Page 1 of 2 Timing key as US stir-fries sanctions
By Peter Lee
The targets, the tactics, even the dramatis persona of the Barack Obama
administration's 2010 sanctions strategy largely repeat the George W Bush
administration's fruitless campaign against Iran and North Korea from 2005 to
2007.
Once again, obtaining or compelling China's compliance in the sanctions regime
is a key element in the considerations of the United States. An important
difference is that, in 2010, China is largely isolated and at odds with the
European Union, Russia and South Korea - groups and nations that in the past
provided
protective cover for China as allies opposed to the heavy handed tactics of the
Bush years.
Now, through skillful diplomatic maneuvering, the Obama administration has
brought the matters of Iran and North Korean sanctions to a head at virtually
the same time.
As Beijing is doubtless grimly aware, the US has the potential to whipsaw China
with punitive sanctions for its support of Pyongyang and Tehran, at the cost of
Chinese prestige and interests, if China doesn't support the US initiatives.
The question is whether the Obama administration has extracted the proper
lessons from the errors committed by the previous administration and properly
grasped the opportunities - and dangers - offered by the current situation.
In the Bush administration, financial sanctions were conceived as another
instrument of American unilateralism.
The Treasury Department's Office of Terrorism and Financial Intelligence (OTFI)
was created after 9/11 with the intelligence-gathering and evaluation capacity
and regulatory authority to cut off foreign institutions from the US system
without reference to international or US law or even US foreign policy.
Under its director, Stuart Levey - a lawyer and veteran of the Bush vs Gore
legal battles in Florida - OTFI routinely stigmatized foreign banks that
accepted North Korean or Iranian deposits as fatally deficient in internal
controls against criminal clients, and therefore a threat to the integrity of
the US financial system.
His chosen weapon - one that proved to be fatally flawed - was the employment
of Patriot Act 311 sanctions to cut off from the US financial system banks
deemed guilty of inadequate "know your customer" internal controls.
In its most extreme form, this strategy was road-tested against a tiny Macau
bank, Banco Delta Asia (BDA), which had dealings with North Korea.
OTFI cited BDA's alleged complicity as a conduit for laundering counterfeited
US currency on behalf of North Korea, designated BDA as a "bank of
money-laundering concern" pending the outcome of an investigation, thereby
triggering an immediate run on the bank, receivership by the Monetary Authority
of Macao and, at US insistence, the freezing of US$25 million in deposits
linked with North Korea.
As the details of the BDA case emerged, they painted a less-than-inspiring
picture of OTFI due diligence.
It transpired that, after BDA had detected and voluntarily reported an instance
of North Korean account holders depositing counterfeit hundred dollar notes in
1994, all of BDA's North Korea currency deposits had been delivered to Hong
Kong & Shanghai Bank for vetting. No phony bills had been detected since
then.
More than half of the $25 million in deposits belonged to legitimate business
ventures operating in North Korea, among them a British-American Tobacco joint
venture producing cigarettes, and a majority foreign-owned and foreign-managed entity, Daedong Credit Bank.
These revelations, provided courtesy of an Ernst & Young audit of BDA
operations, combined strenuous representations by the Monetary Authority of
Macao fell on deaf ears at OTFI which, as a US regulatory agency, had no
obligation to allow foreign banks to confront their accusers or defend
themselves in an open hearing.
Instead, in the most alarming development, OTFI issued a "Final Administrative
Rule" confirming the original designation of BDA a money-laundering bank and
cutting it off from the US financial system.
The development was alarming because it occurred at the same time the US State
Department had struck a deal with North Korea in early 2007 to remit the $25
million in BDA deposits to the North Korean government (even though much of the
money did not belong to the North Korean government) as a confidence-building
measure linked to the resumption of the denuclearization process.
OTFI seemed to intentionally drag out the BDA review process so that the Final
Administrative Rule came out the last possible day designated by statute,
subjecting the US State Department to the embarrassment of missing its declared
deadline for returning the money.
OTFI then added, as it were, injury to insult, refusing to revoke the rule - a
decision well within its competence - and making it known to US and
international banks that they would be in violation of the rule - and subject
to sanctions of their own - if they handled the return of the $25 million.
Congressman Ed Royce, a regime change hardliner, even threatened the US State
Department negotiator, Chris Hill, with the specter of US prosecution as an
accessory to North Korean money laundering activities for his role in
negotiating the BDA deal.
The crisis dragged on for four excruciating months as the US State Department
approached bank after bank and tried to work out a mechanism for remittance of
the funds. A Treasury Department delegation led by Daniel Glaser spent two
weeks in Beijing attempting to explain to the disbelieving Chinese the
mysteries of OTFI supremacy within the executive branch of the US government.
Finally, BDA transmitted the funds to the US Federal Reserve Bank, apparently
an institution beyond the reproach or malice of OTFI, and the funds were handed
over to a Russian bank for eventual transmission to North Korea.
Testimony before a house sub-committee in April 2007 by David Asher, the point
man for the confrontational North Korea policy of the early years of the second
Bush administration, provided an indication of the considerations at work and
the stakes on the table in the bizarre BDA episode.
Asher told the committee that the BDA ruling had been a case of "killing the
monkey to scare the chickens" - in this case, demonstrating to China the ease
with which its banks could be injured through an OTFI designation if they
persisted in enabling North Korea's financial survival. [1]
The intimidating majesty of OTFI before China's banks would have been
significantly compromised by backpedaling on BDA at the State Department's
behest - one US official described the spectacle as "unseemly" - accounting in
large part for its scorched-earth resistance to the compromise.
This same consideration - maintaining the credibility of OTFI and the sanctions
process - may have been behind one of the Obama administration's more
eyebrow-raising actions: the decision to retain the authors of OTFI's
insubordination - Stuart Levey and Daniel Glaser - in their posts in 2009,
making Levey the second-highest Bush administration official, other than
Secretary of Defense Robert Gates, to keep his job under Obama.
Fast forward to the summer of 2010, and we find that the Obama administration
has extracted some significant lessons from the BDA fiasco.
First and most importantly, China is genuinely concerned about the threat of US
Treasury sanctions against its banks.
The Obama administration hopes that China will find US sanctions activity more
palatable if it targets accounts within Chinese banks, rather than the banks
themselves.
The US spin that Chinese banks are independent enough to make a business
decision to drop North Korean or Iranian business despite government policy of
support for Pyongyang and Tehran is probably wishful thinking designed to
deflect Chinese anger at an attack against its national interest.
The apex of giddy optimism was perhaps achieved by a South Korean financial
expert interviewed by Daily NK:
Even the banks of a socialist nation
are freer than in South Korea. In Chinese banking, economic logic is more
important than political logic. They will not maintain North Korean accounts if
that halts trade with the US. [2]
Therefore, the US will use a
scalpel instead of a bludgeon in pursuing North Korean money.
Patriot Act Section 311 investigations are apparently no longer part of the US
sanctions toolbox.
The new version of the policy is carefully and explicitly linked to UN
sanctions resolutions and US laws and executive orders. The
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