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To Prod N. Korea, U.S. Relents in Counterfeiting Case
By Glenn Kessler
Washington Post Staff Writer
Wednesday, April 11, 2007; Page A01
Two months before North Korea tested its first nuclear weapon,
President Bush was asked about a Treasury Department investigation of
North Korean counterfeiting of $100 bills, which had ruptured talks on
ending Pyongyang's nuclear programs. "Counterfeiting U.S. dollars is
an issue that every president ought to be concerned about," he replied
bluntly during an August news conference. "And when you catch people
counterfeiting your money, you need to do something about it."
Yesterday, the Bush administration agreed to allow those suspected
counterfeiters, along with other North Koreans suspected of money
laundering and other fraud, to get their money back -- with no strings
attached -- in the hopes it will ensure that North Korea shuts down
its nuclear reactor by the end of the week. About $25 million had been
frozen by Macau authorities, with about half clearly derived from
criminal enterprises, U.S. officials said.
In a landmark international accord, North Korea promised Feb. 13,
2007, to close down and seal its main nuclear reactor within 60 days
in return for 50,000 tons of fuel oil. The move was that country's
first step in abandoning all nuclear weapons and research programs.
North Korea Agrees to Begin Denuclearization
In a landmark international accord, North Korea promised Feb. 13,
2007, to close down and seal its main nuclear reactor within 60 days
in return for 50,000 tons of fuel oil. The move was that country's
first step in abandoning all nuclear weapons and research programs.
Save & Share Article What's This?
The outcome is the kind of messy, unsatisfactory dealmaking that Bush
disdains. Even as U.S. officials were publicly portraying the final
arrangement as necessary to salvage a nuclear deal reached two months
ago, it sparked controversy within the administration and led some to
question whether the result sets a bad precedent.
The story of how a tiny bank in Macau named Banco Delta Asia became
the center of a diplomatic battle over nuclear weapons is in many ways
a tale of unintended consequences -- and of how Bush, so focused on
the idea of combating North Korean fraud, allowed a dispute over a
relative pittance to thwart progress on an issue central to U.S.
national security.
"The United States started on this path not understanding what the
impact would be," said Alan D. Romberg, senior associate at the Henry
L. Stimson Center and an expert on Asia. "This should be an object
lesson: Be careful what you do, and play through how you would undo
it."
The counterfeiting investigation started during Bush's first term. By
coincidence, it came to fruition just as diplomats were set to strike
a deal on ending North Korea's nuclear programs. At the time, U.S.
officials said, Bush decided not to let diplomacy derail a criminal
investigation. But the effect of the resulting crackdown was much
greater than administration officials expected, painfully damaging
North Korean international business ties.
When Bush earlier this year reversed himself, agreeing to end the
investigation to strike an accord with North Korea, unraveling the
probe became much more difficult than expected. North Korean officials
dug in their heels, insisting that no progress would be made on the
nuclear accord until the money was in their hands. Ultimately, the
administration blinked.
John R. Bolton, the former U.N. ambassador who has emerged as a critic
of the nuclear deal, said the retreat is "an image of surrender that
is going to be hard to erase." Returning the money to entities that
committed fraud "will have a dilapidating effect on bringing sanctions
against Iran and other rogue states," he said. "It is a terrible
symbol."
The investigation started in 2003, when Colin L. Powell's State
Department was under attack from conservatives for not being tough
enough on North Korea. Officials there latched on to the idea of
targeting North Korea's illicit activities, and an interagency group
was formed to track the country's counterfeiting operations and then
figure out ways to cut it off, officials said.
In July 2005, Treasury informed the task force that it was ready to
target Banco Delta Asia, which it had identified as the main conduit
for bringing North Korean counterfeit currency into the international
system.
The U.S. government had seized more than $45 million in highly
deceptive counterfeit $100 bills, known as super notes, that were
produced in North Korea with the approval of top officials.
But officials delayed taking action in July, fearing it might conflict
with a separate Justice Department sting against North Korean
counterfeiters that was planned for August. The Macau announcement was
set for September -- just when negotiators were set to reach a
landmark accord on ending Pyongyang's nuclear programs.
Virtually unnoticed at first, Treasury's designation that Banco Delta
Asia was a potential money-laundering concern appeared in the Federal
Register on Sept. 15, 2005, four days before the nuclear negotiators
from six nations announced they had struck a deal.
The Treasury announcement nearly toppled Banco Delta Asia, as banks
around the world cut their ties for fear of being tainted by the North
Korean connection. To the delight of Treasury officials, many banks
stopped handling North Korean transactions for fear of Washington's
wrath.
Citing reports that two dozen financial institutions in Asia had
voluntarily cut back or terminated their business with North Korea,
Treasury Undersecretary Stuart Levey declared last September: "The
result of these voluntary actions is that it is becoming very
difficult for the Kim Jong Il regime to benefit from its criminal
conduct."
But another result was that North Korean officials refused for months
to return to the nuclear negotiations, citing the investigation.
Finally, after the country's nuclear test in October, North Korea
agreed to renew talks but would not discuss substantive issues until
the banking case was resolved. In January, Assistant Secretary of
State Christopher R. Hill met privately in Berlin with his North
Korean counterpart to work out an agreement that the banking
investigation would end before North Korea froze its nuclear reactor.
Treasury announced March 14 that the probe was finished, with Levey
citing a "gamut of illicit activities." But that was not enough for
North Korea. Speaking yesterday to reporters in Seoul, Hill said that
the United States thought it had fulfilled its pledge, but North Korea
"had a concept that was far more literal, which was they wanted to see
the money."
A high-level Treasury team was dispatched to Beijing, including Chief
of Staff Jim Wilkinson, Deputy Assistant Secretary Daniel Glaser and
James Fries, deputy assistant general counsel. Wilkinson had been a
former senior adviser to Secretary of State Condoleezza Rice, and his
presence was intended to signal that Treasury and State were united on
the issue.
Yet the Treasury team encountered a series of roadblocks on a nearly
two-week trip, as they searched unsuccessfully for a way to ensure the
money was used for humanitarian purposes. Glaser at one point had
issued a statement saying that the Bank of China would be a repository
for $25 million in North Korean funds, but when the team arrived,
Chinese authorities made it clear that no mainland bank would be
involved in holding the money.
The North Korean diplomats, meanwhile, resisted the U.S. proposal of
setting up a humanitarian fund with the money. They would not fill out
forms, provide bank account numbers, or sign waivers that would allow
the money to be released to a humanitarian fund. They stuck to a
simple message: "We want our money."
The Treasury officials left China thinking no deal was possible, but
over the weekend the administration agreed to let the Macau Monetary
Authority, which had frozen the money because of the U.S.
investigation, to simply release it to account holders. There were 52
Banco Delta Asia account holders whose money had been frozen; $12
million, belonging to 17 account holders, is considered tainted.
Some of the $25 million, however, is held by third parties, such as $7
million associated with Daedong Credit Bank, which is being bought by
a British investor. Thus not all of the money will go to the North
Korean government, leaving some U.S. officials wondering whether the
deal yesterday will still keep the nuclear agreement on track.
Correspondent Edward Cody in Beijing contributed to this report.
By Glenn Kessler
Washington Post Staff Writer
Wednesday, April 11, 2007; Page A01
Two months before North Korea tested its first nuclear weapon,
President Bush was asked about a Treasury Department investigation of
North Korean counterfeiting of $100 bills, which had ruptured talks on
ending Pyongyang's nuclear programs. "Counterfeiting U.S. dollars is
an issue that every president ought to be concerned about," he replied
bluntly during an August news conference. "And when you catch people
counterfeiting your money, you need to do something about it."
Yesterday, the Bush administration agreed to allow those suspected
counterfeiters, along with other North Koreans suspected of money
laundering and other fraud, to get their money back -- with no strings
attached -- in the hopes it will ensure that North Korea shuts down
its nuclear reactor by the end of the week. About $25 million had been
frozen by Macau authorities, with about half clearly derived from
criminal enterprises, U.S. officials said.
In a landmark international accord, North Korea promised Feb. 13,
2007, to close down and seal its main nuclear reactor within 60 days
in return for 50,000 tons of fuel oil. The move was that country's
first step in abandoning all nuclear weapons and research programs.
North Korea Agrees to Begin Denuclearization
In a landmark international accord, North Korea promised Feb. 13,
2007, to close down and seal its main nuclear reactor within 60 days
in return for 50,000 tons of fuel oil. The move was that country's
first step in abandoning all nuclear weapons and research programs.
Save & Share Article What's This?
The outcome is the kind of messy, unsatisfactory dealmaking that Bush
disdains. Even as U.S. officials were publicly portraying the final
arrangement as necessary to salvage a nuclear deal reached two months
ago, it sparked controversy within the administration and led some to
question whether the result sets a bad precedent.
The story of how a tiny bank in Macau named Banco Delta Asia became
the center of a diplomatic battle over nuclear weapons is in many ways
a tale of unintended consequences -- and of how Bush, so focused on
the idea of combating North Korean fraud, allowed a dispute over a
relative pittance to thwart progress on an issue central to U.S.
national security.
"The United States started on this path not understanding what the
impact would be," said Alan D. Romberg, senior associate at the Henry
L. Stimson Center and an expert on Asia. "This should be an object
lesson: Be careful what you do, and play through how you would undo
it."
The counterfeiting investigation started during Bush's first term. By
coincidence, it came to fruition just as diplomats were set to strike
a deal on ending North Korea's nuclear programs. At the time, U.S.
officials said, Bush decided not to let diplomacy derail a criminal
investigation. But the effect of the resulting crackdown was much
greater than administration officials expected, painfully damaging
North Korean international business ties.
When Bush earlier this year reversed himself, agreeing to end the
investigation to strike an accord with North Korea, unraveling the
probe became much more difficult than expected. North Korean officials
dug in their heels, insisting that no progress would be made on the
nuclear accord until the money was in their hands. Ultimately, the
administration blinked.
John R. Bolton, the former U.N. ambassador who has emerged as a critic
of the nuclear deal, said the retreat is "an image of surrender that
is going to be hard to erase." Returning the money to entities that
committed fraud "will have a dilapidating effect on bringing sanctions
against Iran and other rogue states," he said. "It is a terrible
symbol."
The investigation started in 2003, when Colin L. Powell's State
Department was under attack from conservatives for not being tough
enough on North Korea. Officials there latched on to the idea of
targeting North Korea's illicit activities, and an interagency group
was formed to track the country's counterfeiting operations and then
figure out ways to cut it off, officials said.
In July 2005, Treasury informed the task force that it was ready to
target Banco Delta Asia, which it had identified as the main conduit
for bringing North Korean counterfeit currency into the international
system.
The U.S. government had seized more than $45 million in highly
deceptive counterfeit $100 bills, known as super notes, that were
produced in North Korea with the approval of top officials.
But officials delayed taking action in July, fearing it might conflict
with a separate Justice Department sting against North Korean
counterfeiters that was planned for August. The Macau announcement was
set for September -- just when negotiators were set to reach a
landmark accord on ending Pyongyang's nuclear programs.
Virtually unnoticed at first, Treasury's designation that Banco Delta
Asia was a potential money-laundering concern appeared in the Federal
Register on Sept. 15, 2005, four days before the nuclear negotiators
from six nations announced they had struck a deal.
The Treasury announcement nearly toppled Banco Delta Asia, as banks
around the world cut their ties for fear of being tainted by the North
Korean connection. To the delight of Treasury officials, many banks
stopped handling North Korean transactions for fear of Washington's
wrath.
Citing reports that two dozen financial institutions in Asia had
voluntarily cut back or terminated their business with North Korea,
Treasury Undersecretary Stuart Levey declared last September: "The
result of these voluntary actions is that it is becoming very
difficult for the Kim Jong Il regime to benefit from its criminal
conduct."
But another result was that North Korean officials refused for months
to return to the nuclear negotiations, citing the investigation.
Finally, after the country's nuclear test in October, North Korea
agreed to renew talks but would not discuss substantive issues until
the banking case was resolved. In January, Assistant Secretary of
State Christopher R. Hill met privately in Berlin with his North
Korean counterpart to work out an agreement that the banking
investigation would end before North Korea froze its nuclear reactor.
Treasury announced March 14 that the probe was finished, with Levey
citing a "gamut of illicit activities." But that was not enough for
North Korea. Speaking yesterday to reporters in Seoul, Hill said that
the United States thought it had fulfilled its pledge, but North Korea
"had a concept that was far more literal, which was they wanted to see
the money."
A high-level Treasury team was dispatched to Beijing, including Chief
of Staff Jim Wilkinson, Deputy Assistant Secretary Daniel Glaser and
James Fries, deputy assistant general counsel. Wilkinson had been a
former senior adviser to Secretary of State Condoleezza Rice, and his
presence was intended to signal that Treasury and State were united on
the issue.
Yet the Treasury team encountered a series of roadblocks on a nearly
two-week trip, as they searched unsuccessfully for a way to ensure the
money was used for humanitarian purposes. Glaser at one point had
issued a statement saying that the Bank of China would be a repository
for $25 million in North Korean funds, but when the team arrived,
Chinese authorities made it clear that no mainland bank would be
involved in holding the money.
The North Korean diplomats, meanwhile, resisted the U.S. proposal of
setting up a humanitarian fund with the money. They would not fill out
forms, provide bank account numbers, or sign waivers that would allow
the money to be released to a humanitarian fund. They stuck to a
simple message: "We want our money."
The Treasury officials left China thinking no deal was possible, but
over the weekend the administration agreed to let the Macau Monetary
Authority, which had frozen the money because of the U.S.
investigation, to simply release it to account holders. There were 52
Banco Delta Asia account holders whose money had been frozen; $12
million, belonging to 17 account holders, is considered tainted.
Some of the $25 million, however, is held by third parties, such as $7
million associated with Daedong Credit Bank, which is being bought by
a British investor. Thus not all of the money will go to the North
Korean government, leaving some U.S. officials wondering whether the
deal yesterday will still keep the nuclear agreement on track.
Correspondent Edward Cody in Beijing contributed to this report.
