Page 1 of 2 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
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
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
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
In September 2005, alleging that BDA was laundering North Korean counterfeit
money, the department announced it was investigating BDA as a "bank of money
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
Secondly, America's image as an honest broker impartially protecting the
integrity of the dollar-based international financial system was seriously
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. 
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
“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.” 
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.