Politics of Financial Warfare: The Banco Delta Asia Case Part-2

This is part 2 of the series, the first part is here: http://smallcrowdedworld.com/2014/04/24/politics-of-financial-warfare-the-banco-delta-asia-case-part-1/

  1. The Banco Delta Asia Case- Law Enforcement or Sabotage?

Kim family finances operate like mafia finances. In order to launder the dirty money, the state uses a series of front companies or smuggles cash through embassies and diplomatic pouches.[i]  The regime relied on a network of international banks to move and hide the money.  The Treasury’s plan, working with the IAI, was to find a weak point in this network and incapacitate it.  The weak point that was decided upon was Banco Delta Asia (BDA), a small privately owned bank in Macao.  Treasury found that other larger banks, such as the Bank of China, were also collaborating with North Korea, but BDA was chosen because it was small enough that it would not cause collateral damage to the international financial system or be seen as a direct threat to Chinese authorities.[ii]

On September 15, 2005, the Treasury Department labeled BDA as a primary money laundering concern under Section 311 of the Patriot Act.  Treasury found that BDA had worked with North Korean front companies for over 20 years, and had tailored their services to facilitate illicit financial transactions for the regime.  BDA was found to have accepted large cash deposits from North Korea, and was suspected to have helped put counterfeit currency into circulation.[iii]  This action had immediate consequences for the bank.  On September 16, 2005, thousands of BDA customers rushed to the banks eight Macao branches to withdraw their savings, a one-day amount of $133 million, worth approximately a third of the bank’s total assets.  That same day authorities in Macao set up a three-person committee to take over BDA and had frozen $25 million of suspected North Korean criminal assets.[iv]

The $25 million frozen, and BDA itself, were relatively small targets, but the Treasury action was designed to send a clear message: doing business with North Korea is not worth the risk.  The invocation of Section 311 cuts banks off from the dollar-based international financial system.  Thus, any potential profits of North Korean business would be small compared to the potential losses of access.  In the aftermath of the BDA ruling, bank compliance officers began subjecting North Korean related clients to increased scrutiny, and closing and freezing millions of dollars worth of accounts.  Even in China, state run banks like the Bank of China froze North Korean accounts out of fear that the Treasury would target them next.  With just one move against a small bank, Pyongyang was pushed outside of its long lasting network of international financial institutions.[v]

3.a The Six Party Talks and Bureaucratic Battles

The Treasury Department and the IAI had scored a clear victory with the BDA operation.  While in isolation there was little that North Korea could do to counter this move, the BDA operation occurred during the fourth round of the Six Party Talks on the North Korea Nuclear Program.  The Six Party Talks had been an ongoing diplomatic effort started in 2003 after North Korea withdrew from the Nuclear Non-Proliferation Treaty.  The aim of the talks was to persuade North Korea to give up its nuclear program for enticements like increased aid and normalization of relations with the United States.  Christopher Hill, the Assistant Secretary of State for East Asian and Pacific Affairs and the head of the U.S. delegation to the Six Party Talks, was a firm believer of the potential of diplomacy with North Korea.  In one of his first meetings with Secretary of State Condoleezza Rice he told her, “If you just let me go to Pyongyang, I’ll get you a deal.”[vi]

Earlier rounds of the Six Party Talks had resulted in little concrete success, but many in the State Department remained committed to the diplomatic approach.  In this context most of the State Department’s Korea experts viewed the BDA action as a threat to engagement with Pyongyang on nuclear issues.  Even the way that the world first learned about the planned BDA operation was a source of friction and mistrust.  On September 8, 2005 Treasury’s plan to designate BDA as a primary money laundering concern was leaked to the Wall Street Journal, days before the actual action was be carried out.  The source of the leak was never discovered, but many in the State Department ascribed the action to “neocons” who were seeking to discredit the ongoing negotiations.[vii]  This bureaucratic struggle would only get more intense after the Treasury Department formally declared BDA a primary money laundering concern a week later.  For example, Korea Desk Director Jim Foster described Treasury’s move as “pure and simple blackmail,” and worried that the North Koreans “are going to walk away from the talks.”[viii]

The Department of Defense, the National Security Council, and the Office of the Vice President were all known to be critical of Christopher Hill’s form of diplomacy that focused on discussions, travel to Pyongyang, and appeasements, leading his critics to give the Assistant Secretary the nickname “Kim Jong Hill.”[ix]  There has even been suspicion that hardliners in the Bush administration used BDA as a tool to derail the Six Party Talks.  Many critics of the BDA action point to the timing, which was only four days before the Joint Statement at the conclusion of the Fourth Round of the Six Party Talks.  This Joint Statement was a breakthrough for diplomacy, in that North Korea had agreed to give up its nuclear program in exchange for economic, security and energy benefits.  However, this viewpoint ignores the fact that the IAI and the intelligence gathering for the BDA operation had been ongoing for years, and was delayed to respect to the start of the fourth round of Six Party Talks in July 2005.  The decision to move forward on BDA was made before it was clear that an agreement would be reached at the end of the fourth round of the talks, and President Bush viewed the IAI’s law enforcement activities as separate from the denuclearization talks.[x]

For much of President Bush’s first term the hardliners had power, but there were several factors that favored Hill and his supporters in the State Department.  Many of the hardliners on the North Korean issue had been architects of the Iraq war, but as their overly optimistic projections about that conflict proved false, they started losing influence.  With the ongoing unpopularity of the Iraq war, there was also a perception that the President was looking for a success that could become his foreign policy legacy.  President Bush had developed close personal relations with Secretary of State Rice, who had decided to back Assistant Secretary Hill’s approach to diplomacy.  As Rice and Hill’s vision for engagement with Pyongyang won favor with President Bush, they started cutting off any perceived hardliners from information flows about the ongoing negotiations, bypassing the usual interagency processes. With Rice and Hill pushing for a deal the administration started looking for a way to return the frozen assets to Pyongyang.[xi]

3.b North Korean Strategy: Consistency and Escalation

While the U.S. was involved with inter-agency jostling, Pyongyang was developing a strategy to deal with the BDA sanctions. The effects of Treasury’s move against BDA weakened North Korea, but they had considerable advantages that ensured the frozen assets would be returned.  The Kim regime was able to maintain unity and consistency in its demands, whereas the U.S. forced to navigate internal power struggles and uncoordinated maneuvers.  North Korean negotiators understood that the $25 million was important for symbolic reasons, it would be a first step in convincing banks it was safe to work with them again.  However, the Americans in charge of the diplomatic effort did not understand the significance of these funds.  In May 2007, Christopher Hill stated that he would not “allow $26 million or $25 million get between us and a deal that will finally do something about nuclear weapons on the Korean peninsula.”[xii]

North Korea was also willing to use escalation and provocations, while simultaneously using the Six Party Talks as leverage, to meet strategic objectives.  In July 2006, North Korea test fired ballistic missiles, and in October conducted their first nuclear test.  All members of the Six Party Talks condemned the nuclear test.  The United Nations Security Council passed resolution 1718 that increased sanctions, banned the sale of luxury items, and allowed for the searching of North Korean ships suspected of carrying contraband.[xiii]  Even Assistant Secretary Hill issued a tough sounding denunciation of the nuclear test, warning North Korea that they “must choose either to have a future or to have nuclear weapons, but it cannot have them both.”[xiv]  Despite the tough sounding rhetoric following the nuclear test, there was an increased pressure to return to negotiations.

One long standing rule that had been established by the Bush administration was that there were to be no bilateral talks with North Korea.  Hill had long advocated for them, and had set up unauthorized situations where he would be alone with Kim Kye-Gwan in the past.  Hill’s unilateral decision to meet with the North Korean negotiator had angered most members of the administration, including his ally Condoleezza Rice.  The sense of urgency created by the nuclear test had changed the administration’s perspective.   On January 16, 2007, Hill was allowed to initiate an official series of bilateral talks with Kim Kye-Gwan, North Korea’s head negotiator.   In order to protect the Six Party Talks, only a handful of administration official knew about Hill’s planned meeting in Berlin.  During four hours of drinks and dinner, Kim pushed for resolution on the BDA issue, and Hill promised that a resolution on the frozen $25 million would be reached.  The problem was that there was a difference in understanding about what a resolution would mean.  Hill had been focused on the nuclear issues, but did not understand the complexities involved with Treasury’s actions.[xv]

3.c Unwinding Banco Delta Asia

BDA was commonly described as a sanction, or a US freeze of assets, but it was officials in Macao who had frozen the North Korean assets, not the US.  The original plan was that North Korea would have to end its illicit activities before having the money returned and the restrictions removed.  What the State Department had promised in Berlin would prove difficult in execution.  The unenviable task of working with North Korea on unfreezing the assets fell to Deputy Assistant Treasury Secretary Daniel Glaser.

There were many complications inherent in the negotiations over the resolution of BDA that came from the technical issues of the operation.  The frozen assets were comprised of 52 accounts, only 17 of which were considered to be illegitimate.  North Korea demanded a return of the full $25 million, but not all of the frozen accounts contained assets belonging to the North Korean state.  The North Korean negotiators that met with Glaser did not have the authority to seriously address American concerns about counterfeiting and other criminal activities, and Glaser could not promise them access to the international financial system because that was up to the private banks to decide.  North Koreans’ insisted on the return of the money before they would return to talks, so it became the Americans’ responsibility to discover a way to return the toxic assets.  This was further complicated by the demand that, instead of picking up the assets from BDA, the funds would have to be wired to a bank in Pyongyang.[xvi]

Even the actual process of wiring the money to Pyongyang would become a source of complication and tension.  The State Department told Glaser that they had worked out a deal with China that involved wiring the money to Pyongyang through a Chinese bank.  Glaser was skeptical of the deal because he did not believe Beijing would be willing to expose its banking system to the toxic money.  When Glaser raised this point with Tom Gibbons, an official working under Christopher Hill, Gibbons responded by verbally attacking Glaser’s motives, accusing him of trying to destroy the Six Party Talks so strongly that Glaser left the room in tears.[xvii]  Afterwards Glaser was required to give a press conference describing the American plan to transfer the money back to Pyongyang, only to learn that the Chinese Central Bank never approved it and was not be willing to transfer the funds.  It took weeks to find a bank willing to expose itself to the BDA money.  Ultimately, it fell to the New York Federal Reserve Bank, who would then transfer the assets to a bank in Vladivostok, Russia, then to the Russian Central Bank, and finally to the bank in Pyongyang.  For all of this to work, the Russians received guarantees that their banks would not be targeted for moving this money.  The $25 million was back in North Korea in June 2007.  Since the price was paid, the talks could continue. [xviii]


[i] Juan C. Zarate, Treasury’s War: The Unleashing of a New Era of Financial Warfare, (New York: PublicAffairs, 2013), 220-221.

[ii] Ibid, 226.

[iii] U.S. Department of the Treasury, Press Center, Treasury Designates Banco Delta Asia as Primary Money Laundering Concern under USA PATRIOT Act (accessed April 12, 2014); available from http://www.treasury.gov/press-center/press-releases/Pages/js2720.aspx

[iv] Mike Chinoy, Meltdown: the inside Story of the North Korean Nuclear Crisis, (New York: St. Martin’s Press, 2009), 260.

[v] Juan C. Zarate, 241-243.

[vi] Glenn Kessler, “Mid-Level Official Steered U.S. Shift On North Korea,” The Washington Post, May 26, 2008. http://www.washingtonpost.com/wpdyn/content/story/2008/05/26/ST2008052600669.html?sid=ST2008052600669

[vii] Glenn R. Simpson, Gordon Fairclough, and Jay Solomon, “U.S. Probes Banks’ North Korea Ties,” The Wall Street Journal, September 8, 2005. http://online.wsj.com/news/articles/SB112612365849834354

[viii] Juan C. Zarate, 258.

[ix] Mike Chinoy, 261.

[x] Victor Cha, 266-267.

[xi] Stephen F. Hayes, “In the Driver’s Seat: Condoleezza Rice and the jettisoning of the Bush Doctrine,” The Weekly Standard, June 2, 2008. http://www.weeklystandard.com/Content/Public/Articles/000/000/015/145jmmdg.asp?

[xii] “Policy Forum 07-044: Behind the Blacklisting of Banco Delta Asia”, NAPSNet Policy Forum, June 05, 2007, http://nautilus.org/napsnet/napsnet-policy-forum/behind-the-blacklisting-of-banco-delta-asia/

[xiii] “UN slaps sanctions on North Korea,” BBC News,  October 14, 2006. http://news.bbc.co.uk/2/hi/asia-pacific/6051704.stm

[xiv] “US ‘cannot allow’ nuclear N Korea,” BBC News, October 5, 2006. http://news.bbc.co.uk/2/hi/asia-pacific/5408246.stm

[xv] Mike Chinoy, 318-319.

[xvi] Juan C. Zarate, 256-258.

[xvii] Ibid, 259-260.

[xviii] Kevin Hassett, “Why Did the Fed Help North Korea Launder Money?,” Bloomberg News, June 18, 2007. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aILkCVkk1tHY

About Leon Whyte

I'm a recent graduate of the Fletcher school of Law and Diplomacy. My interests include Pacific Asia and Security. I am looking for related opportunities.
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1 Response to Politics of Financial Warfare: The Banco Delta Asia Case Part-2

  1. Pingback: Politics of Financial Warfare: The Banco Delta Asia Case Part-3 | Small Crowded World

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