played fast and loose with the truth when he sold his deal to Congress in 2007. Two years later, after his deal with Kim Jong Il had collapsed under the weight of its own suspended disbelief, Hill was eventually confirmed as U.S. Ambassador to Iraq, but only after a bitter confirmation fight. After just 16 months in office, Hill retired, having failed to broker a new Iraqi government or to negotiate a suitable status of forces agreement (and you’d think a guy like Hill could have closed a deal if he wanted one badly enough), and with his relations with U.S. military commanders strained.

I’ve already told you that Zarate’s book is indispensable (it’s also a fun read) but I do have two criticisms. First, his treatment of the SWIFT network as sacrosanct, and his implicit criticism of Section 220 of the Iran Threat Reduction and Syria Human Rights Act of 2012 reads like a set of SWIFT talking points. Zarate worries about U.S. laws and EU regulations that forced SWIFT to cut off certain Iranian banks, and wonders how far down this slippery slope we’d go to sanction other countries.

I agree that SWIFT should be commended for helping Treasury after 9/11, and that The New York Times shouldn’t have outed SWIFT for doing it. But SWIFT has significant business operations located in the United States, and it derives significant benefits from the security of our country and the health of our financial system. By Zarate’s admission, SWIFT took the actions it took in 2001 because it knew it would not prevail if Treasury served it with subpoenas for financial information. Should SWIFT be forced to stop financial messaging services to every country that gets low marks for human trafficking or anti-money laundering countermeasures? Clearly not. But when some supranational authority demands countermeasures against specific banks known to be involved in proliferation or money laundering, SWIFT shouldn’t be exempt, either, particularly given that by its nature, SWIFT doesn’t know the purpose of the transactions it facilitates. Here’s paragraph 11, from UNSCR 2094:

Decides that Member States shall, in addition to implementing their obligations pursuant to paragraphs 8 (d) and (e) of resolution 1718 (2006), prevent the provision of financial services or the transfer to, through, or from their territory, or to or by their nationals or entities organized under their laws (including branches abroad), or persons or financial institutions in their territory, of any financial or other assets or resources, including bulk cash, that could contribute to the DPRK’s nuclear or ballistic missile programmes, or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, or to the evasion of measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, including by freezing any financial or other assets or resources on their territories or that hereafter come within their territories, or that are subject to their jurisdiction or that hereafter become subject to their jurisdiction, that are associated with such programmes or activities and applying enhanced monitoring to prevent all such transactions in accordance with their national authorities and legislation;

Zarate is otherwise pretty big on enforcing international norms and standards, and to be fair, Zarate’s manuscript was probably already with the publisher when this resolution passed. It’s hard to argue today that North Korean banks that have been specifically sanctioned by the U.N. itself, the EU, or the United States because of “credible information” about their proliferation should continue to receive messaging services without interruption. Maybe Zarate wouldn’t argue that now. I hope he wouldn’t. But even before that, we’d seen a long services of messages about the need for “countermeasures” against North Korea from the Financial Action Task Force.

My second criticism is of the opportunity Zarate misses at the end of his book when he calls for the government to help preserve and enhance our economic power. That’s especially unfortunate when Zarate’s explanation of that power and its importance were so effective. His last chapter and his epilogue introduce a series of important concepts concepts about trade, protectionism, technology, foreign investment, and the strength of the dollar, but unfortunately, and perhaps because of the editing process, those concepts aren’t explained or illustrated well, and I finished the book without understanding how more government intrusion would advance, rather than inhibit, our economic competitiveness. I hope that’s something Zarate will explain further, perhaps in a future edition.

(This chapter still stimulated much thought about other key networks, aside from the financial system, that run through the United States. Could the free flow of information through U.S.-based servers, or a cloud network, be another future power source? How about restricting the access to U.S. ports of cargoes originating from ports that fail to take their counter-proliferation or counter-terrorism responsibilities seriously?)

Treasury’s War won’t win any literary awards, but its simple and clear writing style is probably best for a topic this complex. The information, clear explanations, and illustrative examples make it required reading for any student of economics or foreign policy in this age. If you’re a North Korea watcher or congressional staffer who wants to understand how H.R. 1771 would work, and why its strategy is nothing at all like the old fashioned sanctions used against Saddam Hussein, read Zarate’s book (it’s also available on e-book).

Over at Foreign Policy …

Professor Sung Yoon Lee and I have a piece up discussing the world’s next, almost-certain-to-be-lost opportunity to respond to North Korea more effectively than having Susan Rice continue to beat her cranium against the Great Wall of China at the Security Council.  It’s a blend of Professor Lee’s prognostications about what the North will do next, and some of the financial constriction ideas I’ve been pushing as one of those Three C’s.

I’ll say this about FP — it’s certainly a great place to find an audience that isn’t, erm, accustomed to reading that sort of proposal, which makes me all the more appreciative that they decided to publish it.  I’m sure the comments will be just … fascinating.

I want to offer my sincere thanks to Professor Lee for his co-authorship, without which I doubt FP would have given this serious consideration.  Admittedly, there are many people who share his linguistic head start toward understanding the pathology of North Korea; very few who are his equal in judgment, intellect, and knowledge; and none who can communicate that understanding so cogently to those of us who aren’t Korean.  Honestly, I think his English is actually several levels better than mine.  That’s what makes him such a unique resource.

Update:  Here’s Prof. Lee saying many of the same things in 2009.

End of Bureau 39 Wouldn’t Mean the End of N. Korea’s Criminal Enterprises

Reports last week claimed that, according to “sources familiar with North Korean affairs,” North Korea had shut down Bureau 39 of the Workers’ Party — responsible for obtaining hard currency by any means necessary, including illicit activities — and Bureau 38, responsible for managing the regime’s overseas funds.

Are any of the reports true?  My default position about any “insider” reports from Pyongyang is skepticism, and a quick Google search reveals that we’ve heard many versions of this story before.  For example, Office 38 has variously been reported to have been merged into Bureau 39 as early as 2009 (Yonhap), restored in June 2010 (Chosun Ilbo) and February 2011 (Reuters), and then merged into the Moranbang Bureau, another government entity in October of this year (Kyodo).  At the very least, it’s hard to believe these reports could all be true, and kremlinologist Ken Gause correctly cautions against taking even the most recent ones at face value.  Changing the names of the organizations may be nothing more than a superficial way to dodge Treasury Department sanctions, most recently reaffirmed in Executive Order 13,551.

Even if North Korea really did merge, split, and rename these organizations so many times, it seems unlikely in the extreme that it would cease its counterfeiting, drug dealing, money laundering, or other illicit activities.  This recent report from the Carnegie Endowment, and these from the Financial Action Task Force — one of those truly effective international organizations you seldom hear about — suggest that North Korea continued with its illicit activities and the laundering of their proceeds right up to last week.  Current reports suggest that the regime is under severe financial stress and needs those sources of hard currency more than ever.  The reorganizations could also be part of some internecine power play, consolidating all-important sources of income in the hands of a dominant faction.  Either way, if the mergers and revivals of the last two years didn’t affect North Korea’s illicit intent, this year’s changes (assuming there are any) probably won’t, either.

There is another reason to question the veracity of the reports:  their source, Kyodo News.  Kyodo recently sent a delegation to Pyongyang, which performed a ritual prostration before the statues of North Korea’s dead dictators and then met with Kim Yong Nam.  This suggests that Kyodo is interested in opening its own AP-style bureau in Pyongyang, and also that Kyodo sees itself as having an inside track with the sort of “exclusive” North Korean sources that would arouse suspicion in more sober minds.

At Last, Plan B

This afternoon, the Treasury Department finally announced its long anticipated sanctions against North Korea, in the form of a sweeping new executive order. The order, pursuant to the International Emergency Economic Powers Act, authorizes the blocking of assets of “any person” providing what Treasury calls “material support” for North Korea’s WMD proliferation, money laundering, counterfeiting, trade in luxury goods, bulk cash smuggling, and pretty much everything North Korea does that violates UNSCR 1718 or 1874, or the U.S. Criminal Code.

In addition to the new order, Treasury also imposed new sanctions against several North Korean entities under the existing Executive Order 13382. Below the fold, I’ve pasted the text of the Executive Order, President Obama’s letter forwarding the EO to the Speaker of the House, two Treasury press releases, and some remarks by OFK favorite Stuart Levey, all of which I’ve archived here to aid your research and mine.

My initial reaction is that the new EO gets it just right. It’s narrowly targeted at North Korea’s illicit activities, but it’s also broad enough to cover the main ones — arms and drug trafficking, money laundering, currency and pharmaceutical counterfeiting, and the squandering of its resources on luxury goods while North Korean children starve in the streets. This is a tough-yet-refined version of the Plan B I’ve been advocating since its earliest draft in 2006.

Here is the key language:

All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, including any overseas branch, of the following persons are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in:

(i) the persons listed in the Annex to this order; and

(ii) any person determined by the Secretary of the Treasury, in consultation with the Secretary of State:

The EO then goes on to describe a wide range of activities, assistance, and financial activities that could support North Korea’s illicit activities, including the assets of any entity held by a U.S. person, or within U.S. jurisdiction. This means that if a Chinese entity is involved in helping a blacklisted North Korean entity acquire missile components, Treasury could freeze the Chinese entity’s tainted assets based in the U.S., assets of its U.S. subsidiaries, its assets in U.S. banks, or potentially, the entity’s foreign bank’s correspondent accounts in U.S. banks. This is all we could ask, and — if applied vigorously — it will be enough to force international businesses to choose between the use of the global financial system and their business ties with North Korea. Yes, North Korea could try to conceal, blur, obfuscate, and obscure which companies are connected to its illicit activities, but Treasury’s answer to this is that its effect will be to spread suspicion to all North Korean entities, even those that claim to be legit. This could be a severe blow to North Korea’s ability to comingle illicit and legitimate finance (the essence of money laundering) and will terrify investors and cause capital flight from the Palace Economy just as the Kim Dynasty is trying to engineer a smooth succession.

For Senator Sam Brownback, it is also a rightful claim to an important legacy when he leaves the Senate to become, almost assuredly, the next Governor of Kansas. In recent months, as North Korea’s behavior changed thinking in the Obama Administration, Brownback effectively lobbied State for tougher economic sanctions, and skillfully parlayed the stayed threat of nomination holds to build friendships with State Department officials with whom he found common ground. In the absence of strong conservative thinkers on the Senate Foreign Relations Committee, Brownback filled the void, seized the opportunity to build relationships in the Treasury Department, and encouraged it to press for tougher enforcement. The question now turns to the Administration’s determination to use this tool aggressively, and follow the money to the very ash heap of the Kim Dynasty if necessary.

Who is targeted? A lot of entities that were already on Treasury’s list of specially designated nationals, but also, two key additions: Bureau 39 of the Korean Workers’ Party, and the notorious Reconnaissance Bureau, the prime suspect in the recent attempt to assassinate Hwang Jang Yop. Also sanctioned was a North Korean state enterprise responsible for making and exporting submarines and torpedoes.

For the moment, senior State Department people like Robert Einhorn seem determined to use financial pressure to force a fundamental change in North Korea’s behavior, and talk of re-engaging with North Korea all seems very theoretical and conditional. I don’t think anything short of a coup will actually cause that fundamental change, and the real test will come when State and the Administration come to grips with this. For now, this is all we could have hoped for from this Administration.

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Plan B Watch

According to Yonhap, Treasury will roll out its new North Korea sanctions this week. I am giddy with anticipation. And on a related note, I hope the boys at Treasury are Daily NK readers (or better yet, sources):

The No.39 Department, which is responsible for the management of Kim Jong Il’s private funds, holds the bank account with the British Virgin Islands branch of FirstCaribbean International Bank (FCIB), a prominent bank in the Caribbean region.

According to an expert source familiar with China and North Korea, the No. 39 Department’s secret overseas account exists under the name “Hana Holdings”. It is apparently held with the Road Town branch of the bank, which is based in Barbados and has branches in 17 countries.

Explaining the importance to North Korea of the No.39 Department account, the source told Daily NK, “Due to recent UN Security Council sanctions, the No. 39 Department is experiencing considerable difficulties with its overseas financial trade. Currently, excluding Chinese banks, their only active overseas account is that held with FirstCaribbean International Bank.”

Also, he added, “The only bank through which the No. 39 Department can make overseas transfers is FirstCaribbean International Bank in the British Virgin Islands, since their other secret bank accounts are all blocked.”

As usual, there’s a Chinese connection. One of the Daily NK’s sources, Ken Kato, is a DC-based accountant and activist for the release of Japanese abductees I’ve met and corresponded with in the past. This would be a case of North Korea’s malice reaping severe and unintended consequences. Separately, the Daily NK reports that Bureau 39 has fallen on hard times.

Plan B Watch: Einhorn Goes to Tokyo, Pressure Builds on China

The latest reports in the Korean press tell us that the President will soon sign an over-arching executive order that will subsume the authorities of Executive Order 13,382 (see sidebars), and will also allow the blocking of assets used for proliferation, drug trafficking, and currency counterfeiting:

In a press briefing on Monday, Department spokesman Philip Crowley said, “We have no doubt that North Korea has engaged directly in counterfeit operations as a means of bringing currency into the country. This is a longstanding practice.” [Chosun Ilbo]

Several reports discuss plans by Treasury to blacklist specific individuals and institutions suspected of being involved in illegal activity and money laundering:

Observers say a financial services blacklist of individuals to be announced in the new sanctions will likely include O Kuk-ryol, vice head of North Korea’s National Defense Commission, which is led by Kim Jong-il and his family. O is known to be managing a company that tries to attract foreign investment to the North. [Joongang Ilbo]

It will be interesting to see whether the executive order will make findings that Bureau 39, or perhaps the North Korean government itself, is a primary concern for money laundering. That description has been applied to other states for much less — that is, a lackadaisical rather than intentionally criminal approach to the proceeds of illicit activity. If it weren’t for the State Department and its politics, Treasury would probably have designated North Korea years ago.

The United States is expected to blacklist three key North Korean finance officials believed to be taking care of leader Kim Jong-il’s secret funds as part of new sanctions against the communist nation, a government source said Wednesday.

One of the three finance officials is Kim Tong-myong, head of Tanchon Commercial Bank, the source said. “The U.S. is paying special attention to three people, including Kim Tong-myong, who operate North Korea’s secret funds abroad,” the source said on condition of anonymity. “If they are included in the new sanctions, it could deal a blow to North Korea’s leadership.”

The U.S. has also collected evidence that nine North Korean financial institutions operating overseas and as least two trading firms have been used for the regime’s illicit activities, such as trade in conventional arms, luxury goods and counterfeit money, the source said.

Overall, the U.S. is expected to add some 10-20 North Korean entities and individuals to its blacklist of those to be subject to sanctions, which include freezing their assets in the U.S. and banning them from dealing with American financial institutions. [Yonhap]

And given the lack of food or medical care in nominally socialist North Korea, you might be tempted to assume (or even mislead others to believe) that its government had no money to spend for such things. You would be wrong:

Data from the Bank for International Settlements released last month showed that North Korean deposits at banks around the world stood at $670 million as of the end of March. [Joongang Ilbo]

That sum represents just about enough to fund World Food Program operations in North Korea … for three years. Now explain to me again why North Koreans still starve.

Finally, the Daily NK’s Kim Yong Hun explains why Chinese banks will be forced to cooperate with the U.S. Treasury Department, whether the Chinese government wants them to or not. I won’t give you any quotes — just read the whole thing. Marcus Noland has more on this in via the Council on Foreign Relations:

China–which had been essentially unwilling to implement the sanctions on luxury goods–cooperated with the sanctions against BDA. The reason [for that cooperation] is it was not the Chinese foreign ministry or the customs administration, but rather the Chinese ministry of finance and central bank implementing these sanctions. Their concern was that they had much more at stake with respect to Chinese banks’ [access] to the lucrative U.S. market than they ever would have dealing with some small bank in Macao or possible financial transactions in North Korea. The lessons from this seem to be that financial sanctions–that play on banks’ desire to maintain a good reputation, stay within the increasingly stringent international rules on money laundering, and maintain a good relationship with the United States–play to our strengths in terms of the U.S. financial system and the increasingly well-defined and articulated set of international norms and agreements on money laundering. [Financial sanctions] will be more successful than the traditional trade sanctions that are oftentimes implemented less than rigorously.

I suspect Einhorn will have less difficulty securing the cooperation of the Japanese. Perhaps more surprisingly, Hong Kong also appears to be on an active hunt for dirty North Korean money.

One thing that I will say about this, however, is that we should be prepared for the Chinese government to look for ways to actively undermine Treasury’s efforts, such as shipping hard currency directly to North Korea in paper form, gold, or stored-value cards. This certainly isn’t a very efficient way to do things, but it might be just enough to keep the Kim Dynasty in power until the U.S. government decides to cave yet again for political reasons. As always, determination will be dispositive to whether this will work.

During the news conference held in Seoul, Monday, Einhorn played hardball with North Korea with regard to dialogue.

“We can’t repeat the kind of cycle that we’ve been through on a number of previous occasions where North Korea engages in talks, makes commitments, and then abandons those talks. We have to break that cycle,” he said.

“Before the six-party talks to be convened, it’s essential that North Korea demonstrate in an intangible way that it’s prepared this time to make commitments and to fulfill them. And there are some important commitments already existing such as September 2005 commitments. [Korea Times]

When we see the new executive order that will be used as the legal basis for this plan, we’ll probably find out that 80% of the Korean press reports about this are actually true. Recently, we’ve seen some on the American left call South Korea the tail that wags the dog. Frankly, I happen to agree with them on this, up to a point. One of the things that I continue to find simply staggering is the extent of South Korea’s influence on U.S. government policymaking. Clientitis, in its various forms, is rife within these circles, though many of these insiders still privately suspect that the National Intelligence Service frequently plants stories to manipulate press coverage.

Fine, but where were these same people when the tail was Roh Moo Hyun, and the wag was indirect U.S. financial support for Kim Jong Il, his atrocities toward his people, and his proliferation? By which I mean that as U.S. soldiers (me being one of them) ostensibly defended South Korea from North Korea and subsidized its defense, South Korea sent Kim Jong Il billions of dollars in tribute that it didn’t have to spend on its own defense. If you agree that perpetuating North Korea’s capacity to terrorize and proliferate is contrary to America’s interests, and that finally working with allies in the region to address and suppress that threat is in its interests, then the “tail wags dog” meme would have been far more suitable to the years between 1997 and 2008.

Plan B Watch: Robert Einhorn Visits Seoul; State Directs Strong Criticism at China

Robert Einhorn, President Obama’s special adviser for non-proliferation and arms control, is visiting Seoul and Tokyo this week. He is accompanied by Daniel Glaser, who works with Treasury’s Undersecretary for Terrorism and Financial Intelligence, and who was a key architect of the Banco Delta Asia sanctions in 2005 and 2006. At the risk of making a comparison that Glaser might not necessarily welcome, his presence in Seoul has far more deterrent value than parking an aircraft carrier off the coast of Nampo.

einhorn-in-seoul-july-2010.jpg

[Robert Einhorn and his South Korean counterparts. Photo: Korea Herald]

Einhorn and other U.S. officials have given more hints about what financial measures the government is like to take, and what they’re doing to secure international cooperation with them. What’s less clear is whether financial measures are a means to get North Korea to talk, to disarm, or to overthrow a regime determined to do neither. The answer probably depends on how North Korea responds to the pressure over the next year. I’ll predict now that once it begins to have an effect, North Korea will coo seductively about disarmament talks … if only we’d just lift the sanctions. That’s when the administration will be tested again.

Even so, a solid Plan B appears to be taking shape, just as I was about to give up on the Obama Administration. Even if the new policy reflects nothing more than new strength and gravitas about the relationship between pressure and diplomacy, this would be progress.

HOW WILL THE SANCTIONS WORK?

The precise form the measure will take still isn’t clear, but ought to be clearer later this week as Treasury and State add further detail to their plans. We do have some idea of the targeting and methods, however. Treasury will target “North Korea’s illicit transactions and activities regarding luxury goods and arms trade,” will allow for the public designation of “entities and individuals involved in” those activities, to include dollar counterfeiting, and will provide for the blocking of those entities’ assets and property. At least one report advises us to expect a new executive order to this effect:

Under the measure, the U.S. government will reportedly pinpoint North Korean businesses, authorities and individuals associated with illicit transaction or activities and then require U.S. financial institutions to take measures to block their activities and freeze their assets in the United States. [Korea Times]

“By publicly naming these entities, these measures can have the broader effect of isolating them from the international financial and commercial system,” he said. Einhorn was accompanied by Daniel Glaser, a senior Treasury official overseeing efforts to combat terrorist financing and financial crimes. [AFP]

It bears repeating that these criminal enterprises enrich the North Korean elite, but do nothing to feed the hungry:

“These measures are not directed at the North Korean people, but our objective is to put an end to [North Korea's] destabilizing proliferation activities, to halt illicit activities that help fund its nuclear missile programs and to discourage further provocative actions,” Einhorn told reporters, according to a copy of his prepared remarks. [....]

Einhorn said the aim of the sanctions is to go after North Korean sources of “hundreds of millions of dollars” in hard currency, including counterfeiting U.S. currency, narcotics smuggling and other illegal activities. U.S. officials have said that the illicit sale of cigarettes, liquor and exotic food helps provide funding for North Korea’s burgeoning nuclear program. [CNN]

GAINING INTERNATIONAL COOPERATION

I think it’s pretty obvious to everyone whose cooperation has been the most conspicuously lacking, and the statements from the Administration about China and North Korea this week are really something to behold. They’re more strident than anything I can recall seeing from any senior U.S. officials, quite possibly to include John Bolton, in the last two decades. They suggest a real readiness to impose real consequences on China’s economic and security interests.

Einhorn appealed to China, the North’s sole major ally and economic lifeline, to back the sanctions on both countries and not to take advantage of restraint by other countries.

“We want China to be a responsible stakeholder in the international system,” he said. “That means co-operating with the UN Security Council resolutions and it means not backfilling or not taking advantage of responsible self-restraint of other countries.” [AFP]

That’s a strikingly honest acknowledgment of what the economists have been telling us about China undermining UNSCR 1718, and would be a strong statement even if it had been off the record. It gets better:

“China is suffering the indignity of exercises close to its shores, and though they are not directed at China, the exercises are a direct result of China’s support for North Korea and unwillingness to denounce their aggression,” Deputy Secretary of State James Steinberg told a forum at the Nixon Center Tuesday, according to the center’s Web site. [....]

“China is also reflecting on the consequences of all parties’ inability to deter North Korean provocations,” Steinberg said. [....]

“The U.S. should exercise patience and send a message to Pyongyang that their old tactics will no longer work,” he said. “The administration’s strategy and policy should not be altered.” [Yonhap]

Steinberg’s tone, which appeals to Chinese government’s obsession with place and stature, is calculated to put its government under domestic pressure and show the Chinese people that its irresponsible shielding of North Korea has backfired.

State is also putting pressure on Burma to stop buying North Korean weapons.

The chocolate-making countries, which may hold up to $4 billion in North Korea’s infant formula fund personal assets of Kim Jong Il and/or Kim Jong-Eun, are promising to cooperate as well. That includes Switzerland, better known as the country that failed to see anything amiss about selling the North Koreans the same intaglio printing presses and optically variable ink used by the U.S. Bureau of Engraving and Printing:

RFA cited Roland Vock, a senior official of the Sanctions Unit at the Swiss State Secretariat for Economic Affair, as saying that Switzerland is complying with sanctions on Pyongyang applied under UN Security Council resolutions 1718 and 1874.

“Any financial assets that fall under the scope of the resolutions would have to be frozen,” Vock was quoted by RFA as saying. Vock told RFA that if they are provided specific information about illegal financial transactions by North Korea through even unlisted bank accounts, they will start an investigation. [Joongang Ilbo]

Am I reading too much into Vock’s comments to say that I detect an undercurrent of skepticism?

“Give me the information,” he said. “Which bank [of about 500 Swiss banks], what money talking about, where money is coming from, then I can pass information to” the Swiss intelligence agency so that it can begin its probe. He said he meets American officials “very regularly” to exchange information.

Earlier on, Luxembourg also said that under the UN and U.S. sanctions, the country is closely watching for any illegal activities by the North using accounts there and will take “appropriate legal steps” if it finds them.

North Korean leader Kim Jong-il’s slush funds in banks in Switzerland and Luxembourg are estimated at more than US$4 billion. [Chosun Ilbo]

More on Luxemburg’s assurances of cooperation here. North Korea is already reported to be trying to move large amounts out of some of its accounts there. The suggestion is that this is to bequeath them to Mini-Me, but one need not physically move a bank account to change its ownership or control. It seems more likely that any large movement of funds is designed to save those funds from being blocked, but it’s also plausible that as North Korea heads into the succession process and the September party conference, that it needs more goodies for its minions.

WILL IT WORK?

That depends on the objective, of course, but the objective still isn’t entirely clear. Here’s the official explanation:

State Department spokesman Philip Crowley said, “We don’t take a cookie-cutter approach here. Iran and North Korea are two different countries. Iran has resources, particularly in the energy sector. North Korea does not. So we will apply measured sanctions against North Korea as we have in the past, and tailored to help influence the thinking of the government and those who support the government.”

“Likewise, we are directing sanctions at Iran and it’s the agencies that are linked to the concerns that we have — proliferation, nuclear concerns… But they are different,” he added. [Chosun Ilbo]

The Chosun Ilbo’s correspondent seizes on plans for a new executive order and the lack of present plans for new legislation as “confirmation that Washington will not slap the same strong sanctions on the North that it has imposed against Iran,” but the latter doesn’t follow from the former. For months, my spies have told me that Treasury’s most enforcement-minded officials have said that the legal authorities needed to put real pressure on North Korea are already there. As I’ve said for years, this could all be done with a series of executive decisions. And because the Daily NK’s Chris Green reads this blog, he naturally does a superior job of informing his readers:

Over the weekend, some concerns were raised about rumors that the U.S. is planning to pursue sanctions through an executive order, thus bypassing domestic legislative processes, and that this somehow signified a weakening of the proposed sanctions. However, this was refuted by South Korean experts, who noted that an executive order may be better in terms of handing the U.S. government the ability to act quickly in the face of North Korean changes.

Kim Sung Han, a Professor of Institute of Foreign Affairs and National Security at Korea University, analyzed during the phone call conversation with The Daily NK, “The domestic law and administrative order is a matter of flexibility in the United States’ policy, not to distinguish the level of the sanctions. In order for the U.S. to take the initiative and respond to changes quickly, an administrative order, which is free from the unnecessary intervention of Congress, is better.” [Daily NK, Chris Green]

So I don’t take much from the fact that the administration isn’t asking for new legislation now, because I agree that it isn’t really needed yet. The comparison to Iran sanctions is off the mark. Iran, unlike North Korea, has strong trade relations with other countries and oil to sell that other countries — including this one — will continue to buy. Until we can learn to live without Iran’s oil, financial sanctions on Iran are far less likely to put its regime under real pressure. If the administration is asking for new legal authorities against Iran, it’s probably because it knows how much more difficult Iran’s financial links are to cut. But North Korea’s financial links to the Outer Earth are fragile and largely illicit. There is nothing that North Korea sells that anyone really needs.

Assuming, then, that the U.S. government is serious, exactly what is it serious about? There is some ambiguity here, if you believe this second report from the Daily NK, which relies in part on anonymous sources. It reports that the Cheonan Incident was “a turning point” in South Korea’s approach to the North, and has since been migrating in the direction of using sanctions to catalyze “fundamental changes in the country.” It reports that U.S. officials, despite their willingness to “target the North Korean leadership and their assets,” aren’t yet ready to support such an approach, but might be later if North Korea continues to refuse to “show its sincerity” about disarmament.

Those aligned with the Chinoy-Ahn axis are working overtime to mobilize opposition to the administration’s financial strategy. Their argument, offered with an unpersuasive amount of desperation, is that pressure won’t force North Korea to negotiate and will spoil the gemütlichkeit for talks. But if they really believe this, why the desperation? And more to the point, why did North Korea begin hinting at returning to the six-party talks just as press reports began to emerge that Washington would implement comprehensive financial sanctions? To its credit, the Obama Administration gets this, and openly questions the sincerity of North Korea’s belated expressions of interest in negotiations.

Critics of financial pressure could make a more accurate criticism if they were honest enough to make it: financial pressure still won’t “to convince Pyongyang to change course and pursue denuclearization.” For what little it’s worth, I believe we should remain open to the exceedingly unlikely possibility of a negotiated, verifiable, irreversible nuclear disarmament of North Korea, though this would require a fundamental transparency that the Kim Dynasty won’t ever accept.

By itself, the emerging Plan B probably won’t crumple the Kim Dynasty, either, though the succession of the grossly underqualified Kim Jong Eun increases the odds that it might. Mostly, financial pressure can gravely damage the regime’s capacity to proliferate, and inhibit its capacity to repress the latent dissent that will eventually destroy it.

Plan B Watch: A Shot Across China’s Bow?

Hey, did the State Department threaten the Bank of China and the Bank of Shanghai? Or to put the question more bluntly, did someone just grow a pair?

A diplomatic source here said the U.S. will blacklist more North Korean entities and individuals in the coming weeks so that international financial institutions would cut off ties with them.

Any foreign banks refusing to sever business ties with the North Korean entities and individuals in question will have U.S. financial institutions suspend ties with them, the source said. “Think of Citibank or Bank of America suspending business ties with Bank of China or Bank of Shanghai. That will be a great burden to China.”

What I wouldn’t give to see the case of the vapors Peter Lee must be having at this moment. Of course, I care little and know less about Lee’s background, but I wonder if the manic oscillation between contemptuous arrogance and resentful victimhood is a function of life in a society where destiny is so often imposed on the resentful by the arrogant. If it’s futile or worse for a Chinese citizen to curse the policies of his own government, there’s no less futility in cursing the policies of the American government.

Crowley said last week that the U.S. will not only use existing measures like the Patriot Act, but will also establish “new executive authorities” to blacklist more “entities and individuals supporting proliferation, subjecting them to an asset freeze; new efforts with key governments to stop DPRK trading companies engaged in illicit activities from operating in those countries and prevent their banks from facilitating these companies’ illicit transactions.” [Yonhap]

They certainly do sound very serious about this. And thorough:

Robert Einhorn told the Voice of America that the U.S. has tracked down every trading company and individual in North Korea doing illegal business activities overseas and will freeze their assets. It was the first interview Einhorn has given since being made the U.S. government’s special adviser for nonproliferation and arms control.

Einhorn said the legal basis for past sanctions, which he called “existing authorities,” will be more actively applied and used to freeze assets of North Korean organizations, trading companies and individuals involved in terror or nuclear proliferation activities.

The new sanctions, on the other hand, will be focused on restraining other illegal activities such as trade in conventional weapons, luxury goods, tobacco, counterfeit bills and drugs, he said. He said the U.S. is drafting “authorities” to control those non-terror or nuclear proliferation areas. He said once the new authorities are arranged, the ability of the U.S. to freeze those illegal activities by the North will be strengthened. The details of the new sanctions will be announced by next week, he said. [Joongang Ilbo]

All of this has the potential for some very interesting money laundering prosecutions in the courts. The measure to watch for, however, is whether Treasury will simply declare the entire country of North Korea to be a primary money laundering concern and deny its entities access to the U.S. financial system, something that my spies tell me key people in Treasury have seriously considered. This so-called Fifth Special Measure is to Plan B what the Public Option is to Obamacare. And it wouldn’t be unprecedented. We’ve done this to Nauru and the Ukraine, among other places.

It’s encouraging that the old partisan reflexes really aren’t very probative of how people in Washington see the issue of financial pressure. Most hard-liners agree that all kinds of pressure have to be applied in tandem with at least an offer to negotiate, in the unlikely event that North Korea is prepared to accept the kind of fundamental transparency that even most soft-liners now know it never will.

Plan B Watch: Treasury Targets 100 Suspicious N. Korean Accounts Worldwide

According to multiple newspaper reports published since late last week, the Obama Administration’s new asset-freezing campaign against North Korea began in earnest in June. The Treasury Department, having identified about 200 accounts worldwide suspected of storing the proceeds of banned weapons sales, currency counterfeiting, counterfeit cigarettes and Viagra, proliferation, drug trafficking, and other things that all sovereign nations to do pay for yachts for their despotic rulers.

Treasury focused on 100 accounts where its evidence was strongest and quietly persuaded the banks holding those accounts to freeze them. In contrast to the approach applied in the case of Banco Delta Asia, Treasury approached these banks quietly and got their more-or-less voluntary cooperation — and given the conspicuous example of BDA, who wouldn’t cooperate? (FYI to the Hankyoreh: the amount frozen in North Korea’s BDA accounts was $25 million, not $250 million. Not that the Hanky’s reporting on North Korea reveals much accuracy, insight, objectivity, or any of the other qualities one looks for in journalism.)

Reading between the lines of the stories, Treasury appears to be going after patterns of large cash deposits and withdrawals, of the sort that would require the filing of a Suspicious Activity Report if conducted in an American financial institution. A common example of a suspicious activity would be a low-level employee of a North Korean diplomatic mission making a large cash deposit, or purchasing, say, a quantity of Omega watches out of all proportion to his likely salary.

The banks in question are variously reported to be in Africa, Asia, the Middle East, Europe, and Russia, whose organized crime industry is said to be helping Kim Jong Il launder his money. One account in Liechtenstein was apparently exposed by an employee and whistleblower. The Chosun Ilbo also reports (below) that the South Korean government has identified 10 to 20 suspicious North Korean accounts in its banks. (And I can only hope that the Calderon and Massie plaintiffs are reading this.) At least one entity in China, a Hong Kong-based trading company, is also a reported target.

The stories are too full of interesting detail, some of them slightly varying with each other, not to blockquote at great length. Overall, however, the stories are detailed and consistent enough to suggest that someone in the administration has been directed to speak to the Korean press on background. While the South Korean newspapers are reporting on the asset-freezing campaign extensively, there is surprisingly little coverage of this level of detail in American newspapers. The Washington Times speaks generally about the need for tightening sanctions against North Korea, with quotes from Nick Eberstadt, Bruce Klingner, Kim Kwang Jin, and Chuck Downs.

You can read the longer quotes below the fold. Collectively, they suggest that the administration is making the kind of comprehensive effort that is needed here, and which should have the desired (to me) effect of starving the “palace economy” of cash. And while the cessation of illicit activity and proliferation isn’t a bad thing in itself, the reports say little more about the greater purpose of this. Which, I suppose, is fine for the time being. Read more

Plan B Watch: Clinton Announces Tightening of N. Korea Sanctions

Well, it’s about damn time:

The Obama administration announced Wednesday that it would impose further economic sanctions against North Korea, throwing legal weight behind a choreographed show of pressure on the North that included an unusual joint visit to the demilitarized zone by Secretary of State Hillary Rodham Clinton and Defense Secretary Robert M. Gates.

The measures, announced here by Mrs. Clinton after talks with South Korean officials, focus on counterfeiting, money laundering and other dealings that she said the North Korean government used to generate hard currency to pay off cronies and cling to power. [N.Y. Times]

Clinton announced the sanctions as she visited the DMZ, while accompanied by SecDef Gates, and while displaying her supernatural frost-projection powers against a hapless North Korean border guard. I count at least three priceless expressions in this photo.

clinton-dmz.jpg

The Treasury Department announcement I linked here yesterday now looks to be just the first part of the Obama Administration’s dangerously overdue and initially weak response to the sinking of the Cheonan, using at least some of the legal and financial tools I’ve advocated using for the last several years.

“Today, I’m announcing a series of measures to increase our ability to prevent North Korea’s proliferation, to halt their illicit activities that helped fund their weapons programs and to discourage further provocative actions,” Clinton told a news conference in Seoul after high-level security talks with South Korean officials.

Clinton said Washington’s “new country-specific sanctions” will target the North’s “sale and procurement of arms and related material and the procurement of luxury goods and other illicit activities.”

“Let me stress that these measures are not directed at the people of North Korea who have suffered too long due to the misguided and malign priorities of their government,” she said. “They are directed at the destabilizing illicit and provocative policies pursued by that government.” [Yonhap]

With apologies to KCJ, this is encouraging — a strong opening message that will get the attention of the investors on whose cash North Korea depends. Unfortunately, Clinton offered few details about the sanctions, and via some inside sources, I’ve learned that the administration is still debating just what specific measures it’s going to announce. Until I see what those specific measures are, and how strong and comprehensive they are, I will reserve judgment. Or, as one observer put it:

Nicholas Szechenyi, a northeast Asia policy analyst at the Center for Strategic and International Studies in Washington, said the key to effective U.S. sanctions is how they are implemented.

“If the U.S. is doing this in isolation, doing this piecemeal, then I don’t think they’ll have much effect,” he said. “But if there’s a unified effort to not only announce these sanctions as an act of solidarity with our South Korean allies but also to apply some pressure on North Korea, then I think over time it might work.”

That sounds exactly right to me. Nick Eberstadt is more skeptical, and maybe he knows something I don’t:

The moves resemble piecemeal steps of the past, they add, and are unlikely to strike where it hurts: the regime’s access to under-the-table international funds.

“If I were in Pyongyang, I would not be trembling in my boots about this,” says Nick Eberstadt, a North Korea specialist at the American Enterprise Institute in Washington. [Christian Science Monitor]

The real question here is what the sanctions will be designed to achieve:

“The real question, if the talks resume, is so what?” says Mr. Lieberthal. Neither Republican nor Democratic administrations have been successful over two decades at curtailing the North’s nuclear ambitions, he says, adding that the Obama administration “shows no signs of being in the mood to reward North Korea” to prompt its cooperation, a pattern he says the North has become accustomed to.

“So even if the talks resume at some point, would they produce any serious results?” he asks. “I remain very skeptical about that. [Christian Science Monitor]

If the administration is looking for sanctions that are undone as easily as they’re done, this won’t work. Our financial power over North Korea is our power to scare away investors and sever its financial lifelines, including those that originate in China. If we try to spare Chinese entities and only target isolated investors like Orascom and various shady bankers here and there, this won’t work. If the administration nips at North Korea’s illicit financing at its fringes, a U.S.-led sanctions program will fail just as U.N. sanctions always have, because North Korea is very nimble at setting up new banks and companies to evade sanctions, and because Chinese entities will adopt a see-no-evil approach to transactions with North Korea unless it’s made clear to them that their own comingled assets are also at risk.

For what it’s worth, Hillary Clinton and Robert Einhorn will both be traveling to China to seek its cooperation. Wish them luck.

But if the administration goes all-in to hit North Korea’s finances hard before its big succession-focused party conference in September, this could be extremely effective, and might even disrupt Kim Jong Il’s plans to purge his and promote the next generation of apparatchiks to preserve his dynasty for another generation.

You Say That Like It’s a Bad Thing: “China Hand” Fears Treasury Sanctions

I’m apparently not the only one who cocked an eyebrow at the refusal of a State Department spokesman recently to rule out applying new sanctions to be directed at North Korea to third-country entities.

The United States Wednesday did not preclude the possibility of freezing North Korean assets in foreign banks to effectively cut off resources for the North’s development and proliferation of weapons of mass destruction.

“I’m not going to predict any particular step that we’re contemplating, but these are steps that are available to us under existing U.S. international law,” State Department spokesman Philip Crowley told reporters at a daily news briefing.

He was responding to the question if Washington was considering freezing North Korean assets at foreign banks just like it froze more than US$25 million in North Korean accounts in Banco Delta Asia in Macau in 2005. [Yonhap]

Whether we actually set about doing this or not, the response itself is significant. One only hopes that investors in Kim Jong Il’s regime will take enough heed to proceed in an orderly manner to the rooftops of their embassies in Pyongyang with semaphore flags and briefcases stuffed with all the dollars — and yuan — they can carry. One hopes that the most recent G-8 summit also took up this topic in detail, and went beyond gauzy statements about “consequences” for North Korea’s “irresponsible behavior.” Not all power, it seems, comes from the barrel of a gun these days. You’d think this would be cause for rejoicing, but not for Beijing and its tools.

If you’ve deduced that most of the third-country entities that would be affected by U.S. sanctions on North Korea are Chinese, you and I are not alone in this. Peter Lee, whom I gather is the very same “China Hand” from whom I waterboarded this retraction of a completely groundless statement about the topic of sanctions (and me) a while back, now says that a worried China “will be observing [the Treasury Department's potential sanctions] actions on Iran and North Korea with a good deal of wary curiosity.”

Well, good! If China were not abetting mass murder, proliferation, and now acts of war by Kim Jong Il, if China were not cynically undermining the same U.N. resolutions for which it voted, it wouldn’t have to worry about its banks and mining companies being sanctioned for their role in propping up Kim Jong Il. It seems to me that Treasury is supplying the leverage we’ve been missing all along. Consequently, Lee seems to have reserved particular degree of enmity for OFK favorite Stuart Levey, whose inconvenience is that his record disproves the narrative that America has no options but to tolerate and even subsidize Kim Jong Il’s ongoing nuclear buildup. After all of the finger-wagging we’ve had to endure from assorted “China Hands” that America mustn’t do anything to harm about its relations with China, maybe it’s about time the converse was finally true, too.

The main theme of Lee’s argument against sanctioning North Korea and Iran through their Chinese sponsors is that it’s somehow immoral or unfair of the United States and Treasury in particular to use the power of the dollar to influence China toward a foreign policy that’s less malignant toward America’s national security. He calls the threat of sanctions “an abuse of America’s privileged position at the center of the financial world.” Lee’s have-you-no-decency-sir tone makes for an amusing contrast to his giddy harrumphing about America’s debt to China, a subject I previously discussed here. As Lee eventually acknowledges in part, America’s currency gives it this power, in part, because of China’s (artificial) depression of the yuan exchange rate against the dollar to generate more export revenue, but then, what else is China supposed to do with its dollars? I don’t think any Chinese banker is really thinking much about Lee’s suggestion that it buy more Euro these days.

The curious shift in Lee’s tone is a curious thing to observe, but when it comes to the relationship between U.S. sanctions and North Korea policy, Lee is in way over his head and doing his best to cast economic pressure as the moral enemy of effective diplomacy. Now, either the flaw in this argument is obvious to you or it isn’t, but regardless of how you see that question, this flawed argument is built on some real howlers I couldn’t let myself pass up:

Hopefully, the results for the US this time will not be as dire as North Korea’s rush to the atomic bomb occasioned by the sanctions campaign of the Bush administration.

So in addition to The Bomb, Lee must think Kim Jong Il somehow acquired a De Lorean and a flux capacitor. That’s right — Lee is suggesting that President Bush’s financial sanctions caused North Korea to go nuclear, or to dispel any doubts that it has. Perhaps China would be better off if Americans were still arguing over op-eds by Selig Harrison and Mike Chinoy insisting to this day that North Korea’s nuclear program was all some figment of Dick Cheney’s imagination. The truth, however, is that Kim Jong Il’s “rush to the atomic bomb” actually began in earnest during the Reagan Administration. How could he have known that George W. Bush would eventually give it all a perfectly good (for Lee, anyway) post-hoc justification?

I suppose anyone can characterize coincidence as causation, but I see a far greater chance of a causal connection between North Korea’s nuclear test and the open encouragement of people believed to speak for the Chinese government, such as the influential Chinese academic Shen Dingli. Shen’s articles are well worth reading for just to see the malice he expresses toward the United States and its basic security interests, but they’re also important documentary evidence of China’s insincerity when its flacks insist that they, too, want a nuclear-free North Korea. In 2005, Shen wrote the development of nuclear weapons was Kim Jong Il’s “sovereign right,” and he was again showing a green light to the North Koreans as recently as three days before the October 2006 nuclear test Lee now calls a dread “consequence” of sanctions Treasury had announced against a Chinese bank, Banco Delta Asia, on September 15, 2005:

First, and most importantly, North Korea withdrew from the six-party talks in fury, abandoned its nuclear haggling with the United States, and detonated its first atomic bomb on October 9, 2006. Despite revisionist attempts to decouple BDA from the bomb, Levey’s paternity of the Nork nuke is pretty much indisputable.

You can either enforce the law or negotiate with North Korea, but never both. Here is the proof!

sept-19.jpg

That’s right. North Korea was not only still at the six-party talks on September 19, 2005, four days after Treasury took action against BDA, it signed a statement agreeing in principle to give up its nukes. This all happened while depositors were lined up outside of BDA trying to withdraw their money. Now, far be for me to suggest that a North Korean promise, much less merely showing up to talk, represents progress. I’ll leave it to Lee to explain just how much the six-party talks have accomplished, the likelihood that they’d ever accomplish anything, and how China has been helpful in this whole endlessly receding process. You can believe that if you choose, but just know that there are some important facts Lee isn’t telling you.

Secondly, America’s image as an honest broker impartially protecting the integrity of the dollar-based international financial system was seriously tarnished.

Now here is some odd logic. Lee is actually suggesting that Treasury harmed the integrity of the dollar-based international financial system by taking an enforcement action against a willing accomplice of a syndicate that distributed remarkably high-quality counterfeit U.S. dollars, requiring multiple redesigns of U.S. currency. Are we supposed to take this seriously? Lee says that turning Treasury loose on a government with which the U.S. government has differences “weaponizes” law enforcement. But what’s unprecedented here isn’t that Treasury follows crime to its source; it’s that a state is engaging in counterfeiting, and doing so backed by the full faith and credit of the Chinese government, which has the unmitigated chutzpah to suggest that for the sake of a failed diplomatic track, we’re obligated to exempt both China and North Korea from the enforcement of the laws that protect our currency.

Feebly, Lee also questions the evidence that North Korea is counterfeiting dollars:

US laziness in making its case – though largely unchallenged by the media with the exception of McClatchy’s Kevin Hall – did not enhance international confidence in OTFI’s ability to wield this considerable power responsibly.

What Lee mischaracterizes as laziness is in fact the secrecy in which all law enforcement and intelligence services need to pursue their investigations to completion; after all, the lead agency in this investigation is called the Secret Service. This is a principle recognized under law by exceptions to our Freedom of Information Act. Perhaps Lee would like to submit his own FOIA request to the Chinese authorities to see what documents they’d be willing to disclose on this topic. This is an odd argument indeed, coming as it does from a supporter of an opaque and unaccountable dictatorship.

Now if you want to see laziness, it’s Kevin Hall’s failure to so much as pull and read the Treasury Department’s final rule explaining why it took action against BDA. I’ve debunked Hall’s sloppy reporting extensively here. Before and since then, multiple detailed accounts reports by real journalists and researchers, not hacks — have explained the detailed history of the supernote operation, who in the North Korean government is behind the counterfeiting, where the notes are printed, where the North Koreans got their presses and ink, and how North Korea distributes the counterfeit currency right here in the United States, largely through Chinese intermediaries. There’s more here, plus reports from the Congressional Research Service here and here. For those who are willing to examine the open-source evidence, it’s overwhelming.

By the way, Lee helpfully informs us that the president of BDA was “Stanley Au, a local businessman with close ties to Beijing” and “a delegate to the China People’s Consultative Congress.” Just in case you think this was a matter over which the Chinese government had no influence. And BDA was only a small player in Chinese banks’ abetting of the counterfeiting scam:

“Banco Delta was a symbolic target. We were trying to kill the chicken to scare the monkeys. And the monkeys were big Chinese banks doing business in North Korea… and we’re not talking about tens of millions [of dollars], we’re talking hundreds of millions.

Lee is horrified that anyone in the U.S. government attempted to intimidate big Chinese banks away from handling counterfeit dollars, or from keeping Kim Jong Il on his throne. It won’t surprise you that I differ on this. I believe that it’s possible to have biases about a topic, as both Lee and I undoubtedly do, and still follow the known facts to objectively defensible conclusions. Instead, Lee shoehorns them into his conclusions, conclusions that have never seemed more driven by emotion and nationalism, and which, consequently, he simply cannot support.

Is the Obama Administration Ready for Plan B at Last?

Well, finally!

The Obama administration is considering going after the assets of North Korean entities and individuals to punish Pyongyang after the sinking of a South Korean warship, sources familiar with the matter said on Friday. Freezing offshore assets would be the first tangible U.S. action to make North Korea pay a price for the March 26 sinking of the Cheonan corvette in which 46 South Korean sailors died. Pyongyang has denied responsibility for the incident.

While there have been extensive U.S. sanctions on Pyongyang for decades, such a move could influence North Korea because it would hit accounts controlled by military and political leaders whom U.S. officials believe must have authorized the attack.

Speaking on condition that they not be identified, the sources said targeting North Korea’s illicit funds appeared to be one of the few ways the United States can get the attention of the leadership of the impoverished communist state. They also said there is a growing view within in the Obama administration that former President George W. Bush’s 2005 move to blacklist a Macau bank for allegedly laundering North Korean money was ultimately useful in pressuring Pyongyang. [Reuters, Arshad Mohammad]

One minute, you’re an isolated crank shouting at the heavens from the wildness, the next moment, well … you’re an isolated crank whose ideas were several years ahead of their time. And if this administration really has the testicular fortitude to do this, I couldn’t be happier to admit that I was wrong in predicting that it didn’t. But then, we’ve heard leaks like this before, and the measures we’ve applied thus far have fallen far short of their full potential.

“We are facing an imperative to demonstrate once again to North Korea that there is no reward for its provocative behavior, that in fact there is going to be a penalty,” the official said. “We have all the authority that we need to tighten the screws on specific individuals or institutions that support the leadership.”

Perks and luxuries derived from North Korea’s shadowy network of overseas interests are believed to be one of the main tools Pyongyang uses to ensure loyalty among top military and party leaders. The sources said the Treasury had done extensive work to identify targets but if the administration does employ the financial sanctions it would be expected to wait for the U.N. Security Council to first move on against North Korea.

The officials suggest that this new policy direction is largely motivated by a growing consensus that “there is little chance” that the U.N. — sit down for this — “will approve additional sanctions” against North Korea, which is a polite way of saying that China is filibustering and neutering the Security Council’s already dubious utility as an instrument for preserving peace. So we’re going to give the U.N. its opportunity to fail and then proceed, unless this is just a leak designed to get the Chinese to move.

A U.S. Treasury spokesperson said it was not policy to comment on possible investigations or actions. Asked what consequences North Korea had suffered for the Cheonan’s sinking, State Department spokesman P.J. Crowley declined to go into details with reporters on Tuesday.

“We continue to look at ways in which we can affect North Korea’s thinking. And it’s not only the institutions, the revenue stream that goes into the government,” he said.

This updated version of the Reuters report offers a few more details:

Crowley said that Assistant Secretary of State for East Asian and Pacific Affairs Kurt Campbell consulted with Japan and South Korea over possible financial sanctions on North Korea when Campbell traveled to the two countries earlier this week. ”We consult closely with allies on these subjects all the time,” he said, suggesting that Washington is likely to work together with Tokyo and Seoul on further sanctions against Pyongyang. He declined to comment on specific measures the government is studying, saying, ”I’m not going to predict any particular step.”

According to U.S. government sources and those familiar with the matter, the U.S. government is preparing to bar financial institutions suspected of involvement in shady deals with North Korea such as transactions of weapons of mass destruction, currency counterfeiting and money laundering.

If this policy shift really takes place, it’s pregnant with two wonderful ironies. The first is would be the restoration — by President Barack Hussein Obama — of American foreign policy to American institutions, steering us back away from a drum-circle foreign policy held hostage by the U.N., which in turn is the hostage of the ChiComs, the Frogs, and sort-of-post-Soviet Russia. The second would be that the sinking of a South Korean warship during the tenure of a weak South Korean General Secretary could be a League of Nations moment for the United Nations, and with any luck, one of enduring consequence for supplanting the U.N. with a coalition of democracies forming a strong economic coalition and a loose military one.

Plan B Watch

I really, really like the way the South Korean Foreign Minister is talking lately, and I hope he also expresses the sentiments of U.S. officials with whom he’s spoken:

Strangling the flow of cash to North Korea is the most effective non-military way to hold the Stalinist country accountable for the sinking of the Navy corvette Cheonan, Foreign Minister Yu Myung-hwan said Tuesday.

“The U.S. is keeping a close eye on North Korea’s trafficking of counterfeit banknotes, drugs and tobacco while strictly applying existing sanctions on the North,” Yu told the Chosun Ilbo. He said the U.S. has a web of mechanisms to thwart North Korea’s trade, financial transactions and weapons exports but has not yet been running them to full capacity. Now, however, it will gradually step up action.

The U.S. has monitored North Korea’s illicit activities including the forgery of banknotes but has held off from punitive measures so far. “It’s quite possible to punish North Korea effectively through individual actions taken by South Korea’s allies such as the U.S., Japan and the EU even if the UN Security Council won’t impose additional sanctions on North Korea,” Yu said.

Strangling off the cash flow would be effective, he said, because the North “has to import parts to develop weapons of mass destruction including nuclear weapons, so restricting the cash flow will make that more difficult and discourage North Korea from pursuing provocations.”

Robert Einhorn to Lead North Korea Sanctions Implementation Effort

einhorn.jpgThe Joongang Ilbo is reporting that Clinton Administration alumnus and counter-proliferation expert Robert Einhorn is going to be put in charge of “streamlining the process by which it implements” international sanctions against North Korea, sanctions that are likely to be enhanced after an international investigation found that North Korea torpedoed and sank the South Korean warship Cheonan.

“The U.S. administration was seeking more efficient management of implementation of sanctions, which had been divided between the State and the Treasury departments,” the source said. “Philip Goldberg, the assistant state secretary at the Bureau of Intelligence and Research, had been doubling as the implementation coordinator, but Einhorn is poised to take over.

“The U.S. government also tried to strengthen its sanctions system after the second North Korean nuclear test last year, when Goldberg was named the coordinator,” the source said. Goldberg was appointed to his Bureau of Intelligence and Research post in February.

Another source said Einhorn’s nomination is also part of the U.S. government’s efforts to follow up on President Barack Obama’s order to review “existing authorities and policies” on North Korea. Soon after South Korean President Lee Myung-bak unveiled Seoul’s countermeasures against Pyongyang Monday, the White House expressed its support and said in a statement, “This review is aimed at ensuring that we have adequate measures in place and to identify areas where adjustments would be appropriate.

You can read more information about Philip Goldberg here and here. Previous reports suggested that he would quit as North Korea sanctions coordinator, but he continues to occupy a senior post within the State Department.

My research and inquiries about Einhorn suggest that we could do worse. He was deeply involved in negotiating Agreed Framework I, but since then, Einhorn has caught on faster than most of those in the foreign policy industry. His statement in 2007 that North Korea was “backtracking” on its promises to disarm suggests that he could see how Agreed Framework II would end a year before most reporters would see through Chris Hill’s glib deceptions.

“Aside from his knowledge of North Korean nuclear issues, Einhorn is tight with Gary Seymour, the weapons of mass destruction coordinator at the White House, and other nonproliferation officials in the Obama administration,” another source in Seoul said. “Einhorn should be able to provide leadership in his new role.

This is another good sign. The report probably means to refer to Gary Samore, an Obama Administration official whose validation of longstanding suspicions that North Korea was secretly enriching uranium departed from Democratic orthodoxy that the Bush Administration’s 2002 uranium enrichment accusations blew up a perfectly good disarmament deal with North Korea over sketchy evidence. Today, the evidence of North Korea’s cheating is so overwhelming that the Obama Administration is also insisting that North Korea disclose its uranium enrichment activities.

Is it bad news that someone from State, rather than Treasury, is going to lead the implementation effort? Yes, State ought to be handling our dealings with foreign governments, but Treasury — and I single out Undersecretary for Terrorism and Financial Intelligence Stuart Levey in particular — has generally been much more determined and effective than State in making sanctions work. The last time State and Treasury confronted one another over sanctions, Chris Hill rolled Treasury and got sanctions lifted against North Korea, in spite of Treasury’s persistent belief that North Korea continues to counterfeit U.S. currency. My suspicions are fueled by this recent history, and also by the fact that the same people are running State’s East Asia Bureau and Treasury’s Bureau for Terrorism and Financial Intelligence now as during President Bush’s second term. All of the key players in both departments are holdovers or career civil servants. During the Bush Administration, the absence of strong leadership at State, the White House, and the NSC meant that more junior officials like Christopher Hill could effectively set policy. Today, the White House and the NSC seem to be setting policy for the more junior officials to implement.

What the policy will be comes down to the question of political will, but the more reliable information I’ve heard, both before and after the Cheonan report, indicates that the Obama Administration is determined to pressure Kim Jong Il rather than caving in and signing Agreed Framework III. Einhorn isn’t one who appears to favor talks for the sake of talks, at any price. There’s reason, then, for cautious optimism. The question, of course, is where the pressure is taking us. Is the objective to force Kim Jong Il back to talks? There isn’t much point in that if, as almost everyone agrees, he’ll never disarm anyway. That’s especially so when China continues to signal that it will block and undermine sanctions against North Korea, and fails to enforce the sanctions in effect now. At some point, one can only hope that the administration decides to make North Korea China’s problem by trying to destabilize the regime.

Another diplomatic source said the Obama administration needed to tighten its sanctions regime. The source said when North Korean overseas accounts were closed off by U.S. sanctions, they simply changed the name of the individual or the company which had opened the account and resumed transactions. The sanctions were aimed at banning transactions by companies or individuals suspected of involvement in the North’s weapons of mass destruction programs.

“U.S. officials have taken note of such [name-changing] practices and they’re preparing measures to eliminate them,” the source said.

At the same time, the Chosun Ilbo reports that the Obama Administration intends to devote more attention to finding and freezing Kim Jong Il’s substantial personal accounts stashed in overseas banks. This is something I’ve been calling for for years.

Sanctions against North Korea by the U.S. government are expected to focus on Kim Jong-il’s personal slush funds. The aim is to tighten the noose around Kim and the rest of the North Korean leadership rather than to increase pressure on the North Korean people, in a parallel with the 2005 freezing of what was apparently money for Kim’s private use in the Banco Delta Asia in Macau.

U.S. and South Korean intelligence are exchanging information about the bank accounts managed by a department of the North Korean Workers Party’s Central Committee codenamed “Room 39,” which manages Kim’s personal coffers. “We discovered long ago that most of the overseas bank accounts that received money from South Korean businesses involved inter-Korean projects were owned by the North Korean military,” said a South Korean government official.

I’ll just pause here to let you bask in the warm, gentle glow of Sunshine and reflect on how much kinder and gentler it has made North Korea.

Room 39 is expected to be the main target of the latest financial sanctions. It has 17 overseas offices, some 100 trading companies, a gold mine and its own bank. The $200 million to $300 million earned by subsidiary companies have gone straight into Kim’s overseas bank accounts. The director of Room 39, Jon Il-chun, is expected to face financial sanctions as well. Kim appointed Jon after the former head, Kim Tong-un, was put on a blacklist of North Korean officials by the EU in December.

The U.S. government may also freeze overseas bank accounts held by North Korea’s Reconnaissance Bureau, which is believed to have orchestrated the attack on the South Korean Navy corvette Cheonan in March. But some experts say the U.S. may find it more difficult to apply financial pressure on North Korea because the North moved most of its money to accounts in China and Russia.

Are these developments connected? I can’t say for certain, but Einhorn has previously expressed support for tightening sanctions on luxury goods that support Kim Jong Il’s patronage system. The overseas accounts probably consist largely of proceeds of illicit activities, or those banned under U.N. Security Council resolutions. The funds in those accounts are probably paying for the yachts, cars, booze, and other luxuries that Kim Jong Il continues to import in violation of those resolutions.

How can the U.S. government reach those funds? I can think of at least two ways off-hand. One is to designate North Korea, Bureau 39, and/or Kim Jong Il as primary money laundering concerns under Section 311 of the USA PATRIOT Act, which would force any bank holding those accounts to freeze them, or risk losing its access to its correspondent accounts with U.S. banks. As the example of Banco Delta Asia showed, access to correspondent accounts in the United States means access to the global financial system. Depositors who are engaged in international business transactions can’t bank at an institution without that access. With the marginal rate at which banks are capitalized, even the threat of Section 311 sanctions would render most banks insolvent.

Another alternative would be to issue indictments and forfeiture counts against the North Korean accounts themselves, under 18 U.S.C. sec. 1956, our strongest money laundering statute. Because North Korea never contests litigation in U.S. courts, the Justice Department would win convictions on the criminal forfeiture counts, and correspondent accounts of the banks holding those assets would be blocked. The banks, in turn, would have to freeze the accounts to avoid absorbing the loss. Because the money laundering statute has extraterritorial jurisdiction, Justice could pursue the assets almost anywhere in the world. But how would we prove that all of the funds were proceeds of illicit activity? We wouldn’t have to. A long-standing principle of money laundering laws is that if illicit funds are “co-mingled” with legitimately derived funds, the entire amount is considered tainted and can be forfeited.

What charges would we be able to prove? First, Justice would have indicted North Korean entities for the supernote counterfeiting conspiracy years ago, had it not been for the State Department’s intervention. Second, an Australian newspaper recently reported that indictments could be forthcoming for the transactions associated with the 2009 Bangkok weapons seizure.

Finally, does the fact that many of Kim Jong Il’s funds have moved to Russian and Chinese banks put them beyond the reach of Treasury and Justice? No. Like every bank that needs access to the international monetary system, Russian and Chinese banks need their correspondent accounts in U.S. banks to operate. Back in 2005, when the Treasury Department first announced its sanctions against Banco Delta Asia, there were also reports that the Bank of China was also under suspicion. This caused such extreme consternation in the Bank of China that two years later, its officers refused to touch the frozen Banco Delta funds that both the U.S. and Chinese government wanted it to transfer back to North Korea to facilitate Agreed Framework II. For China’s government, the downside of its transition to a market economy is that even it doesn’t have complete control over its capital. And in the face of any hint of a Treasury Department investigation, capital is a coward.

Sanctions Update

The Chosun Ilbo reports that Ambassador Phillip Goldberg has kept himself busy crossing the globe, meeting with government officials and bankers in Russia and China, and shutting down North Korean accounts, even as Stephen Bosworth and others met with the North Koreans to talk nuclear diplomacy.

North Korea invited U.S. North Korea envoy Stephen Bosworth on Aug. 4, when former U.S. president Bill Clinton was in Pyongyang to win the release of two American journalists. The same day, Goldberg was on his way to Moscow, where he met Russian Vice Foreign Minister Alexei Borodavkin and reportedly asked Russia to crack down on a mafia gang based on a tip-off that it had been involved in the laundering slush funds for Kim Jong-il.

South Korean and U.S. intelligence authorities believe that North Korea recently earned a lot of foreign currency by smuggling ivory from Africa and distributing fake Viagra as well as selling drugs and circulating counterfeit dollars.

The North allegedly laundered money or operated secret bank accounts with the help of the Russian gangsters after it became practically impossible for the North to carry out normal transactions using the real names of top officials or agencies. Russia then passed an advisory circular which the U.S. had sent around Russian banks. [Chosun Ilbo]

North Korea has also intensified its arms exports, shockingly, despite a U.N. resolution to the contrary.

According to the source, North Korea expanded arms exports even after UN Security Council Resolution 1874 took effect in the wake of its second nuclear test on May 25. “North Korea has developed new markets in Africa and Latin America, in addition to expanding exports to its existing markets in Southeast Asia and the Middle East,” the source said. “It seems the North is mainly exporting small vessels such as Hovercraft and patrol boats and Air Force equipment including radar and GPS to Africa and Latin America.”

The administration’s policy, for now, is to keep the pressure on, regardless of talks:

We are not going to reward North Korea simply for returning to the six-party talks. We will be looking to see if they’re prepared to take the kinds of affirmative steps that they’ve previously agreed to,” [State Department Spokesman P.J. Crowley] said.

“We have made clear to North Korea and we believe that North Korea understands what the purpose of the meeting is,” Crowley said. [Reuters]

And for what it’s worth, I think that generally, that’s the right approach, although there’s much more we could be doing (see Plan B link in the masthead). Worse, I’m guessing that the North Koreans will eventually promise to honor their previous commitments, we’ll somehow relax sanctions in exchange for bare promises to abide by those, and after a few years of stalling and cheating, North Korea will duly renege. But that’s just my speculation, one that’s backed by observing this traditional ceremony for years.

For now, the administration’s main worry continues to be back-stabbing by China:

Goldberg then visited China in late October to persuade his hosts to implement sanctions against the North. He pledged to concentrate on blocking any money flow related to weapons of mass destruction. There are fears that the sanctions lost their bite when China in early October promised the North a massive aid package, but some experts disagree. [Chosun Ilbo]

It’s strange; in contrast to an abundance of stunningly naive junk analysis from America’s brain trust on the topic of China’s intentions, I think the North Korean intellectuals interviewed by the Daily NK have it about right, assuming that this anecdotal report is accurate and representative:

The North Korean elite’s anti-Chinese sentiment that he described came as a real shock. Nevertheless, he said that although he has a more critical point of view of the Kim Jong Il regime than his colleagues, in general, opinions of China are the same as his own.

China has a so-called blood alliance with North Korea, is a country which fought for the North during the Korea War, and is the current life support system which provides it with the basic resources to maintain its system. After the second nuclear test, as international sanctions were being strengthened, Pyongyang tried to maintain its friendship with China in order to avoid isolation.

However, Choi did not hesitate to say, “China is more vicious than America,” before explaining, “We have been standing against America so far, but now people worry about living as a slave of China.

When The Daily NK’s reporter asked why China is blocking out the pressure from neighboring countries, including the U.S., he noted, “This is only because they need to do it for the sake of their interests, not for our security.

He added, “This is not just my idea, but that of almost every intellectual. He implied that significant concerns about the contradiction between Kim Jong Il’s nuclear plans and the Chinese role exist.

So, he claims, “Since he figured out the Chinese tactics, the Upper (Kim Jong Il) has been doing his best to escape from that situation.

Choi mentioned, “Since the nuclear test, the wariness of university students and intellectuals towards China has risen. Many of them think that we will be spoiled by China.

He emphasized, “The Chinese strategy towards our possession of nuclear weapons is to place itself as a world leader, surpassing the U.S. by using the Kim Jong Il regime. China is using our Republic’s adventurism.

Choi pointed out, “China has manipulated us to increase our stockpiles of nuclear weapons and missiles in practice while pretending to put pressure on us from the outside. On the one hand, they lead North Korea to obtain more nuclear weapons and missile by increasing the sense of crisis on the Korean Peninsula. On the other hand, they let us breathe so that the Kim Jong Il regime doesn’t collapse. [Daily NK]

No strain of xenophobia in North Korea really surprises me, but it does surprise me to see North Korean intellectuals, presumably members of the elite, rooting for the sanctions to work.

Meanwhile, a South Korean expert interviewed by the Daily NK warns us that North Korea’s foreign currency reserves might be greater than what we’re estimating, although it won’t do the regime any good if, as he suggests, much of that currency is in the hands of black marketers and corrupt officials. And on a related note, if this report is accurate, North Korea’s drug economy alone is the elephant in the back room of its larger underground market economy.

Must Read: On N. Korean Counterfeiting

We’ve seen much first-rate reporting on North Korea’s “supernote’ counterfeiting recently, and here’s one via The Independent that frankly outdoes all of them in its scope and detail, and fills in many missing details. I’m not going to even try to quote just one part of this. Just go and read.

The comments are edifying in their own way. The British left is fond of saying that it isn’t really anti-American, just anti-Bush. And yet nothing seems to have changed for The Independent’s readers. If there is no policy America can adopt that can make these bitter, envious, yappy little Yorkies like us, can’t we learn to just ignore them? Now that they’re biting the ankles of Barack Obama, most of the press already has, but that’s another story.

How Kim Jong Il Got Away With Counterfeiting Our Money

Having finally found time to read all of David Rose’s excellent Vanity Fair piece on North Korea’s supernote counterfeiting operation, I agree absolutely with Richardson and Curtis; it’s an excellent piece of journalism. For a fuller understanding, it should be read in the context of two others. Stephen Mihm’s New York Times report explained how North Korea assembled Intaglio printing presses and optically variable ink from the same Swiss manufacturer that supplies them to the U.S. Bureau of Engraving and Printing. Bill Gertz’s Washington Times report explained the kremlinology of the operation inside North Korea itself, attributing the operation’s direction to one General O Kuk Ryol. Rose’s story explains how North Korea uses Chinese criminals to smuggle supernotes into the United States and launder them at stores and casinos.

Both of the latter articles rely heavily on quotations from people involved in investigating the scheme, including an FBI agent and former State Department official David Asher. (I’m intrigued by Rose’s use of the term “palace economy,” one that I’ve often used and which I thought was my own creation.) These leaks suggest a degree of frustration with baseless conspiracy theories that had begun to circulate, most notably via hack journalist Kevin G. Hall and an otherwise obscure German trade journal writer named Klaus Bender, who makes the completely unsupported and thus risible allegation the CIA must have printed the supernotes. Rose picks up Bender like a chew toy and duly drops him. But the most interesting part of the story is something I’ve known for over a year, and previously wrote here. My source asked me not to reveal his identity. I now see that another, equally reliable source has gone on the record with the same information:

The Illicit Activities Initiative had a lot more planned. The final stage, which David Asher says President Bush had been fully briefed about, would have been the unsealing of criminal indictments. “We could have gone after the foreign personal bank accounts of the leadership because we could prove they were kingpins,” Asher says. “We were going to indict the ultimate perpetrators of a global criminal network. “The world wanted evidence that North Korea is a criminal state, not a lot of hoo-ha,” says Suzanne Hayden, a former senior prosecutor at the Department of Justice who ran its part of the Illicit Activities Initiative. “The criminal cases would have provided the evidence. It would have been in the indictments. As with any money-laundering investigation, we would have identified the players and traced them back, from Macao to those who were behind it in North Korea.

Asher says that the evidence in the indictment would have been detailed and compelling, including video and audio of North Korean generals caught in the act. But the indictment was stopped before it ever went to the grand jury.

Instead, the Bush administration suddenly decided not to proceed. What Asher describes as the “ultimate non-aggressive containment strategy” was unexpectedly curtailed. The reason: the administration believed that it risked provoking a permanent North Korean withdrawal from talks on its weapon and missile programs. Hayden says, “Suddenly, the rules had changed. The diplomatic piece of this came swooping in, and the imperative became “˜Let’s get them to the table,’ and that meant everything had to be ratcheted down.

At the time, Christopher Hill assured the gathered members of the House Foreign Affairs Committee that the move did not suggest an American decision to drop the issue without verifying North Korea’s cessation of its counterfeiting. Observe this exchange between Hill and Rep. Ed Royce (R, Cal.):

Ambassador HILL. Mr. Congressman, I want to assure you that I have repeatedly raised with the North Korean side that it is completely unacceptable to be engaged in this type of activity, especially the counterfeiting of this $100 bill. Our vigilance on this matter does not end with our resolving the matter of this bank in Macau. We will continue to monitor this very closely, and as we see signs that the North Koreans are somehow persisting in this activity I can assure you we will react accordingly.

Mr. ROYCE. Well, here is what gives me pause.

Ambassador HILL. We have no intention of trading nuclear deals for counterfeiting our currency. [Transcript, House Cmte. on Int'l Relations, Feb. 22, 2007]

But in what would become an established pattern with Ambassador Hill, what he testified would not happen, happened. Rose continues with the story:

In fact, the program was not just halted but effectively thrown into reverse. Kim Jong Il made his continued participation in international talks contingent on having sanctions lifted, and in March 2007 the administration unfettered Banco Delta Asia and unfroze North Korean assets. Banks around the world that had shunned North Korean companies were now free to do business again.

It gets even worse. Hill arranged to have money that he knew to be the proceeds of illegal activity returned to North Korean through the New York Federal Reserve Bank. The transaction, which may well have been a technical violation of U.S. money laundering laws, compromised the fed’s own integrity.

Is it really necessary to pursue this case? Does it really matter in the long run if North Korea prints a few million dollars’ worth of supernotes each year, a tiny fraction of the total supply of dollars? Consider the following:

Compared with the amount of American currency in circulation around the world–at least half of all U.S. banknotes are physically in the hands of people outside the United States–the total quantity of supernotes, believed to be made by North Korea, to date is small. However, their extraordinary quality can have disproportionate consequences. In 2004, Taiwan’s central bank issued a warning that supernotes had been turning up on the island. This caused a panic, and the Taiwanese banks were overwhelmed by customers seeking to return $100 bills totaling hundreds of millions of dollars, most of them perfectly genuine. “It was effectively a run on the dollar,” says Asher. “No one knew if their money was real or fake.

Finally, recall suspicions of a North Korean connection to a multi-billion-dollar bond counterfeiting scheme.

How much longer will America tolerate this act of war and threat to the integrity of its currency? About as long as the State Department can keep convincing American presidents that it’s worth overlooking in the name of the next Agreed Framework. That is how North Korea has learned to leverage some greater threat to our security into a license to print our money, deal drugs, and commit mass murder. Nowhere else on earth would those crimes be written off as tolerable misdemeanors.

A North Korean Connection to Those Counterfeit Bonds?

counterfeit-bonds.jpgIt’s very short on specifics, but it’s the first published report affirmatively linking those fake bonds to North Korea:

An Italian newspaper reports a recent mysterious case involving US$134.5 billion worth of counterfeit bonds has a North Korea connection. Earlier this month two Japanese nationals were caught in Italy allegedly trying to smuggle the bonds into Switzerland.

Il Messaggero says the fake bonds may have been manufactured in North Korea since the two men are North Korean agents and are believed to have been seeking to purchase weapons.  [Chosun Ilbo]

When the Justice Department first indicted the former IRA terrorist, Stalinist splinter cell leader, and alleged supernote co-conspirator Sean Garland, it claimed that one of the purposes of the plot was to destroy the U.S. economy.  North Korea appears not to have printed anywhere near enough supernotes to do that, but printing good facsimiles of bearer bonds worth billions would be another matter entirely.  Fortunately, the bonds appear to have been obvious fakes, despite the good quality of the printing:

“They are all fraudulent, it’s obvious. We don’t even have paper securities outstanding for that value,” said Mckayla Braden, senior adviser for public affairs at the Bureau of Public Debt at the US Treasury department. “This type of scam has been going on for years.”

The Treasury has not issued physical Treasury bonds since the 1980s ““ they are handled electronically ““ though they still issue savings bonds in paper format.

In Washington a US Secret Service official said the agency, which is working with the Italian authorities, believed the bonds were fake.  [Financial Times]

I will note that the Financial Times had reported that police speculation had originally focused on the Italian mafia, based on a previous alleged scam done jointly with crooked bankers in Venzuela.  That report was printed ten days ago, however, so it’s possible that the investigation has developed further since then.

Either way, it seems odd that Italian police later released the two Japanese men, despite having caught them with the bonds in false-bottom suitcases.  Although both men were holding Japanese passports, the Japanese government professes not to have been told who these guys were.

Previous posts on North Korean supernote counterfeiting here and here.