April 11, 2007
By Glenn Kessler, Washington Post Staff Writer
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.
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.