Tainted Wheat Gluten Update

I was patting myself on the back for tracing the source of the tainted wheat gluten to Binzhou, in Shandong.

There was one element that I got wrong: how and why the melamine got into the wheat gluten.

I argued that melamine was a relatively expensive petrochemical, and it didn’t seem logical from a cost-benefit point of view to use it as filler in wheat gluten.

The New York Times argues quite persuasively that cheap melamine scrap was routinely ground up and added to Chinese feed ingredients to inflate the measured protein content and obtain a higher sales price.

Protein is a difficult component to measure. Protein content is therefore measured indirectly by decomposing the protein’s constituent amino acids to release their nitrogen content. The amount of protein is inferred by recovering and measuring the amount of nitrogen recovered and multiplying that number by a factor reflecting the proportion of nitrogen to the overall amino acid molecule.

The nitrogen-to-protein multiplier for the most commonly used protein measurement procedure, the Kjeldahl test, is 6.25. So one mg of added nitrogen would translate into 6.25 mg of perceived protein.

Melamine is a nitrogen-rich chemical that would be likely to disassociate during the harsh Kjeldahl process—which includes an acid wash—and produce elevated protein results.

The process is extremely laborious and a little bit dangerous, involving digestion, distillation, and titration. Certainly no ordinary farmer could perform it, and the test is probably widely honored in the breach inside China.

Inflating protein content to rip off gullible farmers is a long and honored tradition around the world.

I’m most familiar with the scam of spiking feed ingredients with bone and feather meal from a rendering plant. This meal is proteinacious, but nutritionally useless—the protein is denatured and can’t be absorbed. But adding the meal does allow the supplier to claim a higher protein content—and price.

Since I wasn’t aware of the protein angle for melamine, I proposed that the melamine might have made its way to the wheat plant as contamination in the water supply.

That premise looks like it was waaaaaaaaaay off.

However, I do take some consolation in the fact that the New York Times visited the Mingshui Chemical Plant—which I had identified in my post as the likely source of melamine since it was just upriver from Binzhou--and found that it was a source of the scrap melamine that was auctioned off once per quarter and is apparently finding its way into the local feed industry.

The interesting investigatory issue will involve the nature of the testing that the U.S. importers performed when the Chinese material was received.

Did they perform Kjeldahl tests?

Were there other tests they should have reasonably conducted to detect melamine or other contaminants?

Did the U.S. importers blend the Chinese material—a common precaution to dilute whatever nasties were inside the imported protein materials and also, perhaps, allow the importer to claim U.S. origin for the stuff—or did some companies take the rather reckless step of sending their pet food customers 100% Chinese material?

An interesting story.

Also, a story that the Chinese government—for the sake of its credibility and for the health of its citizens and livestock—should not continue to cover up.

David Asher’s Dead End

"Presumed guilty until proven guilty" makes for a quick and easy North Korea policy...but it's no substitute for global diplomacy

“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.” David Asher, oral testimony, April 18, 2007

We gave them back the chicken...is the monkey still scared? Brad Sherman (D-CA), Chairman, House Foreign Affairs Subcommittee on Terrorism, Nonproliferation, and Trade, April 18, 2007

David Asher’s testimony before a joint House subcommittee on April 18 provided considerable entertainment—inadvertent as well as intentional.

It also revealed some things about North Korea, a lot about the Bush administration and David Asher--and gave little reason to be optimistic about U.S. policy in Northeast Asia.

Certainly, the Chinese are wondering if there are any tangible rewards for engaging with the United States on North Korea—beyond serving as a target of U.S. financial coercion—and as result are probably less than enthusiastic about helping us out on Iran.

Asher—who served the coordinator of North Korea Activities Group at State Department from 2001 to 2005 and takes credit for a raft of activities harassing Pyongyang, including the Patriot Act Section 311 action against Banco Delta Asia-- was brought to the hearing by California Republican Ed Royce to provide conservative talking points on North Korea (Asher’s opening statement and subsequent responses can be found after the 1:58 mark in the webcast).

Asher articulated the hard-line view that using Treasury sanctions to force North Korea to abandon its alleged counterfeiting and proliferation-related activities was more important than the Six Party process, stating explicitly that, in his personal opinion,

“I don’t think the North Koreans are going to give us any more than a freeze for compensation”.

And

“We designed this initiative with the goal of countering these [illicit] activities themselves...not necessarily supporting the Six Party talks.”

And

“We did not design the initiative to give it away.”

And

“Even as a diplomatic act of expediency [returning the BDA funds] strains one’s litmus test of what’s reasonable..."

And

[Returning the funds] is “not a constructive effort”.

Nothing like designing failure into the Six Party process at the start, David.

To help Asher get his point across, Royce framed his questions around Asher’s published statements, making assertions that Asher, naturally, was only too eager to endorse.

As in:

Royce, April 18, 2007:

Referring to allegation of North Korean counterfeiting:

"What would happen if we just decided to implode that regime by responding to an act of economic warfare in a way that embargoed that system?...This is the first time since the second world war that one country has copied another country’s currency..."

David Asher, November 2005:

Under International Law, counterfeiting another nation's currency is an act of causus belli, an act of economic war. No other government has engaged in this act against another government since the Nazis under Hitler.

Royce also had a ready made laugh line to contribute to the tag team entertainment, having mocked the North Korean request for two counterfeit bill detecting machines during the morning testimony.

Asher (who, I’d be willing to bet a jar of kimchi fed Royce the story in the first place), didn’t even wait for a prompt and jumped in himself:

"[North Korea is] interested in obtaining bill detectors so they can improve the quality of their counterfeit...I think it’s likely they’ll be making efforts to counterfeit our new bills which would mean that we’d have redesigned our dollars twice now because of North Korea and we’d have to do it a third time..."

Given the growing doubts swirling around the North Korean counterfeit story (Asher himself twice remarked agitatedly, “some people think we’re making this stuff up...”), I would personally give some credence to the idea that the North Koreans need the machines so they can vet their cash locally, now that having it checked by money center banks like HSBC New York (as BDA did) is apparently no longer possible.

However, the revolting mental image of a leering Kim Jung Il salaciously violating our greenbacks (causus belli, baby!) is central to the conception of North Korea as a rogue actor on the world stage .

Therefore, I expect the Supernote story to be defended to the last ditch.

Asher, a conservative-leaning Japan expert whose career arc has included stints at the American Enterprise Institute and Heritage Foundation as well as the State Department, has built his public career on hyping the criminality of the North Korean regime.

The title of his November 2005 paper, "The North Korean Criminal State, its Ties to Organized Crime, and the Possibility of WMD Proliferation", pretty much says it all in terms of Asher’s conceptual framing of the North Korea issue.

By his formulation, North Korea (or the “Soprano state”, as he refers to it) is, in its essence, criminal and, in any and all conduct of its international activities, is assumed guilty... until proven guilty.

In his oral testimony on April 18, Asher took the argument to the dingbat quadrant.

North Korea is being accused of inflating or manufacturing insurance claims (using “suspiciously” complete and timely documentation) to defraud Lloyd’s names in cases involving $150 million in coverage.

Asher, who was quoted in the article that presumably inspired his remarks, got a little carried away in his testimony, characterizing the proceeds as “pure profit”, disregarding the fact that actual losses such as sinking ferryboats and burning warehouses had occurred, and that the North Korean insurance company had to pay for the reinsurance it acquired on the London market.

Then he grabbed the ball and took it to a new level:

"...[the North Koreans] even scuttled, apparently, one of their ships. They collided deliberately with a Hyundai merchant ship in the middle of the Indian Ocean. It carried $70 (?) million dollars in insurance. The ship...their ship...collided with the Hyundai ship—this is right in the middle of the run-up to the 2000 summit and the ship, even though it had basically a dent in its bow, it just merely [sic] sank which implies it was exploded. They blew it up and sank it...a great way to collect insurance."

Ah, Google. This powerful, little known tool tells us:

Hyundai pays for tragedy

A compensation payment of US$6m has been made by Hyundai Group for the sinking of the North Korean bulker Manpok in March last year. A collision between the 4,411 teu Hyundai Duke and the 15,193 dwt Manpok, carrying a cargo of cement at the time, resulted in the loss of 37 lives aboard the bulk carrier, which sank within moments after the incident 500 miles from Colombo, Sri Lanka. Only two crew were found and rescued by the 1992-built box ship. In a statement, Hyundai said that insurance firms representing both the company and the North Korean government, who owned the Manpok, had reached an agreement on the amount of compensation to be paid. The circumstances of the collision have been surrounded by controversy since it happened, with reports from the Hyundai Duke stating that the Manpok cut across its bow denied by the North Korean government, who claim that the container ship had been shadowing the bulker.

The Hyundai Duke, by the way, is a 52,000 ton behemoth. It, not the Manpok, sustained minor damage to its bow. The Manpok, as befits a little bulk carrier struck either on the side or stern by a vessel at least 3 times larger steaming at 25 knots, sank like a rock, with all but two of its crew perishing.

As to the insurance settlement, the Korea Times reported:

Amid rescue operations for the missing North Korean seamen, two insurance experts have been dispatched to Colombo, Sri Lanka to investigate the cause of Wednesday's boat collision, said a spokesman for Hyundai Merchant Marine Co. (HMM) yesterday.The spokesman said that one of the two is a Korean marine surveyor appointed by Hyundai Maritime and Fire Insurance Co. and the other is a British surveyor dispatched by the London-based Britannia P&I (Protection and Indemnity) Club. The Hyundai Duke, which collided with a North Korean freighter in the Indian Ocean, is insured by Britannia P&I Club and Hyundai Maritime and Fire Co.

...

Yoo said that in the case of HMM, Britannia will cover the human losses from the collision, with Hyundai Maritime and Fire Insurance taking full responsible for all damages to the vessels."When the final report comes out, then we will decide on whether we will compensate for the physical and human losses of North Korean seamen purely from the humanitarian point of view," Yoo said. (Kang Seok-jae, Insurance experts sent to Sri Lanka to investigate cause of boat collision, THE KOREA HERALD, April 3, 1999)

Did the captain of the Manpok steer his boat in front of a South Korean container vessel and then go the extra mile and blow up his ship (with its high value declared cargo of cement, for Chrissakes) and his crew after the crash just to be sure to slake his master’s kleptocratic lust for insurance company gold?

Or is David Asher a dingbat?

I guess this is why these guys prefer not to testify under oath.

There are a few conclusions that can be drawn, beyond the observation that David Asher is sloppy and irresponsible in his testimony before Congress.

First, Mr. Asher is still partying like it’s 2002, when the U.S. (or at least Colin Powell) had the credibility to accuse Saddam Hussein of anything and everything under the sun and when Saddam tried to clear himself, Donald Rumsfeld could harrumph “absence of evidence is not evidence of absence.”

That *ahem* ship has sailed, David. Or sunk.

The hardliners will have to do better than Asher’s junior G-man tales of running stings with fake weddings against Chinese triads to interdict small quantities of NORK counterfeit currency, cigarettes, Viagra, and meth...or easily debunked stories about extravagant suicidal insurance frauds...to make their case about the dangerously criminal character of North Korean regime.

Otherwise, the North Korean effort will be tainted by the same perception of cherrypicking, mendacity, and special pleading that is the enduring legacy of America’s Iraq intelligence.

Asher’s testimony makes one wonder about the quality of our dossiers, the honesty of our representations, and the validity and effectiveness of our tactics.

In this context, I found it most interesting that Asher brought up the issue of the 2000 summit “cash for peace” bribe.

South Korea’s prime minister at the time, Kim Dae Jung, has admitted to passing US$100 million to North Korea to facilitate the historic North-South summit (and Kim’s Nobel Prize).

Hyundai Asan, the intermediary, also passed on another US$400 million, either to smooth the way for its own business plans for North Korea or on behalf of the government in an additional unacknowledged payoff.

The financing is made rather murky by the fact that Kim Dae Jung was apparently joined at the hip with the particular chaebol faction running Hyundai Asan, and unleashed a torrent of $3 billion in government and private loans—to prop Hyundai up in the liquidity crunch following the Asian financial crisis, to smooth the way for his summit, and allegedly, to create a campaign slush fund for certain politicians and provide graft for some well-compensated political fixers.

All one can say is, the 2000 summit was very good for Kim Jung Il.

And if Kim spent the $500 million to develop his nuclear deterrent instead of blowing it on cars, cognac, and Swiss bank accounts, he probably considers it the best $500 million he ever spent.

It looks like that money made it to North Korea via Macau and it looks like that really annoys David Asher:

"...this may sound a little bit exaggerated but the South Korean government alone poured something on the order of $500 million dollars in bribes in order to obtain the 2000 summit and they investigated this...it’s been prosecuted in their courts...in the banks in Macau...in banks accounts which were--we would assume were—controlled by Kim Jung Il, that’s certainly what they assessed."

Grousing about purported income from illicit activities is one thing.

But Asher’s annoyance over Macau’s role in the summit payoff—a piece of checkbook diplomacy that violated plenty of South Korean laws but involved no illicit activity by North Korea—must be traced to the fact that Kim Jung Il got half a billion legal dollars out of it.

The summit bribe must hang like a dark cloud over hardline efforts to isolate, destabilize, and perhaps topple the North Korean regime through financial pressure.

What’s the point of all this time, work, and vexation of trying to financially isolate Pyongyang if South Korean business and government can just write North Korea some big checks any time Kim Jung Il feels backed into a corner and decides to trade some concessions for cash?

Perhaps one objective of the whole Macau brouhaha was to have a chilling effect on checkbook diplomacy, by making the Pyongyang and Seoul anxious that America might drop the hammer on some Macau bank just when it’s got a huge payoff from Hyundai sitting in a North Korean account.

An unexamined by-product of this initiative might be resentment by South Korean government of unilateral and coercive US efforts to pre-empt checkbook diplomacy, a prudent measure that I imagine is closer to Seoul’s diplomatic strategy than trying to kick Pyongyang’s financial can all over Asia.

Asher seems intent upon poisoning the well for State Department’s diplomatic initiatives, not only for North Korea, but also for Macau, China, and, by extension, Iran, with his relentless boasting about the Patriot Act Section 311 sanctions.

In his oral testimony (1:57), Asher stated:

"The Illicit Activities Initiative prominently involved the use of several—the development of the—conceptualization of the use of several of the tools you’re discussing today including USA Patriot Act Section 311. We worked hand in glove with the Treasury Department to apply and plan to apply against North Korea, and after a time of deep research we came to conclude that one of the best spots was in Macau against Banco Delta Asia."

Trouble is, that makes this March 2006 press release from the State Department look kinda like a lie...

Treasury Briefs North Korea on U.S. Financial System Protections

Regulatory action against Macau bank not meant as sanction on North Korea

...
The Treasury Department stressed that the Section 311 action against BDA was not intended as a sanction against North Korea and should be considered matter completely separate from the Six-Party Talks, the ongoing negotiations on nuclear programs on the Korean Peninsula that involve the United States, North Korea, South Korea, China, Japan and Russia.

Asher’s statement raises a raft of questions, such as, if the BDA action was truly directed against North Korea (which, I think, most people believed at the time, despite Treasury’s protestations), why wasn’t it better coordinated with the Six Party talks?

In other words, why did we announce this sanction at the same time that North Koreans had announced a return to the Six Party Talks, thereby giving them a reason to walk out and, apparently...

...convince them that they would get a lot further in their negotiations with the United States if they came back to the talks armed with an atomic bomb, instead of simply enveloped in warm feelings about American good faith and reasonableness?

Awkward...

I’m sure David Asher doesn’t want to go down in history as one of the fathers of Kim Jung Il’s atomic bomb...

...or, perhaps, Iran’s.

Which is the way it might go down, if Asher’s efforts to tangle Macau and the PRC in the Patriot Act web succeed.

Growing out of the premise that North Korea was essentially a criminal state, since Macau was handling North Korean money—and had the presumption to assert that the transactions were legal--well then, Macau had a problem, too:

"DPRK had for decades enjoyed a protected relationship with Macau’s government and many of the business leaders and political leaders that reached far beyond Banco Delta Asia. Not only was Macau a global center for North Korean proliferation, and for illicit activities, it was also a central node for managing the...kleptocratic finances of Kim Jung Il."

Strong words. And there is, of course, more.

Such as Asher’s statement quoted at the top of the article:

“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.”

The implication being, if China refused to share the US assumption that North Korean funds were illicit and act and investigate accordingly, Chinese banks would become subject to US sanctions.

So the action against Banco Delta Asia wasn’t just a legal action against a dirty bank, or a targeted sanction against illicit and WMD-complicit sectors of the North Korean economy.

It was a broad embargo, orchestrated globally, with threats of financial sanctions against the entire North Korean economy and regime, and also against North Korea’s enablers in Macau...and North Korea’s patron, the People’s Republic of China.

That’s a pretty big deal.

Most people have such an ingrained revulsion for Kim Jung Il’s regime that any action that sticks a thumb in Dear Leader’s eye is welcomed, no matter what the implications for US credibility as an ally, a negotiating partner, enforcer of international good-guy norms, or even the superpower that cares about keeping its facts or just its stories straight.

But China is a different matter, and I wouldn’t be surprised if concern over Asher’s reckless enthusiasm for strongarming Macau and China as part of his anti-North Korea campaign contributed to his departure from the State Department in 2005.

It would be easily to dismiss Asher’s anti-DPRK initiative as Axis of Evil nostalgia and hardliner overreach run amok, now that the realists are supposedly running North Korea policy and Asher is free to babble about his dubious achievements and undeniable ambitions while ensconced at a right-wing think tank.

Except for one thing...

...the State Department realists supposedly running our North Korea policy have been unable to get beyond the BDA cul de sac, even after the general exodus of Asher and other hardliners from State.

As far as can be seen, the problem is not with the Section 311 decision that has cut BDA off from the US financial system.

The problem seems to be that the US government is still threatening additional sanctions against non-US banks if they handle the $25 million.

It doesn’t seem plausible, given the mare’s nest that l’affaire BDA has become, that Treasury needs to preserve the credibility of its campaign against Iran by taking further unannounced action to tie up the North Korean funds and make a bad situation even more embarrassing.

Instead, the ongoing imbroglio implies that the Bush administration cannot move beyond its predilection for secretive, deceptive, and coercive unilateralism and dreams of regime change.

It also indicates that Washington’s willingness to engage China as a global security partner is subject to so many unspoken caveats (like “we’ll cut Bank of China off from the US financial system if you don’t go along with us on North Korea”) that it is virtually meaningless.

Taken together, that’s not good news for a successful, global united front against Iran.

Let’s hope that the last two years of Bush administration diplomacy isn’t remembered as David Asher’s dead end.

China Matters Reporting Scorecard

China Matters has had a good run of reporting and analysis particularly on North Korea and Banco Delta Asia and pats itself on the back for various feats of prescience:

Concerning the implications of the BDA debacle for US efforts against Iran...

China Matters, April 17:

If the sanctions against BDA were removed explicitly to facilitate the Six Party Agreement, then the legitimacy of Patriot Act Section 311 investigations—and their intimidating aura of implacable, inexorable malice—would be lost.

And Daniel Glaser and his boss, Stuart Levey, would look like jerks who had been using the pretext of supposed U.S. law enforcement obligations to promote a secret, unilateral, destabilizing North Korea policy under false pretenses.

Which, in my opinion, is exactly what they did.

And now I think the world—and Beijing--knows it.Which means the credibility of Patriot Act Section 311 investigations is shot. European banks (and governments) leery of the U.S. approach on North Korea and Iran will find it easier to opt out of an explicitly politicized Section 311 investigation and sanctions regime. [emphasis added]

Financial Times, US under fire for anti-Iran tactics, by Stephen Fidler and Roula Khalaf in London and Guy Dinmore in Washington, April 19 2007

John Bruton, the European Union ambassador to Washington, expressed concern on Thursday that Treasury officials touring Europe might be threatening European companies with application of extra-territorial US legislation. The EU would “question the wisdom” of the US seeking to impose such sanctions, either retroactively or in the future. The EU-US summit to be held in Washington on April 30 would include discussions on Iran policy, he told reporters.

Concerning what was really going on when Daniel Glaser sat in Beijing for over a week...

China Matters, April 8, 2007:

Daniel Glaser had to come to Beijing to help “implement” the agreement—and, I suppose, explain to a rather grim-faced collection of Asiatics that what he had really meant by “implementation” was that he really didn’t want much of the money returned after all.

That perhaps made for some awkward moments.

I assume the Chinese demanded an explicit written waiver from the Treasury Department stating that Bank of China would be subject to no investigations or potential sanctions stemming from its role in handling the North Korean funds.

...and

China Matters, April 10, 2007:

What sophisticated maneuvers did Daniel Glaser come up with during his two weeks in Beijing to “implement” a way out of the difficulties that the Treasury Department had created?

Apparently nothing.

Certainly not the written waiver for Bank of China to handle the funds that I thought Beijing would get.

Reuters, April 20,2007:

Bank transfer said snagging North Korea deal, Diplomatic Corresponent Carol Giacomo

But Michael Green, former top Asia specialist at the White House's National Security Council, said the Bank of China, which is listed on the international stock exchange, would not accept the money because of concerns it might be sanctioned.

...

"The Chinese wanted the Treasury Department to pledge that they would not sanction any bank that took this money ($25 million) but Treasury wasn't willing to do that. Our law won't allow us to do that, to give that kind of 'get out of jail free card,'" Green told a briefing at the Center for Strategic and International Studies where he is a senior adviser.


And cat food...

And as a bonus for dog and cat lovers, it looks like our exclusive analysis of the probable source of the melamine-tainted wheat gluten in Shandong, Binzhou was correct:



Via Tapped:

TIP-OFFS. In a story that would be utterly hilarious were the consequences less lethal, agricultural giant Wilbur-Ellis has submitted to a national recall of their rice protein concentrate, which has been tainted with Melamine and is poisoning the pet foods. From their press release:
Last Sunday, April 15, Wilbur-Ellis notified the U.S. Food and Drug Administration that a single bag in a recent shipment of rice protein concentrate from its Chinese supplier, Binzhou Futian Biology Technology Co. Ltd., had tested positive for melamine. Unlike the other white-colored bags in that shipment, the bag in question was pink and had the word ‘melamine’ stenciled upon it.

To elaborate, based on the specs we tracked down for the wheat gluten implicated in the original Menu Foods cases, we had traced the supplier past the exporter in Xuzhou to a probable source in Binzhou. Now another U.S. importer of vegetable protein—Wilbur-Ellis--is admitting their material came from the same area. That’s corroboration that somebody in Binzhou is going to have to answer a lot of questions.

So, the good news is readers of China Matters may pride themselves on knowing tomorrow’s news today.

The bad news is that the generally lazy and credulous reporting on North Korean issues is slowly becoming a thing of the past, so we’ll have to dig harder for our scoops.

Back to work!

Gold Digging

Getting to the Bottom of the Treasury Department’s Economic Campaign Against North Korea


Thanks to Asad in the comments for bringing up the issue of parallel U.S. efforts to cut Iran off from the international financial system, using the same laws, arguments, and tactics as it has employed to confront North Korea. It's an important reminder that US North Korea policy has to be viewed through an Iranian lens.

Looking at the self-defeating absurdity of America's half-hearted and self-contradictory execution of its obligations under the Six Party Agreement, it might be the case that the Bush administration wants to keep PA Section 311 investigations in its anti-Iran arsenal and not give European banks and governments an excuse to go wobbly, and that's why it hasn't taken the seemingly logical and sensible step of overturning them in the BDA case.

US North Korean diplomacy is now ridiculous, but it's a sideshow to the main event in the Middle East.

Reality-based reporting is making a comeback on the matter of Banco Delta Asia—the little Macau bank with the frozen North Korean accounts that has held up execution of the Six Party Agreement for almost two months.

McClatchy’s Kevin Hall is one of the few journalists who has followed this issue closely and critically. He recently posted two important articles on BDA.

As a result, a clearer picture is emerging of a concerted U.S. effort to exceed the scope and intent of U.N. sanctions by exploiting the domestic exigencies of the Patriot Act Section 311 anti-money laundering powers as a pretext for pursuing a worldwide economic blockade against North Korea.

Now the imperatives of the Patriot Act have collided with the demands of U.S. diplomacy over the issue of Banco Delta Asia. Diplomacy dictates that the BDA decision be overruled, but elements within the Bush administration are unwilling to surrender or curtail the investigatory and sanctioning power they enjoy under the Patriot Act for the sake of the Six Party Agreement.

The Bush administration’s head might understand the superiority of the State Department’s diplomatic approach to the North Korean (and Iranian) problems, but its heart is with the coercive anti-diplomacy of a faction within the Treasury Department.

Apparently unwilling to choose between one or another, the Bush administration has awkwardly attempted to split the difference and as a result its diplomacy in North Asia is thrown into confusion.

Now an unwelcome light is being cast both upon the use of Patriot Act Section 311 as a policy—as opposed to a national security—tool, and on the role of the Treasury Department in exploiting, misrepresenting, and, quite possibly abusing the Act in turf struggles with realists in the State Department.

At the heart of the BDA matter is the Bush administration’s fundamental conundrum in Asia—whether it should confront or conciliate China.

Hall’s first article, Money laundering allegations by U.S. false, report says describes the (relatively) clean bill of health Ernst & Young gave to BDA in its audit, characterizing it as a legitimate bank doing legal business, albeit with weak internal controls, and debunks the counterfeit supernote moneylaundering canard.

The second article, Gold sales may have spurred Macau bank’s blacklisting, posits that the real motive for the crackdown on BDA was to cut off North Korea’s (legitimate) gold bullion sales, noting that BDA purchased and resold about $110 million of North Korean gold.

The significance of McClatchy’s reporting is that it further undercuts the U.S. assertion that the BDA sanctions executed under Section 311 of the Patriot Act were independent Treasury efforts to protect U.S. currency from compromise by counterfeit currency and prevent terrorists from exploiting the world financial system--and should not, indeed can not, be subordinated to the exigencies of U.S. diplomacy.

However, cutting off bullion sales by the North Korean government was not part of the U.N.-approved international sanctions regime against Pyongyang’s WMD industries; and it could not be construed as a legitimate pretext for sanctioning BDA under the Patriot Act.

Cutting off North Korean government sales of bullion looks like part of a campaign of economic blockade and financial warfare that goes beyond the targeted sanctions regime endorsed by the United Nations.

And using Patriot Act Section 311 as the means to shut down BDA’s bullion purchases from North Korea looks less like a legitimate use of the Act to protect U.S. national security and more like an element in a campaign of coercion on behalf of a unilateral United States foreign policy—a secret policy that had regime change at its heart.

As to the question of how important BDA was to North Korea’s gold bullion sales, I will admit to being an agnostic.

Gold is as good as...gold. People like it, especially when desperate sellers provide a discount, as North Korea probably does.

North Korean gold is probably not that hard to sell, even in the context of North Korea’s rumored production of six tons per annum and in the face of a U.S. campaign to cut North Korea off from the world financial community.

What the United States has probably accomplished is simply to make it very difficult for North Korea to trade gold on the established international markets, and force it to dispose of the gold at a less desirable price.

As the Christian Science Monitor reported in January:

One indication of North Korea's need to sell gold was its decision to provide information needed by the London Bullion Market Association (LBMA) to list the North's central bank as a "good deliverer" of gold and silver. Listing with the LBMA is essential for refiners who want to sell their products in London. The bank's listing was suspended 2-1/2 years ago when it failed to respond to LBMA requests for "proactive monitoring."

The LBMA said it does not "take into account any political criteria," and will keep the bank on its rolls for another three years without monitoring.

Despite the listing, market experts say the big banks that are major buyers of gold – and form the LBMA's core membership – are not likely to flout the spirit of the US Treasury order against Banco Delta Asia, through which North Korea exported gold prior to the ban.

"The fact that they're on the list does not mean they can deliver to the London market," says Stewart Murray, the LBMA's chief executive. "When we have sanctions, none of the facilities will accept delivery from a company or a country that is subject to these sanctions."

Of course, North Korean gold exports haven’t been officially banned, so Murray’s statement that, despite being listed as a “good deliverer”, North Korea was not allowed to sell gold on the London market makes little sense except in the context of a U.S. campaign to discourage trade in North Korean gold on the London exchange, using either diplomatic pressure or the threat of some Treasury enforcement action.

Colin McAskill—who purchased Daedong Credit Bank, the bank which has $6 million in funds tied up in BDA—has been campaigning to make it possible for North Korean gold bullion and other metals to be sold freely on the international market, thereby making foreign investment in North Korea’s gold and other metals and raw materials industries more feasible and attractive.

I wonder if McAskill’s enthusiasm for bringing North Korea in from the cold on gold sales is a reason why the obviously legitimate and private character of his bank’s account at BDA has been ignored by the champions of the free market and capitalism at the Treasury Department and, instead of being repatriated separately, his monies will disappear into Kim Jung Il’s suitcase as part of the funds “resolution”.

As befits its anonymous, fungible character, North Korean gold has found its way into the world market through other channels.

An interesting article by Bertil Lintner in Asia Times describes the growth of North Korean gold and silver sales to Thailand. Precious metal exports from North Korea to Thailand grew from virtually zero to $40 million in 2006.

Along the way, Lintner also documents the financial harassment of North Korea in Europe:

The action against Banco Delta Asia, a privately owned bank that the Macau government later had to prop up to prevent it from collapsing, was the second move against North Korea's assets abroad. In a much less publicized action, North Korea's only bank located in a foreign country - the Golden Star Bank in Vienna - was forced to suspend its operations in June 2004.

The Golden Star was 100% owned by the Korea Daesong Bank, a state enterprise headquartered in Pyongyang, and was allowed to set up a branch in the Austrian capital in 1982. For more than two decades, Austrian police kept a close eye on the bank, but there was no law that forbade the North Koreans from operating a bank in the country.

Nevertheless, Austria's police intelligence department stated in a 1997 report: "This bank [Golden Star] has been mentioned repeatedly in connection with everything from money-laundering and distribution of fake currency notes to involvement in the illegal trade in radioactive material."

Eventually the international pressure to close the bank became too strong. Sources in Vienna believe the US played an important behind-the-scenes role in finally shuttering Golden Star's modest office on 12 Kaiserstrasse in the Austrian capital. Until then, Vienna had been North Korea's center for financial transactions in Europe and the Middle East. Visitors to North Korea have noted that euro coins in circulation in the country - the US dollar is not welcome in Pyongyang - invariably came from Austria. (Euro notes are the same in all European Union countries, but coins designate individual member countries.)

Here’s another data point, courtesy of Daily NK:

Singaporean newspaper “Singapore Lianhe Zaobao” reported, “Though the recent BDA issue ended in shambles, Macao and BDA did face some trials” and “With the U.S. able to strangle any county with international financial sanctions, the BDA issue rang alarm bells for illegal acts occurring throughout the world.”

The Zaobao’s online site reported on the 24th, “7~8 small scale family run banks in Macau banks are faced with the threat of closing down as BDA concluded that these banks were acting as North Korea’s ‘laundering black money.’

Macau has been caught in this political issue after being targeted as a place dealing North Korea’s money laundering.” The newspaper also analyzed that the international community had questioned China’s morals [emphasis added].

China’s morals are probably not the issue here.

China’s insistence on following the letter of the UN sanctions and not the broad interpretation favored by the United States is probably at the nub of it all.

China is North Korea’s largest trading partner. It can purchase exportable North Korean outputs for its own use or even repackage and re-export them.

It can pay for North Korean exports using foreign exchange, let North Korea hold the funds in a Chinese bank, and permit North Korean companies to use those funds to open letters of credits for imports.

Its jewelry industry can easily absorb North Korea’s bullion—or, if desirable, resmelt it into clean, pretty bars—without reference to any de facto sanctions by the London exchange.

Therefore, China is the weak link in any U.S. led financial blockade of China.

And we all know, a chain is only as strong as its weakest link.

Which means that an effective financial blockade of North Korea had to include an effective China component—something which is apparently lacking.

Unfortunately, diplomacy was apparently not part of the Bush administration skill set, and the big stick was trundled out to threaten China with dire consequences if it didn’t participate in the unilateral U.S. sanctions regime.

As David Asher—the State Department’s previous pointman for the North Korean effort at State—acknowledged in a recent interview, the ultimate target of Treasury’s investigations in Macau was China.

In comparison with Banco Delta Asia, the information that had been collected on evidence of money laundering by the Macao branch of the Bank of China was "voluminous," Asher said.

Asher insists that the move against Banco Delta Asia was the direct consequence of law enforcement efforts and was not designed as political leverage in talks that were taking place simultaneously with North Korea on nuclear disarmament.

He advocates that efforts to curtail North Korea's links to criminal activity, and to ensure that China joins the enforcement effort, should not be suspended for the sake of expediency in the disarmament talks in Beijing.

"Banco Delta may be a sacrificial lamb in some people's minds, but it is not about Banco Delta," he said. "It's about Macao, Macao's government, China, the Chinese government and their complicity and their accommodative behavior toward North Korea's illegal activities, proliferation activities and leadership financial activities." (Donald Greenlees and David Lague, How a U.S. inquiry held up the N. Korea peace talks, International Heritage Tribune, April 11, 2007)


It looks like Treasury took the provocative step of threatening Bank of China with a money laundering tag in a failed attempt to get Macau and its patron Beijing to fall into line on America’s unilateral sanctions initiative against North Korea.

The threats apparently persisted even after the so-called March 14 resolution of the BDA funds—the Treasury Department’s scorched-earth final decision denouncing BDA. After the decision was announced, Daniel Glaser went to Macau and presented the results of the Treasury investigation to the Macau authorities in an effort to persuade them not to release some of the BDA funds.

Reading between the lines, Glaser probably declared that Treasury’s campaign against purported laundering of North Korean funds by Macau banks would not be suspended unless Macau obeyed Treasury’s diktat concerning the BDA funds.

My hypothesis is when Macau didn’t respond with appropriate enthusiasm, Glaser injudiciously escalated the confrontation by promising further investigation of mom-and-pop banks in Macau, possibly an indictment of BDA’s directors for being knowing conspirators (something that was bruited about in the Macau press) and, most unwisely, threatened to make it known that Treasury considered Bank of China Macau to be implicated in the North Korean money laundering web.

This kind of threat against the reputation and viability of Bank of China Macau is the best explanation I can come up with for China’s remarkably harsh and pointed subsequent summons to Treasury.

On March 21, the Chinese Ministry of Foreign Affairs stated:

In an effort to safeguard the financial stability in the Macao Special Administrative Region (MSAR), China yesterday demanded the US consult and negotiate with the MSAR government to address the latter's concerns over the issue of Banco Delta Asia (BDA), a Macao-based bank.

Foreign Ministry spokesman Liu Jianchao made the remarks at a regular press conference commenting on the frozen capital of North Korea at BDA. ... He urged the US to negotiate with the MSAR government on the issue to maintain Macao's financial and social stability.

Nothing here about greasing the wheels for the Six Party Agreement. Or doing the right thing by a little bank that got caught in the middle of superpower diplomacy.

China’s talking about the “financial and social stability” of Macau.

That probably means Bank of China Macau.

So Daniel Glaser was called back for what appears to have been ten days of stonewalling during which he refused to lift the threats against Bank of China Macau and other banks handling North Korean money or gold.

His line of defense—in his discussions with perhaps his most determined opponent, the State Department—probably hinged on the fact that Patriot Act 311 enforcement had been sold as an independent U.S. enforcement initiative unrelated to whatever U.N. sanction or Six Party diplomatic process involving North Korea.

If the sanctions against BDA were removed explicitly to facilitate the Six Party Agreement, then the legitimacy of Patriot Act Section 311 investigations—and their intimidating aura of implacable, inexorable malice—would be lost.

And Daniel Glaser and his boss, Stuart Levey, would look like jerks who had been using the pretext of supposed U.S. law enforcement obligations to promote a secret, unilateral, destabilizing North Korea policy under false pretenses.

Which, in my opinion, is exactly what they did.

And now I think the world—and Beijing--knows it.

Which means the credibility of Patriot Act Section 311 investigations is shot. European banks (and governments) leery of the U.S. approach on North Korea and Iran will find it easier to opt out of an explicitly politicized Section 311 investigation and sanctions regime.

And obtaining explicit waiver from Section 311 investigations will emerge as a central theme in trade negotiations between China and the United States (whose team will be led by Levey and Glaser’s boss, Treasury Secretary Paulson).

Nevertheless, Levey and Glaser probably insisted to President Bush that the club of Section 311, exploiting the central position of the United States in the world financial system and shielded from international and U.S. law under the national security aegis, was too powerful a weapon to repudiate for the sake of the Six Party Agreement (indeed, this is an assertion that Glaser and Asher and their advocates have been making with suspicious frequency in public fora).

And perhaps President Bush, himself a big fan of coercive middle-finger unilateralism, backed them, in effect splitting the baby, letting State pursue engagement and Treasury continue with confrontation.

Maybe it was the Chinese and the State Department who blinked, in effect throwing up their hands, ginning up a workaround, proceeding with the Six Party Agreement, and leaving the question of what to do about Patriot Act initiatives against Chinese banks—and the issue of the Treasury Department’s refractory attitude--for Secretary Paulson’s upcoming China trade talks.

Given the general contempt for North Korea and the credulity and sloppiness of most Western reporting on this subject, the only reason that we know or care that the Treasury Department is out to screw the North Koreans no matter what is the embarrassment and chaos its intransigence has brought to American diplomacy.

But now, thanks to the saga of the $25 million that somehow could not make it out of Macau, the narrative emerging from the BDA mess is not of the threat from North Korean supernotes, contraband, or WMDs.

It’s a picture of a U.S. campaign of economic warfare against North Korea, a campaign which may have registered successes in cutting off access to U.S. financial institutions, intimidating European banks, ostracizing North Korea from the London gold exchange, and twisting the arm of the Macau monetary authority to stop BDA and possibly other Macau banks from selling Kim Jung Il’s gold.

And it’s the disturbing picture of a campaign that went too far, stalled and become meaningless except as an unnecessary irritant to China, a crucial world power, because the United States lacked the political will and international support to initiate a high-stakes confrontation with North Korea’s powerful protector over a little country with a little bomb.

Even more disturbing, it’s a picture of a campaign that has been so extensive, so prolonged, so demanding of our allies, so insistent and coercive upon international financial institutions, and so central to American prestige and credibility that we are unable to abandon it and move beyond a campaign of harassment against a tiny bank in Macau—and provocation directed against a country that is central to the United States’ economic and fiscal well-being.

But the true story is not one of confusion, contradiction, and mixed messages in U.S. policy.

The story is one of American shortsightedness.

If North Korea wants to be insulated from the international financial community, all it needs to do is hide behind China’s coattails.

But that’s not what it wants.

North Korea wants to achieve international legitimacy and access to world financial markets. It wants to export directly, attract foreign investment, raise capital on the international financial markets, and sell its gold on the world exchanges.

North Korea doesn’t want to grovel to the Chinese and sell energy, resources, and gold to Beijing at below-market prices.

Quite the opposite.

Returning from North Korea, Bill Richardson noted:

Interestingly, North Korea sees themselves eventually as an ally of the United States; in other words, as an ally against China. They see themselves as playing a strategic role as a buffer between the United States and China.

Every American comes back from North Korea with the same message.

North Korea wants to break free of Chinese domination and align itself with the United States.

And what do we do?

Every time the North Korean dog sticks its head out of its Chinese kennel, we beat it on the snout with a stick—and force it back to the heel of its Chinese master.

And we persist with the policy even when it runs counter to our current diplomatic efforts and security strategy for the region.

It’s a policy that’s blind, self-defeating, and futile.

And now that the U.S. has abandoned a policy of confrontation with North Korea, it’s also become ridiculous.

BDA Comic Relief, Courtesy of NPR

There was a laughing out loud moment in the interview with Christopher Hill on NPR on April 12.

After delivering the talking point that the North Korean issue had “been resolved”, Hill made the interesting statement, “We’ve had serious discussions with the North Koreans about the need to make sure this money does not go back to nefarious people for nefarious purposes”, implying that yes, there are some restrictions placed on the free movement of these funds by the U.S. that justify the use of ironic airquotes around the word “resolved”.

Either because of editing or a certain lack of anchorly focus, the interview abandons this issue for a piece of pseudo-serious bombast by NPR’s Steve Inskeep:

“Do you think you have found North Koreans you can look in the eye and trust?”

Even the least inquiring mind should be capable of realizing that a) the US is in breach of the agreement, having been unable to secure the return of the Macau money in 55 days, let alone the one month we promised b) despite our ludicrous shortcomings in money management we were demanding that North Korea shut down a nuclear reactor in 2 days instead of a month and c) the State Department is desperately spinning this matter so that North Korea and not the US will be blamed if the wheels come off the Six Party Agreement.

Add to that the disturbing impression that the Treasury Department apparently has no qualms about sabotaging an diplomatic agreement between six governments, we might ask, are there any U.S. diplomats that North Korea can look in the eye and trust to deliver on the obligations they have assumed?

So I wouldn't be surprised if Chris Hill chuckled to himself after the interview—and sighed with relief at the credulousness of the US media.

“Do you think you have found North Koreans you can look in the eye and trust?”

Yes, I think that line will occupy a place of honor in my Hall of Fame of Risible Statements—and Chris Hill’s.

BDA Fallout: When Neocons Attack...

The neocons are emerging from their cubbyholes to defend their role in screwing up the Six Party Agreement.

David Asher, whose ostentatious self-promotion as leader of the State Department’s anti-North Korean efforts I have previously critiqued, pontificated on the significance of the BDA case from his new perch at the Heritage Foundation.

Yet for the officials who tracked North Korea's illicit financial dealings and the progress of the law enforcement investigations in the United States, Banco Delta Asia had never been the main offender in Macao.

"The fact is that Banco Delta was an easy target in the sense that it was not so large that its failure would bring down the financial system," said Asher, who is now a senior associate fellow with the Asian Studies Center of the Heritage Foundation.

In comparison with Banco Delta Asia, the information that had been collected on evidence of money laundering by the Macao branch of the Bank of China was "voluminous," Asher said.
Asher insists that the move against Banco Delta Asia was the direct consequence of law enforcement efforts and was not designed as political leverage in talks that were taking place simultaneously with North Korea on nuclear disarmament.

He advocates that efforts to curtail North Korea's links to criminal activity, and to ensure that China joins the enforcement effort, should not be suspended for the sake of expediency in the disarmament talks in Beijing.

"Banco Delta may be a sacrificial lamb in some people's minds, but it is not about Banco Delta," he said. "It's about Macao, Macao's government, China, the Chinese government and their complicity and their accommodative behavior toward North Korea's illegal activities, proliferation activities and leadership financial activities." (Donald Greenlees and David Lague, How a U.S. inquiry held up the N. Korea peace talks, International Heritage Tribune, April 11, 2007)

Hmmm. China China China.

Thanks, David, for confirming that we sought to implicate Bank of China in the BDA case in order to pressure China to come down harder on North Korea.

It’s a miracle the Six-Party Talks got as far as they did.

And it's also no surprise that Treasury's Daniel Glaser was summoned to Beijing March 24 and spent almost two weeks trying to deal with the fallout from whatwe now know was a direct threat to Bank of China.

Here’s what four years of investigations turned up:

According to briefings given in August 2005 by Justice Department officials, Smoking Dragon and Royal Charm produced 59 arrests as a result of more than four years of work involving the use of undercover agents who posed as members of a U.S. organized crime group.

The contraband seized by law enforcement agencies included about $4.5 million in counterfeit $100 bills, sometimes referred to as supernotes because they are so difficult to detect. Other seized items included millions of dollars of counterfeit cigarettes, Ecstasy pills and fake Viagra.

And the bad guys:

When it was over some 20 months ago, it produced dozens of arrests and hard evidence that Chinese criminal gangs had smuggled counterfeit U.S. currency, cigarettes and drugs made in North Korea into the United States.

David Asher bagged 59 Chinese gangsters passing some pills and $4.5 million in funny paper. As a bonus, he threatened Bank of China, one of the largest holders of U.S. government debt with a Patriot Act Section 311 prosecution.

Downside: North Korea pulled out of denuclearization talks to protest the freeze on BDA...

...and got the atomic bomb.

No wonder Asher feels compelled to step up and defend his nonsense.

Maybe someone will actually call him on it.

I’m waiting to see if the State Department will expend more political capital to save the Six Party Agreement—and the U.S. relationship with China--or just give up.

The neocons and the Chinese are no doubt watching too.

To compare and contrast, over the last three years—roughly the term of Asher’s crusade against North Korea--an estimated $8 billion was stolen or wasted by the government of Iraq, and the loot that didn’t end up in Swiss bank accounts was presumably funneled to the insurgents killing U.S. troops.

Un-frikking-believable.

Of course, that’s all behind us now, isn’t it?

David Asher might have thought that threatening Beijing with total financial war was more important than engaging with North Korea and working with China, but Condi purged him from the State Department and the realists have their hands on the wheel now.

Right?

The Six Party Agreement is just rolling along, thanks to the Bush administration’s concession on the BDA accounts.

Or is it?

Moving from past to present, I guess one of the disadvantages of being a despised troglodyte dictatorship is that people get to print arrant nonsense about you in the newspapers:

North Korea had previously seized upon what U.S. officials called mere "technical problems" in transferring the money, through the Bank of China, to stall nuclear disarmament talks. (Choe Sang-hun, North Korea is ready to accept UN nuclear inspectors, International Herald Tribune, April 11, 2007)

Resolving the BDA funds issue by March 14 was supposed to be a confidence-building concession that would be followed by the North Koreans shutting down the Yongbyon reactor 30 days later.

The fact that it is now April 11 and the funds are still in BDA (no confirmation yet that any bank is willing to handle the funds) might lead inquiring minds to the conclusion that it is the United States and not North Korea that is “stalling the disarmament talks”.

But that is apparently not International Herald Tribune reporter Choe Sang-hun’s bent.

The whole thing would be laughable.

Unless we blame the North Koreans for not shutting down the reactor by April 14...and then blame them for the fact that we won’t agree to an extension.

But wait. Choe Sang-hun is on the case!

A potential failure to meet the Saturday deadline for switching off North Korea's atomic reactor is the latest reminder of unpredictability in dealing with North Korea, and it is a setback for the Bush administration, which had hoped for quicker progress.

Actually, if you don’t do something you promised and blame the other side for it, that’s not “unpredictability”. That’s bad faith.

With reporting like this—and the neocons apparently regrouping to do battle—look for the political difficulties of the Six Party Agreement, and obstacles to extending the timeline in response to the BDA, to multiply in the weeks ahead.

Groundhog Day for BDA Funds

Update:

The Washington Post’s Glenn Kessler weighs in with what I regard, in my dyspeptic mood, as an inevitable piece of behind-covering by Treasury officials trying to explain how they couldn’t move $25 million dollars in 12 days.

The North Korean diplomats, meanwhile, resisted the U.S. proposal of setting up a humanitarian fund with the money. They would not fill out forms, provide bank account numbers, or sign waivers that would allow the money to be released to a humanitarian fund. They stuck to a simple message: "We want our money."

The Treasury officials left China thinking no deal was possible...

Not much clarity here beyond an attempt to ascribe the inability to move $25 million to North Korean “show me the money” goofiness.

Recall that the original agreement was that the money would be deposited in a North Korean Foreign Trade Bank account at Bank of China, not some “fund”, and Pyongyang “pledged” to spend it on humanitarian and educational purposes.

The DPRK has proposed the transfer of the roughly $25 million frozen in BDA into an account held by North Korea's Foreign Trade Bank at the Bank of China in Beijing.

"North Korea has pledged, within the framework of the Six-Party Talks, that these funds will be used solely for the betterment of the North Korean people, including for humanitarian and educational purposes. We believe this resolves the issue of the DPRK-related frozen funds.

In other words, the North Koreans would get their money in their account and then they would promise to spend it on the widows and orphans. I expect Kin Jung Il would be on his best behavior and, even if he was stupid enough to blow it on cognac and cigarettes, who cares? We’re trying to de-nuclearize North Korea, not set up the Pyongyang branch of the Ford Foundation to disburse $25 million transparently and effectively.

As to whose idea this was, judging from remarks Daniel Glaser made at a press conference in Beijing on March 19 announcing the “humanitarian and educational” boondoggle, he seems to be saying that it was North Korea’s idea, not America’s:

QUESTION: After saying that it was totally up to the Macanese authorities how to hand over the money, why is the U.S. announcing this?

DEPUTY ASSISTANT SECRETARY GLASER: We had - I was in Macau just on Saturday, and we discussed a number of things with the Macanese authorities. It was an opportunity for us to present the results of the investigation that we had conducted into BDA, and we did that. It was an opportunity to discuss the finalization of the Section 311 rule, and it was an opportunity to discuss the overarching mechanisms that could be used with respect to bringing a resolution to the funds transfer issue. Now this is a North Korean proposal, and both we and the Macanese thought that it was a very promising proposal. So I don't think this is about anyone imposing anything on Macau. I think this works very well for Macau, and I think that they found it to be a promising proposal. It will have to be accomplished in conformity with their laws, and I'm sure it will be.

and

QUESTION: You said you were taking the North Korean proposal as is. This is a North Korean proposal that you have accepted, that the United States had no part in this proposal whatsoever. By doing that are you accepting that this was a problem - an issue with the bank - and that the bank is to blame for this issue, or does North Korea share some of the problem in this whole issue?

DEPUTY ASSISTANT SECRETARY GLASER: This was a North Korean proposal. It was actually put to us in the bilateral working group that we had with them. So yes, it's a North Korean proposal. With respect for who's to blame, I think there's a lot of blame to go around. There were problems with the bank that we've articulated, and we've also articulated problems with many of the account holders. I think that there's a lot of blame to go around.

No “fund” there. And a lot of “North Korean proposal”.

Maybe “fund” is just another example of the sloppy verbiage that the U.S. has been applying to this situation since December, and they were just talking about the North Korean account at BOC.

Or maybe the U.S. (or the Treasury Dept.) decided to throw some more sand in the gears by trying to place new obligations on the Bank of China and North Korea for tracking, disposing of, and accounting for the money through a “humanitarian fund” as we saw fit.

The theme that China, as Bank of China’s regulator, would have “obligations” concerning the account had already made an unwelcome appearance in March.

QUESTION: The fact that these are going into a Bank of China account - does that suggest that China will have some responsibility in ensuring that the funds are used appropriately?

ASSISTANT SECRETARY HILL: I think any regulator has certain responsibilities, and I would put the Chinese in that category, as would any regulator of any bank account anywhere.
...
QUESTION: Who's going to be in charge of the humanitarian funds?

DEPUTY ASSISTANT SECRETARY GLASER: I think the specific modalities of this have yet to be worked out, but it will be probably deposited into a foreign trade bank account at the Bank of China in Beijing. And as we said, we have assurances that it will be used for these purposes - humanitarian purposes. And this is going to be - and these assurances have been made in the context of an ongoing process, an ongoing dialogue. And we are going to use that to make sure that our concerns are addressed and that commitments are lived up to.

Maybe in March, the U.S. expected to be sitting on the sidelines while North Korea floundered in discussions with Macau trying to implement this ridiculous agreement.

After all, a significant chunk of the frozen funds belonged to foreigners involved in North Korean business and one of them, Colin McAskill, had been quite vocal concerning his unwillingness to see his money vanish into the maw of Kim Jung Il’s “humanitarian and educational” venture.

But then the Chinese demanded that the U.S. return to Beijing to iron out the kinks—including obstacles never specified that made the Chinese government unwilling to handle the funds—and all of a sudden Christopher Hill and Daniel Glaser had the job of making the deal work, but couldn’t or wouldn’t git ‘er done.

So maybe the U.S. is trying to claim credit for proposing the “humanitarian fund” because otherwise it would be clear that the Treasury/State team had neither initiated nor accomplished anything positive—indeed had made the North Korean proposal impossible to implement—during the last two dreary weeks in Beijing.

Below is the original post, Groundhog Day for BDA Funds, outlining the apparent lack of progress in resolving the BDA funds situation as of April 11.

Supposedly another breakthrough.

According to Reuters, Sean McCormack said:

"The bottom line is that they [the Macau monetary authorities—ed.] have unblocked these accounts and the ... authorized account holders can withdraw the funds from those accounts," U.S. State Department spokesman Sean McCormack said in Washington.

Here’s what the Monetary Authority of Macao had to say:

The SAR Government of Macao has noted the public statement released by the U.S. authorities in relation to the North Korea funds in Banco Delta Asia. The Monetary Authority of Macao will continue to coordinate all parties concerned in Macao to properly deal with this issue within the parameters of existing legislations. Simultaneously, it expects all parties concerned to come up with appropriate and responsible arrangements respectively.

That's the whole statement.

Wow. Try to curb your enthusiasm, guys.

Back to Reuters:

The Monetary Authority of Macau issued a written statement that made no mention of unblocking the accounts, but Japan's Kyodo news agency quoted an authority spokeswoman as saying account holders could now withdraw or transfer the funds.

A Banco Delta Asia spokesperson also said the relevant account holders were free to do as they wished with the money.

Let’s see what the South Korean media has to say:

South Korean top nuclear negotiator Chun Yung-woo said after a meeting with U.S. chief nuclear envoy Christopher Hill the situation has returned to the status quo ante of Sept. 2005, when the U.S. fingered the bank as a “major money-laundering concern.” Pyongyang can either withdraw the money or carry out banking transactions with the funds, Chun said.

“Status quo ante of September 2005” is, unfortunately, completely untrue.

Prior to Sept. 2005, North Korea was merrily funneling all sorts of money through BDA on its way to other banks and other accounts without restriction.

We’ve really just turned the clock back to March 19, 2007 when Treasury followed up on its no-quarter final decision on BDA under Patriot Act Section 311 by ostentatiously washing its hands of BDA and announcing that the matter of the frozen accounts was “between the North Koreans and the Macanese”.

A more accurate description was that “we spent three weeks running in circles and ended up right where we had started”.

They could make a sequel to the movie Groundhog Day, in which Christopher Hill has to relive the BDA fiasco in perpetuity.

The money’s there but no other bank dares accept it--presumably because of Treasury Department shenanigans--according to the South Korean report referenced above:

North Korea had been demanding that all the assets are transferred to the Bank of China, which refuses to handle the North Korean money.

What sophisticated maneuvers did Daniel Glaser come up with during his two weeks in Beijing to “implement” a way out of the difficulties that the Treasury Department had created?

Apparently nothing.

Certainly not the written waiver for Bank of China to handle the funds that I thought Beijing would get.

And apparently Secretary Rice was unable to muster the political will or clout to get Glaser’s boss, Henry Paulson, to overrule him. That’s perhaps the most significant and disturbing element.

Absent assistance from Treasury, Christopher Hill’s solution is apparently for Pyongyang to send some guy over to pick up a suitcase full of cash, neatly recapitulating the way a lot of North Korean money made it to the bank in the first place.

North Korea will probably have to withdraw US$25 million of unfrozen funds from the Macau-based Banco Delta Asia in cash. A South Korean government official on Sunday said the North wanted the money transferred to an overseas bank account, “but realistically there are too many difficulties. Both the U.S. and China are of the opinion that everything should be discussed between Macau authorities and North Korea." A diplomatic source said despite a visit to China by U.S. Deputy Assistant Treasury Secretary Daniel Glaser, Washington and Beijing have failed to find a solution in the way North Korea wants. “To my understanding, the U.S. and China instead reviewed ways for North Korea to open a new separate account at BDA and withdraw the money, and have suggested this to North Korea." The source said the practical way would be allowing North Korea to withdraw the money after providing details about the account holder, or do so after opening an integrated account at BDA.

In a recent meeting in New York, the U.S. chief nuclear negotiator Christopher Hill put the suggestion to the deputy chief of North Korea's UN mission Kim Myong-gil. But it is unclear whether North Korea will accept. Chun Yung-woo, South Korea's top negotiator at the six-party nuclear talks, recently said the North apparently wants to open an overseas bank account to withdraw the money in cash. But sources say even if Pyongyang accepts the suggestion, it would still take a considerable amount of time because North Korea has to undergo procedures like identifying the account holder before it can withdraw the money.

And what about the legit account holders, like Colin McAskill’s DCB bank? No clean bill of health for that $6 million? He’s got to get his money back through Kim Jung Il?

Sheesh.

In other words, after all this rigamarole, it looks like the timeline for “resolving” BDA and shutting down the Yongbyon reactor won’t be met.

And Sean McCormack is apparently spinning haplessly trying to cover up the fact that we couldn’t resolve the BDA matter as we promised and the timeline for executing the Six Party Agreement is about to slip out of our fingers.

One doesn’t have to be a fan of the Six Party Agreement to be concerned about how this inability to live up to the terms of an agreement concerning a piddling $25 million will affect perceptions of America’s good faith in pursuing diplomatic engagement with regimes it dislikes—not just North Korea, but the big one, Iran.

I hope we don’t have to take this as a sign that the Bush administration’s short-lived enthusiasm for diplomacy with the axis of evil has already evaporated, and we can expect military strife with Iran after all.

Environmental Cat--astrophe

Does the trail of tainted pet food lead to a fertilizer plant in Shandong?

America is much abubble concerning a mysterious string of pet deaths and illnesses.

Dogs and cats have been keeling over with kidney failure, apparently caused by pet food.

The smoking gun concerning the pet food connection may very well be the lone human casualty, a woman in Ottawa who bravely and almost fatally consumed her pet’s dog food in order to coax the recalcitrant mutt to eat its dinner.

As reported in the March 25 National Post, Woman sick after eating tainted pet food, by Melissa Arseniuk:

"I was trying to get her to eat," Ms. Larabie said, but Missy’s protest continued. Desperate, Ms. Larabie tried "just a little bite" of the Iams dog food to make the terrier think it was people food, then gave Missy the rest.

"I said, 'It’s not going to kill me to take a little bite' ... but I guess it could have," said Ms. Larabie...
...
The mealtime routine continued for about two weeks, until both dog and master became sick on March 17.

She—and her initially prudent but ultimately gullible dog—ended up under emergency medical care:

In this case, a canine and its master wound up in hospital — Missy at the Alta Vista Animal Hospital and Elaine Larabie at an after-hours emergency room.

"I thought I caught a virus, but then I realized I ate the food, and put two and two together," Ms. Larabie said.

For three days, she suffered a range of "confusing" and "embarrassing" symptoms, including loss of appetite, vomiting and foaming of the mouth. She also had problems urinating.

Pet food is being swept from the shelves in recalls, and there are dark suspicions of thousands of pet fatalities and millions of dollars in legal damages in the offing.

China comes into the picture because contaminated Chinese wheat gluten is the focus of US investigations.

The gluten’s exporter of record is one Xuzhou Anying Biologic Technology Development Company.

It doesn’t produce wheat gluten but, in return for its investment in production of other vegetable-based protein powders, it apparently has trading rights to export wheat gluten and other feed additives.

Anying has discretely removed wheat gluten from its product list, but its offering survived on one of the innumerable Chinese on-line bulletin boards meant to facilitate business-to-business commerce (the magnificently named “Ubiquitous Value Network”; last I checked the server was down, but I had previously printed out Xuzhou’s solicitation to sell).

The spec is distinctive, a low quality material with wet-based protein > 64%, dry base > 66%...you get the picture.

Anyway, the only place I could find offering that identical spec was an outfit in north-central Shandong, called the Binzhou Rongchang Biologic Technology Development Corp 滨州荣昌生物科技有限公司 .

Binzhou is in a wheat-producing area crisscrossed by tributaries of the Yellow River, with two large flour mills.

Unlike Xuzhou, Rongchang bills itself as a producer (and not just exporter) of wheat gluten (谷朊粉to the trade).

Not a 100% lock but certainly a good possibility that the wheat gluten came from Binzhou.

Having come up with a defendable hypothesis for the source of the wheat gluten, China Matters will engage in risky speculation.

Fortunately, we are not alone. The pet food poisoning has been something of a puzzle for a lot of experts.

Labs have been picking over the wheat gluten but have been unable to identify an unambiguously toxic component.

A lab at Cornell originally declared on March 23 that it had detected aminopterin—identified as a rat poison--in the wheat gluten.

That sounded promising: wheat + rats + poison + sloppy housekeeping = contamination.

But it turns out that aminopterin is an anti-leukemia drug. Its identification as a rat poison in actual use is a canard, based on a reference from an American Cyanamid patent.

According to the ASPCA, the descriptions of distress they are hearing aren’t consistent with aminopterin.

Also, the FDA couldn’t find aminopterin in its wheat gluten samples.

What they did find was melamine—up to 6.6% contamination, with the crystals “clearly visible” . And there were reports that melamine crystals were found in the kidneys of some deceased pets.

Problem is, melamine isn’t considered to be particularly toxic.

So scientists are theorizing about how the nitrogen in melamine somehow got converted into some highly toxic derivative that smoked the victims’ kidneys.

Well, what interested me about the whole issue was my mis-spent youth, much of it spent in Chinese grain and chemical plants.

Wheat gluten and melamine really don’t go together.

For one thing, melamine is considerably more expensive than wheat gluten. No unscrupulous exporter is going to cut wheat gluten with melamine to increase his profits.

Second, wheat gluten is produced in wheat milling plants in China’s grain handling and processing network using an old and simple technique. Then the stuff is bagged and sold to food and feed processors.

Users rely on wheat gluten’s ability to absorb a great deal of water and become sticky to make their products—like pet food—all yummy-gummy instead of slurping out of the can in disgustingly distinct streams of fat, water, innards, cereals, and whatever else goes in there.

There’s an international demand for wheat gluten, it’s one of the more profitable outputs available to the traditionally impoverished grain processors in China, and so Chinese plants are pretty keen to make it.

Melamine is produced in a chemical plant—in China, usually in a urea fertilizer plant under the chemical industry bureaucracy—using a relatively sophisticated process. Some of it is used as a fire retardant or fertilizer; most of it is shipped to plastics plants, where it’s polymerized with formaldehyde and turned into products like disposable plastic cutlery.

I’m pretty sure that both these products—relatively valuable and meant to be free of contamination—are bagged on site where they are produced. It’s quite unlikely that they would be shipped in bulk by rail car or, even if they were, that wheat gluten would end up in a chemical bulk car and get contaminated.

So, finding melamine in your wheat gluten is like opening your box of corn flakes and finding a fistful of moonrocks inside. It could happen—apparently it did happen—but it doesn’t seem likely.

I do have a theory.

There is one common thread between wheat gluten and melamine:

Water.

Wheat gluten production uses a lot of water. After the wheat kernel is broken up in the dry mill, a water wash separates the insoluble wheat gluten from the soluble wheat starch. Then the globs of wheat gluten are screened off and go through a drying process. Any insolubles in the water could be concentrated in the gluten.

The melamine production process happens to produce a lot of melamine-laced effluent water.

Melamine has low solubility in water, biodegrades poorly, and tends to hang around in the environment.

For the purposes of my theory, it is highly advantageous that upriver of Binzhou is the Shandong Mingshui Great Chemical Group, whose urea plant--one of China’s ancient, 1958 vintage demonstration plants-- also produces melamine.

I must now hasten to add that I do not know about conditions at these two plants. I don’t know if the two plants share a water source, if there are significant quantities of melamine in Mingshui’s effluent, or how the wheat gluten plant in Binzhou treats its incoming process water.

But right now, I’d say that the theory of impurities in the wheat gluten through use of melamine-contaminated process water looks as good as any.

From Illogic to Idiocy to Ignominy: Is the Hegira of the North Korean $25 Million Finally Over?

$25 million in accounts related to North Korean entities on deposit at Banco Delta Asia that were frozen by Macau’s monetary authority after the United States Treasury Department announced that BDA was a bank of “primary money laundering concern” looks like it’s finally headed to a North Korean account at Bank of China.

Maybe.

On April 5, the State Department announced that a “pathway” had been established for returning all of the $25 million.

That pathway apparently leads out of a maze of obstacles erected by the Treasury Department.

Interested observers will note an interesting theme in the reporting:

From Warren Strobel at McClatchy:

The administration appears to be united now that North Korea will receive all $25 million. Earlier this year, top State and Treasury department officials had suggested that only a portion of the money would be returned.

But McCormack said Friday, "We have arrived at the point where we . . . have expressed our support for release of all the funds."

The Treasury Department said it had "communicated its support for the release of all funds."

From the New York Times:

When United States officials announced a deal in mid-February under which North Korea agreed to freeze, and ultimately dismantle, its main nuclear complex, they said they expected that the illicitly gained money would still be withheld by the authorities in Macao.

I thought I was following this issue reasonably closely. I don’t recall any public statement from the U.S. along the lines of “North Korea’s not going to get some of the money back”.

Quite the contrary, in fact.

The buzzword was “resolving” the BDA issue, with the “details to be worked out between the North Koreans and the Macanese authorities”.

Of course, thanks to the Treasury Department, things hadn’t been going too smoothly.

First in a fit of passive-aggressive noodgery, Treasury withheld the final decision on BDA—which was needed by Macau in order to determine the ultimate regulatory status of the bank and dictate how the frozen accounts should be disposed of—until the absolute last day negotiated by the United States and North Korea: March 14.

The decision itself was a scorched earth condemnation of BDA, the accounts at BDA, and the North Korean government. The North Koreans might have entertained hopes that “resolution” of the BDA issue might have been shorthand for “cessation of U.S. activities to U.S. activities to ostracize North Korea from the world financial community”, but these hopes were certainly dashed by the Treasury decision.

But all in all, the North Koreans swallowed their disappointment and took it reasonably well.

And they waited for the BDA money to show up.

Initial public statements intentionally gave the impression that everything was hunky-dory.

Treasury’s undoubted concerns about the nature and destination of the funds were supposed to be addressed by plunking the money in a kind of escrow fund for “humanitarian and educational purposes”.

There’s no hint that moneys will be withheld.

In fact, here’s what the Treasury Department statement said on March 19:

"The DPRK has proposed the transfer of the roughly $25 million frozen in BDA into an account held by North Korea's Foreign Trade Bank at the Bank of China in Beijing.

"North Korea has pledged, within the framework of the Six-Party Talks, that these funds will be used solely for the betterment of the North Korean people, including for humanitarian and educational purposes. We believe this resolves the issue of the DPRK-related frozen funds.

"The disposition of the frozen assets has always been and remains a decision by the Macanese authorities to be taken in accordance with Macanese law. North Korea will need to work out the legal and technical intricacies of the arrangement with the Macanese. The Treasury has communicated to both the Macanese and Chinese Governments the United States' support of this arrangement.

And here’s what Hill and Glaser said in response to questions at the press conference in Beijing announcing the statement:

QUESTION: So does this mean that all the money is being released? Does this mean none of the money was involved in illegal activities?
ASSISTANT SECRETARY HILL: What this means is the North Koreans, the DPRK, understood our concerns and are prepared to cooperate with us to make sure this money is used appropriately.
QUESTION: Mr. Glaser, do you not have any concerns that this might send the wrong message, saying that all the money was involved in illicit activities?
DEPUTY ASSISTANT SECRETARY GLASER: No, I think the message at this time is, as I said in the prepared statement, first of all, the broad message that I think it sends, is that we will not be tolerating illicit conduct by financial institutions in the international financial system. With respect to the actual disposition of the funds, I think it's important to look where we were eighteen months ago and look where we're going now. Eighteen months ago, these funds were in a bank that did not have adequate anti-money laundering protections and that was facilitating illicit activity. There was very little being done about it. Eighteen months later, the bank is under responsible management, and we have received assurances that the funds are going to be transferred to an account in Beijing that can allow them to be used for humanitarian purposes, for educational purposes.

I think that's a great success. It's all part of an ongoing process to work with North Korea on trying to address what we've said before are a lot of the fundamental underlying concerns of the international financial community.

Great success!

In retrospect, I suppose what he really meant was “great success in sticking a finger in North Korea’s eye while claiming it’s Macau’s faults so that the Six Party Agreement will collapse over $25 million in contested funds”.

Diplomacy is all nuance, I guess.

Nevertheless, when Christopher Hill negotiated the agreement with North Korea about “resolving” BDA as the first, critical confidence-building step, I don’t think his intention was to play word games and endanger the Six Party Agreement with a “gotcha! You’re not getting the money back after all!”.

So I call “nonsense” on the assertion that it was a matter of understood U.S. policy that the North Koreans weren’t supposed to get that money.

In fact, a focus of concern at the press conference was precisely the opposite: “why should licit business accounts improperly frozen because of a North Korean relationship be ‘returned’ to North Korea instead of released to the account holders” i.e. why should North Korea get all the money?

The DPRK pledge to spend the money on humanitarian and educational purposes—which they presumably agreed to as a gesture to help the U.S. save face—was completely illogical.

At least a third of the money was untainted by conventional standards, some of it belonging to a British-American Tobacco joint venture whose laudable purpose is to poison the North Korean elite with its potent and addictive cigarettes.

And what about account holders like Colin McAskill, who bought controlling interest in the Daedong Credit Bank, a North Korean institution that saw $7 million of its money frozen in BDA?

Arguing that this money is legit, McAskill is not unreasonably demanding that the Daedong money be carved out from the sanctioned accounts and, instead of being transferred to the Bank of China account of the North Korea’s Foreign Trade Bank—and squandered on DPRK humanitarian and educational purposes instead of used to clear whatever transactions it was involved in before it got stuck in the BDA quagmire--be allowed to disappear in an innocent, fungible way into the world banking system.

Well, did Treasury step up and say, legitimate account holders should get their money back, illegitimate money should be frozen, and the North Koreans will spend what’s left on humanitarian concerns?

Back to that press conference.

QUESTION: But it is not only North Korean Government but also the 50 account holders. All of them agree with this agreement? I mean, you know, the money to be used for the humanitarian assistance? Because the bank holders are not only North Korean government, right?

DEPUTY ASSISTANT SECRETARY GLASER: That's right. There are non-North Korean Government account holders, and again, this will have to be conducted within Macanese law. And I'm sure the Macanese and the North Koreans - I'm sure the Macanese will discuss it with the North Koreans and explain to them exactly what needs to be done to accomplish this.

ASSISTANT SECRETARY HILL: We're not here to explain Macanese laws and procedures. What we're here to do is explain our role, and the fact that we've concluded our role.

Not a lot of straight talk here. A lot of trying to hide behind the Macau Monetary Authority.

Thanks to the current spin that “not all the money was supposed to be returned”, at least we are receiving backhanded confirmation that, when Dan Glaser went to Macau in mid-March to “brief the Macanese monetary authorities on the determination and the evidence from Treasury’s investigation”, he was not expediting the Six Party Agreement.

In fact, the “S” word—“sabotage”—might be more appropriate.

He was really trying to get Macau to withhold some of the money and, in a rather graceless fashion, have Macau take the heat for an action that the world’s only superpower—or at least a faction within the Treasury Department of the WOS-- was unwilling to publicly take responsibility for.

That makes this statement from the March 19 press conference look kinda hypocritical:

"The disposition of the frozen assets has always been and remains a decision by the Macanese authorities to be taken in accordance with Macanese law. North Korea will need to work out the legal and technical intricacies of the arrangement with the Macanese. The Treasury has communicated to both the Macanese and Chinese Governments the United States' support of this arrangement.


As to whether the Macau authorities were enthusiastic and independent participants in this vendetta against BDA, or were tormented by the legal, fiduciary, and ethical implications of sending $25 million to the dictators of Pyongyang c/o an account in Beijing in support of an agreement that was supposed to save the region from an existential nuclear threat...

...it should be noted that the Macau authorities were not at all happy with the Treasury investigation and its characterization of the bank and its accounts.

In fact, prior to the draconian final Treasury decision, BDA was expected to be passed from its government receivers back into the hands of its owners with upgraded controls and a clean bill of health.

We can also safely say that Macau would have had absolutely no problem with shoveling the whole $25 million out the door, in order to close the books on this unpleasant episode and in order to please the Chinese government and expedite the Six Party Agreement.

In circumstances like this, $25 million is not a lot of money.

In order to make the deal work, Macau could have sent the $25 million to the North Korean account and indemnified BDA against claims by any legitimate account holder who showed up and could reasonably complain that his or her money shouldn’t have been shunted off to the North Korean government.

Now, with the admission that the US didn’t expect all the money to be sent back, we can state fairly confidently that, yes, Treasury was trying to stop the money at the Macau end but Macau didn’t play ball.

When the cooperation of Macau seemed less than wholehearted, Glaser perhaps made the tactical error of pulling out the big stick by declaring that any bank that handled funds Treasury deemed tainted would face the threat of a Patriot Act 311investigation of its own.

Since the intended recipient of the funds was none other than Bank of China, instead of caving, Macau got on the phone to its masters, and Glaser was on the next plane to Beijing.

Support of this thesis comes from the fact that, when the money didn’t show up—and the North Koreans walked out of the Six Party talks--there was no more of that “North Koreans have to talk to the Macanese” frou-frou.

Daniel Glaser had to come to Beijing to help “implement” the agreement—and, I suppose, explain to a rather grim-faced collection of Asiatics that what he had really meant by “implementation” was that he really didn’t want much of the money returned after all.

That perhaps made for some awkward moments.

I assume the Chinese demanded an explicit written waiver from the Treasury Department stating that Bank of China would be subject to no investigations or potential sanctions stemming from its role in handling the North Korean funds.

Given what we can gingerly characterize as Treasury’s bad faith in implementing the Six Partry Agreement, it would not be surprising that there was non-stop weaseling by Treasury in trying to assert its continued involvement in the BDA money, or that the Chinese demanded the most categorical, explicit, and uncaveated waiver possibly.

Treasury’s last riposte might have been attempting to assert that Bank of China has a special regulatory obligation, beyond normal due diligence and including special investigative and administrative actions, to monitor the flow of these funds out of the North Korea Foreign Trade Bank account.

In that March 19 press conference, Glaser had stated:

QUESTION: How do you verify the money will be used properly for humanitarian and educational purposes? How will the United States verify?

DEPUTY ASSISTANT SECRETARY GLASER: As I said, there are no guarantees in this, and we're embarking into this in the spirit of an ongoing process. We have received assurances. We're expecting that the assurances will be lived up to. We will be engaged in an ongoing dialogue, and we're going to have to take it from there. If North Korea wants to have access to the international financial system, they're going to have to start getting used to working productively with other members of the international financial system. Hopefully this is something that's going to be beneficial for everybody. We're going to continue to work with them. The funds are [to be deposited] in a Chinese bank, as Ambassador Hill said, regulated by Chinese regulators. We expect that people will live up to their obligations. [emphasis added]

Therefore, in addition to slapping down Patriot 311-related culpability for handling dirty money, I expect the Chinese government would also demand a written waiver that Bank of China would be exempt from special investigatory obligations or hazard relating to monitoring the expenditure of the money under the Six Party Agreement once it came into the account.

So I think Daniel Glaser spent two weeks in Beijing unsuccessfully searching for a face-saving formula that would avoid undermining his precious Patriot Act 311 powers or at least make more palatable the issuance of a formal U.S. government undertaking that it would close the books once and for all on the BDA money and not care where it went, who it went to, or if it was unfair or illegal.

Perhaps he had to sign off on each account individually, arguing down the list of 50 account holders individually and probably losing on most if not all of them.

The Chinese would have had the upper hand, knowing that the collapse of the Six Party Agreement would be laid at Treasury’s door—and reveal the United States as the superpower that could not honor the commitments of its diplomats.

That’s not a place the State Department—or the Bush administration--want to be, especially as the diplomatic and public relations campaign against Iran heats up.

And the State Department was happy to let Glaser twist in the wind, squandering his valuable time and precious prestige trying to wriggle his way out of his predicament as punishment for Treasury’s virtually overt attempts to sabotage the Six Party Agreement.