From the April 3 Ministry of Foreign Affairs press briefing in Beijing:
Q: Glaser is still in Beijing. Is there any new progress on the transfer issue of BDA? Sources from the ROK suggested that the US and the DPRK will hold bilateral meetings at this weekend. Can you confirm?
A: The relevant parties are still having consultation on the issue. As for the meetings between the US and the DPRK, please refer your question to the US or the DPRK side.
Glaser arrived Beijing on March 25 to "implement" the transfer of funds from 50 frozen accounts at BDA into a North Korean account at Bank of China--the first key trustbuilding exercise that was supposed to be resolved by March 14.
He's been there a long time. Wonder what he’s doing.
Thursday, April 05, 2007
Wednesday, April 04, 2007
“Managed Trade” with China: Managed by the Treasury Department?
The countervailing duty (CVD) determination against China for subsidizing its paper industry points to the emergence of a new approach by the Bush administration.
With the Democrats in control of Congress and political pressure from both sides of the aisle to “do something” in response to the ballooning trade deficit with China, the Bush administration appears to be offering an alternative to a fireeating attack on China’s undervalued yuan by the Chuck Schumers of this world.
The alternative looks a lot like “managed trade”, the nibbling attack on Japan’s structural impediments, non-tariff trade barriers, and non-market self dealing begun in the reign of Bush the Elder.
The CVD decision itself eschewed claims of government subsidy of exports through the exchange rate. Instead, it appears to be responding to specific assertions by the US paper company, NewPage, that Chinese banks were propping up the Chinese pulp and paper industry with credit at preferential rates, and also by forgiving dud loans.
This is a reasonable approach—if difficult to prove in the case of the two Chinese paper companies that got whacked with the high CVD tariffs—and is reminiscent of U.S. gripes about Japanese industrial policy, with its overt and hidden promotion of certain export industries through preferential credit access in the 1980s and 90s.
The door is now open to a slew of similar complaints by every American industry under pressure from Chinese imports. And I suppose the U.S. government can be selective in which of these cases it chooses to support , and thereby use them as bargaining chips in negotiations with the Chinese government, both over trade and other economic concessions.
If the Bush administration has an objective in China, I imagine it would not be an apocalyptic political struggle over the yuan exchange rate that would provoke the Chinese to accelerate its switch from the dollar to the Euro, threaten to reduce purchases of U.S. government debt, and destroy life as we know it on this planet.
Maybe something more modest and welcome to Republican donors in the financial service industries—like greater opportunities in China’s protected financial markets for foreign firms, with the not unlaudable benefits of, in addition to enriching our deserving banks, insurance companies, and stockbrokers, accelerating the reform of China’s dismal domestic banking industry, compelling increased transparency in the equities markets, and heightening the pressure on China’s undervalued yuan from within the Chinese financial system.
The amazing thing is that the Bush administration, even with its house of cards crumbling around it, actually might have a China trade policy. And for this, I suppose we can thank Henry Paulson, Secretary of the Treasury.
Indeed, a recent article in the Financial Times identified Paulson, together with Secretary of State Rice and SecDef Gates, as the “Gang of Three” who might “leave office in January 2009 with higher standing” than when they came in.
It is perhaps both because of Paulson’s energy and focus and because the ultimate goal of the Bush policy is to open China’s financial markets to greater foreign participation, that the Treasury Department seems to be taking a lead role in China trade policy.
And the Treasury angle also raises the interesting question of there was any backscratching and logrolling involved in the fact that NewPage, filer of the paper complaint is controlled by Cerberus Capital, the finance firm run by ex-Secretary of the Treasury John Snow.
In the perceived context of a protracted negotiation process conducted through the carrot-and-stick tactics of “managed trade” given teeth by the threat of runaway protectionist political sentiment within the U.S. Congress, this Treasury press release from February is worth quoting in full:
Treasury Department Names Alan F. Holmer as Special Envoy for China and the Strategic Economic Dialogue
With the Democrats in control of Congress and political pressure from both sides of the aisle to “do something” in response to the ballooning trade deficit with China, the Bush administration appears to be offering an alternative to a fireeating attack on China’s undervalued yuan by the Chuck Schumers of this world.
The alternative looks a lot like “managed trade”, the nibbling attack on Japan’s structural impediments, non-tariff trade barriers, and non-market self dealing begun in the reign of Bush the Elder.
The CVD decision itself eschewed claims of government subsidy of exports through the exchange rate. Instead, it appears to be responding to specific assertions by the US paper company, NewPage, that Chinese banks were propping up the Chinese pulp and paper industry with credit at preferential rates, and also by forgiving dud loans.
This is a reasonable approach—if difficult to prove in the case of the two Chinese paper companies that got whacked with the high CVD tariffs—and is reminiscent of U.S. gripes about Japanese industrial policy, with its overt and hidden promotion of certain export industries through preferential credit access in the 1980s and 90s.
The door is now open to a slew of similar complaints by every American industry under pressure from Chinese imports. And I suppose the U.S. government can be selective in which of these cases it chooses to support , and thereby use them as bargaining chips in negotiations with the Chinese government, both over trade and other economic concessions.
If the Bush administration has an objective in China, I imagine it would not be an apocalyptic political struggle over the yuan exchange rate that would provoke the Chinese to accelerate its switch from the dollar to the Euro, threaten to reduce purchases of U.S. government debt, and destroy life as we know it on this planet.
Maybe something more modest and welcome to Republican donors in the financial service industries—like greater opportunities in China’s protected financial markets for foreign firms, with the not unlaudable benefits of, in addition to enriching our deserving banks, insurance companies, and stockbrokers, accelerating the reform of China’s dismal domestic banking industry, compelling increased transparency in the equities markets, and heightening the pressure on China’s undervalued yuan from within the Chinese financial system.
The amazing thing is that the Bush administration, even with its house of cards crumbling around it, actually might have a China trade policy. And for this, I suppose we can thank Henry Paulson, Secretary of the Treasury.
Indeed, a recent article in the Financial Times identified Paulson, together with Secretary of State Rice and SecDef Gates, as the “Gang of Three” who might “leave office in January 2009 with higher standing” than when they came in.
It is perhaps both because of Paulson’s energy and focus and because the ultimate goal of the Bush policy is to open China’s financial markets to greater foreign participation, that the Treasury Department seems to be taking a lead role in China trade policy.
And the Treasury angle also raises the interesting question of there was any backscratching and logrolling involved in the fact that NewPage, filer of the paper complaint is controlled by Cerberus Capital, the finance firm run by ex-Secretary of the Treasury John Snow.
In the perceived context of a protracted negotiation process conducted through the carrot-and-stick tactics of “managed trade” given teeth by the threat of runaway protectionist political sentiment within the U.S. Congress, this Treasury press release from February is worth quoting in full:
Treasury Department Names Alan F. Holmer as Special Envoy for China and the Strategic Economic Dialogue
Today, US Treasury Secretary Henry M. Paulson announced he has appointed Ambassador Alan F. Holmer as Special Envoy for China and the Strategic Economic Dialogue. In that role, Ambassador Holmer will lead a strong Administration team managing the bilateral economic relationship with China.
Ambassador Holmer was Deputy U.S. Trade Representative under President Ronald Reagan, ran the anti-dumping and anti-subsidy programs at the Commerce Department, chaired the international trade practice at a major international law firm, and most recently was President and CEO of the Pharmaceutical Research and Manufacturers of America (PhRMA), where, among other responsibilities, he led efforts to improve intellectual property protection around the world, including in China. He has co-authored three books on international trade law.
"Alan brings a wealth of international and leadership experience that will allow him to hit the ground running, and lead successful efforts to help the Chinese government move toward a balanced, growing economy that is not reliant on large external surpluses," said Paulson.
President Bush and President Hu established the Strategic Economic Dialogue to manage our bilateral economic relationship effectively. The first meeting of the Dialogue was held in Beijing last December. After frank conversations on a range of cross-cutting economic issues, we agreed on work plans for services, investment, transparency, health care, and energy and the environment. Work has begun in each of these areas since the December meeting.
The second meeting will take place in Washington, DC, May 23 and 24.
"I believe that the Strategic Dialogue, where we speak with one voice with the highest levels of the Chinese government, is the most effective way to make progress on immediate issues and on the longer term issues that we face with China," said Paulson.
Beyond the quite remarkable fact that Paulson was able to recruit the head of Big Pharma, the most potent industry lobbying group on the planet, to descend into the smoking crater of the Bush administration for its last few months of existence—and the fact that Holmer ran anti-dumping and anti-subsidy programs at one time at Commerce but will now lead the charge from Treasury instead--the emerging outline of managed trade in the “Strategic Economic Dialogue” with Henry Paulson speaking as the "one voice" of the US on this issue make it possible that we might see something interesting and even productive from this administration with regard to China trade.
Monday, April 02, 2007
China’s Export-Driven Economy: Is the Party Over?
Update II:
Judging from NewPage's testimony before Congress, the complaint was not a "direct attack on yuan undervaluation" as I characterize it below. NewPage claimed that the Chinese pulp and paper industry was benefiting from preferential government loans and preferential treatment from government-owned banks, and did not stake its claim on the broader issue of yuan valuation.
NewPage's SVP for Sales and Marketing testified:
The government of China provides very significant subsidies to its domestic paper producers, and these subsidies are injuring competing U.S. paper producers. Starting in the late 1990’s the government of China targeted its domestic coated paper industry for rapid development. As part of this development plan, the Chinese government provides low-cost policy loans through government-owned banks. It also provides grants for the development of new paper capacity, and tax breaks based on export performance and domestic equipment purchases. Moreover, government banks in China forgave at least $660 million in loans they had provided to China’s largest paper producer, Asia Pulp & Paper, when that company declared bankruptcy in 2003. The PRC has also fostered the development of timber and pulp production in China -- the key inputs into paper production -- with similar subsidized incentives. These subsidies have had the effect of vastly expanding China’s capacity to produce coated free sheet paper.
The Bush administration may have chosen to favor a complaint based upon a seemingly narrow grievance--loan policy--in order to forestall pressure to go mano-a-mano with China on yuan valuation.
However, it appears to me that the loan policy argument is so broad that virtually every industry can demand immediate relief. And once this principle of injury--and right of redress--is established on behalf of myriad private U.S. parties, it will be a lot harder to manage i.e. put the litigatory toothpaste back into 10,000 tubes--than negotiating a government-to-government deal on the yuan would be.
Update:
Another interesting data point, from the February 22 International Herald Tribune:
Meanwhile, the former secretary of the U.S. Treasury, John Snow, said that the United States could not force Beijing to allow faster gains in the yuan, and that dialogue was the best way to achieve appreciation.
"It's in China's own interest to continue to allow the yuan to expand in terms of flexibility," Snow, now chairman of Cerberus Capital Management, which is based in New York, said in an interview in Hong Kong. "I don't think we can force China to do anything."
Interesting, since the countervailing duty determination by the US government--issued in response to a complaint by NewPage, a paper firm controlled by Snow's firm--looks like a long-planned, confrontational measure to compel quicker revaluation of the yuan.
Thank you to China Redux to linking to my post, below, on NewPage, Cerberus, and the China CVD case.
I'd like to take this opportunity to acknowledge ChinaRedux and note its addition to my blogroll. Ben Landy cares about the same issues I do, and discusses them knowledgably and thoughtfully.
He also reads extensively and discriminatingly in the growing universe of high quality Asia blogs, so his posts also provide an excellent overview of what’s being said on topics of interest. His CVD post is a fine example.
I think that China may have been prepared for the risk that the export-driven party might soon be over, and I suspect it has contingency plans beyond fulminating at the Commerce Department’s CVD ruling.
It will be interesting to follow analysis in the media and on blogs as to how China responds to the ever-more-apparent threat of American protectionism, and this attack on one of the keystones of China’s success, its undervalued currency.
Also, thanks to commenter Will for the tip about John Snow’s recent visit to China.
I had blogged that Snow's investment group, Cerberus, holds the controlling interest in NewPage, the paper company whose complaint that China was subsidizing its competitors led to the whole CVD brouhaha.
Following up, I came upon a profile, Cerberus set to help China, India take flight-Snow, by Alison Tudor, Reuter’s impressively-titled Asia Private Equity Correspondent.
It was dated February 22, 2007, when NewPage was already hip-deep in the CVD complaint.
Mr. Snow unburdened himself of his strategic thinking:
Cerberus Capital Management LP, which has a mandate to invest across all asset classes and sectors globally, believes in China it could add significant value at state-owned enterprises.
Cerberus already has a presence in Japan and Taiwan, and is in the process of setting up an office in Hong Kong. Longer-term it may set up offices in Beijing and potentially India.
“Over time we hope to have a good footprint in India and China, probably China first,” Snow said in an interview with Reuters.
Good luck with that, John.
So I’ve been doing a little thinking about my previous assumption that the Bush administration was coordinating with Snow’s firm when it chose Cerberus affiliate NewPage as the test case for pushing the CVD ruling.
Maybe it was more like assisted suicide, with the Bush administration happily indulging John Snow’s desire to rush to the head of the line and catch spears in his chest for the sake of the CVD determination.
I wonder how incensing Beijing with a highly political and economically incendiary attack on China's export regime fits in with Cerberus’s business strategy.
Per Reuters, Cerberus wishes to stake its claim in one the great (potential) gold rushes of the early 21st century: M&A services to Chinese state-owned enterprises.
Think of those hundreds of billions in forex reserves, the inexperienced managers of SOEs longing to spread their wings overseas, the overvalued properties, the bidding wars, the fees!
Reading between the lines, I think the Cerberus pitch is that the sun is setting on China’s export-driven economic boom. Domestic capital and international political pressures dictate that China can no longer hide behind the wall of its undervalued currency.
So far, so good.
In the new age, it's a reasonable assumption that Chinese capital must flow overseas (and into the pockets of investment bankers).
After all, the Chinese government is tired of the headache of dealing with its mounting forex surplus.
It would like to see some of those billions allocated rationally by market forces and diverted to productive investments overseas, so that China’s economy is diversified and less vulnerable to economic and political risk.
Snow argues that his firm can play a special role:
Snow’s Washington savvy and connections will help its clients circumvent U.S. protectionism and close those rich U.S. deals:
China's companies are keen to spread their wings abroad but several big deals, such as Chinese oil major CNOOC Ltd.'s acquisition of U.S. energy producer Unocal, have run aground during the U.S. approval process.
...
Snow, an experienced politician and well-known name in Asian political circles, hopes to help smooth the way for Cerberus' co-investors.
“In the case of investments in the United States, we would bring a real understanding and sensitivity to the process. We know the rules of that game that could help co-investors avoid legal barriers,” said Snow, who plans to visit Asia three or four times a year.
Not so fast.
Here’s a trip down memory lane on the Unocal bid courtesy of the July 16, 2005 Washington Post:
Chevron's already formidable lobbying staff has been bolstered by a who's who of experts and Washington heavyweights: Wayne L. Berman, a top fundraiser for President Bush whose wife is the White House social secretary; Drew Maloney, a former legislative director of House Majority Leader Tom DeLay (R-Tex.); Kenneth J. Kies, a prominent tax lobbyist; former commerce secretary Mickey Kantor; Democratic trade experts Claude G.B. Fontheim and Kenneth I. Levinson; and David M. Marchick, a senior trade official in the Clinton administration who specializes in national security reviews by the high-level Committee on Foreign Investment in the United States.
All of the action is coordinated daily during an 8:30 a.m. conference call led by Lisa Barry, Chevron's vice president of government affairs.
"They're fielding a full team, and I think they're making all the right moves," said Todd M. Malan, executive director of the Organization for International Investment, which lobbies on behalf of foreign companies.
Unfortunately for Mr. Snow, the lesson of the Unocal deal is that both sides outfitted themselves with the best investment bankers, lobbyists, and lawyers available, and the competitor with the best gang--including a member of the Bush inner circle married to the White House social secretary--wins.
And Cerberus doesn’t look like the A-Team.
Aside from Snow himself—widely derided as an ineffectual, out of the loop empty suit as Treasury Secretary—what is Cerberus’s secret weapon?
Dan Quayle.
Cerberus also boasts former U.S. Vice President Dan Quayle as chairman of Cerberus Global Investments, a division of Cerberus Capital Management.
In any clash of the titans in the White House or on Capitol Hill, John Snow is probably going to get his and his clients’ lunches eaten.
In this context, the judgment of NewPage’s management—largely Cerberus appointees—in pushing the CVD suit is open to question.
Certainly, Cerberus wants to demonstrate to its Chinese clients an intimate knowledge of the regulatory, legal, and political pitfalls that await them in the U.S. market.
But is launching the CVD suit that has ignited Chinese anxiety and rage over its export driven business model really the way to do it?
I wouldn’t staff up that Beijing office too hastily, John.
Judging from NewPage's testimony before Congress, the complaint was not a "direct attack on yuan undervaluation" as I characterize it below. NewPage claimed that the Chinese pulp and paper industry was benefiting from preferential government loans and preferential treatment from government-owned banks, and did not stake its claim on the broader issue of yuan valuation.
NewPage's SVP for Sales and Marketing testified:
The government of China provides very significant subsidies to its domestic paper producers, and these subsidies are injuring competing U.S. paper producers. Starting in the late 1990’s the government of China targeted its domestic coated paper industry for rapid development. As part of this development plan, the Chinese government provides low-cost policy loans through government-owned banks. It also provides grants for the development of new paper capacity, and tax breaks based on export performance and domestic equipment purchases. Moreover, government banks in China forgave at least $660 million in loans they had provided to China’s largest paper producer, Asia Pulp & Paper, when that company declared bankruptcy in 2003. The PRC has also fostered the development of timber and pulp production in China -- the key inputs into paper production -- with similar subsidized incentives. These subsidies have had the effect of vastly expanding China’s capacity to produce coated free sheet paper.
The Bush administration may have chosen to favor a complaint based upon a seemingly narrow grievance--loan policy--in order to forestall pressure to go mano-a-mano with China on yuan valuation.
However, it appears to me that the loan policy argument is so broad that virtually every industry can demand immediate relief. And once this principle of injury--and right of redress--is established on behalf of myriad private U.S. parties, it will be a lot harder to manage i.e. put the litigatory toothpaste back into 10,000 tubes--than negotiating a government-to-government deal on the yuan would be.
Update:
Another interesting data point, from the February 22 International Herald Tribune:
Meanwhile, the former secretary of the U.S. Treasury, John Snow, said that the United States could not force Beijing to allow faster gains in the yuan, and that dialogue was the best way to achieve appreciation.
"It's in China's own interest to continue to allow the yuan to expand in terms of flexibility," Snow, now chairman of Cerberus Capital Management, which is based in New York, said in an interview in Hong Kong. "I don't think we can force China to do anything."
Interesting, since the countervailing duty determination by the US government--issued in response to a complaint by NewPage, a paper firm controlled by Snow's firm--looks like a long-planned, confrontational measure to compel quicker revaluation of the yuan.
Thank you to China Redux to linking to my post, below, on NewPage, Cerberus, and the China CVD case.
I'd like to take this opportunity to acknowledge ChinaRedux and note its addition to my blogroll. Ben Landy cares about the same issues I do, and discusses them knowledgably and thoughtfully.
He also reads extensively and discriminatingly in the growing universe of high quality Asia blogs, so his posts also provide an excellent overview of what’s being said on topics of interest. His CVD post is a fine example.
I think that China may have been prepared for the risk that the export-driven party might soon be over, and I suspect it has contingency plans beyond fulminating at the Commerce Department’s CVD ruling.
It will be interesting to follow analysis in the media and on blogs as to how China responds to the ever-more-apparent threat of American protectionism, and this attack on one of the keystones of China’s success, its undervalued currency.
Also, thanks to commenter Will for the tip about John Snow’s recent visit to China.
I had blogged that Snow's investment group, Cerberus, holds the controlling interest in NewPage, the paper company whose complaint that China was subsidizing its competitors led to the whole CVD brouhaha.
Following up, I came upon a profile, Cerberus set to help China, India take flight-Snow, by Alison Tudor, Reuter’s impressively-titled Asia Private Equity Correspondent.
It was dated February 22, 2007, when NewPage was already hip-deep in the CVD complaint.
Mr. Snow unburdened himself of his strategic thinking:
Cerberus Capital Management LP, which has a mandate to invest across all asset classes and sectors globally, believes in China it could add significant value at state-owned enterprises.
Cerberus already has a presence in Japan and Taiwan, and is in the process of setting up an office in Hong Kong. Longer-term it may set up offices in Beijing and potentially India.
“Over time we hope to have a good footprint in India and China, probably China first,” Snow said in an interview with Reuters.
Good luck with that, John.
So I’ve been doing a little thinking about my previous assumption that the Bush administration was coordinating with Snow’s firm when it chose Cerberus affiliate NewPage as the test case for pushing the CVD ruling.
Maybe it was more like assisted suicide, with the Bush administration happily indulging John Snow’s desire to rush to the head of the line and catch spears in his chest for the sake of the CVD determination.
I wonder how incensing Beijing with a highly political and economically incendiary attack on China's export regime fits in with Cerberus’s business strategy.
Per Reuters, Cerberus wishes to stake its claim in one the great (potential) gold rushes of the early 21st century: M&A services to Chinese state-owned enterprises.
Think of those hundreds of billions in forex reserves, the inexperienced managers of SOEs longing to spread their wings overseas, the overvalued properties, the bidding wars, the fees!
Reading between the lines, I think the Cerberus pitch is that the sun is setting on China’s export-driven economic boom. Domestic capital and international political pressures dictate that China can no longer hide behind the wall of its undervalued currency.
So far, so good.
In the new age, it's a reasonable assumption that Chinese capital must flow overseas (and into the pockets of investment bankers).
After all, the Chinese government is tired of the headache of dealing with its mounting forex surplus.
It would like to see some of those billions allocated rationally by market forces and diverted to productive investments overseas, so that China’s economy is diversified and less vulnerable to economic and political risk.
Snow argues that his firm can play a special role:
Snow’s Washington savvy and connections will help its clients circumvent U.S. protectionism and close those rich U.S. deals:
China's companies are keen to spread their wings abroad but several big deals, such as Chinese oil major CNOOC Ltd.'s acquisition of U.S. energy producer Unocal, have run aground during the U.S. approval process.
...
Snow, an experienced politician and well-known name in Asian political circles, hopes to help smooth the way for Cerberus' co-investors.
“In the case of investments in the United States, we would bring a real understanding and sensitivity to the process. We know the rules of that game that could help co-investors avoid legal barriers,” said Snow, who plans to visit Asia three or four times a year.
Not so fast.
Here’s a trip down memory lane on the Unocal bid courtesy of the July 16, 2005 Washington Post:
Chevron's already formidable lobbying staff has been bolstered by a who's who of experts and Washington heavyweights: Wayne L. Berman, a top fundraiser for President Bush whose wife is the White House social secretary; Drew Maloney, a former legislative director of House Majority Leader Tom DeLay (R-Tex.); Kenneth J. Kies, a prominent tax lobbyist; former commerce secretary Mickey Kantor; Democratic trade experts Claude G.B. Fontheim and Kenneth I. Levinson; and David M. Marchick, a senior trade official in the Clinton administration who specializes in national security reviews by the high-level Committee on Foreign Investment in the United States.
All of the action is coordinated daily during an 8:30 a.m. conference call led by Lisa Barry, Chevron's vice president of government affairs.
"They're fielding a full team, and I think they're making all the right moves," said Todd M. Malan, executive director of the Organization for International Investment, which lobbies on behalf of foreign companies.
Unfortunately for Mr. Snow, the lesson of the Unocal deal is that both sides outfitted themselves with the best investment bankers, lobbyists, and lawyers available, and the competitor with the best gang--including a member of the Bush inner circle married to the White House social secretary--wins.
And Cerberus doesn’t look like the A-Team.
Aside from Snow himself—widely derided as an ineffectual, out of the loop empty suit as Treasury Secretary—what is Cerberus’s secret weapon?
Dan Quayle.
Cerberus also boasts former U.S. Vice President Dan Quayle as chairman of Cerberus Global Investments, a division of Cerberus Capital Management.
In any clash of the titans in the White House or on Capitol Hill, John Snow is probably going to get his and his clients’ lunches eaten.
In this context, the judgment of NewPage’s management—largely Cerberus appointees—in pushing the CVD suit is open to question.
Certainly, Cerberus wants to demonstrate to its Chinese clients an intimate knowledge of the regulatory, legal, and political pitfalls that await them in the U.S. market.
But is launching the CVD suit that has ignited Chinese anxiety and rage over its export driven business model really the way to do it?
I wouldn’t staff up that Beijing office too hastily, John.
Sunday, April 01, 2007
Chinese Paper Chase: NewPage, the CVD regime, and John Snow
The application of the CVD (countervailing duty) regime to China over the price of coated paper is a big thing.
Anti-dumping penalties—the preferred mechanism in the past—made assumptions about Chinese costs and made the call that U.S. prices were below cost i.e. dumping.
The countervailing duty regime is an assertion that Chinese prices are so low because the Chinese government is subsidizing Chinese exporters.
And that means big, punitive industry-wide sanctions.
In the narrow sense, the CVD call is, I think, unfounded. The Chinese government doesn’t hand out checks to papermakers.
This decision probably finds its justification in the broader structural and political sense—that China’s exchange rate regime is a de facto subsidy to Chinese industry.
So if the CVD holds up in the final decision, there will be a swarm of complaints and CVD will probably apply to everything. Literally everything.
So it’s no surprise that the stock market sagged in response to a threat that the price of Chinese goods would rise 10%--20%--the countervailing duties awarded in the paper case.
Of course, despite Commerce’s assertion that this was just U.S. due process and not a matter for negotiation, there will undoubtedly be negotiation a.ka. a game of chicken, as the New York Times reports:
Although the tariffs imposed by the decision today are effective immediately, the action is subject to review by the Commerce Department, and a formal decision is due in October. But the administration’s position is not expected to change unless it is ordered to do so by a court or by the World Trade Organization.
The decision, however, is certain to become a focus of talks in the “strategic economic dialogue” begun by Mr. Paulson last September. The first meeting of top Chinese and American cabinet members to discuss a range of economic issues was in December, and another is due in Washington in May.
Mr. Paulson’s effort is aimed at getting China to move on a number of issues, including the suspected manipulation of its currency, that Washington regards as unfair.
I was very interested that a U.S. paper company would push such a theoretical, policy-heavy case—and a case that, if subsidies were narrowly understood, would probably have no merit.
But there was broad-based support for the move, again per the Times:
The NewPage complaint was backed in separate filings by leaders of several industries, including steel. The ruling on Friday was hailed by several groups critical of current trade policies, from manufacturers to labor unions to environmental groups, none of which have been very complimentary toward the administration on these issues in the past.
The steelworkers union—which represents most paperworkers—put its shoulder to the wheel.
Even the Sierra Club piled on, supporting NewPage's complaint with the sort of airy-fairy anti-business logic that would normally have Bush administration regulators spitting out their cigars with indignation:
The Sierra Club wants the Commerce Department to treat lax enforcement of environmental laws in foreign countries as a "subsidy" that the U.S. could counter with duties on imports.
So we’re looking at a complaint in which the importers’ lobby a.k.a. Walmart + is being countered by manufacturers + unions + environmentalists + nativist Republicans + China-bashing Democrats.
The Chinese probably regard this as serious business.
Why was NewPage leading the charge?
There’s an interesting answer.
NewPage, which filed the complaint, is a brand new company, a debt-laden creature that lumbered onto the papermaking scene by purchasing the coated-paper assets of MeadWestvaco.
It’s losing money ($20 million in the 4th Quarter) and, in a normal world, its $1.7 billion in debt would be seen as the explanation for its financial woes.
And it would not be regarded as the poster child for beat-on American mom-and-pop industries.
In fact, if you turned it around and looked at the way CEOs in debt-laden companies prefer to evaluated—EBITDA (Earnings Before Income Tax, Depreciation, and Amortization a.k.a. not taking into account the crazy stuff the investment bankers did), NewPage would have made $56 million in the 4th Quarter, a tidy payday, again not exactly an advertisement for government relief—or an indictment of Chinese dumping.
But NewPage has a special identity.
It is the creature of Cerberus Investments, an investment outfit run as of October 2006 by...
...John Snow, ex-Secretary of the Treasury, the go-to guy for browbeating the Chinese government on exchange rates before he handed the hot potato over to Henry Paulson.
Cerberus, in addition to financing the buyout of MeadWestvaco’s assets, also provided the company with its new President and COO, Rick Willett, and CFO, Jason Bixby.
Hmmmmm...
Wonder if there was any coordination there.
And in the best Bush tradition of “doing well by doing good”, Cerberus Investments holds interests in a raft of U.S. rust belt industries, such as Formica Corp., GDX Automotive, GMAC, and Guilford Mills, that should do very well if the countervailing duty craze spreads (although, to be fair, they do hold stakes in apparel and retailing companies that might take it on the chin under the CVD regime).
Cerberus also has a Taipei office (and no China office), something that the Chinese will no doubt note with some disgruntlement.
Anti-dumping penalties—the preferred mechanism in the past—made assumptions about Chinese costs and made the call that U.S. prices were below cost i.e. dumping.
The countervailing duty regime is an assertion that Chinese prices are so low because the Chinese government is subsidizing Chinese exporters.
And that means big, punitive industry-wide sanctions.
In the narrow sense, the CVD call is, I think, unfounded. The Chinese government doesn’t hand out checks to papermakers.
This decision probably finds its justification in the broader structural and political sense—that China’s exchange rate regime is a de facto subsidy to Chinese industry.
So if the CVD holds up in the final decision, there will be a swarm of complaints and CVD will probably apply to everything. Literally everything.
So it’s no surprise that the stock market sagged in response to a threat that the price of Chinese goods would rise 10%--20%--the countervailing duties awarded in the paper case.
Of course, despite Commerce’s assertion that this was just U.S. due process and not a matter for negotiation, there will undoubtedly be negotiation a.ka. a game of chicken, as the New York Times reports:
Although the tariffs imposed by the decision today are effective immediately, the action is subject to review by the Commerce Department, and a formal decision is due in October. But the administration’s position is not expected to change unless it is ordered to do so by a court or by the World Trade Organization.
The decision, however, is certain to become a focus of talks in the “strategic economic dialogue” begun by Mr. Paulson last September. The first meeting of top Chinese and American cabinet members to discuss a range of economic issues was in December, and another is due in Washington in May.
Mr. Paulson’s effort is aimed at getting China to move on a number of issues, including the suspected manipulation of its currency, that Washington regards as unfair.
I was very interested that a U.S. paper company would push such a theoretical, policy-heavy case—and a case that, if subsidies were narrowly understood, would probably have no merit.
But there was broad-based support for the move, again per the Times:
The NewPage complaint was backed in separate filings by leaders of several industries, including steel. The ruling on Friday was hailed by several groups critical of current trade policies, from manufacturers to labor unions to environmental groups, none of which have been very complimentary toward the administration on these issues in the past.
The steelworkers union—which represents most paperworkers—put its shoulder to the wheel.
Even the Sierra Club piled on, supporting NewPage's complaint with the sort of airy-fairy anti-business logic that would normally have Bush administration regulators spitting out their cigars with indignation:
The Sierra Club wants the Commerce Department to treat lax enforcement of environmental laws in foreign countries as a "subsidy" that the U.S. could counter with duties on imports.
So we’re looking at a complaint in which the importers’ lobby a.k.a. Walmart + is being countered by manufacturers + unions + environmentalists + nativist Republicans + China-bashing Democrats.
The Chinese probably regard this as serious business.
Why was NewPage leading the charge?
There’s an interesting answer.
NewPage, which filed the complaint, is a brand new company, a debt-laden creature that lumbered onto the papermaking scene by purchasing the coated-paper assets of MeadWestvaco.
It’s losing money ($20 million in the 4th Quarter) and, in a normal world, its $1.7 billion in debt would be seen as the explanation for its financial woes.
And it would not be regarded as the poster child for beat-on American mom-and-pop industries.
In fact, if you turned it around and looked at the way CEOs in debt-laden companies prefer to evaluated—EBITDA (Earnings Before Income Tax, Depreciation, and Amortization a.k.a. not taking into account the crazy stuff the investment bankers did), NewPage would have made $56 million in the 4th Quarter, a tidy payday, again not exactly an advertisement for government relief—or an indictment of Chinese dumping.
But NewPage has a special identity.
It is the creature of Cerberus Investments, an investment outfit run as of October 2006 by...
...John Snow, ex-Secretary of the Treasury, the go-to guy for browbeating the Chinese government on exchange rates before he handed the hot potato over to Henry Paulson.
Cerberus, in addition to financing the buyout of MeadWestvaco’s assets, also provided the company with its new President and COO, Rick Willett, and CFO, Jason Bixby.
Hmmmmm...
Wonder if there was any coordination there.
And in the best Bush tradition of “doing well by doing good”, Cerberus Investments holds interests in a raft of U.S. rust belt industries, such as Formica Corp., GDX Automotive, GMAC, and Guilford Mills, that should do very well if the countervailing duty craze spreads (although, to be fair, they do hold stakes in apparel and retailing companies that might take it on the chin under the CVD regime).
Cerberus also has a Taipei office (and no China office), something that the Chinese will no doubt note with some disgruntlement.
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.
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...
...to 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.
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...
...to 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.
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.
Subscribe to:
Comments (Atom)