Why Kim Jong-il came back to the bargaining table
Throughout the history of North Korea, the U.S. government has been at odds with its two leaders, Kim Il-sung and Kim Jong-il. George W. Bush called the rogue state a part of his "Axis of Evil" in a speech delivered in 2002, to which dear old Kim flagrantly snubbed his nose and shrugged it off. A policy of appeasement was not working, so the United States had to come up with another plan. Nothing deterred Kim and he continued to shoot off his mouth and missiles. A puzzling question that continued to linger and haunt America and most of the world was, what does North Korea have to offer? Anything? Consumer goods? Technology? Medicine? Anything at all? Well, no, nothing of a positive nature stands out. Instead, we see a regime that sells missiles, but is it enough to finance a country where the ruling party lives in splendor while the rest of its population starves? How was it able to finance trade deficits without access to international capital markets? After all, they don't sell enough weapons to stay afloat. The country is in economic chaos and ruin and in default of its debt.
There is a simple answer: crime. North Korea exports counterfeit cigarettes, illicit drugs, weapons and counterfeit "superdollars" to name a few. The list is long and profit margins are high. What could be done to stop it all and shut off the flow of cash rolling in? The answer came in as a surprise: the Department of the Treasury. Here was the new secret weapon.
Think of the regime of North Korea as the Mafia and how it is organized in a similar fashion. Since the early days of organized crime, the area where it has been most vulnerable has been finances. Several officials of the Treasury and State departments formed a group called the Illicit Activities Initiative and kept a close watch on North Korea's racketeering. It began to blossom as the Secret Service added its resources and hundreds of Executive branch officials and over a dozen foreign governments chimed in. The Bush administration learned how Kim Jong-il was living high on the hog.
A Treasury official by the name of Juan Sarate, now a national security adviser, found a relatively unknown provision of the Patriot Act, Section 311, that ultimately turned into a mushroom cloud vastly larger than any bomb North Korea could set off and it reverberated around the world, unleashing a plethora of problems for Kim Jong-il.
Section 311 amended the Bank Secrecy Act and gave the Treasury Department the power to designate suspect foreign banks as "institutions of primary money laundering concern." Consequently, Treasury required U.S. banks to impose measures designed to cut those institutions off from the U.S. banking system.
It focused on one bank in particular, Banco Delta Asia (BDA) in Macau, as a mecca of illicit North Korean activity. In September of 2005, it found the bank to be of "primary money laundering concern" and authorized a formal proceeding against it. The Treasury announcement was timed to increase pressure and coerce North Korea to return to the six-party talks, which were then deadlocked. A few days later, the North Koreans proudly stated it would fully denuclearize in exchange for economic aid and normal relations. Holy kimchi! What happened?
Well, it seems the very next day after the Treasury announcement, there was a run on the bank. Depositors withdrew over $40 million, and like a tsunami, it wiped out the entire money reserve. Fearing a collapse of that and other banks, the government of Macau took over BDA and froze over $25 million held in several dozen accounts that had North Korea written all over them. Then, the whole thing spiraled out of control and Kim Jong-il's problems began to soar higher than his best missile.
Without any nudging from the Macanese authorities, the Bank of China froze many of its accounts related to North Korea. Soon, banks around the world thought they could suffer the same fate by a quick note from Treasury and began to stifle or close existing accounts. They also refused North Korea's requests to take on new business.
In the aftermath, an extremely angered Kim Jong-il walked out of the six-party talks and for more than a year he refused to return unless the BDA problem was resolved. Meanwhile, the north began test-firing ballistic missiles again and set off a nuclear warhead. Throughout this ordeal, North Korea made demands to State Department Undersecretary Christopher Hill, who leads the U.S. delegation at the talks, to which he basically responded, "Hey, I work for State. I can't answer for Treasury. Not my yob, man." Besides, once the whole mess hit the entire world, there was no stopping it. Pyongyang could not understand that the Treasury Department could not undo what the rest of the free world market had done.
In December of 2006, Treasury deputy assistant secretary Daniel Glaser met with the North Koreans and Pyonyang agreed to return to the six-party talks and by mid-February they agreed to cease operations at their Yongbyon reactor and allow IAEA inspectors in exchange for economic aid and a U.S. promise to fix the BDA issue. Many conservative pundits squawked in outrage, but was it really a concession? By mid-March, Treasury issued a final ruling that stated BDA to be of "primary money laundering concern." It was blunt: "BDA Cut Off From US Financial System."
The North Koreans blew up. Their accounts had to be unfrozen, period! "What are we to do?" Treasury responded. "We're not the ones who froze your accounts." The Macanese authorities had done that and Macau falls under Chinese control. North Korea demanded that the U.S. help them gain access to their money. On April 10, the American response was:
Based on previous discussions with the Chinese, Macanese, and DPRK officials, as well as understandings reached with the DPRK on the use of these funds, the United States would support a decision by the Macau authorities to unblock the account in question.
Macau promptly unfroze the $25 million, but another problem loomed: North Korea couldn't do anything with it. No bank in the world was willing to take wired transfers of funds allegedly connected to criminal activity, not risking the wrath of the U.S. Treasury.
The U.S. Treasury became the best weapon America could muster against North Korea and the fallout has been irreversible in its effects. Rogue states beware. Our dollar bites harder than yours. With international securities regulations in place, globalization will guarantee that, in order to maintain a stable and reliable investment climate. North Korea found out the hard way and guess who is bailing them out? We should pay them in counterfeit won.