Stuart Levey, the United States official in charge of unilateral financial sanctions against Iran and North Korea, is resigning as Assistant Secretary of State for the Office of Terrorism and Financial Intelligence.
Levey was apparently fondly regarded in the Obama White House as a key player in the “smart power” strategy, and highly regarded by hardline and pro-Israel groups for his relentless attack on the international banking and financial relationships of the Pyongyang and Tehran regimes.
After Secretary of Defense Robert Gates, Levey, 47, was the highest-level holdover from the George W Bush administration. His intention to resign was announced in January after six years in the job. The White House has nominated Levey’s deputy, David Cohen, to replace him.
President Obama’s National Security Advisor for Counter-terrorism, Tom Donilon, told Foreign Policy: “Stuart designed and executed innovative financial strategies for targeting terrorists, proliferators, and other illicit actors, and built an international consensus around the use of targeted sanctions as an effective means of combating threats, pressuring regimes, and safeguarding the financial system.”
Senator Joe Lieberman also piled on the praise: “Indeed, what David Petraeus has done for counter-insurgency warfare, Stuart Levey has done for economic warfare – completely rewriting the book on the subject.” 
When examined more closely, the characteristic feature of Levey’s tenure appears to be failure – and his unexplained involvement in one of the more remarkable instances of insubordination in the history of the executive branch of the US government.
However, this insubordination may not have been an instance of Levey “going rogue”. Instead, it may have reflected a secret policy and unspoken objectives of the United States concerning North Korea policy – and support for a pro-American regime in Seoul – that both the Bush and Obama administrations share.
The Treasury Department’s Office of Terrorism and Financial Intelligence (OTFI), with Levey as its chief, was set up after 9/11 in an effort to track, impede and prevent the movement of funds used by terrorists.
OTFI derived its power and utility from a provision, Section 311, inserted into the Patriot Act by John Kerry. Section 311 empowered the Treasury Department to sever banks deemed insufficient in financial reporting transparency (and therefore potentially obscuring the movement of terrorist funding) from the US financial system.
If OTFI won major victories related to its original mandate, they have gone unrecorded. A March 2008 article by Josh Meyer in the Los Angeles Times reported that terrorist funding was too minute and its channels too informal for OTFI to detect, calling into question the efficacy of the expensive, intrusive and highly-touted strategy. 
In a classic case of mission creep, OTFI was repurposed to serve as an instrument of the unilateral foreign policy of the George W Bush administration in its efforts to isolate, pressure and possibly destabilize Iran and North Korea.
United States sanctions already blocked American firms from dealing with Iran and North Korea. For sanctions to “bite” they had to extend to the Chinese, European and Asian banks that dealt routinely with the two nations – and bypass the governments that were unenthusiastic about the US strategy and its economic cost.
OTFI systematically and energetically contacted foreign banks to convince them to sever ties with Tehran and Pyongyang on the grounds that Iranian and North Korean duplicity and lack of transparency put the banks at risk of unwittingly abetting proliferation, terrorist and criminal activities – and severance from the US financial system by Treasury fiat.
Many banks apparently acquiesced. Some did not.
Especially Chinese banks, their resistance encouraged by their economic interest, buttressed by the diplomatic support the Chinese government was giving to Pyongyang and Tehran in defiance of the United States.
Kill Chicken, Scare Monkey
In 2006, the Bush administration’s Working Group on North Korea decided to take stronger measures to dissuade China from providing North Korea access to the world financial system.
The chosen target was Banco Delta Asia (BDA), a small bank headquartered in Macau that transacted business with North Korea.
The chosen measure was a ruling by the Treasury Department’s Office of Terrorism and Financial Intelligence under Section 311, designating BDA as “a bank of money laundering concern”, severing it from the US financial system pending an investigation and final ruling on its fate.
There was an immediate run on the bank. It was taken into receivership by the Macanese monetary authority, which froze the North Korea-related accounts.
The head of the working group, David Asher, subsequently testified to the US Congress that the designation was a matter of “killing the chicken to scare the monkeys”, ie using the example of BDA to demonstrate to Chinese banks what the US could do if they didn’t toe the line on North Korea.
BDA was a particularly unlucky and inappropriate chicken, chosen perhaps because its chairman, Stanley Au, was a delegate to the Chinese People’s Consultative Congress, a talking shop organized by the Chinese government to give prominence to selected overseas and local Chinese worthies.
As a subsequent investigation by Ernst & Young determined, BDA was innocent of the most dire charge against it: laundering of counterfeit US currency – the dreaded Supernote – for North Korea.
When the OTFI designation shut it down, BDA was holding $24 million in around 50 North Korea-related deposits. Half of this amount was irreproachable: accounts of British-American Tobacco’s North Korea joint venture, and Daedong Credit Bank, a joint venture trying to encourage foreign investment in the North.
In United States policy circles, the BDA saga is vaguely remembered in glowing but fuzzy terms.
An ex-Treasury functionary, Juan Carlos Zarote wrote an op-ed for the LA Times in April 2009:
In September 2005, as part of a strategic pressure campaign, the Treasury Department ordered US financial institutions to close correspondent accounts for a private bank in Macau – Banco Delta Asia. This bank was facilitating money laundering, proliferation and counterfeiting on behalf of the North Korean regime.
The regulation cut the bank off from the US financial system. More important, the unilateral regulation unleashed the global financial furies against North Korea…
This hurt Pyongyang. The North Korean regime scrambled to regain access to money and accounts around the world while trying to undo the official damage done to its reputation in the international financial community. Key state actors, including China, had no incentive to block the full effect of the market reaction. On the contrary, they did not want their banks or financial reputations caught up in the taint of North Korea’s illicit financial activity.
This pressure became the primary leverage for the United States to press for North Korea’s return to the six-party negotiating table. Once the six-party talks reassembled, the financial pressure campaign against North Korea ended, resulting in a loosening of the financial squeeze. 
For the benefit of readers perhaps with a stronger grasp of cause and effect than Zarote, the BDA affair actually unfolded as follows:
November 2005 – US Treasury designation of BDA.
February 2006 – North Korea announces it will not return to talks until sanctions lifted.
April 2006 – North Korea offers to resume talks if the US releases recently frozen North Korean financial assets held in BDA. The US refuses.
October 9, 2006 – North Korea detonates a nuclear device.
31 October, 2006 – Six-party talks resume under Chinese auspices.
February 13, 2007 – US chief negotiator Christopher Hill announced that all of the $25 million in funds belonging to the North Koreans in Banco Delta Asia that had been frozen were being unfrozen to reciprocate the positive steps the North Koreans have taken toward freezing their Yongbyon nuclear reactor and readmitting inspectors from the International Atomic Energy Agency (IAEA), with a future goal toward total nuclear disarmament of the Korean Peninsula.
In other words, and contra to Zarote’s assertion, the BDA designation drove North Korea away from the talks, not toward it. It was the bomb, not OTFI, that brought the six parties back together.
In fact, the whole BDA designation looks less like a negotiating strategy than a means of torpedoing the six-party talks, which were puttering along with their usual combination of duplicity, venality, futility and sunny optimism a mere two months before Levey dropped his bombshell.
OTFI’s subsequent march of folly concerning the funds frozen at BDA indicates that some peculiar agenda was in motion – and it wasn’t the stated US policy.
As noted above, as part of the deal for the restoration of the six-party talks was the unfreezing of the $25 million at BDA. Once again, a simple timeline will illustrate the dynamic at work::
February 13, 2007 – Christopher Hill announces BDA funds will be “resolved” within 30 days. North Korea has 60 days to shut down its reactor at Yongbyeon.
March 14, 2007 – OTFI waits until the very last day of the 30-day period to announce its final ruling on BDA (following an investigation of 18 months). It’s a scorched earth ruling against BDA, severing it from the US banking system. No bank is willing to handle the transfer of the money from BDA to North Korea for risk of designation as handler of tainted funds. The United States has no choice but to miss the deadline.
March 22, 2007 – The Financial Times reports that Treasury Secretary Henry Paulson had to overrule Stuart Levey and order the return of all the BDA funds to North Korea.
North Koreans walk out of talks in Beijing because the BDA money hasn’t shown up.
April 5, 2007 State Department announces a “pathway” has been established for the return of the funds.
May 16, 2007 – Washington Post reports that Secretary of State Condoleezza Rice has asked Wachovia Bank to handle the remittance of the $25 million. But…
The Treasury Department has not been involved in the effort to find a financial institution to handle the money, leaving the search to the State Department. But Treasury would need to grant significant waivers, such as special permission for a US bank to deal with Banco Delta Asia. One senior US official said that it is not clear “what universe of waivers” would be needed to ease the bank’s concerns that it would not be putting its reputation at risk.
May 18, 2007 – In a Wall Street Journal op-ed, John Bolton alleges that the State Department has concluded a secret agreement with Pyongyang to allow North Korea to use Wachovia to evade US sanctions and access the world financial system.
May 18, 2007 – Ed Royce, Republican Congressman and hardliner on North Korea, writes letter to Secretary Rice deploring State Department’s efforts to “unravel” Treasury sanctions by bringing in Wachovia.  A conservative website characterizes the State Department’s efforts to implement the agreement as “more-or-less openly engaging in a conspiracy that would land anyone else in a federal prison for international money laundering”.  The Wachovia channel falls through. China, Russia, and South Korea openly expressed frustration with US failure to move the money.
May 31, 2007 – In discussions with Japanese prime minister Abe, president Bush states that the US “screwed up” on the BDA issue. 
June 11, 2007 – Russia offers to move the money. But no commercial bank dares provide the US dollar funds.
June 12, 2007 – Ed Royce, Ileana Ros-Lehtinen, and four other North Korea hardliners in the US House of Representatives write a letter to the General Accounting Office asking it to evaluate “whether all US official actions undertaken in connection with support for the transfer of North Korean funds held in Banco Delta Asia accounts are in keeping with the prohibitions regarding money laundering and counterfeiting as stipulated in the US Criminal Code, Title 18, sections 1956 and 1957.” The implication is that Christopher Hill, who is quoted in the letter as expressing his determination that the funds be moved, may be complicit in money laundering. 
June 14, 2007 – Finally, four months after the announcement of the agreement – and three months after the deadline – the funds are returned: from BDA to the US Federal Reserve New York branch, then to Russia’s central bank and finally to a Russian bank.
In sum, a pretty clear attempt by hardliners to force the agreement negotiated by the State Department to collapse by making the US unable to fulfill its commitment to return the BDA funds.
A few points should be made for clarity:
First, the hardliners attempted to claim that the US had not committed to return the BDA money and had no obligation to do so to get the six-party talks rolling again. Indeed, statements by secretary Condoleezza Rice and assistant secretary Hill on February 13 were replete with weasel words indicating that Treasury was not on board, and only promising that the issue would be “resolved” in 30 days.
Question: You mentioned the 30 days to resolve BDA. I mean, can you give more specifics on that? Is that all the accounts?
Assistant Secretary Hill: I can’t at this point, but we said we would resolve them in 30 days. We have had senior level discussions about that. I think we will get that done.
As it transpired, “resolving” the issue turned out to be Treasury issuing the final ruling that rendered return of the funds virtually impossible.
But to imply that US diplomacy was based on this malicious sophistry concerning the implications of the term “resolved” – and that there was no expectation on the North Korean side and hope on the US State Department side that the funds would be unfrozen for return to Pyongyang – is simply untrue.
It is clear that the only way that North Korea would return to the six-party talks was if the funds were unfrozen. And it is equally clear that the State Department felt the same way, since it embarked on a humiliating but ultimately successful four-month process to get the funds unfrozen and ultimately remitted to Pyongyang.
Secondly, some effort was expended make the case that the Treasury final ruling was the law of the land and could not be overturned for reasons of mere diplomatic expedience.
However, OTFI designations and final rulings are administrative rulings of the executive branch.
No doubt part of their attraction to the unilateralists in the Bush administration was that they are virtually devoid of due process, can be challenged only by petition, and can only be overturned in the target of the designation sues in district court and can prove that the Treasury Department abused its regulatory discretion and acted illegally.
But designations can be routinely overturned at Treasury’s discretion when it detects the proper combination of reform and remorse in the sanctioned institution. The entire nation of the Ukraine and a bank in Latvia both saw their designations revoked in 2006.
When I queried the Treasury Department spokesperson in 2007 as to whether a final rule – such as that imposed on BDA subsequent to its designation – could be revoked, the response was: Treasury’s Financial Crimes Enforcement Network can rescind a final rule.  ‘Nuff said.
In summary, there was an active effort by North Korea hardliners to block a key piece of US diplomacy: the repatriation of the BDA funds to North Korea.
Whether the Treasury Department actively or passively abetted the hardliner campaign – and it appears that Treasury postponed its final ruling until the last possible day to put severe pressure on the negotiated timeline, battled the State Department to oppose repatriation, and took active measures to dissuade banks from handling the “tainted” funds – Levey was at the heart of the dispute.
Nevertheless, he has never been questioned about this rather significant act of apparent insubordination and, indeed, was welcomed into the Obama administration to continue leading OTFI.
One might think there would be some settling of accounts for this fiasco. But it depends on how one keeps score.
One on level, the BDA affair was a humiliating train wreck for American diplomacy.
On the other hand, Levey’s apparent insubordination was so unchecked – and so rewarded – that it may have reflected a policy consensus beyond the militant obstructionism of the hardliners and the unblinking malevolence of former vice president Dick Cheney.
The South Korean government in power in 2006-2007 under president Roh Moo-hyun was leftist, reflexively anti-American, committed to the “Sunshine” policy, and a most unwilling and refractory partner in the Bush administration’s North Korea strategy. As the United States was attempting to strangle North Korea economically, Roh’s officials were literally delivering suitcases of money to North Korea at the 38th parallel to evade US sanctions and continue his policy of engagement.
As the BDA debacle unfolded in 2007, Roh’s popularity was at the terminal 20% level and his discredited government was staggering toward its annihilation in the December 2007 elections.
Even by early 2007, it was almost certain that, come 2008, there would be a new, pro-American sheriff in town in the person of a president representing the conservative Grand National Party.
Was there a nod and a wink between conservatives in South Korea, hardliners in the United States, and pragmatists in the White House: an understanding that fruitless and irritating engagement with North Korea could be slow-walked thanks to Treasury obstructionism, denying the Roh Moo-hyun administration political traction from a foreign policy success, and ensuring that North Korea policy would be put on hold until a pro-American administration was in place in the Blue House?
And did the Obama administration share this understanding, and appreciation for Levey’s efforts? An interesting topic, perhaps, for future historians of South Korean politics and North-South diplomacy.
Perhaps the BDA campaign really was a success, albeit not in the terms that its defenders present it. The BDA designation, as shown above, did not drive North Korea back to the six-party talks.
On the contrary, it paralyzed North Korea diplomacy until the Roh Moo-hyun government was voted out of office and the US could rely on a more favorable alignment of forces with the conservative administration of Lee Myung-bak.
The price for this advantage was North Korea’s detonation of an atomic bomb – a rather large and dismaying price. This may be why supporters of the Treasury campaign are so determined to forget and/or obfuscate the real chains of events leading from the BDA designation.
Also, the Lee Myung-bak presidency and its hardline policies have yielded no breakthroughs on North Korea. Lee’s attempt to institute a self-righteous paralysis in North-South relations have led to a string of destabilizing provocations that have inspired China to step up and support Pyongyang, instead of isolating it.
Lee Myung-bak, limited to a single term under the South Korean constitution, is already being discussed in lame-duck terms even though his presidency will not end until 2012. Chinese media and the North Korean government have indicated they are willing to wait Lee’s term out in the expectation that South Korea’s next president will see the political and economic benefits of recommitting to the six-party talks and engagement with Pyongyang.
So, it looks like Stuart Levey’s term at OTFI can be called a success … depending on how one defines “success”.
As President Lee’s term grinds out, the definition of “success” may become much narrower and more difficult to support.
Perhaps, then, this is the best time for Stuart Levey to depart.
Peter Lee edits China Hand.
1. Geithner: Levey’s departure won’t affect policy , Foreign Policy, January 24, 2011.
2. Terrorism money is still flowing, Los Angeles Times, January 24, 2011.
3. Unleash the financial furies against North Korea, Los Angels Times, April 14, 2009.
4. Transfer of N. Korea Money Sought, Washington Post, May 17, 2007.
5. Congressman slams N. Korea bank deal, Washington Times, May 18, 2007.
6. I have in my hand a list of names…, China Matters, May 23, 2007.
7. Bush admits U.S. ‘screwed up’ over N. Korea banking impasse, Breitbart.com, May 31, 2007.
8. Republicans Rebel on N. Korea Policy, Demand GAO Money Laundering Inquiry, One Free Korea, June 12, 2007.
9. Patriot Act Section 311 Moves to the Forefront of the North Korea/BDA Issue, June 5, 2007.