Breaking the Bank in Macau

[Updates: You can read Treasury’s final rule here. Start on page 14 to read just what Banco Delta failed to do to Treasury’s satisfaction. The message for North Korea’s other bankers out there is clear: ask obvious questions. Among BDA’s practices, according to the rule, was to provide a discount for a “high-risk North Korean-related bulk currency depositor” they either knew, or should have known, was laundering money. BDA obfuscated about reforms, failed to change its corrupt management, and didn’t even come clean about all of the North Korean accounts it was keeping. Based on the notice, BDA was largely in the business of laundering money and was just waiting for things to blow over:

For example, two related business accountholders, which accounted for more than 30 percent of the bank’s bulk cash turnover over a multipleyear period, provided intermediary financial services on behalf of North Korean banks at least in part to disguise the origins of the transactions. Bank documents reveal that Banco Delta Asia had knowledge of the relationships between the banks and these entities, willingly obscured the identity of the transacting institutions, and agreed to continue treating the accounts as business accounts, not banking accounts, despite activity consistent with banking.

And what was BDA’s answer to this? That it had absolute faith in the Central Bank of North Korea to prevent (gasp!) money laundering. What’s less clear is whether this will really mean the end of BDA after all; they don’t currently have correspondent accounts in U.S. banks, although they may have indirect access to the U.S. financial system. Now, it’s all up to the Macanese regulators.

Rep. Ed Royce’s office e-mailed to express his general satisfaction with the action, which surprises me to a degree.

Treasury’s action today should put meaning behind the words of U.S. diplomats who have said that they take North Korea’s illicit activity, including the counterfeiting of U.S. currency, seriously. We must continue to aggressively track North Korea’s global and robust illicit activity — taking action against other complicit financial institutions as necessary. The danger is that post the February 13th nuclear agreement, and post Banco Delta Asia, North Korea’s illicit activities are downplayed.

Confronting North Korea on its illicit activities bolsters our diplomatic efforts, and makes denuclearization of the Korean Peninsula more likely, not less. Ending its counterfeiting and other criminal activity would sever a key subsidy for North Korea’s weapons of mass destruction program and force North Korea into international norms. ]

Original Post: After seeing so much dreadfulness coming from our own government on North Korea lately, I have to say that the Treasury Department’s resolution of the Banco Delta issue is definitely not as dreadful as you might think on reading this:

The move would clear the way for Macau authorities to decide whether to release some of the frozen accounts — an estimated $8 million to $12 million — Pyongyang has demanded as a condition of negotiations on its nuclear program, other U.S. officials said. [Reuters]

It seems pretty unlikely to me that a country with an annual defense budget of $5 billion is going to be able to stretch $12 million very far. Frankly, I think the loss of the U.N. Automatic Teller will at least offset this modest recovery. It’s also a lot more favorable than what I read in the Chosun Ilbo yesterday — a report that Kim Jong Il would get back the entire 25 mil, ill-gotten gains and semi-ill-gotten gains.

On the other hand, none of that matters a spoonful of doenjang next to this:

The U.S. Treasury Department will bar U.S. banks from doing business with a Macau bank holding frozen North Korean assets believed connected to illegal activities, a U.S. official said on Tuesday.

According to some reports, this means that Banco Delta will cease to be, and that Macanese regulators will come in with metaphorical cutting torches and a flatbed to haul away its assets and sell them for scrap value.  [Update 3/18:

The move was widely expected to lead to the liquidation of the Macau bank, thus allowing the impoverished North to reclaim its frozen assets of some US$24 million in the process.  [Yonhap]]

At best, BDA will face extreme difficulty surviving. Now imagine yourself as an officer or major shareholder in any other bank. Ask yourself if you’d want to accept deposits from the Zokwang Trading Company or Tanchun Sinyong Company now. In fact, that’s just what’s been happening since September of 2005 — banks all over the world have concluded that doing business with Kim Jong Il isn’t worth the risk. That means there’s no place to put all the profits from drug smuggling, counterfeiting, or slave labor for that matter. Sure, the North Koreans can try to violate customs laws in the countries where they do business by smugging out the cash in bulk, or more likely through stored-value cards (slow pdf), but the danger of detection, seizure, and embarrassment is greatly increased, and such transactions are both inefficient and labor-intensive. Consider that as you wonder what Kim Jong Il was so furious about a measly 25 million. Treasury never designated North Korea itself under PATRIOT 311 — it should have — but this will have almost as serious an effect.

I admit to being pleasantly surprised, overall. Yes, I’m bothered by the idea of giving Kim Jong Il a single nickel. Under our forfeiture laws, 18 U.S.C. secs. 981 and 982, we could have tried to forfeit that money by piggybacking a forfeiture count onto a criminal charge, or by filing a civil forfeiture action. Either action would have required proof that the sums were proceeds or instrumentalities of a crime, usually a specified unlawful activity under the money laundering statute, 18 U.S.C. sec. 1956. Despite the fact that there are other criminal cases pending now relating to North Korean supernotes — most famously, Sean Garland’s and the fruits of Operation Smoking Dragon — we decided not to do that here, and probably for political reasons. I don’t opine on international criminal jurisdiction, but North Korea, as a listed terror sponsor, lacks many protections of the Foreign Sovereign Immunities Act, as would trading companies operating as commerical entities.

The last question here is why Treasury decided to go medieval when State appears to have so badly wanted it not to. In particular, many conservatives objected to Treasury Secretary Henry Paulson’s nomination because he is allegedly too pro-Chinese (he’s now destroyed one of their banks). Several possibilities occur to me. One is that there is a coordinated Mutt-and-Jeff show here, in which State tries to look like the good guy for cosmetic purposes, while Treasury applies its wrecking ball. After all, no serious person really expects us to put up with having our currency counterfeited. Another speculative explanation is simpler, and to one who has worked in government, more plausible: State pushed Treasury to let up on Banco Delta, Treasury saw itself as protecting America’s single most important material asset and pushed back, a bureaucratic conflict opened up, and Treasury decided to give State the middle finger. A third possibility is that Treasury found so much compelling evidence of BDA’s culpability that it felt it had no choice but to ban BDA from holding correspondent accounts. Finally, the fact that it’s this easy to buy “supernotes” right across the street from Dandong’s customs office suggests that a strong message was necessary (ht: GI Korea).