Did Misapplication of Patriot Act Section 311 Investigations Lead America into a North Korean Cul de Sac?

A relatively obscure advisory on the Department of the Treasury website offers evidence of the hardliners’ determination to implement a financial blockade of North Korea in 2005-2006.

On December 13,2005, two months after the Patriot Act Section 311 investigation against BDA was announced, Treasury issued an advisory entitled Guidance to Financial Institutions on the Provision of Banking Services to North Korean Government Agencies and Associated Front Companies Engaged in Illicit Activities.

It stated :

This advisory warns U.S .financial institutions that the U.S. Department of the Treasury has concerns that the Democratic People’s Republic of Korea (“North Korea”), acting through government agencies and associated front companies, is engaged in illicit activities and may be seeking banking services elsewhere following the finding of Banco Delta Asia SARL to be a financial institution of “primary money laundering concern”.

Accordingly, U.S. financial institutions should take reasonable steps to guard against the abuse of their financial services by North Korea, which may be seeking to establish new or exploit existing account relationships for the purpose of conducting illicit activities...We encourage financial institutions worldwide to take similar precautions.

An international financial newsletter summarized the advisory for its subscribers with the comment:

We encourage financial institutions worldwide to take similar precautions as those contained in the Advisory. The Department of the Treasury is actively monitoring this situation and will take any further action to protect the U.S. financial system as appropriate.

This advisory would seem to be the missing link between an enforcement action targeting one ostensibly misbehaving institution in Macau and a broad based effort to cut North Korea off from the world financial system in the service of diplomacy, regime change, or something in-between.

The advisory is explicitly linked to the action against BDA, with the clear implication that banks that allow transactions through existing North Korean accounts, or allow the opening of new North Korean accounts will find their heads on the chopping block next.

Connecting the dots from the Banco Delta Asia precedent, it is apparent that the threat to other banks would be a Patriot Act Section 311 investigation like the one announced against BDA, which had sparked a run on the bank, its takeover by Macau regulators, the freezing of 51 accounts linked to North Korea at Treasury’s request, and what turned out to be 18 months of legal limbo.

Examining how that advisory was put into effect illustrates the legal and diplomatic pitfalls of exploiting Patriot Act Section 311 investigations as a tool of de facto economic sanctions, and provides a perspective on the embarrassing three month fiasco of Banco Delta Asia’s “tainted” funds.

The Treasury Department has always taken pains to indicate that the Patriot Act Section 311 investigation against BDA was “not a sanction”.

That’s probably because a PA 311 investigation, as was later revealed to the Bush administration’s chagrin, is not a particularly applicable or appropriate tool for applying economic sanctions against a country or even against a targeted account holder.

Patriot Act Section 311 is meant to be applied selectively by the United States in response to conditions at specific financial institutions and legal jurisdictions in order to perfect and maintain the integrity of the US financial system.

It isn’t a sanction, and it is not a viable substitute for explicit, enforceable, and rescindable global U.N. sanctions—legitimized by transparency, negotiation, and international buy-in--against an outlaw regime.

The target of a PA 311 investigation is a bank or jurisdiction whose anti-money laundering (AML) laws, processes, or controls are deemed inadequate by the Treasury Department.

At the heart of anti-money laundering is the demand that financial institutions “Know Your Customer” (KYC) and use due diligence concerning the identity of its accountholders and the sources and destination of their monies in deciding whether to open and maintain accounts or handle transactions.

Understandably, Patriot Act Section 311 says nothing about freezing accounts in foreign banks overseas, or prohibiting them from handling funds outside U.S. territory. The U.S. government can’t do that, for reasons of jurisdiction, sovereignty, and due process.

However, it’s easy—perhaps too easy—for the U.S. government to use the threat of a Patriot Act Section 311 investigation to exploit the risk averse character of overseas banks and discourage them from doing business with certain customers.

Banks around the world are guided by U.N. and national sanctions lists, their own law enforcement agencies, and private sector firms like World Check to decide which crooks, kleptos, terrorists, and proliferators should be barred from their institutions.

They also rely on the United States, which considers itself the lawgiver in international finance, is very much the moving spirit behind efforts to create a seamless worldwide information web to snare money launderers, and maintains a aggressive, high profile intelligence operations—FinCEN and OTFI--to support its AML activities.

But it looks like the PA 311 process got hijacked by OTFI (Office of Terrorism and Financial Intelligence, run by Stuart Levey and Daniel Glaser with the stated intention of using these tools aggressively against America’s enemies) for some serious Nork bashing.

And it also looks like OTFI put Treasury’s credibility—and the legitimacy of the Patriot Act Section 311 process—at risk for a dubious cause, threatening overseas banks with destruction in the service of a unilateral U.S. North Korea policy that had not even been clearly articulated within the administration, let alone announced and explained to the world.

In this situation—a policy muddle and a secretive effort to misapply an existing regulatory capability to a secret and perhaps unrealistic objective—it is understandable that OTFI had to drive the point home in person to foreign banks too obtuse or bewildered to get the message.

Subsequent to the issuance of the December 2005 advisory, Stuart Levey and Daniel Glaser roamed the earth putting the fear of the U.S. Treasury into banks that otherwise might have been willing to give North Korea the benefit of the doubt and do some business.

As reader LR kindly pointed out to me, Congressional Quarterly reported that one Boiko Borissov, a leather-jacketed oaf who is positioning himself to become our treasured asset in Bulgaria, found out that America’s appreciation does not encompass letting his girlfriend’s bank play footsie with Pyongyang:

During a private meeting in Washington last February [2006—ed.], Deputy Treasury Secretary Robert M. Kimmitt warned Bulgaria’s Finance Minister that the Economic and Investment Bank (EI), chaired by the girlfriend of powerful Sofia mayor and presidential aspirant Boiko Borissov, was a target of a North Korean money-laundering effort.

And let’s not forget Mongolia:

Mongolian cabinet ministers, senior officials, and representatives of the banking and financial sectors met with Daniel Glaser, U.S. Treasury Deputy Assistant Secretary for Terrorist Financing and Financial Crimes, during his recent visit to Ulaanbaatar to discuss how possible money-laundering, counterfeiting, and smuggling activities in the country could be stopped.
...

It is believed that he also met with representatives of local commercial banks and non-banking financial institutions. Onoodor daily reported on Tuesday that some Mongolian commercial banks were under suspicion of involvement in North Korean money-laundering, smuggling and counterfeiting activities.

...
“Mr. Glaser discussed U.S. actions to protect the international financial system from abuse by North Korean or other entities engaged in illicit activities. He commended Mongolia for its commitment to ensure its financial system is not abused by North Korea to facilitate such activity. He also discussed the importance for Mongolia to implement an effective anti-money laundering/counter-terrorist financing regime that included a strong legal framework as well as financial supervision and regulatory systems that meet international standards,” the statement said.

Following the Onoodor report that North Korea may have deposited large amounts of money in a Mongolian commercial bank after the USA had frozen certain accounts in Banco Delta Asia, an official from the Golomt Bank told the daily that “no investigation in relation with illegal smuggling of cash deposit has been made at the Golomt Bank. Such misleading media reports against Golomt Bank are being made on purpose to mislead both our local and foreign customers so that they might lose confidence in us.”

Daniel Glaser’s boss, Stuart Levey, rang the changes on Vietnam.

Hanoi, about to host the APEC summit that signaled its new eminence in Asian and world affairs, apparently obliged with alacrity.

From the August 23, 2006 Financial Times :

Vietnamese authorities on Wednesday said only that they were investigating US allegations that North Korean funds had been parked in accounts in the country.

But Peter Beck, a North Korea expert with the International Crisis Group, said he was told by the expatriate general manager of North Korea’s Daedong Credit Bank, Nigel Cowie, that Vietnamese banks shut the North Korean accounts several weeks ago.

The step followed a visit to Hanoi by Stuart Levey, the US Treasury official overseeing Washington’s crackdown on international banks working for North Korea.

And for good measure, Singapore felt some heat:

Since the North Korean regime lost the window on the world's financial institutions that it maintained through banks in China's Special Adminstrative region in Macau, the DPRK has accessed Western banks through a bank in Singapore. This information was made public this week in South Korea, and was reputedly obtained from a reliable United States source.
The name of the Singaporean bank has not been disclosed to the public, but it was stated that it is on an American "watch list." In the recent past. American authorities have chosen to leak important information about North Korean banking activities through South Korean media.

So there's a "watch list". Maybe getting put on the "watch list" is a warning to shape up or else the Section 311 hammer gets dropped.

Indeed, in response to OTFI’s AML crusade, even the North Koreans got into the act, passing their own anti-money laundering law.

Laughable perhaps, it represents another ignored attempt by North Korea to engage Washington on this issue, which was probably at the core of Treasury’s strategy for most of 2005 and 2006:

The legislation, adopted by the standing committee of the North's Supreme People's Assembly in October last year[2006—ed.], bans financial transactions involving illegal earnings, NIS [South Korea’s National Intelligence Service—ed.] said.

The law pertains to earnings from illegal trade in drugs, counterfeit currencies, weaponry, real estate and precious metals, it said.

It also obliges North Korean financial institutions to stop allowing bank accounts under any alias; to verify suspicious funds, and to report money laundering cases, NIS said.

"The North Korean enactment seems aimed at settling the BDA (Banco Delta Asia) issue by introducing a transparent institution to meet the international standards in its financial transactions," it said.

A general picture emerges.

The December 2005 Advisory appears to represent an overt politicization of Patriot Act Section 311 actions.

Instead of targeting individual banks or jurisdictions for derelictions in their anti-money laundering controls, Treasury appeared to overstep its Patriot Act Section 311 mandate by telling banks overseas—in the absence of international or national sanctions or local enforcement actions—not to do business with any North Korean account holders or else suffer under the U.S. assumption that they are money laundering.

I’m speculating—and I don’t think I’m out of line here—that there were sticks brandished (i.e. threats of Patriot Act Section 311 actions).

To make sure life becomes very difficult for North Korea, OFTI dispatched Stuart Levey and Daniel Glaser to the obscure corners of the world to tell little banks that might welcome some Nork business to back off (and it is perhaps significant that we never heard much about successful moves against China and Russia, North Korea’s main banking partners).

This high-powered whack-a-mole strategy was clearly in the service of a diplomatic (or undiplomatic) strategy of financially isolating North Korea, as opposed to efforts to perfect the web of international AML laws, procedures, and alliances.

I’ll also speculate that, since this was a foreign policy power play against North Korea and not a straight, above-board enforcement action against non-complying banks, that the documentary support for U.S. demands may sometimes have been a farrago of allegations, expedient assumptions, and selectively edited data that the Brits would characterize as a “dodgy dossier”.

In the Bulgarian case, the head of the bank called out the U.S. Treasury Department, which apparently did not back up its allegations of North Korean activity with any hard evidence.

EI Bank board Chairwoman Tsvetelina Borislavova... said the tip was based on “false information” concocted by political enemies of her boyfriend Borissov...
Borislavova said the bank had thoroughly investigated the allegation and found that “there has never been any account opened by a North Korean company or a joint venture company” in the bank.
...
Borislavova added angrily that she was “disappointed that high U.S. officials had passed along false “rumors” and ”gossip” about North Korean involvement with the EI bank, Bulgaria’s second largest.

She singled out [Treasury Deputy Secretary] Kimmitt for criticism, saying “the next time” U.S. officials repeated such allegations she would “make a statement to the U.S. ambassador” in Sofia.

A Treasury official at first declined to discuss the particulars of Kimmitt’s meeting with the finance minister, saying such details were “classified.”

But informed of Borislavova’s remarks, the official e-mailed a statement on condition of anonymity. “Deputy Secretary Kimmitt and Minister Orescharski discussed our mutual obligations to protect the global financial system from the illicit conduct of North Korea and Iran, pursuant to U.N. Security Council Resolutions,” it said.

“Both officials reiterated the need to remain vigilant in making the financial system inhospitable to illicit money flows.”

Not much of a rebuttal. The article continues:

Whether Bulgaria’s own financial investigators had uncovered evidence of North Korea’s alleged interest in the EI bank could not be learned.

Not much so far. Well, what juicy tidbits did get leaked to the Congressional Quarterly to explain the case against EI?

Apparently a third-party private report for a Swiss concern:

The 3-inch-thick report, compiled by a team headed by a former top U.S. law enforcement official, also said Sofia Mayor Borissov had “a documented history of business affiliations with persons who are alleged to be the top leaders of organized crime in Bulgaria.”

The dossier included details on suspected criminal associates of Borissov, who years ago was chief bodyguard for Bulgaria’s last communist dictator. It also lists 28 underworld-connected “assassinations” that remained unsolved during his four-year stint as chief of staff of the Interior Ministry.

In other words, plenty of tittle-tattle about what a dirtbag Borissov seems to be, but apparently nothing about North Korea.

In the Mongolian case, if we were providing intel to the local regulators, it was apparently not of the best:

A member of the U.S. Treasury Department delegation, who had been a Peace Corps volunteer in Mongolia in 1998-2000, told Onoodor in a telephone interview that they “met the President of Bank of Mongolia and representatives of 13 commercial banks of Mongolia, to talk about money laundering.”

Some Mongolian commercial banks have correspondent links with North Korean financial institutions. Some officials of the North Korean Daedong Credit Bank (DCB) were arrested by police and intelligence agents at the Chinggis Khaan International Airport in Ulaanbaatar on February 21, 2006, and charged with importing counterfeit currency to the country. The North Koreans, who all held diplomatic passports, said the US$1 million and JP¥20 million that they were carrying was meant to be deposited at the Golomt Bank. The entire amount was taken to the Bank of Mongolia, where the authenticity of the currency notes was checked.

The bank later claimed that the accusation of counterfeit notes had been proved false. In a press release, it said, “On March 7, after holding the cash for 14 days claiming they were still checking it, Mongolian intelligence officials in a meeting with DCB representatives finally conceded that all the notes were genuine; the cash was released. The money was deposited with the Golomt Bank of Mongolia on March 9, as had originally been intended.”

Nigel Cowie, general manager of Daedong Credit Bank, wrote on an Internet web site that the “funds were the proceeds of legitimate business activities by DCB’s known foreign customers, and Daedong Credit Bank followed all the laws and procedures required by Mongolian authorities for such cash deposits. The seizure of the funds, and the subsequent leaking of false information to the media, damaged the reputation of both Daedong Credit Bank and the Golomt Bank of Mongolia.

“We discussed in detail with them [Golomt Bank officials] procedures for handling cash transactions in a legally correct manner. We also provided them with a copy of our anti-money laundering procedure manual, a manual that, incidentally, had been accepted by our other correspondent banks.”

The DCB opened accounts with Golomt Bank at the end of last year, after its accounts with Banco Delta Asia in Monaco were frozen. Daedong Credit Bank, established in 1995, is a majority foreign-owned joint venture retail bank based in Pyongyang.

Daedong Credit Bank, of course, is the enterprise owned by Colin McAskill’s group, and also had $6 to $7 million frozen in Banco Delta Asia. It’s intended to be a flagship for foreign investment in North Korea’s economy, and a sign that it’s OK to do business with Pyongyang.

Yes and that’s the same Nigel Cowie who was the source for the FT article on Vietnam.

You’d have to think that the U.S. government wanted to make it impossible for Daedong to transact its (legitimate) business internationally, and American efforts to get the Macau account of a foreign-owned retail bank frozen, and its cash deposit in a Mongolian bank confiscated, and quite possibly to get its account closed in Vietnam, were not simply coincidental examples of U.S. AML zeal.

Indeed, this serial harassment of a legitimate enterprise—moreover one that was in the vanguard of North Korean economic reform and opening to the outside—makes the U.S. campaign look like a cynical, dishonest, and rather shoddy effort to abuse the significant—and important--powers of Patriot Act Section 311 for unacknowledged foreign policy ends.

It will be interesting to see if Colin McAskill ever decides to tell his side of the story.

The revelation that Daedong was trying to make a cash deposit brings me to another interesting implication of the Treasury Advisory against North Korea:

It takes the “fun” out of “fungible”.

Under normal circumstances, cash is king.

But when anti-money laundering is involved, cash is at a disadvantage.

Cash has no provenance, no transaction history, and it can’t be proven not to be illicit.

Any bank that is under the American anti-money laundering microscope vis a vis North Korea is not going to let some North Korean guy with an ill-fitting grey suit and a bad haircut deposit a suitcase of cash in an account.

So that makes me think that America’s generous offer to let the North Koreans withdraw the BDA funds in cash was really...not so generous.

The intent was that North Korea would have to take the money back to Pyongyang and sit on it, because no foreign bank would dare to handle it.

Which brings me to the real significance of the Federal Reserve transaction channel for the BDA funds:

It restored order and normalcy to the international banking system.

Patriot Act Section 311, which was designed to reform banking procedures, turned out to be a crude and unresponsive tool for cutting North Korea off from the world banking system.

When the BDA issue was stalemated, international banks were in a quandary.

They had North Korean funds but were afraid to move them. And the North Koreans were unwilling to withdraw them.

The Know Your Customer procedure, with its implicit blacklist, that OTFI had found so useful in getting risk-averse banks to back off from North Korean business, offered no recourse.

Given the year of relentless jawboning that Mr. Levey and Mr. Glaser had devoted to intimidating overseas banks considering North Korean business, perhaps even the withdrawal of the December 13 advisory, as inconceivable as that would be, might not have persuaded the banks that it was safe to do business with North Korea.

OTFI might have considered that a feature, not a bug, but with North Asian diplomacy dead in the water, it finally became an embarrassment and the Bush administration and Treasury finally acted to break the impasse.

North Korean money isn’t necessarily "tainted".

Arguably, the world financial system was tainted by America’s opportunistic and perhaps abusive application of its intimidatory power under Patriot Act Section 311 to harass North Korea.

And the U.S., through three months of defiant recalcitrance on BDA, had demonstrated to the world’s satisfaction that the Treasury Department had no intention of revising or withdrawing its advisory and was determined to reserve its right to target any commercial bank that had the temerity to do business with North Korea.

Now, however, the Fed route used for the BDA funds demonstrates to international banks and to North Korea that there is a process—albeit an awkward one requiring government intervention--to permit conventional licit financial transactions between North Korea and the international banking community.

When there’s business to be done, not only the North Koreans but the Chinese and the Europeans can lobby the United States to make the Fed route available again.

I doubt anybody really cares about North Korean finances too much, but North Korea has always been a stalking horse for Iran.

I don’t think European banks or governments were at all comfortable with the idea that de facto global economic sanctions against Iran could be imposed unilaterally on overseas banks by the Treasury Department using the club of a Patriot Act Section 311 investigation--perhaps based on unproven and perhaps unprovable allegations.

Now, however, it’s not just a matter of Treasuring imposing unanswerable sanctions on helpless foreign commercial banks; instead, there is now a mechanism available for foreign governments who can, through direct negotiations with the U.S. government, contest Treasury actions they consider an affront to their national sovereignty or policy.

It’s another welcome sign that incrementalism and negotiation—as opposed to an artificial sense of manufactured crisis—is guiding U.S. foreign affairs.

Stuart Levey and Daniel Glaser at OTFI may not be happy that their campaign has failed, their strategy has been repudiated, and the weapon they treasured—the power to threaten a Patriot Act Section 311 sanction—has been stripped of some of its aura of inexorable, implacable menace.

The North Koreans are certainly pleased.

The Chinese and Russians are probably pleased.

Maybe the Europeans are pleased, too.

Maybe even the rest of Treasury is pleased.

And maybe we should be pleased, too.

BDA Endgame

Via AP:

Macau's secretary of economy and finance said Thursday the money has been transferred, but it remained unclear if it was the entire amount or whether it had reached its destination.

"Banco Delta Asia transferred more than $20 million out of the bank this afternoon in accordance with the client's instruction," Francis Tam told reporters on the sidelines of a business gathering, without saying where the money was sent.

"We have heard reports in foreign media that the money can be wired via the U.S. or Russia, for example. I think these routings are possible," Tam said.

North Korea had $25 million at the bank in the Chinese territory, but Tam would not say exactly how much was transferred.

"Most of the money in this account has already transferred out. There will probably not be another transfer," he said.

From Reuters:

Japan's Kyodo news agency quoted Macau authorities as saying the funds would move along a highly unusual route first to the U.S. Federal Reserve New York branch, then to Russia's central bank and finally to a Russian bank.

"It was a one-time, technical solution and did not quite allow North Korea's integration into the international financial system," said North Korea expert Paik Hak-soon at Seoul's Sejong Institute.

The Hardliners Strike Back, Kinda

North Korea hardliners are attempting some pushback on the reported deal that will utilize the Federal Reserve and a Russian bank to electronically remit $25 million in funds frozen at Banco Delta Asia to a North Korean bank account.

As Reuters reports, a group of GOP congresspeople have written the General Accountability Office to request an investigation as to whether U.S. bureaucrats violated any money laundering laws by working to expedite the transaction.

Onefreekorea is the go-to blog for this kind of thing and sure enough, he has the full text of the letter .

He also states, with blushing modesty:

I suggested that our own State Deparment’s attempts to return $25 million to the North Korean regime — much or most of it proceeds of crime — could violate U.S. money laundering laws, as well as two U.N. resolutions the United States successfully lobbied for less than a year ago. As it turns out, great minds think alike.

Now, with Russia about to step up to facilitate this faustian transaction, six House GOP foreign policy heavyweights have signed a letter asking the General Accountability Office to determine whether it’s legal. The letter cites the very same sections of the criminal code I’d cited in the pieces linked above (cool!).

Quite a coincidence. How ‘bout that.

Some background on what looks like an ongoing attempt to intimidate Chris Hill et. al. with accusations of involvement in money laundering can be found here.

Reuters lists the foreign policy heavyweights on this particular card:

In addition to Ros-Lehtinen [ranking minority member of the House Foreign Affairs Committee-ed.], the letter was signed by Reps. Christopher Smith of New Jersey, Dan Burton of Indiana, Edward Royce of California, Mike Pence of Indiana and Joseph Pitts of Pennsylvania.

Ros-Lehtinen represents a Florida district and advocated the assassination of Fidel Castro.

Mike Pence notoriously compared Baghdad street markets to their placid counterparts in his state of Indiana during a recent visit to Iraq.

Dan Burton’s Wikipedia page provides enough amusement and jawdropping revelations about his allegedly golf, graft, and fornication-fueled career that he should assign a staffer to edit it full time. His proposal that an aircraft carrier be stationed “off the coast of Bolivia” is priceless.

Mr. Burton could learn from Ed Royce , a strong proponent of a hard line on North Korea and previous chair of the House subcommittee on International Terrorism and Nonproliferation, about how to keep his Wikipedia page tidy and boring.

Christopher Smith and Joseph Pitts keep a relatively low profile.

Heavyweights all.

In an indication that Treasury is on board for the deal and well pleased to be rid of this mess, Molly Millerwise, provided no aid and comfort to the hardline position:

"We appreciate Congress' interest in safeguarding the U.S. financial system from abuse. The transaction the U.S. government is helping to facilitate would be fully consistent with all applicable laws and regulations," added Treasury spokeswoman Molly Millerwise.

I don’t know how far the hardliners will get with this. It would appear their best shot is Article 18 Section 1956 of the criminal code:

(2) Whoever transports, transmits, or transfers, or attempts to transport, transmit, or transfer a monetary instrument or funds from a place in the United States to or through a place outside the United States or to a place in the United States from or through a place outside the United States—
(A) with the intent to promote the carrying on of specified unlawful activity; or
(B) knowing that the monetary instrument or funds involved in the transportation, transmission, or transfer represent the proceeds of some form of unlawful activity and knowing that such transportation, transmission, or transfer is designed in whole or in part—
(i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or
(ii) to avoid a transaction reporting requirement under State or Federal law,
shall be sentenced to a fine of not more than $500,000 or twice the value of the monetary instrument or funds involved in the transportation, transmission, or transfer, whichever is greater, or imprisonment for not more than twenty years, or both. For the purpose of the offense described in subparagraph (B), the defendant’s knowledge may be established by proof that a law enforcement officer represented the matter specified in subparagraph (B) as true, and the defendant’s subsequent statements or actions indicate that the defendant believed such representations to be true.

Trouble is, there are a lot of allegations of North Korean criminal behavior but as far as I know nobody’s gotten around to convicting a North Korean entity or individual for an underlying crime that would establish the legal basis for classifying the handling of the BDA funds as “money laundering”.

So I think the GAO investigation can take a low place on the list of things that keep Chris Hill awake at night.

BDA: Now the Fed Gets Involved

With respect to the reports in the Wall Street Journal and the New York Times concerning the Russian bank/Federal Reserve Bank route to remitting the Banco Delta Asia funds to a North Korean account, my initial, jaundiced view was to take it as merely a piece of negative confirmation: that the efforts to obtain a Treasury waiver for a conventional transaction mediated by a commercial bank had failed.

From the Times :

Recently, a Russian bank agreed to be the vehicle for the transaction, American officials said, provided that it could obtain dollars to carry it out.

With American laws barring American commercial banks from supplying the dollars, officials turned to the Federal Reserve Bank of New York to facilitate the deal with North Korea.
“The United States is working with Russian and Macanese authorities to facilitate the transfer” of North Korean funds that were previously frozen at Banco Delta Asia, said Molly Millerwise, a Treasury Department spokeswoman. “We appreciate the willingness of the Russian government to facilitate this transaction and the good cooperation of the Macanese authorities.”
...

American officials said because the Federal Reserve Bank of New York was not a private bank, but part of the Federal Reserve system, it was not subject to American laws barring commercial transactions involving illicit funds. The system is independent of the government but run by presidential appointees.

But from the June 11 State Department press briefing , we get:

QUESTION: Can you tell us what the deal is with the BDA and the -- and this Treasury has come out and said that yeah, you are in fact working with the Russians on this. So can you give us a --

MR. MCCORMACK: Can't get ahead of my friends over at Treasury. I know that they've talked a little bit about it, but I can't really offer any more details at this point other than to say and to repeat what I have said before, that we'd all like to see this behind us so we can get back down to the real business of the six-party talks, denuclearization of the Korean Peninsula. We have not yet received word from the North Korean Government to any of the six parties that they have received their money in a new bank account. So when and if that happens and they acknowledge it, then maybe -- perhaps be able to talk a little bit more about this and certainly in the sense that it is behind us at that point.

QUESTION: Right, but -- I mean, in terms of where you have been over the past couple months on this --

MR. MCCORMACK: Right.

QUESTION: -- in the stalemate, is there some -- any sense of hope that it could finally really now be on the brink of being solved?

MR. MCCORMACK: You know, this is one of those issues where until it is done, I'm not going to be laying down any bets. Certainly, we would like to see it done. I know that Treasury has talked a little bit about a possible mechanism to get this done. We'll see.


Emphasis, as they say, added.

This is apparently not just another desperate State Department Hail Mary.

This is apparently something that Treasury—presumably because it has been ordered to find a way out of the impasse—has come up with.

We can assume Banco Delta Asia still has an account with the Federal Reserve—as do the Russians—and the FRB will agree to debit and credit the various accounts directly so that the Russian bank can deposit $25 million in a North Korean account without going through a correspondent bank.

If Treasury supports it, it will probably work.

As a sidebar, I note Mr. McCormack’s comment about the money going into a “new account”.

Maybe it was necessary to find a bank that had no previous North Korean accounts, so there would be no issue of commingling the $25 million in funds released as a Six Party deal concession with other tainted North Korean lucre, so it can be received and remitted with enmeshing the bank in accusations of handling illicit North Korean funds.

Setting the Cat Among the Pigeons

Reader DJ sets the cat among the pigeons, e-mailing the Hong Kong and Shanghai Banking Corp. asking if HSBC, Banco Delta Asia’s main correspondent partner until September 2005, was part of the web of collusive bankers that David Asher alleged is knowingly passing Supernotes instead of confiscating them, thereby keeping the magnitude of the North Korean counterfeiting problem hidden from the U.S. government statistics and the public view.

What Mr. Asher said:

Some argue that [the low level of seizures] shows that counterfeiting is just a drop in the bucket. Let me argue against this view.

First, although supernote definitely can be detected, it is of such high grade that much of it circulates undetected. Largely this is because it has been primarily distributed in the economies of Asia, the former Soviet Union, Africa, and the Americas where the dollar functions as a parallel currency and major money center banks that process currency are few. Another reason for the low amount of detected circulation is that the banks themselves only lose money if they allow the notes to be turned over for processing back to the US. They receive no compensation for being honest. The dirty little secret among bankers and bank tellers appears to be that if they unwittingly accept supernote deposits they should then recirculate them along with genuine currency. They can do this because to almost everyone the notes appear genuine and can be passed as “real.” Thus, for these reasons there could be a lot more of the notes out there than we can document.

The macro issue—of the purported parallel economy, insulated from the banking system, chugging along on U.S. cash, and without the means to detect high quality counterfeits—has been authoritatively debunked by the Treasury Department.

Mr. Asher’s second assertion—that banks are doing catch-and-release, detecting counterfeits but returning them to the wild instead of confiscating them—would require a common policy of evasion by all the banks in a region, otherwise the honest bank or banks would be confiscating the counterfeit currency they detect, and that would make it into the statistics...

And the banks would have to segregate the counterfeit notes from the general population, to make sure they kept circulating funny money while they sent the good stuff back to the money center banks...

...and, since banks only keep a small amount of cash on hand (5 to10% of deposits, which for Banco Delta Asia would have amounted to about $15 to $30 million), if they were stockpiling large quantities of Supernotes they might have to explain to their stockholders and auditors why they were keeping an inordinate amount of money in non-income earning cash, instead of buying T-bills for the benefit of stockholders...

...or maybe falsify their books.

That’s a nice, big, dangerous conspiracy for the privilege of trafficking in Supernotes.

Doesn’t sound like the sort of thing HSBC would do, does it?

HSBC replied to DJ and confirmed that HSBC received cash deposits from BDA and checked them.

Their spokesperson also took pains to disassociate HSBC from any formal role in vetting currency on behalf of BDA, or of knowingly handling North Korean currency.

Of course, the most plausible target for Mr. Asher’s allegations is not HSBC—or Wachovia, Banco Delta Asia’s other correspondent bank.

That target would seem to be China.

China holds $50 billion in U.S. currency.

Theoretically, the Chinese government could have decided to accept a boxcar of Supernotes from North Korea to settle North Korea’s Chinese debts.

But China couldn’t—and wouldn’t—try to launder them in Macau. As the Treasury Department itself has pointed out, counterfeit banknotes in open economies inevitably end up confiscated—and in the Treasury Department statistics.

The only possible way for the Chinese to pass hundreds of millions in Supernotes would be to pass them in China, against its own citizens, and with the collusion of all its deposit-taking banks to maintain separate stashes of Supernotes for local circulation.

If David Asher made the allegation that China is defrauding its own citizens with counterfeit hundred dollar bills, that would really set the cat among the pigeons, freaking out the millions of Chinese who use US currency—and provide a gratifying poke in the eye for the Chicoms whom Asher blames for laundering hundreds of millions of illicit North Korean proceeds.

Why hasn’t he done that?

Patriot Act Section 311 Moves to the Forefront of the North Korea/BDA Issue

Via Arms Control Wonk , the Russians are also offering to step up and handle North Korea’s $25 million if...

... if the U.S. side provides a written guarantee that they will not introduce any sanctions against our financial institutions, we may be in a position to look at the possible transfer of these funds to a Russian bank where the North Korean government has an account,” Alexander Losyukov said.

To me, this is no more—or less—than the Russians weighing in on the side of the State Department and pushing the Bush administration to override whatever objections raised by the Treasury Department and/or hardliners and resolve this issue.

By my count, China, Russia, and South Korea have all expressed various degrees of impatience with the United States in the last few days, an indication of their frustration and perhaps also a response to some lobbying from the State Department looking for help pushing the Six Party process out of the BDA ditch.

With the deadlock over this piddling sum approaching its third month, it’s starting to look embarrassing for the United States—something that President Bush is probably unhappily aware of.

A reader pointed me toward the June 4 State Department press briefing , in which a questioner stated that Bill Richardson (New Mexico governor, Democratic candidate for president, and recent visitor to North Korea) says the BDA matter will be resolved in a about two weeks.

Governor Richardson might be passing on optimistic State Department spin; I would be surprised if he would have the inside scoop on what President Bush is actually going to do on this issue.

The press briefing also included the amusing spectacle of reporters struggling to get a grip on the very complicated question What’s holding up the remittance of North Korean funds out of Banco Delta Asia (and the Six Party Agreement)?:

QUESTION: Can we then conclude that using this 311 section of the Patriot Act
is like a far more powerful tool than anybody imagined? That it's one that
people just can't turn off once you turn it on?

MR. MCCORMACK: It is a powerful tool.

How powerful is Patriot Act Section 311?

It seems it’s more than an un-turn-offable tool.

Like the Shadow, Patriot Act Section 311 has the power to cloud men’s minds, as I learned to my cost in a futile exchange on the Marmot’s Hole with a poster determined to spread the hardliner canard that executing the remittance is impossible without breaking or bending U.S. law.

I asserted that Patriot Act Section 311 special measures are executive branch administrative rules that can be imposed—and can be revoked or modified—unilaterally at the discretion of the Treasury Department without the need for any legislative or judicial action.

Was I right?

Determined to lay this issue to rest, I contacted the Treasury Department spokesperson Molly Millerwise and asked her what it would take to waive, modify, or rescind a Patriot Act 311 ruling.

She kindly directed me to a Treasury web page that summarizes the status of the various Patriot Act Section 311 special measures, and advised me to read the Federal Register notices for previously lifted rules in order to understand the process.

Sixteen banks and jurisdictions have been targeted by a Patriot Act Section 311 Finding or Notice of Proposed Rulemaking.

Two—Multibanka (a bank in Latvia) and Ukraine—have seen their special measures rescinded.

In the July 12, 2006 notice announcing the rescission of Multibanka’s notice, the Treasury Department acknowledged the efforts of Latvia and the bank itself to crack down on money laundering and stated:

If a financial institution that is the object of a proposed section 311 special measure is determined to no longer be of primary money laundering concern, we have the authority to withdraw the finding and to withdraw any related proposal to impose a special measure.

In the case of the Ukraine, in response to passage of new money laundering legislation that passed Treasury muster, Treasury announced:

In light of the further legislative enhancements, the commitment of Ukraine to further efforts to implement its anti-money laundering legislation, and the FATF [Financial Action Task Force]’s decision to rescind the call for counter-measures, Treasury has decided to revoke the designation of Ukraine as a primary money laundering concern under section 5318A [added to the U.S. Code by Patriot Act Section 311 for the designation of “banks of primary money laundering concern”--ed.].

At the end of the notice is the statement:

Revocation of the Designation of Ukraine as a Primary Money Laundering Concern

For the foregoing reasons, the designation of the country of Ukraine as a primary money laundering concern for purposes of section 5218A of title 31, United States Code, is hereby revoked.

(Signed)
James F. Sloan
Director
Financial Crimes Enforcement Network

That’s pretty cut and dried.

Banks and jurisdictions do bad stuff, Treasury announces a Patriot Act Section 311 designation.

Banks and jurisdictions do good stuff to the satisfaction of the Treasury Department, the designation is rescinded. It’s up to Treasury’s discretion.

There was one final area of uncertainty.

In addition to Banco Delta Asia, five other banks and jurisdiction have been the subject of a Final Rule: Asia Wealth Bank (Burma), Burma (the whole country), Commercial Bank of Syria, Myanmar Mayflower Bank (Burma), and VEF Banka (Latvia).

None of these banks have ever had their Final Rules rescinded.

Could it be that a Final Rule was permanent and could never be rescinded?

Ms. Millerwise obliged with the answer:

Yes, the Treasury’s Financial Crimes Enforcement Network can rescind a final rule.

Doubtless, the Treasury Department has standards to uphold, guidelines to respect, and processes to follow. And they are probably not happy to see the Patriot Act Section 311 designation—which has been apparently been applied conservatively and judiciously in other instances—thrown on the table by the State Department as a bargaining chip in the Six Party talks.

But it would seem there is no legal obstacle to Treasury waiving the Patriot Act Section 311 measures against Banco Delta Asia and allowing the North Korean money to be remitted to another bank.

Wanna Buy a Watch?

Via Rebecca McKinnon, someone in Canada is offering on eBay a "Tiananmen Massacre Medal Watch" provided by “an ex-PLA officer” to benefit an organization called the Tiananmen Mothers’ Campaign .

Bidding starts at $8964.18 (as in the eighteenth anniversary of the June 4 massacre of 1989).

The auction description states hopefully:

No local collection specialist has seen it before, it might be the only one existing outside China.

‘Fraid not.

I’ve got one of these babies. A friend in Beijing gave it to me shortly after the massacre, so I’m quite sure of its authenticity.

Courtesy of the eBay listing, here’s a picture of the watchface in all its doofy glory, with the hands cleverly positioned to look like a TV antenna sprouting out of the bewildered grunt’s helmet.

My version has a fancy metal wristband (not leather, like the one on offer) and came in a red and white plastic case reading: Presented to the Capital Martial Law Force （ 赠首都戒严部队）.

Think I’ll hold on to mine for a bit.

You can bid on the eBay auction here .

BDA as a Litmus Test for US-China Relations...and Maybe More

AFP reports:

US officials say Beijing has begun voicing frustration over Washington's handling of a banking dispute with Pyongyang which has held up implementation of a February agreement under which North Korea agreed to give up its nuclear weapons program.

Chalk this report up to a State Department attempt to try to push the Bush administration to resolve the funds remittance by pointing out that the Chinese are upset.

The Banco Delta Asia ball seems to be squarely in Washington’s court—and neither the State Department nor the media seems to taking the effort to bat it back and claim, at least for appearances sake, that the North Koreans are somehow responsible for the US inability to get the money remitted from BDA to a Pyongyang account.

Apparently, Chris Hill was in Beijing for two days of jibber-jabber and I wouldn’t be surprised if the little issue of Banco Delta Asia is occupying a disproportionate amount of everybody’s time.

Nothing is going particularly well between Beijing and Washington, and the one thing that could go well—the Six Party Agreement—has fallen victim to a political squabble between the State Department realists trying to implement the agreement and hardliners intent upon derailing the agreement by preventing the remittance of the BDA funds.

This matter has dragged on long enough and the stalemate has become so obvious that President Bush's paralysis--or indifference--vis a vis the Six Party Agreement is itself going to emerge as an issue if it isn't solved soon.

I wonder if, to the Chinese, BDA has become a litmus test to see if the Bush administration can deliver anything with respect to the US-China relationship.

If President Bush yields to the hardliners and the Six Party Agreement falls apart, it can be taken as an indication that lame duckery and Washington bureaucratic infighting reached such toxic proportions that the next 18 months will see little more than dysfunctional bickering, sterile obstructionism, and political posturing in East Asian affairs.

There may be a larger context here as well: that the hardliners hope to win the struggle on the insignificant issue of BDA, so they can discredit the State Department as a source of reliable information, loyal advice, viable policies, and effective diplomacy in the much more important debate over how aggressively Iran should be confronted in the upcoming months—the long hot summer of 2007 that may be the last, desperate chance for the hardliners to pursue their grand dreams for the violent transformation of the Middle East.

A Drop in the Bucket

The Federal Reserve Board Debunks Allegations of Large Scale Laundering of North Korean Supernotes


In my previous post about alleged North Korean counterfeiting, I wrote that the U.S. Secret Service had reported that only $50 million in Supernotes had been seized over the last 15 years. This meager haul provides little evidentiary or logical support for the idea that North Korea was funding its current account deficit through counterfeiting.

The counterfeiting allegation is an important part, perhaps a central pillar, of the hardline case for aggressive action against the North Korean state.

It’s difficult to make the case for North Korea as a “Soprano state” relying on hundreds of millions of dollars in profits (not revenues, mind you) from criminal activity to finance its current account shortfall through counterfeit cigarettes, narcotics, and pharmaceuticals trafficking alone.
With the allegation of counterfeiting—and the picture of North Korean printing presses cranking out hundreds of millions of dollars of fake US currency every week—these difficulties would seem to evaporate.

Also, in contrast to illicit production of cigarettes and drugs--which could be plausibly if not convincingly blamed on rogue elements inside the North Korean economic and security apparatus--the massive effort, expense, and difficulty of counterfeiting and distributing Supernotes in large quantities could only be undertaken with the knowledge of the North Korean government.

Finally, while North Korea’s other alleged criminal activities primarily impact China, Japan, and other Asian countries, Supernote counterfeiting can be considered a direct affront, even a threat, to the United States.

Indeed, counterfeiting another nation’s currency has been declared a casus belli under international law by David Asher, architect of the Illicit Activities Initiative against North Korea--although I have as yet been unable to find an independent citation supporting this position.

In light of the insignificant quantity of Supernotes seized, I wrote that conspiracy theorists would need an alternate explanation to justify an aggressive campaign against North Korea: that there were hundreds of millions in undetected Supernotes out there, and this theory would necessarily require collusion by some big financial guns:

...especially since the only way to pass a significant, obviously suspicious wad of hundreds of millions or billions in US currency, even if the bills were perfectly undetectable, would be with the collusion of Chinese or Russian banks—and their governments.

I don’t know if Mr. Asher would take such a big step [as confronting China on the pretext of an investigation against BDA] on the shaky assumption that North Korea was grinding out hundreds of millions of dollars in absolutely undetectable supernotes. I suppose we’ll have to await the publication of his memoirs to learn his true feelings on the subject and whether I am pummeling a straw man on this subject.

Well, impatient readers need wait no longer...and straw men can retire unmolested to their hayricks.

David Asher, architect of the anti-money laundering campaign against Banco Delta Asia and North Korea, apparently does not believe the North Korean government can produce undetectable Supernotes.

However, he does make the assertion that detectable Supernotes can circulate in the world economy undetected—and through the vagaries of the world financial system and the connivance of bankers—leaving the door open for continued allegations that the Chinese are assisting the North Korean in injecting significant amounts of counterfeit currency into the global market.

Unfortunately for Mr. Asher, this position has been authoritatively debunked by the U.S. government—four times.

In remarks to a Heritage Foundation seminar in April 2006, David Asher stated:

As the Secret Service has now revealed, the Federal Reserve Bank has come into the possession of roughly $48 million of these notes in the last fifteen years. Some argue that this shows that counterfeiting is just a drop in the bucket. Let me argue against this view.

First, although supernote definitely can be detected, it is of such high grade that much of it circulates undetected. Largely this is because it has been primarily distributed in the economies of Asia, the former Soviet Union, Africa, and the Americas where the dollar functions as a parallel currency and major money center banks that process currency are few. Another reason for the low amount of detected circulation is that the banks themselves only lose money if they allow the notes to be turned over for processing back to the US. They receive no compensation for being honest. The dirty little secret among bankers and bank tellers appears to be that if they unwittingly accept supernote deposits they should then recirculate them along with genuine currency. They can do this because to almost everyone the notes appear genuine and can be passed as “real.” Thus, for these reasons there could be a lot more of the notes out there than we can document.

I would say that Mr. Asher is taking the logically risky tactic of starting with a negative—that trade statistics provide no clear evidence about how North Korea is covering its current account deficit—to make a dubious assumption—that North Korea is counterfeiting currency—and, in order to deal with the objection that very little counterfeit currency has been detected, takes that second negative—the absence of counterfeit currency—to posit a new interpretation of currency flows in which large amounts of counterfeit currency are knowingly injected into a parallel global cash economy by venal bankers.

Mr. Asher’s chain of reasoning is logically shaky and also contradicted by analysis by people who probably know more about it that he does: the Federal Reserve Board.

In connection with introduction of the new, difficult to counterfeit US currency—the NCD or New Currency Design—the Federal Reserve Board and the Treasury Department undertook a massive, multi-year effort to understand the nature and vulnerabilities of the international demand for US currency.

A 2002 paper entitled Estimating the Worldwide Volume of Counterfeit U.S. Currency: Data and Extrapolation, by Ruth Judson and Richard Porter, was prepared for the Division of Monetary Affairs of the Federal Reserve System, and later formed the basis for a series of three reports to Congress by the Treasury Department.

It analyzed the statistics on counterfeit confiscations and analyzed the worldwide flow of US$ cash. The authors concluded that there was no significant “parallel economy” insulated from the big money center banks.

Contra Mr. Asher’s apparently undocumented assertions concerning his understanding of the world currency markets, I particularly enjoyed this passage:

Locations visited by the authors of the current paper included Argentina, Bahrain, Belarus, Bolivia, Bulgaria, Chile, China, Colombia, the Dominican Republic, Ecuador, El Salvador, Egypt, Greece, Hong Kong, Latvia, Lithuania, Mexico, Panama, Peru, the Philippines, Poland, Romania, Russia, Saudi Arabia, Singapore, South Africa, Switzerland, Taiwan, Turkey, United Arab Emirates, the United Kingdom, and Vietnam. Other team members visited Brazil, Cambodia, Indonesia, Japan, South Korea, Paraguay, and Thailand.

Believers in the North Korean counterfeit story may try to extract some comfort from the fact that the Fed team didn’t visit Macau.

However, the point of the report is that it is impossible for counterfeit currency injected into an open economy such as Macau’s to be quarantined from the banking system.

Consider the circulation lives of $100 notes. Genuine notes circulate, return to Reserve Banks, and sometimes recirculate; their average lifespan is about eight years. In contrast, counterfeits end their lives when they are detected, which at the very latest is on their first (and only) trip to a Federal Reserve Cash Office....we assume that on average counterfeits could remain in circulation at most for one year, with a few months being much more likely.

The authors make the interesting point that cash is exchanged, on the average, once a week, and the probability of a note finding its way to a bank after 22 weeks of circulation is 95%. They conclude:

Based on what we observed, it was apparent that currency does not endlessly recirculate in any of the markets we visited. Currency is used for a wide range of transactions, but even in gray or black market economies it will eventually find its way into a commercial banking institution, most likely after being used in relatively few transactions.

In sum, we find it unlikely that counterfeits can circulate for long outside the banking system and thus outside reasonably sophisticated counterfeit detection for very long. These figures suggest that notes are unlikely to circulate outside banks for much more than a year.

...We believe that an estimate in the neighborhood of $40 to $50 million...is the most plausible and is consistent with a relatively short average lifespan for a given counterfeit note.

I recently corresponded with individuals familiar with the issues addressed in this report, and they advised that they have not come across any new evidence that would lead them to question its conclusions concerning the magnitude or character of counterfeit US currency circulation in the world economy.

In a footnote, the North Korean counterfeiting conspiracy theory is addressed:

For years, stories have circulated that some government(s) hostile to the United States had obtained plates to print currency and were going to produce a flood of counterfeits in an effort to destabilize the dollar. It was argued that these counterfeits could circulate endlessly and freely within the bounds of such countries. We have no way of confirming or denying such stories. If “closed” countries (e.g. North Korea) do indeed have many counterfeits in circulation, it is impossible to know as long as the system remains closed. The evidence and model we present here apply to open markets and economies.


In other words, the existence of North Korean counterfeits could be concealed from the world financial system—if they are only circulated in North Korea. So, if North Korea is counterfeiting vast quantities of US currency, maybe Kim Jung Il is doing it to build a palace from bricks of hundred dollar bills; an offense against good taste, perhaps, but hardly a casus belli.

Bottom line is, Mr. Asher’s allegation that Supernotes of the type that have already been detected are circulating in large quantities thanks to the vagaries of the international cash system and the cupidity of bankers is extremely implausible.

And, parenthetically, where are our counterfeits coming from?

The number one source of counterfeits (measured by counterfeits seized) for the last four years running: Colombia.

How ‘bout that!

Counterfeiting is apparently an attractive business for narcotics traffickers, using similar distribution networks but with decreased risks and legal penalties. The main markets are in Latin and South America, where use of the dollar is widespread (Ecuador and El Salvador went so far as to dollarize their economies), but packages of counterfeit bills also end up in the U.S.

The 2006 report provides the enticing news that a large number of Supernotes entered the Peruvian economy in early 2005, but provides no information on the amount or their origin.

The 2003 report also describes a high level of Chinese expertise in detecting counterfeits:

During its visit to China, the ICAP team learned that People’s Bank of China statistics indicate that mainland Chinese banks have been receiving between $4 to $6 million in counterfeit U.S. dollars annually. While the ICAP team was not able to substantiate these figures by the usual means of directly inspecting the suspect notes, they could determine that the PBOC had a well-developed process for handling, archiving, and maintaining statistics on counterfeit U.S. currency. Furthermore, Secret Service representatives on the team examined a small sample of counterfeit notes provided by the PBOC in Shanghai and determined that the majority were of high quality.

For perspective, China accounts for about 20% (second behind Russia) in overseas holdings of U.S. currency, in other words about $50 billion.

As to whether North Korea is involved in Supernote production, even if it is not passing a significant number, the 2006 report on counterfeiting states:

The U.S. Secret Service has determined through investigative and forensic analysis that these highly deceptive counterfeit notes are linked to the Democratic People’s Republic of Korea (DPRK) and are produced and distributed with the full consent and control of the North Korean government.

I would like to think of the U.S. Secret Service as unpoliticized, interested in genuine enforcement issues, and conservative in its conclusions.

So I find the statement attributed to the Secret Service that the DPRK is involved in Supernotes persuasive, despite the seemingly immense technical and logistical difficulties involved in making Supernotes in North Korea, let alone continually redesigning them to track changes in the legit currency.

Well, maybe the Supernotes aren’t being made in North Korea.

And a not-too-convoluted parsing of the statement might beg the question, why didn’t they say the Supernotes are produced in North Korea? Instead they said the notes are “linked” to the DPRK and “produced and distributed with the full consent and control of the North Korean government”.

Maybe somebody in another country is cranking out some Supernotes for North Korea.

I’d vote Russia instead of China, simply because the Chinese seem to have their spooks under control, while the lid came off in Russia and there might be some skilled and connected forgers over there who would be willing to run off small orders of Supernotes for Kim Jung Il.

Or maybe the U.S. government is confident about North Korean involvement in Supernotes because it provided them some detectable, traceable Supernotes in a sting, which would be...funny, but not the kind of smoking gun the international enforcement community would be looking for.

In any case, the Treasury Department reports Supernotes remain a drop in the bucket. Since 1996, only $22.4 million have been confiscated while being passed, while $50 million worth have been seized.

$75 million in $100 notes represents a stack of currency smaller than a refrigerator.

Kim Jung Il may have more stashed in his palace. Maybe when there’s an opportunity—like the faulty currency-checking system that existed in Peru for a few months—he takes a desperate risk to pass some Supernotes through a criminal gang.

Nevertheless, the bottom line is, it can be said with considerable confidence that Supernotes are not a significant source of revenue—or focus of money laundering—for the North Korean government.

This state of affairs leads believers in the North Korean counterfeit story to an awkward place.

It’s a place where the investigations of the U.S. government itself—hey, the Treasury Department itself!—indicate there is no significant flow of Supernotes into the world economy.

It’s a place where the only argument for massive North Korean counterfeiting would have to rest on their ability to forge undetectable supernotes.

That’s a place no Treasury official committed to protecting the viability of the US dollar as a world currency is willing to go.

That’s a place no American diplomat interested in preserving his or her credibility is willing to go.

Heck, it doesn’t even seem to be a place David Asher wants to go, as his apparent acceptance of the detectability of Supernotes (see above, “supernote definitely can be detected “) seems to indicate.

And that leaves his allegations of significant North Korean counterfeiting of supernotes...nowhere.

So I would pronounce the story of collusive money laundering of counterfeits by Macau banks—and a large part of the justification for the BDA action and the effort to confront China over alleged complicity in laundering of hundreds of millions in North Korean Supernotes—DOA.

Without the counterfeiting angle, Mr. Asher must now rely on counterfeit cigarettes, counterfeit pharmaceuticals, trade in endangered species, weapons sales, and provision of money laundering services to support his business model of North Korea financing an annual current account deficit of $500 million through illicit activities—and justify his allegation that Chinese banks in Macau are laundering hundreds of millions of dollars of illicit North Korean proceeds.

With an important element of his seductive narrative of the North Korean criminal state largely discredited, the burden of proof is shifting to Mr. Asher to demonstrate that the move against Macau banks was inspired by compelling evidence of extensive money-laundering of North Korean criminal proceeds—and not lazy, unproven assumptions of criminality exploited to disrupt North Korea’s legitimate access to the international gold markets, South Korean financial aid, overseas cash remittances, and its bona fide government and personal forex accounts.

It’s Official: Somebody Screwed Up on BDA

As sharp-eyed read DJ pointed out, Bush admits that somebody “screwed up” on the North Korea funds transfer.

Full text of the Kyodo News report :

U.S. President George W. Bush admitted during his talks in April with Japanese Prime Minister Shinzo Abe that the U.S. government failed to fully read North Korean actions over the recent banking impasse, saying Washington ''screwed it up,'' sources close to the Japan-U.S. relation said Thursday.

The remark may be seen as a rare acknowledgment by Bush that the United States erred in handling the stalemate over the transfer of North Korean funds that effectively has held up the six-nation nuclear talks since March, the sources told Kyodo News.

Presumably the people that “screwed it up” were in the State Department by being creatively vague in February about what “resolving” the BDA matter actually meant—so they could get the Six Party Agreement first and fight the bureaucratic battles later.

But the fact that Bush is blaming his own State Department instead of North Korea might be an indication that, since the U.S. made the mistake, it will do something to fix it.

Maybe Treasury gets to savor the sweet spectacle of State being taken to the woodshed—in consolation for swallowing the bitter pill of granting a waiver to Wachovia or another bank so the BDA funds can be remitted to North Korea electronically.

The AP version adds tidbits about how angry Bush is with the North Koreans and how much he mistrusts Kim Jung Il.

It’s reassuring to see that President Bush can still claim the moral high ground despite suffering from a self-inflicted wound courtesy of his own Treasury Department—the ridiculous three month charade over the $25 million dollars.

The report also passes on this inspiring piece of lip service to Abe on the abductee issue:

Meanwhile, in his talks with Bush, Abe, mindful of the North Korean abductions of Japanese nationals in the past, cited "voices of concern within Japan" about a shift in U.S. policy toward dialogue in handling North Korean affairs, expressing hope that Bush would not readily give in to North Korea, the sources said.

Bush encouraged Abe to express such a view to U.S. foreign affairs officials, according to the sources.

Yeah. Talk to my people. Whatever.

As an interesting footnote (h/t to the Marmot’s Hole), South Korea’s president Roh Moo-hyun confirmed Seoul was ready to provide a channel for the BDA funds, but North Korea and the U.S. weren’t interested.

Roh said his government had hoped to help to resolve the dispute. He did not elaborate on the offer, but local news media have said Seoul was considering asking a South Korean bank to be the middleman for getting the money to a North Korean account."We have offered to help in resolving the issue to both sides, but after our offer there has not been an answer from either side," Roh said, referring to Washington and Pyongyang.

I suspect the State Department wanted to control resolution of the BDA matter so it wouldn’t look like Seoul was breaking the ostensible world united front against Pyongyang and running an overtly independent North Korea policy.

The Acme of Neo-con Hubris

In the early years of the George W. Bush administration, the Defense Department apparently felt confident—or lucky—enough to roll the dice on a possible war with China.

Via Laura Rozen, Jeff Stein of the Congressional Quarterly reports on allegations by Lawrence Wilkerson, a top aide to Colin Powell while Powell was Secretary of State in the first GW Bush administration, that the Department of Defense, led by Donald Rumsfeld, was promising to support Taiwan against China if Chen Shui-bian declared independence.

From CQ:

“The Defense Department, with Feith, Cambone, Wolfowitz [and] Rumsfeld, was dispatching a person to Taiwan every week...essentially to tell Chen Shui-bian...that independence was a good thing.”

Wilkerson said Powell would then dispatch his own envoy “right behind that guy, every time they sent somebody, to disabuse the entire Taiwanese national security apparatus of what they’d been told by the Defense Department.”

“This went on,” he said of the pro-independence efforts, “until George Bush weighed in and told Rumsfeld to cease and desist [and] told him multiple times to re-establish military-to-military relations with China.”

Wilkerson’s account is supported by Douglas Paal, former head of the American Institute in Taiwan.

Interesting sidelight: Theresa Sheehan was the previous head of AIT—and is married to Larry DeRita, Rumsfeld’s chief press flack at the Pentagon. She used her bully pulpit to push for Taiwan independence and support the credibility of the DoD approach until Colin Powell demanded her resignation and she was removed.

“In the early years of the Bush administration,” Paal said by e-mail last week, “there was a problem with mixed signals to Taiwan from Washington. This was most notably captured in the statements and actions of Ms. Therese Shaheen, the former AIT chair, which ultimately led to her departure.”

Spluttering denials from the hardliners involved, but this looks like the real deal—and probably the acme of reckless neo-con hubris during the entire George W. Bush administration.