Thursday, June 07, 2007

Setting the Cat Among the Pigeons

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

What Mr. Asher said:

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

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

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

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

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

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

...or maybe falsify their books.

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

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

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

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

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

That target would seem to be China.

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

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

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

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

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

Why hasn’t he done that?

1 comment:

Unknown said...

This is a very well written piece, and it mentions this site: