Monday, March 26, 2007

Financial Waterboarding: A Section 311 Primer

Do you know whom the North Koreans can blame for the whole BDA mess?

John Kerry!

According to a superb March 18 backgrounder by McClatchy’s Kevin Hall, Treasury's Patriot Act power goes too far, critics say, we learn:

Section 311... was drafted as stand-alone legislation by Sen. John Kerry, D-Mass., but incorporated into the Patriot Act...

Section 311 of the Patriot Act, which was the basis for Treasury’s action against BDA, essentially allows the Treasury Department to effectively shut down any bank in the world if it has “reasonable grounds” to assume that bank is “of primary money laundering concern”, by making it illegal for US financial institutions to maintain correspondent relations with that bank.

Big John has, surprisingly, been silent on this latest application of his extra-Constitutional handiwork.

It’s a power that foreign banks and nations fear...and the Treasury Department is loathe to surrender.

Due process consists of consultations between Treasury, State, and Justice to announce an investigation, then a final decision which, if negative, requires U.S. financial institutions to break off correspondent relations.

When the BDA investigation was announced in 2005, nervous depositors in BDA ran on the bank and withdrew HK$300 million—amounting to about 10% of the bank’s capital and more than enough to topple it into insolvency.

The bank went into receivership. The Macanese authorities froze accounts identified by the U.S. Treasury Department as suspect, and waited for the outcome of the investigation.

And waited...and waited...

Finally, the axe fell on March 14, 2007, on the last day of the deadline that Christopher Hill had promised the North Koreans for the resolution of the matter.

Treasury stated categorically that the bank was dirty and instituted the formal ban on correspondent relationships.

Now the Macau authorities are free to return the money to the various depositors and possibly even return the bank to its original owners. Stanley Au, the chief shareholder, wants it back and is agitating to get the Treasury ban lifted.

To fully understand the nature of the Treasury Department action, it is necessary to understand that now in this world there are three types of sanctions:

U.N. sanctions, relying on U.N. Security Council unanimity, therefore usually diluted, consensual, and weak;

Sanctions under national law, involving advise and consent, due process, and appeal and judicial interpretation, and various constitutional rigamarole, at least in the United States;

A new category, national security sanctions, which is what the Treasury money-laundering sanctions fall under.

By design, national security sanctions have a bias for action. The philosophy is, in this ticking time bomb mushroom-cloud world, there is no time for evidentiary niceties and no leeway for bad guys to hide behind U.S. legal mumbo jumbo.

And, since watching the actual process of national security sausage being made would be deleterious to the morale of observers with a bias toward due process transparency, and accountability—not to mention possibly providing the basis for challenges to Treasury’s diktat in the courts or in the press--Treasury investigations under Section 311 are conducted unilaterally and in secret.

Again, from Kevin Hall:

Supporters view Section 311 as a diplomatic sledgehammer that gets results. Critics -- many of whom refused to speak on the record, saying they fear retribution -- complain that the provision denies suspects due process and presumes that the accused are guilty rather than innocent.

Through Section 311, the Treasury doesn't have to tell accused banks or countries what threat they allegedly pose to the U.S. financial system, and the Treasury has the power to act as both prosecutor and judge.

``There is certainly an element of unfairness when you are accused,'' said Peter G. Djinis, a money-laundering expert and former high-level Treasury official who was involved in the earliest Section 311 proceedings. ``First, you don't know who the accusers are and the strength of their convictions, and you have to work yourself out of the hole. And in many cases you won't succeed.''

As a footnote in the final BDA rule indicates, classified information can be used in internal Treasury deliberations:

These conclusions were derived in part from classified sources...

In its final decision, Treasury announced it had received comments on its investigation from two sources—one from a college professor offering his apparently unnecessary observations on how the net around money laundering banks could be drawn even tighter—and a clutch from BDA.

The BDA comments were dismissed in relatively short order. My favorite:

Finally, the bank suggested in its comments that imposing the fifth special measue would be inconsistent with U.S. foreign policy considerations. We disagree.

Full stop.

Handwringers anxious about Star Chamber proceedings based on secret information can rest easy, according to the Treasury Department as reported by Hall:

The accused do have rights, said Molly Millerwise, a Treasury spokeswoman.

``We have previously lifted proposed rules when the institution took appropriate steps to strengthen their controls,'' she said. ``Moreover, as with all regulatory actions, 311 rules can be challenged in federal court.

Actually, Molly—and Stanley Au, who is talking in some vague way about a court challenge--I think that since U.S. financial institutions—not BDA—are the subject of the Treasury rule, under the Administrative Procedures Act, BDA’s grounds for challenging this ruling in U.S. court amounts to about zip.

Of course, if some U.S. bank wants to paint a bullseye on its back and go to bat on behalf of BDA, well go ahead.

But don’t expect things to go too well (another footnote from the BDA ruling):

Classified information used in support of a section 311 finding...may be submitted by Treasury to a reviewing court ex parte and in camera.

Parallels with Guantanamo are not accidental. The Treasury money laundering provisions under Patriot Act Section 311 were designed to give the Treasury Department the ability to act as judge, jury, and executioner, in order to protect the U.S. homeland.

The best description of the Patriot Act 311 provisions I read somewhere called them “financial waterboarding”.

In some respects, the result of the BDA sanctions were undoubtedly encouraging. There was a run on the bank, a good demonstration of the intimidating power of U.S. disapproval.

But once the bank went into receivership, it continued to make money!

Herculano de Sousa, who was selected in 2005 by Chief Executive Edmund Ho as chairman of the administrative commission that manages Delta Asia Bank, declined to disclose details of the operation but said the bank had made profits "despite the adverse circumstances under which it is operating".

Concerning these adverse circumstances, de Sousa explained they were the result of "all commercial relations with the parallel banks having been severed", and said that the setback did not hamper the bank from achieving a positive balance logged at the end of the year.
At the end of the first trimester of 2006, and according to data published in the Official Gazette, the bank's operation showed earnings of 43.9 million patacas and expenses of 28.8 million patacas, with a positive balance of 15 million patacas.

The other interesting point here is the phrase “all commercial relations with the parallel banks having been severed” which indicates that, despite the whole veneer of due process covering the Treasury Department’s lengthy and disputed investigation, foreign banks—undoubtedly under U.S. pressure—had severed correspondent relations with BDA even before the final ruling came down.

Though isolating BDA prior to the final ruling probably pleased Treasury, I doubt many international banks appreciated participating in this campaign of coercion meant to advance U.S. diplomatic priorities (as opposed to assisting hot financial pursuit of terrorists planning an attack).

I suspect the U.S. action was more in lines of a naked threat, rather than a collegial request. Perhaps any bank contemplating corresponding was confronted with the Treasury threat that they too might become a target of “primary money laundering concern” if they helped move money from the bank.

Indeed, it is reportedly because of fears of being “contaminated” that the Bank of China is reportedly balking at accepting the North Korean funds released from BDA, even if it threatens to fatally delay the execution of the Six Party Agreement.

Beyond BDA being able to continue functioning while under Treasury’s investigatory stigma, the U.S. juggernaut hit a few other bumps.

Despite the fact that the decision was Treasury’s to make and the investigation Treasury’s to conduct as it saw fit, the Macanese conducted their own audit which, embarrassingly, indicated that there was little justification for shutting down the bank:

An audit of the Banco Delta Asia's finances by accounting firm Ernst & Young found no evidence that the bank had facilitated North Korean money-laundering, either by circulating counterfeit U.S. bank notes or by knowingly sheltering illicit earnings of the North Korean government.

In a filing submitted to the Treasury Department last October, Heller Ehrman LLP, the bank's New York law firm, reported that an audit by the government of Macau also had found no evidence of money-laundering.

As for my favorite dubious allegation of North Korean malfeasance, the Supernote counterfeit $100 bill boondoggle:

...according to the filing by the bank's attorneys, which the Treasury Department hasn't challenged, there was almost no way that North Korea could have laundered counterfeit U.S. currency through the bank.

Large deposits of North Korean cash were sent to the New York branch of the giant HSBC bank to be run through sophisticated counterfeit-detecting machines, the law firm's filing said. The only evidence of counterfeit currency that Banco Delta Asia found was much earlier, in 1994, and the bank notified local authorities immediately, the filing said.

Then the State Department landed a body blow, pressuring Treasury Secretary Paulson to override the Treasury Departments attempt to block repatriation of about $15 million in funds:

Until the intervention by Mr Paulson, Treasury had been prepared to tell the Macao government that it would not object to returning about a third of the $25m for which there was less-than-conclusive evidence of illicit activity. Treasury on Wednesday dismissed suggestions that it had succumbed to political pressure.

Perhaps the most conspicuous virtue of the Patriot 311 sanctions is that they are, in theory, completely shielded from outside pressure.

Invoking the sacred cause of American national security against terrorism, they are not supposed to be bartered away in the cause of diplomatic compromise.

In fact, even at the time that the United States was conducting a concerted campaign of diplomatic and economic coercion against North Korea through the United Nations, the Treasury Department went to great pains to insist that the money laundering investigation had “nothing to do” with sanctions.

That’s why the deal with North Korea under the Six Party Agreement was such an unwelcome shock to the Treasury Department.

Its supreme coercive instrument, money laundering investigations under Patriot Act Section 311 had, at a stroke, been devalued and shown to be just another component of the diplomatic package to be employed or discarded as needed to advance U.S. foreign policy goals.

Given these challenges to the morality, efficacy, veracity, and legitimacy of the Treasury actions, it is not surprising after all that Treasury, for the sake of its own reputation if not the needs of U.S. national security, came out with a thoroughgoing blood-and-thunder condemnation of BDA in its final decision.

But the damage has been done. Post-BDA, the United States will find it difficult to assert credibly that Section 311 sanctions are anything more than fundamentally flawed, coercive, and reversible expressions of American diplomacy and politics.

Is Daniel Glaser Eating Crow in Beijing? The Latest Permutation in the Treasury Department/Banco Delta Asia Saga

What’s Daniel Glaser up to?

Eating crow, it looks like:

U.S. Secretary of State Condoleezza Rice has reportedly discussed the issue [of transferring funds in North Korea-related accounts from Banco Delta Asia to Bank of China--ed] over the phone with Chinese Foreign Minister Li Zhaoxing. The two are said to have agreed that since the delay was due to a simple technical issue, it should not hinder implementation of last month's six-party agreement and the joint statement of September 2005.

Meanwhile, U.S. Deputy Assistant Treasury Secretary Daniel Glaser is meeting Chinese and Macao authorities in Beijing to discuss procedures for transferring the 25 million dollars from the BDA accounts to the North.

Sources said Glaser is expected to provide the Bank of China with written assurances that it would not be negatively affected by accepting funds from the blacklisted Macao bank.

For “negatively affected” read “fanatically pursued by the U.S. Treasury Department as part of its vendetta against North Korea, the Six-Party Agreement, and the State Department”.

Daniel Glaser, Deputy Assistant Secretary for Terrorist Financing and Financial Crimes, is the money laundering guy under Stuart Levey in the Treasury Department Office of Terrorism and Financial Intelligence. He's been bouncing around Asia for the last couple weeks on mystifying monetary missions.

As previously described in Treasury's Not So Secret War Against the Six Party Agreement, the OTFI is a bastion of foreign policy hardliners which is less than thrilled with the concessions on Banco Delta Asia concerning frozen North Korean accounts.

Last week, after Treasury issued its final decision cutting off BDA from correspondent relations with American banks and grudgingly agreed not to object to the repatriation of $25 million in deposits belonging to various North Korean corporations and fronts, Glaser came to Macau to hold discussions around March 17 with the local government and monetary authority concerning BDA.

Details of what he discussed weren’t clear, but it’s clear that he pitched flies into the ointment instead of facilitating the Six Party Agreement.

The talks in Beijing broke down when the BDA money did not reach North Korea’s account in Bank of China.

The Treasury Department had adopted the line that effecting the transfer was strictly between the Macau authorities and China and Treasury had washed its hands of the matter.

However, within one week of his return from Macau, Glaser was back on a plane, this time to Beijing, to provide Treasury Department "expertise" to facilitate the transfer.

The Macanese and Chinese have made clear that they want to ensure implementation of the agreement is consistent with their own laws and with their international obligations. We are bringing Treasury expertise to help the Macanese and Chinese wade through some of these implementation issues," said Glaser.

He didn’t go to Beijing to teach the North Koreans how to fill out a deposit slip.

Glaser’s job is to stop money laundering, not coddle Asian bankers.

Presumably, he said or did something in Macau that raised a new obstacle to the negotiations.

And then he had to go to Beijing and publicly disown his handiwork.

As previously discussed, Treasury is not happy with the concessions it made under the Six Party Agreement, since they demonstrated that Treasury’s enforcement actions could be influenced, diluted, and superseded by diplomatic negotiations. Since the original objective of OTFI was to set up an independent intelligence and enforcement capability targeting foreign money laundering operations—and shielded from UN and State Department interference by the veil of the Patriot Act—the override on the North Korean sanctions was a major blow to Treasury’s prestige and credibility as scourge of international moneylaunderers.

Did Daniel Glaser go to Macau to try to block the transfer of some of the North Korean funds behind the scenes by pressuring the Macau authorities?

And did his plan backfire?

I think the answer to both questions is yes.

The Bloomberg version of Glaser’s March 17 meetings in Macau pushed the initial spin, contradicted by the fact of Glaser’s hasty return to Asia, that Treasury was bowing gracefully out of the BDA mess, and added one nugget of information:

`I think it's important to emphasize that this was a Macanese action to freeze the funds, and it would be a Macanese process to make a determination as to the release of the funds.''

The U.S. investigation does have information that would help Macanese authorities to make an informed decision, said Glaser...

An informed decision?

Why on earth would anybody need “an informed decision” when the needs of the Six Party Agreement and the intentions of the US government—at least State—the Chinese, and by extension the Macanese, seem to dictate that Macau pitchfork the $25 million out the door asap, no questions asked, so execution of the deal can continue?

Same tune, different words from the South Korean media, which added the tidbit that the “information” was apparently “investigative documents”:

U.S. Treasury officials also visited the Chinese territory's financial authorities, offering investigative documents on the bank's accounts.

Glazer told reporters that the meeting was friendly and productive, saying it is the decision of Macau authorities whether to unfreeze North Korean funds at the bank.

Friendly and productive? Color the Macau authorities unthrilled.

According to Xinhua:

The MSAR government reiterated its concern and regret over the decision made by the US Department of the Treasury in regards to the BDA.

Prior to Glaser’s visit, the version that circulated in the local media was that Treasury had information on BDA’s money laundering activities, and speculated that a) BDA would be downgraded from “a bank of primary money laundering concern” to “a money laundering bank”, and that b) BDA’s directors would face indictment, presumably for being knowing participants in and owners of a money laundering operation (and not just sloppy managers).

I don’t think it’s going out too far on a limb to say that neither the Macanese or the Chinese are interested in seeing the BDA’s financial Calvary continue and, if there’s some complication involved in processing the remittance of funds, it is very likely that it can be laid at Daniel Glaser’s doorstep.

The implacable pursuit of BDA doesn’t sit well with the Macanese or the Chinese, who apparently view BDA as a scapegoat and collateral damage in America’s vendetta against North Korea.

Amazingly, BDA managed to turn a profit last year, despite the fact that it had lost virtually all of its correspondent relationships.

The bank is due to come out of receivership shortly. Stanley Au, the majority shareholder, wants his bank back and he wishes to appeal the Treasury decision instituting the ban on U.S. financial institutions doing business with BDA.

In short, the local attitude appears to be that the U.S. Treasury Department used BDA as a club to beat the North Koreans with for two years, the bank managed to stay afloat thanks to the pains taken by the owners and the government receivers, now it’s time for Treasury to bug out and let people get on with their lives.

Summing up what we know: Glaser went to Macau to present evidence concerning BDA activities that he wanted the Macau authorities to consider when processing the repatriation of the funds.

Presumably his intention was obstructionist, either for reasons of Treasury pride or Boltonian petulance.

Otherwise, why add further complications to a situation that was already unusual and fraught with difficulties?

And there are no signs that anybody welcomed his intervention

Now, for speculation:

Maybe Treasury decided that working a Macanese back-channel to put obstacles in the way of the transfer even after it agreed that the money could go back to the North Koreans was a valuable face-saving exercise and a justified slap at the State Department for trespassing onto its turf.

Glaser might have wished to persuade the Macanese authorities, when confronted with evidence that the United States considered incontrovertible, to refuse to repatriate certain funds related to accountholders tainted by moneylaundering.

In a less than subtle form of persuasion, he might have threatened to formally downgrade BDA to a “moneylaundering bank” and start legal proceedings in U.S. courts against Stanley Au and other BDA directors, with the ultimate goal of convicting them and demanding their extradition, if Macau was too cavalier in remitting funds to questionable North Korean accounts (bear in mind, before Secretary Rice steamrolled Secretary Paulson, the Treasury Department stated that it could only accept repatriation of about one-third of the funds in the various North Korean accounts).

After all, despite the fact that the Treasury investigation of BDA under Patriot Act Section 311 has been closed, the Treasury Department has other tools, also courtesy of the Patriot Act, such as Section 317.

Section 317 provides something called “long-arm jurisdiction” for U.S. courts against money launderers overseas who use U.S. based banks—maybe against directors of little Macau banks that sent trunkfuls of U.S. currency deposits from North Korea to New York for vetting by HSBC, as BDA did.

As the AP reported:

U.S. officials, who have not released any evidence publicly, stuck to their view that the bank knowingly helped North Korea launder money. (emphasis added)

If Glaser thought he could pressure the Macau authorities, it was a bad idea.

The first response of the Macau authorities, in response to any Glaserian brow-beating, would be to pick up the phone and talk to Beijing.

The primary issue being, if the U.S. Treasury Department was determined to pursue money-laundering charges against BDA in retaliation for Macau transferring allegedly dirty components of the $25 million against its wishes, then both Macau and Beijing would conceivably be subjected to U.S. demands--backed up with the threat of coercive measures under the Treasury Department's Patriot Act powers--to monitor, investigate, and account for the deposition of the dirty funds sent to Bank of China to U.S. satisfaction.

This, I would imagine, is a responsibility that the Chinese government has absolutely no interest in assuming.

Beyond the immediate, major issue of having to battle a Patriot Act enforcement process—one that Treasury can pursue unilaterally, secretly, and with limited recourse to the U.S. legal system for the target institutions--the Chinese and Macau authorities would definitely have a problem with Treasury’s perfunctory dismissal of Macau’s regulatory and enforcement integrity.

BDA has been in government receivership—including an audit--for 18 months, and the Macau authorities have instituted a passel of new anti-money laundering regulations as demanded by the United States.

Before the final decision was announced, there was even some speculation that Treasury might even consider that Macau’s monetary authority was capable of exercising oversight over BDA, and let the bank back in business with a slap on the wrist.

But no. Treasury justified its decision to cut off BDA by the statement that the chance of recidivism by BDA was too great, and the Macau administration wasn’t up to keeping tabs on this tiny bank:

While these efforts are important and welcome signs of Macau’s overall progress in strengthening its anti-money laundering and combating the financing of terrorism regime, full and comprehensive implementation of these measures in all the covered sectors will need to follow.

If, after all that Macau had done, the Treasury Department conducts an adversarial investigation against Macanese institutions and individuals as retaliation for disregarding its demands concerning the tainted accounts, it's a public assertion that Macau can't regulate its banking industry and that, in effect, Macau is not a legitimate financial center.

This is the kind of American high-handedness that drives the Chinese crazy.

And that’s before we get to Stanley Au. There was an interesting but somewhat suspect quote in the Financial Times indicating a willingness to throw Stanley Au under the bus:

“Stanley Au is not part of the Macao establishment per se,” said one person close to the Macao government. “I think the perception is that this is an isolated problem associated with a small bank. Treasury picked a low-hanging fruit when it picked on BDA.”

Leaving aside the question of what people close to the Macau government sprinkle their conversation with “per se” and “low hanging fruit”, the trouble with this observation is that Stanley Au is 1) the guy who contested the chief executive job against Edmond Ho in 1999 and subsequently served two terms in the local legislator; therefore a local political figure of note 2) a guy whose family has run banks and other operations in Macau for over a century and 3) a delegate to the China People’s Political Consultative Congress, the rubber stamp of China’s rubber stamp NPC if you will, but a guy with a certain profile within China.

In other words, he doesn’t look to me like some bum twisting alone in the wind, and that quote looks more like a piece of pre-emptive conceptual framing meant to promote Au's premature political demise.

In fact, the government might have been getting ready to hand his bank back to Mr. Au until Daniel Glaser showed up:

Mr Au said the Macao government, which took control of BDA in September 2005, had planned to return management control to the bank two days before the Treasury's latest move. He said he did not know how the ban would affect the handover but that he had no intention to give up control of the bank.

And Mr. Au might be able to bring some significant political support to bear :

"I firmly believe my country and the Macao government will find a way out to help me to solve this problem," Au said Friday, a day after returning from a meeting in Beijing, where he is a member of the Chinese People's Political Consultative Committee.

By refusing to give up on pursuing moneylaundering charges against BDA, it may have been Daniel Glaser and the Treasury Department who picked a fight that they couldn’t win.

I’m not surprised that the Chinese Ministry of Foreign Affairs made this extremely strong statement on March 21:

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.

...or that Daniel Glaser was ordered on the next plane to China to explain himself... the Macanese, the Chinese, and the US State Department...

...and very possibly make a formal undertaking on behalf of the Treasury Department not to pursue any further investigations of any kind against Banco Delta Asia or its directors and officers or, at the very least, exclude Bank of China from any obligation to participate in them.

Friday, March 23, 2007

Treasury's Not So Secret War Against the Six Party Agreement

Even though John Bolton is gone, like Lord Voldemort he left part of himself in horcruxes scattered through the US government.

With the realist takeover of the State Department and the exorcism of Bob Joseph, one of the last bastions of Boltonianism is Stuart Levey’s operation, the Office for Terrorism and Financial Intelligence at the Treasury Department.

Given the secretive nature of international banking compounding the instinctive secretive tendencies of the Bush administration, Stuart Levey’s operation has largely avoided public attention and scrutiny.

But that may change now that the Treasury Department has persistently and disruptively inserted itself into the execution of the North Korea Six Party Agreement, to the point that the execution of the Agreement is seriously endangered.

Most recently, the North Korean delegate walked out of the Six Party talks in Beijing because the matter of the Banco Delta Asia—which Christopher Hill had promised to resolve within 30 days—was still left hanging, with the Bank unwilling or unable to remit the funds into North Korea’s account at the Bank of China, probably because of behind-the-scenes obstruction by Treasury.

Treasury’s role as an independent and increasingly nettlesome factor in the North Korean negotiations has become increasingly apparent since last year’s mid-term elections exiled Bolton, catapulted Secretary Rice and the realists in control of the North Korea negotiations, and created a divergence between the priorities of State and Boltonian dead-enders at Treasury and elsewhere.

I blogged on it here, here, here, here, and here.

Now, the press is paying attention to the Treasury Department’s incessant efforts to throw sand in the gears of the Six Party Agreement on North Korea’s nuclear programs.

Via Arms Control Wonk, in mid-March, the Nelson Report reported “shock” in the State Department at the intransigent tone of the Treasury Decision on BDA.

On March 22, The Financial Times ran a piece laying bear the rift between State and Treasury, Rice helped unfreeze N. Korean funds.

And today the LA Times quoted an expert pointing out how unhelpful it was for Treasury to withhold its decision on BDA until the very last minute, shaving thirty days off the sixty days mandated under the agreement for North Korea to shut down the Yongbon reactor:

The importance North Korea has attached to these funds is no secret, prompting Li and other analysts to point a gentle finger at the U.S. for waiting until just hours before the Monday start of talks to announce the end of its investigation."

Maybe someone in the Bush administration believes they can't give in too easily," said Joseph Cheng, professor at the City University of Hong Kong. "But they already made the concession. Allowing enough time for the transfer to proceed smoothly would have been wiser."

And stories are starting to percolate about how elements in the Treasury Department might be working behind the scenes to make hinder the repatriation of the funds to Pyongyang’s account in Bank of China—a delay that caused a North Korean walkout from talks in Beijing on March 21, knocking off a few more days from the time available to get the deal done:

"As far as I know, the Bank of China refuses to accept the transfer of the frozen funds" from BDA, Xinhua's news agency quoted Russian envoy Alexander Losyukov as saying.

A diplomatic source said: "China, in fact, does not want to play a role in getting the 'dirty money' back to North Korea. The Americans are smart enough to toss the ball in the Chinese court over the questionable funds."

The North Korean situation is starting to shine unwelcome light on Levey’s Office of Terrorism and Financial Intelligence which, I expect, much prefers to operate behind the scenes to keep maintain its aura of power and unpredictability.

Stuart Levey is not a money man. He’s a lawyer, a smart cookie, (Harvard undergrad/law) one of many Bush loyalists that proved his merit in the Florida recount —he worked in Martin County—and found a slot in the Justice Department working on counter-terrorism.

He came to Treasury in 2004.

He wasn’t just filling an empty seat at Treasury or, for that matter, just a new slot on the organization chart.

According to his confirmation hearings, his mission at Treasury was to create a new counter-terrorist capability—a new office of Terrorism and Financial Intelligence-- inside Treasury.

In his prepared statement, Levey talked about an expanded enforcement role for Treasury, exploiting provisions of the Patriot Act:

I hope to bring a heightened sense of urgency to the terrorist financing mission at the Treasury Department...the overarching mission for the new Office of Terrorism and Financial Intelligence will be to ensure that the Treasury Department is fully exploiting all of it authorities, capabilities and all of the government’s information to combat terrorist financing and financial crime...I will strive to make better use of the tools the Congress provided in the new PATRIOT Act and of Treasury’s other enforcement powers. I also would build a new Office of Intelligence and Analysis that will exploit Treasury’s own information and integrate the Department more fully into the intelligence community...

Describing his work as the Justice Department’s principal representative to the Terroriist Financing Policy Coordinating Committee, Levey stated:

I have also become familiar with Treasury’s new and promising powers under Section 311 of the USA Patriot Act to impose counter-measures against financial entities or foreign nations that are a primary money laundering concern...the battle against terrorist financing [is]...a campaign to disrupt and cripple the end=users of these funds—the terrorists themselves.

About that intelligence office:

In response to a question from Senator Grassley concerning his vision for the Intelligence Analysis office, Levey responded:

The first function of the OIA (Office of Intelligence and Analysis—ed.) is to build a robust analytical capability on terrorist finance. The Department of the Treasury needs actionable intelligence that can be used to fulfill its mission and exercise its legal authorities. Analytical products from the intelligence community tend to be based on anecdotal information and are largely intended to inform policymakers rather than provide them with date points that can be a basis for then [sic] taking action. They also tend to be highly classified, whereas Treasury often needs to use the lowest classification possible to be used openly to press foreign governments or in evidentiary packages. While OIA will draw on all-source analytical products from the intelligence community, it willl produce its own intelligence reports tailored to the particular needs of Treasury’s mission.

To me, the money quote is “actionable intelligence”. Just like Stephen Cambone at Defense, Levey would have his own intelligence, his own justification for policy, and his own license to act.

If you’re thinking “stovepipe”, “independent spook operation”, so am I. In this case, however, the weapons are dollars instead of guns, and the battlefields in the plush offices of the world’s banks instead of on dusty deserts.

Levey worked hand-in-glove with John Bolton to squeeze North Korea and Iran, using the philosophy that it was not enough to hinder financial operations directly related to banned activities

Instead, Levey believed it was necessary to degrade the overall financial capabilities of the nations behind the activities by banning US banks from doing business with them, and persuading or intimidating the world’s banks into following Treasury’s lead.

I don’t know how successful Levey has been in conducting a worldwide financial boycott against North Korea and Iran.

Like most Bush administration initiatives, there is probably a lot of psy-ops and self-promoting bluster involved. China and Russia are certainly opposed to Treasury’s financial inquisitions, and the Europeans probably don’t like them either: the whole policy smacks more of intentional destabilization and regime change instead of interdiction or conventional counter-proliferation.

Back in November I questioned Levey’s grandiose claims concerning the financial noose that Treasury’s BDA sanctions were tightening around Pyongyang’s neck, opining that Chinese good offices had a lot more to do with the progress toward the Six Party Agreement than Levey’s Inspector Javert-like pursuit of Kim Jung Il’s $25 million.

Nevertheless, there is no question that threatening Chinese or European banks access to the US banking system is an extremely powerful weapon.

A hint that Treasury might threaten a harassing investigation of how Bank of China handled the North Korea transfer might be enough to stall it, and compel the Chinese to ask for clarification and reassurance from the State Department before they proceeded.

Levey has employed Treasury’s new powers discretely and persistently, even if we don’t know how effectively.

Until now.

The overt actions by Treasury against the North Korean deal make Levey’s shop look like a rogue department pursuing a vendetta against Pyongyang, deliberately undercutting the State Department, and embarrassing President Bush in one fell swoop.

It also makes Treasury look less like a team of dedicated, dogged government investigators and more like a cabal of disgruntled, obstructionist Boltonians.

There might be more to Treasury’s efforts to derail the North Korean deal than sheer ideological cussedness.

Treasury is undoubtedly infuratated that the State Department was able to override Treasury on the decision to release all the BDA accounts.

It’s not so much a question of principle.

It’s one of power.

Treasury destroyed BDA simply by announcing its investigation—and by asserting that its actions were under the Patriot Act, a matter of US law and enforcement, unrelated to UN sanctions, and therefore beyond international pressure or compromise.

The ability to sanction international banks while sheltered behind the Patriot Act and U.S. law would appear to be at the core of Treasury’s power—and just the sort of enforcement Easter egg that John Bolton would be happy to plant in the U.S. government.

That position was blown out of the water by the U.S. government’s backdown on BDA.

If foreign governments believe that Treasury’s decisions can be overturned by State on grounds of overriding national interest—or just casual deal-greasing—then Treasury’s intimidating “I’ll huff and I’ll puff and I’ll blow your bank down” approach to dealing with foreign governments and banks will look more like empty bluster.

As the Financial Times reported:

The same official, who broadly supports making small sacrifices to achieve the larger gain, said it was "very unseemly" to have Treasury publicly acquiesce in Beijing. It also appeared at odds with previous statements by Mr Hill, who in a speech to the American Enterprise Institute in 2006 said he had no influence over the Treasury action on BDA.

"We have a separation of duties and it is not for me to tell law enforcement people not to pursue and not to do their jobs," Mr Hill said.

Indeed, the Treasury Department had gone to great lengths in its initial moves against BDA to describe them as domestic enforcement issues, unrelated to the concurrent UN sanctions.

Of course, as the flip-flop ordered by the State Department reveals, it would have been more honest to characterize the Treasury investigation as “one element of U.S.
activities directed against North Korea and coordinated with John Bolton’s efforts at the UN but shielded behind the excuse that it was a Patriot Act enforcement activity”.

But I don’t think the U.S. government was fooling anybody. Certainly not the Chinese and North Koreans.

China’s sensitivity to the “Treasury weapon”, and the added possibility that it is out of control of the State Department, may very well turn out to be more of a headache for the United States—which has $350 billion of its bonds held by China, and would not like to see China moving to a new forex basket with decreased exposure to that dangerous dollar—than for China.

On matters of bureaucratic power, as well as enforcement power and institutional credibility, Treasury is on the defensive. The Financial Times reported on another measure that assured State’s current ascendancy over Treasury:

[A Capitol Hill staffer] added that the Treasury shift [to endorse release of all funds] came after the departure of Bob Joseph, the former state department hardliner on North Korea who "worked hand in glove" in opposing Mr Hill.

Stuart Levey’s operation has a lot riding on it.

With the State Department in the hands of the realists, the Treasury Department has become the stronghold of the hardliners, as can be seen from Levey’s recent uncompromising testimony before Congress on Iran.

The big fish in international financial counterterrorism is, of course, Iran.

With Iran sanctions sputtering, Stuart Levey might want to use the BDA matter to send a message to the UN and the State Department that Treasury, with its independent intelligence, investigatory, and enforcement powers authorized by numerous US resolutions and findings vis a vis Iran, is a force that still must be reckoned with in fixing US policy—and ignored at the peril of its foes, domestic as well as foreign.

Thursday, March 22, 2007

The BDA Saga Continues: More Obstruction from the U.S. Treasury Department?

Regime change elements in the United States have not given up on trying to derail the Six-Party Agreement—and they may succeed.

Using the principle Trust—Then Verify, North Korea has refused to participate in meetings and talks until the $25 million of funds frozen in Banco Delta Asia are returned to them.

Treasury delayed its report disposing of the BDA investigation until the last possible date, shaving 30 days off the sixty day period in which North Korea promised to shut down its reactor.

Now, with Christopher Hill and the other negotiators gathered in Beijing, the North Koreans left the meetings and flew home because another glitch had occurred in the hegira of the $25 million, probably courtesy of the Treasury Department.

Although the U.S. Treasury Department had ended its investigation and agreed to let the Macanese banking authorities dispose of the funds—in which case the funds would be remitted to North Korea’s Bank of China account—the transfer hadn’t happened yet.

At least one-third of the money is apparently above-board and legit, involved in transactions with the likes of British-American Tobacco and Hyundai.

Some of the other accounts...well, it looks a bit murky.

One account-holder is reportedly dead, and another in Pyongyang. Probably some hanky-panky involved. Anyway, a headache, a headache that might involve a bit of eye-averting and nose-holding to resolve if the BDA issue is going to be finalized, North Korea shuts down the Yongbon reactor, the fuel oil arrives, so on and so forth.

But bank-related greasiness works a lot better if everybody’s on the same page and nobody raises a fuss about things like back-dated paperwork, dodgy affadavits, and a disinterest of banks and banking authorities in performing due diligence concerning same.

That’s hard to do when the US Treasury Department has announced in letters of fire ten feet high THIS MONEY IS DIRTY and is unambiguously hostile to the entire proceeding.

Treasury is definitely not happy and I suspect that some working-level goblins in the Treasury Department are threatening to turn the TD’s Sauron-like fiery eye on the Bank of China if it receives and passes on funds whose origin and ownership—and disposition and destination--haven’t been accounted for to their satisfaction.

"As far as I know, the Bank of China refuses to accept the transfer of the frozen funds" from BDA, Xinhua's news agency quoted Russian envoy Alexander Losyukov as saying.

A diplomatic source said: "China, in fact, does not want to play a role in getting the 'dirty money' back to North Korea. The Americans are smart enough to toss the ball in the Chinese court over the questionable funds."

The easiest way to solve this would be for the Chinese simply to front the suspect $8 million, heck, the whole $25 million just so the show can get on the road.

But, as a matter of principle, the Chinese are not going to put up with veiled threats against BOC by elements in the Treasury Department seeking to derail an important diplomatic arrangement involving the US and the PRC, not when said BOC is holding $350 billion in Treasury Department T-Bills.

So I will wager that Christopher Hill has been put on notice it’s his job to battle with the hardliners once again to try to keep the deal going.

The Financial Times has an interesting and important article, Rice Helped unfreeze N. Korean funds, on the recent battles between the State and Treasury Departments:

Current and former officials say Christopher Hill, the chief US negotiator on North Korea, convinced Ms Rice that the US should sacrifice the issue of the frozen funds to push forward the broader goal of implementing last month's six-party accord on denuclearising the Korean peninsula.

Several people familiar with the debate said Hank Paulson, Treasury secretary, agreed to overrule officials responsible for terrorism financing [a.k.a. Stuart Levey, an insistent advocate for exerting maximum financial pressure on Kim Jung Il's regime--ed.], who objected to the move, after Beijing warned that a failure to return the North Korean funds would hurt the Sino-US strategic economic dialogue.
Many experts, and some White House officials, were dismayed when Daniel Glaser, the Treasury deputy assistant secretary for terrorist financing and financial crimes, said in Beijing on Monday that the US and North Korea had agreed on a mechanism to refund all the money...

Until the intervention by Mr Paulson, Treasury had been prepared to tell the Macao government that it would not object to returning about a third of the $25m for which there was less-than-conclusive evidence of illicit activity. Treasury on Wednesday dismissed suggestions that it had succumbed to political pressure.
One US official who broadly supports the nuclear deal said the administration was scrambling to find a way to return the $25m, which had been complicated by the fact that some banks were reluctant to help move the money because the US Treasury had previously insisted it was "contaminated".

The Treasury people are probably sitting on their hands, saying, We’re not going to soil our fingers with dirty money from a dirty bank...and neither should you!

More provocatively, it seems elements in Treasury are basically daring Rice to tell President Bush that the U.S. government has to ignore evidence of illegal funds, turn a blind eye to whatever funny business is needed to finish the paperwork and get the money out of BDA’s door, accept its repatriation to another bogus bagman in North Korea no questions asked, and reduce the proud men and women of the United States to colluding with drug dealers and counterfeiters, sullying the honor of this great nation...well, you get the picture...just so State can have its denuclearization agreement.

In the end, I think that, as usual, the elements opposed to the deal have been too clever by half in their virtuous conspiracy to sabotage the Six Party Agreement.

The intransigent tone of Treasury’s BDA decision does keep North Korea’s status as a financial pariah alive...but by limiting Pyongyang’s gains in the initial stage to a paltry $25 million and keeping de facto financial sanctions in place (making it impossible for Pyongyang to walk away from the Agreement with the BDA money and its international financial standing rehabilitated), it increases North Korea’s incentives to stick with the process.

President Bush will be forced into the awkward position of intervening on behalf of North Korean money launderers and counterfeiters by instructing his Treasury Secretary to turn a blind eye to whatever legerdemain is needed to get the BDA funds out the door...but he will resent the unwelcome demands being put on him by the hardliners who at present provide not a scrap of meaningful political cover and instead beset his administration with fresh difficulties as it fights for its political life.

And the Chinese will certainly be impressed by the bureaucratic hostility--whose indefatigable malice will appear quite familiar to the veterans of decades of bloody battles within the committees and bureaus of the PRC--to the Six Party Agreement...which will encourage them to redouble their efforts to preserve and advance it, so its enemies cannot force a repudiation of the agreement in the US Congress.

In a perverse way, you can say that the hardliners, through their conspiratorial obstructionism, offer the best assurance that the highly flawed Six-Party Agreement will achieve some permanent and significant successes.

As long a the signatories to the Six Party Agreement (excluding Japan) focus on the pressing need to keep the neocons at bay—instead of regarding the profound unsavoriness and duplicity that is Kim Jung Il—they will share a common desire to keep the process alive.

Onefreekorea is, as usual, the go-to source for the back story on regime-change machinations.

Its recent efforts have been hampered by the fact greater-than-usual amounts of willful ignorance and self-deception are required to blame the North Koreans for duplicity and perfidy in executing the Agreement so far, when elements in the U.S. Treasury Department have been working so energetically and unambiguously to sabotage the deal.

It has issued its marching orders in the next but certainly not final battle against the Agreement:

If this agreement is not to degenerate into a protracted farce – and no deal at all would be a far better thing – this is our last chance to stop it. Here is what we should do now:

1. Stop the delivery of the fuel oil until North Korea shows up to “discuss” its full nuclear disclosure, as it agreed.

2. Clarify that North Korea must “shut down and seal” Yongbyon as agreed by April 13th.

3. Declare our Banco Delta obligations fully resolved and reaffirm that North Korea is bound by UNSCR 1718 in its disposition of the $25 million, and that we make no promises about what Treasury will do if the funds are unlawfully diverted to non-humanitarian purposes.

Item 3 strikes me as pretty weak beer, another effort to ensnare North Korea in the punitive sanctions regime.

I think Pyongyang’s interest in the $25 million is symbolic, as a necessary demonstration of US good faith (or failing that, the ability of pro-deal elements in the US government to deliver on their stated commitments), and Kim Jung Il would be able to sequester these funds for conspicuous good works if the need arose and still sate his sinister desire for French cognac and Rolex watches.

As for 1 & 2, extrapolating on the point I made above, missing key deadlines might be a disaster for the Agreement...but also both for President Bush and the regime changers, if informed opinion in Washington and world capitals held them--and not Kim Jung Il--responsible for America’s inability to deliver on the deal it had agreed to.

Tuesday, March 20, 2007

Another Boltonian Policy Bites the Dust?

With the departure of John Bolton and (most of) his cabal from the State Department, there has been an orgy of making hay while the sun shines e.g. quickly executing policy and personnel initiatives that would have been 86’d by the moustachio’d one and his White House cohorts if they still held power.

And it’s not just Condi Rice and her realists who are frantically reaping the harvest.

France has pitched in, calling for the ancient and anachronistic EU arms embargo against China to be lifted (from The Nation [Pakistan], Arms embargo against China unjustified: France, March 20, 2007, h/t to for the article):

The European Union’s arms embargo on China is no longer justified and should be lifted, France’s defence minister said on Monday, adding that this did not mean Paris wanted to start selling weapons to the Chinese.

The arms embargo has no technical justification because French and EU regulations are already more restrictive than what’s in the embargo, Michele Alliot-Marie told a news conference in Beijing....

The embargo only concerns the EU and hasn’t stopped other countries from supplying weapons and components to China, Alliot-Marie said at the end of her China visit...

The political justification for the embargo is based on criticisms on the part of the EU over certain human rights issues, she said, without saying what those were. But the same countries accepted that China get the Olympics even though the criteria for getting the Olympics are the same as the embargo. Their logic is inconsistent, the minister added, without elaborating.

The embargo was instituted in 1989 in response to the Tian An Men massacre, cutting off arms sales to China until its human rights behavior achieved more civilized standards.

Since then, if China has done a bad job of moving forward, the world has done a good job of moving back.

Viewed in the context of an unprovoked invasion of Iraq by the democratic and civilizing powers of the West and Japan that has cost upward of 500,000 Iraqi lives, the Tian An Men massacre, while not a walk in the park, does not justify an arms embargo approaching its second decade.

In fact, in 2005, with China, with a fifteen-year record of reasonably good international behavior and recognized as a politely enthusiastic handmaiden to President Bush’s GWOT (Global War on Terror), Beijing (end the EU) entertained genuine hopes that the embargo would be lifted.

However, the Taiwan issue flared up again and, in a worrying sign that the politics of containment, confrontation, and regime change were designed for application beyond the Middle East, John Bolton and his allies in Japan lobbied vociferously and effectively for maintaining the embargo.

In fact, the looming Boltonian plans for China was one of the inspirations for the creation of this blog, and in one of my first posts in April 2005, I wrote on Bolton’s efforts related to the EU arms embargo as follows:


...the EU’s retreat from lifting the arms embargo [is] no doubt China’s sorest disappointment:

Beijing was certain early this winter that a European Union arms embargo against China would be lifted (a move ardently opposed by the Pentagon). But last week, the EU said it no longer had a consensus to lift. German Foreign Minister Joschka Fischer, in a frank interview with German media, even mentioned a possible need for a form of containment of China, until its social, political, and military direction became clearer.

Getting the EU to back away from lifting the arms embargo was one of John Bolton’s major achievements, accomplished with the help of a House of Representatives resolution and intensive lobbying of the European powers by both the United States and Japan—something the Chinese are well aware of.

John Bolton’s Feb. 25, 2005 speech in Tokyo laid out the position for and rationales for America and Japan’s joint approach to quarantining China, including scuttling the EU’s plans of lifting the arms embargo:

Similarly, we are having discussions with other governments about existing arms embargoes against China and about our concerns that others--such as the EU [European Union]--may lift their embargoes and thereby negatively impact the security of America, and its friends and allies in the Asia-Pacific region....

I expect the Europeans beat a retreat on lifting the arms embargo when they realized that America’s post-9/11 engagement with China beyond the most cosmetic gestures is dead. Rather than try to welcome China’s post Tian An Men return to full membership in the family of nations with a few juicy arms deal, it was better to back off and avoid getting tangled up in another U.S. scorched earth foreign policy crusade.

Those with long memories will recall that the sanction regime against Iraq was weakening because of European indifference and impatience before the Bush administration stepped in with its anti-Saddam campaign and made it clear that it would not permit Saddam’s Iraq to regain the measure of legitimacy and protection under international law that status as an unsanctioned, member-in-good-standing of the nation-state club bestows.

With that background, it must be especially disturbing to China that the U.S. wants to maintain an explicit sanction and embargo regime against China, with the implication that China is prone to devious, dangerous pariah-state behavior that the leadership and force of the United States-and Japan-- is needed to check.

Again, from John Bolton’s speech in Tokyo:

The second reason we oppose the lifting of the EU arms embargo against China was very well stated by our friend Foreign Minister Machimura, when he noted that "We are against a lifting of the arms embargo. The matter of the lifting of the arms embargo is one of great concern not only for Japan but for the security of East Asia as a whole."

Our respective government’s positions on resolving the Taiwan-China Cross-Strait issue are well-known. Suffice it to say, though, we are concerned that any measures that allow China to significantly improve its coercive capabilities could make fostering a peaceful resolution of this issue less likely. We concur with Foreign Minister Machimura that it will contribute to regional instability.

Moreover, as I highlighted above, no adequate mechanism currently exists to prevent China from transferring technology and lethal weaponry to other, less stable regions of the world, including rogue states, or to use it for the purposes of internal repression.


If the embargo is lifted, China may feel a greater sense of security because it has access to European arms.

But it will be more relieved to know that, with the defection of the EU, US efforts to maintain internationalized sanctions against China have crumbled and Beijing is free to step off the US sanctions--regional sanctions—UN sanctions—interdiction and destabilization escalator that John Bolton had designed for it.

Monday, March 19, 2007

A Funny Story About Funny Money: Debunking the North Korean Supernote Myth

H/T to Simon World for the Asia Sentinel link

Incorrigible skeptic that I am, I am willing to give credence to the detailed Frankfurter Allgemeine report asserting that the $100 supernotes that North Korea is reputedly running off to finance Kim Jung Il’s mad schemes are more likely blowback from some CIA-run off-the-books funding operation, than they are the fearsome economic poison of those master counterfeiters at Pyongyang’s Printing Plant No. 62:

The Allgemeine piece is written by Klaus Bender, a well-known financial journalist who spent ten years researching the “security printing” (currency, stock certificates, passports, etc.) business and wrote a book about it (Moneymakers: The Secret World of Banknote Printing, 2006, J. Wiley-VCH).

Bender describes the Supernotes—which have been circulating since 1989 and have kept pace with 19 ever-more sophisticated redesigns of US currency, including 1/42,000 of an inch microprinting--as follows:

Even experts on currency printing have been unable, using visual inspection and touch-testing - the most important tests of authenticity for average citizens - to differentiate the counterfeit 100-Dollar-Notes from the genuine ones. With respect, investigators therefore baptized the forged notes as Supernotes.

Compare and contrast the Asia Sentinel’s description of its experiments in passing North Korean funny paper acquired in Dandong.

Pyongyang’s pitiful productions apparently can’t get past the cursory scrutiny of any experienced examiner:

First at a bank:

A counterfeit-bill detecting machine similar to ones used in casinos and about the size of a large wallet was produced and the bills inserted one at a time. The real $100 slid through effortlessly but the supernote stopped three fourths of the way through and a small red light began blinking.

...then a mom and pop money changing outfit:

When given both bills it took the couple about two minutes to confidently select the phony bill – “bad color!” ‑ and advise that it be taken to the nearest bank for confiscation.

...and finally Western Union:

In Wanchai, a Western Union clerk, equally used to handling massive amounts of foreign currency, immediately picked out the phony bill. Asked why, she said it just didn’t quite feel right.

Here’s what I think:

First, the North Korean government lacks the logistical and technical wherewithal and immense financial resources (the press alone costs $50 million, for crying out loud, and that doesn’t cover the cost of the custom papermaking plant or the cost of making or accessing the sophisticated and tightly controlled security inks) to track US currency through its multiple redesigns and make high quality supernotes.

Second, the great thing about counterfeit money is that you don’t have to print it. You can buy it at a discount. If you use $1 of legit forex to buy $2 of funny money, you’re doubling your money. That’s the best return on their US$ holdings that the North Koreans are likely to find on this planet.

Third, probably organizations or individuals within some country with reasonably close links to the North Koreans, a flourishing, highly organized criminal infrastructure, and kinda dirty banks is probably selling supernotes to the North Koreans. I think Russia is more likely than China.

Fourth, the North Koreans have no compunctions about abusing the world financial system with counterfeit money, either by buying it or making it. They might have some crappy printing press turning out crappy $100 bills like the ones Asia Sentinel got their hands on. Or their Chinese currency printer is doing some off the books printing for them. But these notes are a minor, easily detected element in the local cash trade in China, North Korea, and environs.

Fifth, I have no problem with the idea floated in the Allgemeine that the CIA is printing the notes to finance off the book operations.

In fact, the most bizarre element of the true Supernotes may be the most revealing. This high quality forged currency, with the special inks, the microprinting, the itty-bitty polyester threads, etc. is easily detectable with the automatic currency testing machines used by the major banks.

Strangely, although the counterfeiters have mastered the technology of the infrared sensitive security inks used on the new Supernotes, the notes are produced in such way that automated currency test systems recognize them immediately as forgeries. In America, the Supernotes have little chance of going undetected.

Funny about that.

Also note that the counterfeiters are neglecting the $50 bill—which could be passed more readily in general circulation and would cause significant distress to John Q. Taxpayer if it was being confiscated right and left.

Also suspicious is the fact that the 50-Dollar Supernote, which is even more finely crafted that the 100-Dollar Supernote, is not being circulated by the forgers, even though this denomination is far more widely used by the general public and often goes untested.

But if I were the CIA and trying to justify to myself undermining the world financial system--the same world financial system we’re supposed to be protecting with all this skullduggery--with counterfeit supernotes, I’d shrug off some of the moral burden by coming up with what Ollie North would call a “really neat idea”:

These notes can only circulate on a small scale in the cash economy of guys and gals the CIA is supporting, bribing, paying off, or stinging. It’s mattress money. When it’s deposited in a major bank, gazing! it’s confiscated—and the depositor either eats the loss... unless a bad guy bank/government accepts the notes, probably at a deep discount, thereby draining said freedom-hating institution of genuine, fungible forex...

unless it puts the supernotes in a safe...remembers Gresham’s law...

...and sells the funny paper at a discount when the cash-strapped North Koreans come to town.

And to throw people off the scent as to where the Supernotes are coming from, I would state that the money is being printed in whatever part of the world is the most detestable and least accessible to independent investigators.

Bear in mind that these notes have been around since 1989 and the U.S. government used to claim that they were being printed in Iran, and then in the Bekaa valley in Lebanon (where Hizbollah and those Syrian stinkers hold sway) in the middle of a war zone, less than one hundred miles from the Israeli border.

It seems that the location of this phantom plant will migrate to wherever the political needs of the U.S. government demand. Maybe the next stop is China.

Sunday, March 18, 2007

Circular Gratification: Vice President Cheney’s Most Recent Effort to Contain China

Vice President Cheney recently visited Asia to lend his prestige and power—two increasingly devalued commodities--to two faithful and embattled allies in his global campaign of confrontation and containment, Japan and Australia.

Japan, in particular, needed bucking up, since the Abe regime is reeling from the perfunctory US abandonment of the abductee issue in the rush to conclude the Six Party Agreement on North Korea.

The abductee issue was at the core of Abe’s North Korea policy and, indeed, Abe’s entire political identity as a principled and valued core member of the US effort to assert its interests and agendas in North Asia through confrontation-based diplomacy.

With realists in ascendance at the State Department and negotiation, conciliation, and compromise at the heart of U.S. Asia policy, Vice President Cheney brought with him a rather contrarian and dubious gift—an effort to singlehandedly will into existence another coalition of the willing, centered on Japan, Australia, and India, to take on the unenviable and almost impossible task of presenting an effective, united front against China.

The Marmot’s Hole looks at a proposal for an anti-Chinese alliance midwifed by Dick Cheney and sees an iron ring of democracies containing China.

I look at the vision of an American, Japanese, Australian, and Indian security quadrilateral and see a regional circle j**k characterized by shared press conferences, private fantasies, and shamefacedly selfish gratification.

Australia is blundering through its self-made neocolonial quagmires in Papua New Guinea, the Solomon Islands, Tonga, and Fiji. It can’t even handle its back yard (where China is cautiously but productively fishing), let alone contribute effectively to the Ant-Chinese Superhero League that’s supposed to take the fight to the Yellow Peril.

All India wants is to play off the United States, China, and Russia against each other and reap concessions and aid from each while it concentrates on its economic development and energy security.

Indeed, Mr. Cheney's hasty initiatives in ad hoc coalition building are probably a direct response to a conspicuous piece of footsie between New Delhi and America's strategic competitors: the Russian/Chinese/Indian mini-summit in Delhi in February.

Which leaves the United States and Japan...well, maybe just Japan.

The money grafs in the story in the Australian:

The Japanese Government and US Vice-President Dick Cheney are keen to include the growing economic and military power of India in the already enhanced "trilateral" security arrangements, locking together the three most powerful democracies of the Asia-Pacific region.

Mr Cheney gave the Japanese proposal new life on his recent visit to Japan and Australia after sections of the Bush administration rebuffed the plan.

Ah, yes...emphasis added.

With the neocons in retreat on Washington and on the North Korean issue, it seems that Japan provides the vital function to Dick Cheney of providing political cover and scope for strategic initiatives that are foreclosed at home.

In this context, I am tempted to describe Japan as our “Israel in the Pacific”, exploiting relationships inside the US government to develop foreign and domestic policitical synergies that go beyond US official policy, in a manner similar to Tel Aviv's.

Now more than ever, Israel is openly and unapologetically working with elements in the Bush administration to advance a particular policy toward the Middle East—and elements within the US national security establishment are utilizing allies within the Israeli government to assist them in promoting their preferred agenda in the policy battles inside the U.S. government.

The estimable Laura Rozen, in profiling Secretary Condileezza Rice’s yearlong struggle to gain control over the Bush administration’s Iran policy, related a similar kind of back-channel initiative that, if it didn’t involve the politically sacrosanct state of Israel, might be unkindly regarded as colluding with a foreign power against the policy of the United States:

Rice knows how the system works. In February, she traveled to Jerusalem to attempt to restart the Middle East peace process. But while she was en route the neoconservative NSC adviser Elliott Abrams was, according to news reports, using contacts in the office of Israeli Prime Minister Ehud Olmert to arrange a phone call between Olmert and Bush. After the call, Olmert announced that Israel would not recognize the Palestinian unity government as a legitimate negotiating partner—an essential precondition for productive talks—and that Bush supported Israel’s stance. Her position fatally undercut, Rice returned to Washington empty-handed.

It’s one thing for a small-time erstwhile felon like Elliott Abrams to use a foreign government to promote his virtuous conspiracy against the Palestinian peace process.

But when Big Time, America’s shadow president, has to outsource his anti-China agenda to Japan and two weak and/or unenthusiastic partners in South Asia and rely on them to whipsaw the State Department, that’s a sure sign that it’s going nowhere.

Or better yet, in circles.

Friday, March 16, 2007

Twilight of the Boltonians: Treasury Works to Derail the North Korea Deal

In a comment on Arms Control Wonk in 2007 and in this post, I made the statement that the website Onefreekorea had apparently received an advance copy of a government ruling concerning Banco Delta Asia. I inferred this from my reading of the timestamp on the OFK post, which I believed indicated that the post had been put up the day before the ruling was officially announced and publicly available. OFK’s proprietor has advised me that he obtained the ruling through an electronic subscription to the Federal Register and did not receive it in advance. I regret the error, withdraw the statement, and apologize to OFK. I’ve also asked ACW to delete the comment. CH, June 1, 2008)

In a display of maximal middle finger truculence, the Treasury Department posted its final decision concerning Banco Delta Asia on the very last day, darnit! of the 30-day term promised by the United States during the Six Party negotiations.

In one way, the Treasury decision promotes the North Korean denuclearization process by closing the books on the BDA investigation and allowing the Macau government to distribute the deposits of the bank (which collapsed when the US investigation was announced) to North Korean and other depositors.

However, the true import of the Treasury decision was to force the closure of BDA as an outlaw bank doing outlaw business with an outlaw regime by declaring it was an unrepentant conduit for illicit North Korean actions and unfit to maintain correspondent relations with any banks operating in the US.

Since BDA is bust, the decision can be viewed as announcement that, in the eyes of some people at the Treasury Department at least, North Korea is still a financial pariah and other banks that are thinking of doing business with the North Koreans can expect the same treatment as BDA got.

You can imagine that the North Koreans are shooting angry glares at the Chinese, in effect saying, “You promised me that the US was going to ease up on sanctions. The sanctions on BDA are gone, but only because the bank is gone with them! And the way the decision’s written, no other bank is supposed to do business with us either!”

And the Chinese are shrugging and saying, Hang in there. Next time we’ll pay more attention to the fine print.

"We express deep regret at the US insistence on using US domestic law to apply a ruling to the Banco Delta Asia," Qin Gang, Chinese foreign ministry spokesman, told a news conference.

He said all steps should assist general progress in the six-party talks that produced the February accord, under which Kim Jong-il's regime agreed to shut down its main nuclear reactor by mid-April. "We hope the relevant parties can honour their commitments [to the February agreement]," Mr Qin said.

Are there politics involved? As in that whole realist vs. neocon thing? You bet!

Courtesy of Arms Control Wonk, the Nelson Report stated:

Still, observers in and out of State were shocked at the very firm declaration by Treasury that even though the Ernst & Young audits completed last October had apparently found nothing to confirm the various charges, as of yesterday, Treasury firmly stated that each and every one was proven beyond doubt.

Onefreekorea, a Washington-based lover of all things regime-change who spends quality time with John Bolton, had the complete text of the Treasury Department decision up on its website on March 13, the day before it was officially issued, indicating some concerted perception management is at work.

Onefreekorea is eager to claim evidence of dealbreaking perfidy and bad faith by the North Koreans, and promotes the canard that North Korea had no right to expect that the BDA issue be resolved in the initial stage of execution of the Six-Party Agreement (or hold up a meeting with El Baradei in Pyongyang because Treasury was still sitting on the ruling).

In an early March post, Onefreekorea quoted a report from Yomiuru Shinbun:

“The United States promised to resolve the problem of sanctions against our country within 30 days. If this promise is kept, then we will shut down our nuclear facilities in 60 days,” said Kim, the chief negotiator to the disarmament talks.

and commented:

That would suggest that it’s the North Koreans themselves who are either misunderstanding or reinterpreting.

He also argued:

...there’s no pretending that we can accomodate this North Korean demand [for lifting financial sanctions—ed], or that it’s consistent with what we’ve agreed.

What did we actually agree to do? The agreement is silent on any action by Treasury or on the lifting of sanctions or financial measures.

Again, one March 15, onefreekorea has another go:

The DPRK mentioned that they are waiting for the lifting of sanctions with regard to the Macau bank before they implement the part of the agreement allowing the agency to monitor and verify the shutdown of the Yongbyon facility,” ElBaradei told a news conference…. [Reuters, Chris Buckley] ...

Needless to say, the agreement does not make the lifting of sanctions a precondition to the shutdown of Yongbyon. This may well be our critical failure point.

Let’s put that one to rest, courtesy of the State Department transcript of Christopher Hill’s February 13 press conference in Beijing:

QUESTION: You mentioned the thirty days to resolve BDA. I mean, can you give more specifics on that? Is that all the accounts?

ASSISTANT SECRETARY HILL: I can’t at this point, but we said we would resolve them in thirty days. We have had senior level discussions about that. I think we will get that done.
QUESTION: And the Treasury issue is being resolved?

ASSISTANT SECRETARY HILL: Well, I mean with respect to the BDA, the Banco Delta Asia, we’re prepared to resolve that within thirty days. But with respect to the overall issues, overall financial issues, I think the North Koreans seem to understand that they need to get out of this money laundering business and ultimately start getting out of this nuclear business.

There are important factors at work that make the resolution of the BDA issue less than perfect, but North Korean bad faith and misunderstanding are not among them.

The declaration by Treasury is of a piece with recent efforts by pro-Boltonian forces use their now limited organizational resources at hand to derail the North Korean deal.

As blogged previously, in January Jay Lefkowitz took note of his part-time obligations as Special Envoy for Human Rights to North Korea and accused North Korea of slave labor practices, and our Ambassador for UN Reform, Mark Wallace, was able to freeze UNDP aid to North Korea on the basis of allegations of financial mismanagement yet to be proved.

The Treasury action, like these two previous sallies, is proving to be a damp squib, eliciting a stern statement of disapproval from the Chinese, no response from the North Koreans and, as yet, no signal that the Six Party process has broken down.

These measures may not be useful in reversing US policy on North Korea, but they feed the Boltonians’ creation myth, a myth that it was U.S. intransigence and harassment—and not China’s regional power offices in the aftermath of the North Korean nuclear test—that pushed Pyongyang back to the negotiating table.

On the BDA issue, in particular, I’m skeptical of the extravagant claims that Treasury has made on behalf of their campaign to bring North Korea to its knees by gutting this small Macau bank. In fact, I think the Chinese forced our hand even on that matter by unilaterally unfreezing some accounts in BDA back in December.

Of course, incorrigible skeptic that I am, I am also willing to give credence to the detailed Frankfurter Allgemeine report asserting that the $100 supernotes that North Korea is reputedly running off to finance Kim Jung Il’s mad schemes are more likely blowback from some CIA-run off-the-books funding operation, than they are the fearsome economic poison of those master counterfeiters at Pyongyang’s Printing Plant No. 62.

The Allgemeine describes the Supernotes—which have been circulating since 1989 and have kept pace with 19 ever-more sophisticated redesigns of US currency, including 1/42,000 of an inch microprinting--as follows:

Even experts on currency printing have been unable, using visual inspection and touch-testing - the most important tests of authenticity for average citizens - to differentiate the counterfeit 100-Dollar-Notes from the genuine ones. With respect, investigators therefore baptized the forged notes as Supernotes.

Compare and contrast the Asia Sentinel’s description of its experiments in passing North Korean funny paper acquired in Dandong.

Pyongyang’s pitiful productions (the Allgemeine also notes that Pyongyang's only legit currency press is out of action due to a lack of spare parts and North Korean currency is probably printed in China) apparently can’t get past the cursory scrutiny of any experienced examiner:

First at a bank:

A counterfeit-bill detecting machine similar to ones used in casinos and about the size of a large wallet was produced and the bills inserted one at a time. The real $100 slid through effortlessly but the supernote stopped three fourths of the way through and a small red light began blinking.

...then a mom and pop money changing outfit:

When given both bills it took the couple about two minutes to confidently select the phony bill – “bad color!” ‑ and advise that it be taken to the nearest bank for confiscation.

...and finally Western Union:

In Wanchai, a Western Union clerk, equally used to handling massive amounts of foreign currency, immediately picked out the phony bill. Asked why, she said it just didn’t quite feel right.

So I think the world financial system is safe from North Korean economic sabotage even if the Treasury sanctions amount to nothing, as they probably will:

... one source in Washington said, “The access to the financial institutions of China and Russia, which are relatively less influenced by the U.S., will become easy for North Korea. Since transactions between the North and two countries are significantly large, you may say, a half return (to the international financial market) will be likely made by North Korea.”

Of course, if things go sour on the North Korean deal, facts can be eagerly and easily dispensed with and the creation myth can also be easily converted to a Dolchstoss myth, so the neo-cons mount a counterattack to purge the realists from the State Department.

Despite my reservations about the North Korea deal, that’s something I don’t want to see happen.

Wednesday, March 14, 2007

The Iran Endgame: Parallels with North Korea

It looks like the United States is going to get precious little satisfaction from the new UN sanctions (see China and the Iran Sanctions Follies for details).

I attribute this to the fact that the world looked at US actions over the last two months and saw it excessively lenient with a genuine nuclear threat—North Korea—but disturbingly confrontational with a faux nuclear power, Iran, dispatching an additional carrier group to the Gulf, detaining Iranian officials in Irbil, and playing the “force protection” card to threaten military action.

Under the circumstances, there wasn’t much enthusiasm for following the lead of one conflicted but chronically violent superpower.

In its details, the endgame on Iran seems to be eerily recapitulating the deal with North Korea—only this time Russia is playing the frustrated intermediary role instead of China.

There has been a certain amount of attention given to Russia’s stated dissatisfaction with Iran’s nuclear stance, as revealed in authoritative leaks to three Russian newspapers:

Iran's defiance of the International Atomic Energy Agency has caused Russia to suffer "losses in relation to its foreign policy and image, but they insist on their line," the anonymous official said, as quoted by Itar-Tass.

"Iran with a nuclear bomb or a potential for its creation is impermissible for us," the official said. "We will not play with them in anti-American games. . . . The Iranians are abusing our constructive attitude and have done nothing to help us convince our colleagues of Tehran's consistency."

Presumably they have telephones connecting Moscow and Tehran well-suited to the delivery of expressions of exasperated menace, so one purpose of sending this message publicly via Moscow’s bespoke media is Russia’s desire to curry favor with the United States—which is going to swallow some pretty lame new “action” on sanctions, largely in part because of Russian resistance—by making a display of impatience with Iran.

But that’s not all.

There are certainly genuine differences between Moscow and Tehran.

I think that Russian behavior, objectives, and concerns vis a vis Iran parallel China’s over North Korea.

In both cases, the dominant regional power is protecting a client state, but at the same time doesn’t want the client to exploit nuclear weapons to achieve foreign policy freedom of action and pursue goals that might conflict with those of the patron.

Russia would be happy to say Iran discard its uranium enrichment program, just as China would be happy to see North Korea abandon its nuclear pretensions.

There’s no question that Russia would love Iran having a “Come to Allah” moment where it renounced its uranium program and Russia gets some international cred as the indispensable intermediary—like China did with the North Korea deal.

But even if Tehran refuses to play ball and cleaves fanatically to its uranium program, there is no question of Moscow allowing the United States to claim a pretext for attack or harassment under UN auspices by allowing significant economic sanctions, let alone military action.

Unfortunately, protecting the client in the crisis gives the client the idea it can act with impunity.

And success in resisting US demands for dangerously open-ended sanctions brings with it the concern that, with the receding threat, the client won’t consider its patron so necessary—or noble--anymore.

That’s what I think is at work in the harrumphing over the Bushehr transaction, with both sides claiming the other isn’t living up to the bargain..

The glue in patron-client relations is the external threat.

Once the external threat is gone and the awkward issue of conflicting goals comes up, things turn nasty.

The patron quickly finds the client ungrateful—in this instance, for vital diplomatic cover—and the client suddenly objects to getting hosed in financial arrangements for glorious adventures in economic cooperation that suddenly look like crappy, exploitative deals.

That’s how it’s been between North Korea and China

So I take the Russian display of dissatisfaction as a sign that another toothless UN resolution is a distinct and immediate possibility.

Without it, the Russians fear a loss of that vital political and security commodity: leverage.

Darfur Tragedy and Farce

The March 13 LA Times article by Edmund Sanders, Darfur’s rebels pose latest threat to the displaced, isn’t going to give a lot of comfort to the Save Darfur forces.

By describing a state of affairs in which it is the Darfurese militias, and not the Khartoum-backed janjaweed, that are terrorizing the immense Gereida refugee camp, antagonizing the AU peacekeepers, and forcing the withdrawal of foreign aid workers, the Times is stripping away the robe of noble victimhood that enfolds Darfur.

In doing so, it also implies that, even if the Bush administration discovers a new kind of diplomacy beyond blundering, braindead opportunism; the Chinese acquire some moral backbone; the Sudanese government ceases its depredations against the Darfurese; and Bashir is packed off to The Hague for crimes against humanity, Darfur is still going to be a pretty screwed up and miserable place.

Sad but true.

But what brought my grim reflections on Darfur’s future to a sudden halt was these grafs:

Many accuse the Arab-dominated Sudanese government of encouraging the rebel split by pursuing a divide and rule strategy, bribing some of the groups while bombing others.

In May, the government signed a peace agreement with one SLA faction led by rebel leader Minni Minnawi, who received a plum government job in exchange. Other rebel commanders rejected the deal, leading to further splits, power struggles and aggressive behavior.

(Insert sound of phonograph stylus voomping to a halt)

Fortunately, my obscure China blog is available to rebut this absurd piece of spin and remind its gentle readers that it was not the Sudan regime that foisted the peace agreement—and Minni Minnawi—upon the long-suffering people of Darfur.

Here is the incriminating photo of Minnawi meeting with the cynical, thoughtless ass who thought bribing and promoting this divisive and incapable gangster could advance his plans for Darfur:

Photo: Jason Reed, Reuters

Courtesy of China Matters and through the magic of cut and paste, the backstory from September 2006:


In June of this year, Robert Zoellick of the U.S. State Department and Hilary Benn of the U.K. inserted themselves in African Union negotiations for two days and tried to solve Darfur with an agreement that can be described charitably as half-assed.

It was signed with only one of the rebel groups, Minni Minawi’s Sudanese Liberation Army, which took its (presumably generous) payday and disintegrated in a vortex of banditry; it made no provisions for restraining or disarming the Janjaweed; and indeed made virtually no demands on Khartoum while leaving the burden for security on the hapless AU force.

A negotiator for one of the rebel groups provides some insight into the Darfur Peace Agreement:

The US engineered peace for Darfur, commonly known as Darfur Peace Agreement (DPA) is both “fake and unsustainable”. Its prime engineer Mr Robert Zoelick and his arch Experts produced a document that turns out to be a mockery of international diplomacy. As Professor Reeves said, the DPA was borne dead right from day one. In addition to the government of Sudan, the only other signatory of the DPA was Minni Minnawi and his SLM fraction, erroneously and persistently promoted to be the biggest Darfur “rebel” group. Subsequent attempts to create a force out of Minnawi by the international community, the AU and the Government of Sudan came to naught. The US too was involved in this fiasco, culminating in Minnawi’s visit to the White House. The visit was by means ill-advised.

That the DPA is dead if not borne so is beyond doubt. Mr. Pronk, the UN Special Representative to Darfur described it as “severely paralysed, does not resonate with Darfur people and requires major rewriting”. Lashing Minnawi to sign the agreement, Mr Zoelick warned him: “I could be a very good friend but could also be a nasty enemy”. Well Mr, Minnawi chose “a very good friend”. Mr President, I trust you concur with us that any agreement that is an outcome of bullying cannot guarantee “lasting and sustainable peace”.

Mr. Minnawi has so far failed to sell the DPA to Darfur people.

Both of his public rallies in Alfashir and Khartoum had to be cancelled. But he is not the only one who failed to recommend the DPA in a public venue to Darfur People. Mr. Egeland, the Head of UN Humanitarian Operations had a tragic experience. His attempt to recommend the DPA to Darfur IDPs [internally displaced persons—ed.] ended up with his interpreter lynched in front of him. If the IDPs do not think that the DPA is good for them, who else does?

For “lynched” read “beaten and hacked to death”.

As reported above, President Bush even took the extraordinary step of meeting with Minni Minawi in July 2006, and made what sounds like a futile and humiliating attempt to cajole him into behaving like a genuine American client.

From the Washington Post:

Bush told the rebel leader that his forces must refrain from violence and pressed him to forge an alliance with other factions in Darfur to broaden support for a peace agreement, [NSC spokesperson] Jones said.…Jones had no comment on how Minnawi responded.

When a policy’s success relies on inviting a powerless, semi-retired, and risk-adverse bandit to the White House for a dispirited jawboning session, you can say that policy is in trouble.

From the same article:

Minnawi faces rising opposition to his leadership among commanders in northern Darfur, including those from his Zaghawa tribe, according to the United Nations.

"He signed under incredible U.S. pressure and was probably given a lot of promises by the U.S. and the U.K.," said Jemera Rone, a Sudan specialist with the advocacy group Human Rights Watch. "I'm sure he feels that the U.S. government now owes him and the people of Darfur quite a lot."

A report issued earlier this month by the U.N. mission in Sudan cited allegations by displaced Sudanese that Minnawi's faction "was indiscriminately killing, raping women and abducting" civilians.

"That agreement is not working, and one of the many reasons is Minni Minnawi," Kenneth H. Bacon, president of the advocacy group Refugees International, wrote last week in a letter to Bush.

Refugees International said yesterday that Minnawi's forces have conducted a "reign of terror" in North Darfur by beating and raping women, killing young men and displacing thousands of people. Bacon asked Bush to "please stress" to Minnawi that the rebel leader "must honor the terms of the Darfur Peace Agreement and stop fighting."


It took the LA Times seventh months to catch up, and they still screwed up the story.