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    Greater China
     Jun 24, 2010
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China in America's sanctions crosshairs
By Peter Lee

Stuart Levey, "father" of the North Korean atomic bomb, is back, and with him is the threat that the United States will deploy the most feared and dangerous weapon in its diplomatic arsenal - sanctions against foreign corporations and foreign banks - to advance its Iran and North Korea policies.

Levey, director of the US Treasury Department's Office of Terrorism and Financial Intelligence (OTFI), returned to the spotlight with the announcement of US add-on Iran sanctions in the wake of United Nations Security Council (UNSC) Resolution 1929. China has a considerable amount of experience with Levey, mostly negative, and will be observing his actions on Iran and North Korea with a good deal of wary curiosity.

With the exception of Secretary of Defense Robert Gates, Levey


is the highest-ranking George W Bush administration holdover in the Barack Obama administration. The retention of the architect of financial sanctions against North Korea was a signal that Obama was much enamored of them as the "smart power" alternative to military force as a coercive instrument of American policy. Hopefully, the results for the US this time will not be as dire as North Korea's rush to the atomic bomb occasioned by the sanctions campaign of the Bush administration.

Certainly, the US dollar is still king and the threat of ostracization from the US financial system is a real and significant worry ... but not necessarily for America's enemies. North Korea and Iran have already been cut off from the US financial system. The real threat is to America's allies and "strategic competitors", such as China, who do not toe the line in a satisfactory fashion.

Sanctioning of third-country financial corporations has a dismal history under the Bush administration. The Obama administration appears to be taking steps to avoid duplicating the mistakes of its predecessor but, given the inherent contradictions of sanctions, may nevertheless be doomed to repeat them.

OTFI first emerged after 9/11 as an extension of the Treasury Department's money-laundering investigative activities, traditionally concentrated on drug trafficking, to terrorism.

Its terrorism-related efforts were largely ineffective. In contrast to the gigantic transnational rivers of cash needed to sustain the booming drug trade, the tiny amounts of money needed to finance conspiratorial terrorist activity such as al-Qaeda's were a drop in the international ocean of financial transfers, virtually impossible to detect except in hindsight.

Nevertheless, OTFI exploited the anti-terrorism powers given to it and evolved into an important instrument of American foreign policy under the Bush administration.

OTFI received new powers under Section 311 of the Patriot Act - penned by Democrat John Kerry - which gave the Treasury Department the power to sanction foreign financial institutions that were insufficiently transparent and cooperative in matters of tracking terrorist financing by cutting them off from the US financial system.

The Bush administration welcomed OTFI's expanded mandate and powers, since it gave the executive branch a powerful and arbitrary instrument of unilateral power beyond international challenge or congressional oversight. On the basis of its internal investigations and with the justification of protecting the US financial system from terrorist infiltration, the Treasury Department could ban designated foreign banks from transacting business with US financial institutions.

Wielding - and abusing - this power proved an irresistible temptation to the Bush administration in its campaign against the two members of the "axis of evil" - Iran and North Korea - that survived after the military overthrow of Saddam Hussein's regime in Iraq.

OTFI, under Levey, enthusiastically and unapologetically deployed the threat of financial sanctions.

Significantly, its targets were not Iranian and North Korean banks - which were already barred from dealings with US corporations under US law. Instead, the genuine object of OTFI's threats were the financial institutions of American allies - allies that, for reasons of principle, greed or strategic necessity, had not seen fit to impose the same national sanctions on Tehran and Pyongyang that had been imposed by the United States.

During the second Bush administration, the peripatetic Levey roamed the globe, chivvying the huge European financial institutions but also venturing into backwaters like Mongolia and Bulgaria to threaten local banks that dared take Iranian and North Korean deposits and offer the two pariahs access to the international financial system.

In one significant instance, the Treasury Department moved beyond threats to actually institute sanctions against a targeted bank. This was the case of Banco Delta Asia - BDA - a small bank in Macau that accepted North Korean deposits.

In September 2005, alleging that BDA was laundering North Korean counterfeit money, the department announced it was investigating BDA as a "bank of money laundering concern".

There was a prompt run on the bank, the Macau authorities took BDA over, and $24 million or so in North Korea-related funds in 51 accounts were frozen at American insistence. That represented the highwater mark of America's success in quarantining BDA.

There were several worrying consequences.

First, and most importantly, North Korea withdrew from the six-party talks in fury, abandoned its nuclear haggling with the United States, and detonated its first atomic bomb on October 9, 2006. Despite revisionist attempts to decouple BDA from the bomb, Levey's paternity of the Nork nuke is pretty much indisputable.

Secondly, America's image as an honest broker impartially protecting the integrity of the dollar-based international financial system was seriously tarnished.

In the past, the Treasury Department's efforts to combat counterfeiting and stem the oceans of cash sloshing through the world's drug economy were universally respected. However, by unleashing OTFI on Iran and North Korea, the Bush administration had made the fateful decision to "weaponize" financial enforcement, using it to advance nontransparent, unilateral geostrategic goals far removed from the department's genuine mission.

In order to justify a unilateral financial assault on North Korea, the Bush administration hitched its star to the "Supernote" counterfeiting allegation to redefine the North Korea problem as an attack on the US dollar rather than a multilateral security issue in North Asia. As far as US allies and interlocutors - especially China - were concerned, the OTFI initiative signified Washington's effort to seize control of the North Korea dossier and pre-empt their input.

In the realm of international law, it was also a worrying case of de facto extra-territoriality - applying US jurisdiction to foreign corporations operating in foreign countries. The fact that OTFI money-laundering sanctions were completely non-transparent applications of US executive branch rules, by which the accused party could not even appear, let alone mount a defense, certainly contributed to the OTFI's intimidating aura, but also fueled international fear and resentment.

US laziness in making its case - though largely unchallenged by the media with the exception of McClatchy's Kevin Hall - did not enhance international confidence in OTFI's ability to wield this considerable power responsibly.

A convincing explanation was never offered for how the tottering North Korean state was able to import the only press capable of printing US banknotes, develop the highly specialized papermaking technology, either duplicate or acquire from Switzerland the necessary optically variable inks, or track the US currency through 19 design changes, in order to produce a mere $45 million worth of Supernotes over 10 years. [1]

The United States accused BDA of laundering Supernotes, ignoring the inconvenient fact that BDA sent all of its cash deposits for independent inspection by Hong Kong & Shanghai Bank (HSBC) before sending them off the Federal Reserve for credit - and no counterfeits had been detected since 1994.

So OTFI became associated with American unilateralism, the back-door assertion of extra-territorial jurisdiction, and shoddy procedures: essentially, an abuse of America's privileged position at the center of the financial world.

Third, even after the North Korean test had sidelined American advocates of confrontation and the six-party talks were set to resume, the Treasury Department blocked the remittance of the North Korean funds at BDA - the key confidence-building measure negotiated by Christopher Hill - by issuing a scorched-earth ruling formalizing the complete cutoff of BDA from the US banking system. On the dubious pretext that its unilateral administrative ruling against BDA could not be undone without violating US laws, the Treasury Department blocked the remittance for another excruciating eight weeks. Finally, the State Department, after futile and humiliating public contacts with several US and international banks that refused to handle the funds because of the threat of Treasury sanctions, arranged the remittance via the US Federal Reserve and a Russian bank.

The realization that Levey, whether or not he was acting in collusion with diehards of the Dick Cheney stripe to sabotage the resumption of the six-party talks, could defy the executive branch virtually openly, was undoubtedly a sobering reminder to the Bush administration that unilateral, unchecked power can cut both ways.

The final, and strategically most significant, fallout of the BDA affair was that it showed China's leadership how far the United States was prepared to go to attack core Chinese interests in pursuit of its foreign policy goals. The BDA sanction was, openly and avowedly, designed to intimidate China with the threat of being cut off from the US financial system.

The China aspect extended beyond the fact that BDA was in Macau - a Chinese jurisdiction - and was run by Stanley Au, a local businessman with close ties to Beijing who was a delegate to the China People's Consultative Congress.

David Asher, the brash architect of the hardline North Korea policy, testified before Congress in 2007 that BDA was a case of "killing the chicken to scare the monkeys".

“Banco Delta was a symbolic target. We were trying to kill the chicken to scare the monkeys. And the monkeys were big Chinese banks doing business in North Korea... and we’re not talking about tens of millions [of dollars], we’re talking hundreds of millions.” [2]

To a certain extent, Asher's public testimony may have been vainglorious. Certainly, one objective of the attacks on North Korea's bank dealings was to harass South Korea. Under the conciliatory regime of Kim Dae-jung, Seoul was funneling billions of dollars in Sunshine Policy payments to Pyongyang through Hong Kong or Macau banks. With proper timing and selection of target, the Treasury Department could have frozen billions of dollars of South-to-North cash and put a serious crimp in Kim Dae-jung's dollar diplomacy as well as Kim Jung-il's bank account.

However, China treated the BDA matters as a matter of its core interests, angrily summoning Treasury functionaries to Beijing for protracted negotiations during the convoluted remittance crisis. It learned, to its dismay, that the Treasury Department was unwilling to grant the People's Bank of China a waiver to allow it to handle the BDA funds and get the six-party Talks - the crown jewel in Beijing's efforts to claim recognition for its central role in regional diplomacy - restarted.

Given this baggage, and OTFI's rather dismal record of failure and insubordination on BDA, it is interesting that the Obama administration kept Levey in his post after it took office.

The administration's infatuation with smart power applied through multi-lateral initiatives is well-known, and financial sanctions are viewed as a critical force multiplier allowing America to recruit and lead a global coalition by virtue of its central role in the international financial system. 

Continued 1 2  

China plays lap-dog in sanctions ploy
(May 25, '10)

US mum over China's links to Iran
(May 22, '10)

1. Core concerns spark Iran reaction

2. Iran, Turkey: Friends today, rivals tomorrow?

3. Danger signs in Turkey's strategic depth

4. Big is beautiful in Laos

5. Back to the Kaiser's world

6. Bhopal, BP and karma

7. The yuan and the failure of diplomacy

8. Great eggspectations: Dear dupe?

9. Call the politburo, we're in trouble

10. Pakistan might fight - for a price

(24 hours to 11:59pm ET, Jun 22, 2010)


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