The North Korea Financial Sanctions: Same Shit, Different Decade

After Desert Storm, Gaddafi worried that he was next.  In one of the few victories for George W. Bush coercive diplomacy, Gaddafi revealed and decommissioned his nuclear and chemical WMD programs under international inspection, acceded to the Chemical Weapons Convention, re-opened Libya’s oil industry to foreign investment, and ponied up over US$1 billion in compensation for the Lockerbie bombing (if, as some suspect, Iran engineered Lockerbie as retaliation for the U.S. shootdown of Iran Air 655, the mullahs of Tehran must be grateful indeed).  In return, Libya got normalized relations, a U.S. shield from terrorism lawsuits, visits from Condoleezza Rice and Tony Blair, and the pleasure of receiving, incarcerating, and abusing repatriated anti-Gaddafi dissidents.  The “Libya model” was actually touted as a precedent for bringing North Korea in from the cold.

All that evaporated, together with Gaddafi and for that matter much of civilized Libya, as President Obama yielded to the urgings of the “we must not be on the wrong side of Arab Spring history” crowd and agreed to drop the hammer on the Gaddafi regime.

That definitely put the USA on the wrong side of the North Korea, which understandably cited the Libyan precedent as justification for why it could never, ever surrender its nuclear weapons.

And as for why President Obama is dealing with a publicly-demonstrated, full-fledged North Korean nuclear deterrent–instead of dealing with the discrete and selective displays of their nuclear capabilities at Yongbyon and elsewhere that the North Koreans used to put on for Siegfried Hecker–a trip in the Wayback Machine is in order.

For me, the anti-North Korea financial sanctions announced this week were an exercise in nostalgia in the matter of policies, rhetoric, and even actors–and also a bitter reminder of two lost years of US DPRK policy, and the bomb they helped birth.

North Korean financial sanctions is truly a matter of Same Sh*t Different Decade, recapitulating and hopefully improving on one of the biggest and at the same time unreported fiascos of American foreign policy: the 2005 attempt to achieve regime change on the cheap against North Korea through covert financial sanctions.  The 2005 circus also featured a pair of principals in the January 13, 2015 congressional testimony: Congressman Ed Royce, a leader of the “something must be done about North Korea” caucus and Treasury’s Daniel Glaser, Assistant Secretary for Terrorist Financing, who is in charge of OTFI, the Office of Terrorism and Financial Intelligence a.k.a. sanctions central.

Since the miraculous efficacy of financial sanctions is now an article of faith thanks to the apparent success of Iran sanctions, I think it’s a good time to lift up the curtain and look at what happened, what didn’t happen, and what was misreported the first time America took a financial swing at North Korea.

I made my rattly bones writing about the sanctions story non-stop in 2007.  Long story short, the Bush administration, which had lost its multi-lateral mojo thanks to the Iraq f*ck up, decided it would further beef up America’s unilateral muscles by “weaponizing” financial enforcement.

The U.S. Treasury Department’s FinCEN (Financial Crimes Enforcement Network) operation had done a bang-up job on its original, apolitical mission: tracking and blocking drug cartels’ ongoing struggle to launder the immense ocean of cash sloshing out of their operations.  Come 2001, FinCEN was, of course, recruited into the GWOT with the creation of the OTFI operation, but was of limited utility: the amount of money that actually needed to change hands through the international financial system to execute a terrorist attack is vanishingly small.  Under Bush, Section 311 of the Patriot Act was generously reinterpreted to exploit its coercive potential by employing FinCEN money laundering investigations against disliked state actors like North Korea.  Somebody coined the term “financial waterboarding” to describe the borderline legality and extremity of the tactic.

In 2005, after Bush’s re-election, Colin Powell was gone and the Cheney gang of f*ck-you unilateralists were enjoying a brief ascendancy in the foreign policy apparatus.  Aggressive North Korea regime change policies moved to the top of the agenda  and somebody, a.k.a. probably John Bolton, got the brainwave that the resources and legislation enabling FinCEN, coupled with the central U.S. position in the world financial system—which meant that U.S. unilateral actions against any foreign bank would cut it off from the world financial system–could be used to destabilize North Korea.

Ground Zero for the initiative was a small Macau bank, Banco Delta Asia, which had allowed North Korean entities to open some 50 accounts.  I suspect the proximate impetus for going medieval on BDA was that in 2000 South Korea under the engagement-minded Kim Dae Jung had funneled $500 million to North Korea in return for a summit (and, subsequently, a Nobel Peace Prize) through some Macanese banking channel, thereby making a mockery of US attempts to isolate, defund, and pressure North Korea.

The U.S. Treasury Department, under OTFI jefe Stuart Levey, designated BDA as an institution “of primary money-laundering concern” under Section 311, averring that it was suspected of laundering the infamous North Korean “supernotes”—a miraculous counterfeit of the US hundred-dollar note that was virtually indistinguishable from the real thing.  To “protect the U.S. financial system”, U.S. financial institutions were instructed not to have dealings with BDA.  Result: a run on the bank, and BDA went into receivership in the hands of the Macau financial authorities.

Mission accomplished, one might think.  Without any due process (the designation was merely the beginning point of an 18-month investigatory process, not a conclusion), the US government had successfully torpedoed a foreign bank.  And about $25 million in North Korea-related accounts was frozen and out of Pyongyang’s reach!  Pow!  Power!!

By the lights of the Bush administration, the fact that this power could be exercised unilaterally, pre-emptively, without any checks and balances (the case, when investigated, is a completely internal US government star-chamberesque proceeding, without any opportunity for the targeted institution to confront its accusers, demand discovery, etc.) no doubt added to its intoxicating allure.

In order to further accentuate the measure’s unilateral dark and mighty awesomeness a la Cheney (and shield the actions from any trace of international accountability or consultation), at first the Bush administration even peddled the myth that the BDA designation was just a plain vanilla Treasury enforcement action against a Macau bank with shoddy controls and had nothing to do with North Korea (even as Treasury conducted a secret global campaign of harassment  against any bank that dared to do business with the DPRK and also dished out the same treatment to Cuba).

As a matter of evidentiary rigor, the Bush administration f*ked up royally.  It turned out that BDA routinely sent all its cash deposits over to Hong Kong & Shanghai Bank in Hong Kong for vetting, and the single time counterfeit currency had been detected—one decade before!– the U.S. Treasury had been promptly informed.  But that did not deter the Treasury Department, which ground on with the apparently bogus case.  I assume that the flimsiness of the case was perhaps considered as not a bug, but a feature, a sign that U.S. financial might, diplomatic determination, and unilateralist ambitions would prevail under the most adverse circumstances.

The U.S. government’s determination to prevail had a lot to do, I suspect, with the fact that the real target of the BDA procedure was not BDA or even North Korea; it was the People’s Republic of China.

The PRC is the 800-pound gorilla in the room when it comes to Iran as well as North Korea sanctions.  If the PRC is unenthusiastic, the sanctions simply don’t work.  When Treasury officials talk about “cutting of North Korea from the world financial system” they’re really talking about the PRC.

The architect of the 2005 campaign, David Asher, came out and said it in congressional testimony in 2007.

“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, we’re talking hundreds of millions.”

BDA’s chairman, Stanley Au, had been a delegate to the China People’s Consultative Congress, a prestigious “united front” talking shop that showcased pro-PRC overseas Chinese.  The BDA designation was a demonstration project, meant to show the PRC what could happen to its friends–and its banks–if the US line was not satisfactorily toed.

Since these kinds of activities allow the United States to throw its weight around without dropping bombs, IR types find the exercise of financial sanctions “soft power” incredibly beguiling, even though it ignores all the checks/balances/due process/proportionality stuff that is supposed to give “soft power” its moral and diplomatic strength.

As a result, I have seen reporters peddle the myth that the BDA designation “worked”.

This is what “worked” looks like:

September 2005 U.S. Treasury Department announces designation of Banco Delta Asia as a bank of “primary money laundering concern”

April 2006 Six Party nuclear talks halt since US refuses to discuss North Korea’s frozen accounts.

October 2006 North Korea conducts its first successful nuclear test.

That’s not what success looks like.

Even for the Bush administration, whose attitude toward foreign policy fiascos was usually one of callous insouciance, it was a Defcon 1 disaster.

In an undignified scramble, the Cheney hardliners, including regime change fire-eater in chief Bob Joseph, were pushed out of the way and Condoleezza Rice took over.  Various deals were cut in January-February 2007 and in March 2007 U.S. Assistant Secretary of State Christopher Hill announced the Norks would be getting their money (a whopping $25 million, half of which, by the way, was the property of hapless joint ventures in North Korea like British American Tobacco, not even Kim Jung Il’s) out of BDA.

In what is I think perhaps the most under-reported story of the Bush administration, hardliners in the U.S. government worked indefatigably to sabotage the deal negotiated by Christopher Hill.  In February 2007, as the statutory eighteen month investigatory period expired and the State Department was struggling to cobble together a deal, Treasury announced a scorched earth final rule against BDA citing Patriot Act Section 311.

Using the patently false statement that the rule could not be revoked, Treasury then declared that any bank that was involved in repatriating the North Koreans’ $25 million out of BDA would be sanctioned.  The State Department frantically roamed the financial world looking for somebody who would dare handle the transaction.  After a futile four months’ quest for a commercial bank willing to handle the deal—the Chinese banks all demurred either out of fear or from a desire to watch the US twist painfully in the wind–in June 2007, the State Department finally cobbled together a channel using the New York Fed and the Russian central bank to get the cash back to the Norks.

Turning to the current actors, in 2007 representative Ed Royce also pitched in at the time, cosigning a letter with other anti-Nork heavyweights that raised the specter of prosecuting Christopher Hill for money laundering for his efforts in trying to arrange the repatriation.

And for that matter, I suspect Daniel Glaser may have wandered off the res and delivered some back-channel threats in Macau to try to derail the repatriation, and he was subsequently, I speculated at the time, dispatched to “eat crow in Beijing.”

Even the designated existential menace of 2005, the frickin’ Supernote canard, gets an occasional shoutout in current coverage.  Kevin Hall of McClatchy conducted a thoroughgoing investigation of the counterfeiting boondoggle and I did my share of the debunking.

I’m assuming the hardliners obstructing the repatriation of funds were getting their marching orders and political backing from a furious Dick Cheney.  To my mind, it is the most remarkable example of open insubordination within the U.S. executive branch that I can think of.  Hopefully, some insider will write it up some day.

The Obama administration was also entranced by the potential of the financial sanctions weapon.  Stuart Levey was the highest-ranking holdover from outgoing Bush administration other than Secretary of Defense Gates.

In his signature style, President Obama was more cerebral, patient, and multilateral in his planning.  The pretense of independent Treasury proceedings to “protect the US financial system” were dropped in favor of overtly legislating and applying sanctions in the context of multi-lateral diplomacy.

To my mind the biggest genuine achievement in US-PRC coordination under President Obama was Beijing’s decision to throw Iran under the bus and support UNSC sanctions in 2010.  The threat of US financial sanctions was a recurring a headache for the PRC and had changed its behavior in 2005 (though I suspect that financial channels between Beijing and Pyongyang were kept open even as China’s big banks dropped North Korea transactions) and I presume some combination of financial threats and political inducements prompted the PRC’s move against Iran.  Again, the inside story remains to be told.

Given the virtually total separation of the US and DPRK economies, Treasury measures that hit North Korea indirectly–by, effectively, sanctioning foreign financial institutions that do business with the DPRK, not the DPRK itself–quickly rose to the top of the agenda when it was time to “do something” about the Sony hack.

In his testimony before the House Committee on Foreign Affairs on January 13, Daniel Glaser advised that the Obama administration had crossed a Rubicon of sorts by openly deploying unilateral Treasury sanctions as a “because we can” tool of coercive diplomacy divorced from the financial violations they were originally designed to counter.  The “weaponization” of US financial regulation, in other words, is pretty much complete (and the inconvenience of trying to justify Treasury sanctions using boondoggles like the Supernote canard is pretty much circumvented):

E.O. 13687 [signed by President Obama on Jan. 2, 2015; gives Treasury the authority to sanction the DPRK government and Workers’ Party of Korea for the Sony hack and “other egregious acts”–ed.] represents a significant broadening of Treasury’s authority to increase financial pressure on the Government of the DPRK and to further isolate the DPRK from the international financial system. With the issuance of E.O. 13687, Treasury, for the first time, has the authority to designate individuals and entities based solely on their status as officials, agencies,instrumentalities, or controlled entities of the Government of the DPRK or the WPK. Treasury also now has the authority to designate those acting on their behalf or providing them with material support.

In his written statement, Royce identified the Executive Order as enabling a full-spectrum financial jihad against banks of any jurisdiction doing business with North Korea.

[T]he significance of this new Executive Order may come from the broad power it gives the President to target anyone who is a part of the North Korean government or is assisting them in any way for anything. That is, if the Administration chooses to use it to its full advantage.

We need to step up and target those financial institutions in Asia and beyond…

In his verbal opening remarks, Royce referred to the BDA sanctions as a success, a characterization I hope that readers of this post will take with a grain of salt.

Financial sanctions against the DPRK, of course, brings the unwelcome issue of the People’s Republic of China back to to the fore.

In the matter of North Korea, despite Kim Jung Un’s  geostrategic footsie with Park, Abe, & Putin, the foreign relationship, now as in back in 2005, that still matters most is the People’s Republic of China.  Glaser, in his testimony, described the PRC as still “taking the lion’s share” in terms of providing North Korea’s international financial facilities.  With a lot of American levers against the PRC losing their effectiveness, I suspect President Obama is loath to surrender the nuclear option: the threat that Chinese banks can be blocked from the global financial system.  When the financial sanctions weapon is trotted out, it is a signal that the PRC is supposed to take heed and “do something.”

But actively and aggressively wielding that weapon is another matter.

Sanctions that cut PRC institutions from the US-controlled international financial system is a wasting asset (though not evaporating quickly enough to satisfy RMB triumphalists, perhaps) as the PRC has prioritized its international forex/financial policy to wean the PRC both incrementally from the US dollar and from the need to clear transactions through the US and its allies.

I also suspect that the PRC believes that in 2015 the Obama administration is not going to risk accelerating this process of disintermediation over the case of a hack against a Japanese entertainment company that North Korea may or may not have committed.

It’s worth noting that the testimony of Song Kim, the Obama administration’s special representative for North Korea policy, was markedly short of fire-eating and notably larded with “doors open” verbiage, which leads me to believe that the Obama administration is actually more interested in fostering a Burma-type strategic realignment by North Korea toward the US tolerated by the PRC in a spirit of forbearance, and not really that enthusiastic about a regime change/collapse scenario that might please Ed Royce but also trigger a Chinese intervention.

So I suspect the current posturing on financial sanctions is more an exercise in political kabuki before the new Republican-controlled Congress than a genuine attempt to relive the dubious glories of 2005.

By the way, despite the US Treasury final rule, Banco Delta Asia is still in business. Thanks to its local retail operations and, perhaps, a generous helping of F*ck You, OTFI, sub rosa support from Beijing, it seems to be doing fine.

Peter Lee edits China Matters and writes about Asia for CounterPunch.

Peter Lee is creator of the Patreon Peter Lee’s China Threat Report.