Treasury's War Read online

  The most brazen North Korean illicit financial activity was the counterfeiting of US $100 bills. These were the highest-quality counterfeit US bills in the world. The Secret Service had dubbed them the “supernote.” Most bank tellers and commercial enterprises could not tell the difference between the supernote and genuine US currency. The paper, ink, and printing for the fake currency made the supernotes almost identical to real bills.

  The supernote was first detected in 1989 by a Filipino money exchanger in Manila, who felt the counterfeit bills and knew from his tactile experience with US currency that something was not right.3 The Secret Service investigates all types of counterfeit currency—but most of it is of poor quality and has little chance of undermining confidence in the US dollar. The investigators for the supernote found that it was a different breed altogether.

  As Secret Service agents began to talk to banks and money exchangers around the world, they found more instances of the supernote popping up in locations as far flung as Taiwan, Yemen, and Peru. A pattern began to emerge. Wherever there was a North Korean presence or link, the supernote appeared. Surveillance photos of North Korean officials passing supernotes in banks and casinos revealed direct connections between the note and the regime in Pyongyang. Currency forensics reinforced the conclusion that North Korea was producing the bills. By tracking each instance of the supernote, the Secret Service traced the currency straight back to North Korea.

  The counterfeit $100 bill had proved quite useful to North Korean agents and diplomats—especially when big-ticket cash transactions and imports were necessary or illicit deals with organized crime figures were consummated. The regime even used supernotes to buy genuine currency. North Korean agents and front companies would sell the notes at a discount—for $70 or $80 per note—typically to foreign buyers. The buyers would get the full value of the supernotes when they introduced them into the financial system, and the North Koreans got real foreign currency in return. The trade in counterfeit currency had brought the North Koreans closer to Asian criminal triads as well as to the Irish Republican Army (IRA). One well-known IRA member, Sean Garland, worked directly with the North Koreans to help move supernotes in Ireland. Garland, a wanted Irish leftist and terrorist organizer, visited the North Korean embassy in Moscow and returned to distribute millions of dollars of supernotes through his criminal network in Dublin. It had been estimated that the North Korean government earned $15 million to $25 million per year from the counterfeiting.4

  The experts at the US Bureau of Engraving and Printing and the US Secret Service tried to stay one step ahead of the counterfeiters by changing the type of printing and the special features of US currency. Much of US currency is held outside of the country, with citizens in many countries around the world—where local currencies are volatile or governments can change currency policies on a whim—holding onto dollars like an insurance policy. More than two-thirds of the $800 billion of US currency in circulation is held abroad.5

  The confidence in the dollar and its widespread use makes it valuable to hold. Whenever a new version of US currency is introduced, the Treasury devotes resources to explaining the changes in places like Russia, where a significant number of US bills are held. The $100 notes, with the famous Ben Franklin profile, are often the preferred denomination. The new “big head” $100 notes—so-called because the picture of Ben Franklin takes up more of the space on the currency—had special security features intended to make it almost impossible to counterfeit.

  The North Koreans had made an industry of producing new lines of counterfeit notes to match the new bills and security features introduced by the Treasury. Over the years, the North Koreans have issued several series of the fake currency to account for changes in the style and security features of the “Benjamins” and to improve the quality of the counterfeit. Pyongyang imported high-quality industrial printers, the same kinds of intaglio presses used by the US Bureau of Engraving and Printing, to manufacture US dollars. The counterfeiters were using the same kinds of paper as the United States, with the right mix of cotton and with the same optically variable ink used by the United States. They used specially designed plates to create near-perfect replicas.

  The currency experts at the Secret Service showed me samples of supernotes compared to the real thing. Minute differences between the fake currency and the real notes could only be detected with a magnifying glass when looking at very specific security features on the bill. Mike Green, the National Security Council’s senior director for Asia Affairs during the Bush administration, described the Secret Service’s presentation on the supernote to him in 2001 as the most interesting briefing he had heard, noting that “all [the Secret Service] wanted were the [currency] plates back.” Pyongyang had become a full-scale industrial counterfeiter of US currency.

  The counterfeiting of these notes and the undermining of confidence in the US dollar were unacceptable. Under international law, counterfeiting the currency of a country qualifies as a proxy attack on its national integrity and sovereignty—and a causus belli to justify self-defense. This international doctrine reflects the importance of the integrity of currency to countries and their economies as well as the use of counterfeiting as a form of financial attack throughout history. During World War II, the Nazis forced Jewish artists to replicate US and British currency as part of an operation seeking to undermine the Allied economies. This effort was never implemented, however, and most of the bills were dumped underwater. From this perspective, North Korea has been engaged in financial warfare by undermining the integrity of the US $100 bill.

  Moreover, Pyongyang ran major drug-trafficking operations and was a source of illicit proliferation of missile and nuclear technology—engaging in both for the purpose of generating funds and preserving the regime. Abdul Qadeer Khan worked closely with North Korea to build and export centrifuge and other nuclear technologies. North Koreans helped to design the nuclear facility in Syria that was destroyed by the Israelis in 2007 and were advising the Syrians.6

  Our team sought a way to squeeze the regime financially that would stop its illicit financial activity, impede its proliferation of nuclear technology, and end or slow its own nuclear program. Again, a financial tool of isolation could help give teeth to our diplomacy. It would also demonstrate Treasury’s importance on one of the thorniest national security problems facing the United States.

  Our strategy was straightforward—we would tighten and close North Korea’s remaining access to the banking system. This approach came directly from the Bad Bank Initiative, which was well underway and serving its purpose. Already we were uncovering and isolating key financial institutions facilitating a full range of illicit financial activity—from drug trafficking and money laundering to terrorist financing and sanctions evasion. Now we would add North Korea to the target deck.

  Pyongyang was dependent on banks to do business. It had a domestic bank, Tanchong Commercial Bank, which the regime used as its primary financial institution and a trading company doing business with the world. It facilitated much of the proliferation activity with the North Korean company KOMID (Korean Mining and Development Corporation). It also relied on Daedong Credit Bank, the only foreign-owned bank in North Korea. These banks helped give the North Koreans access to other banks and the international financial system. And the regime and its networks relied on banks outside of North Korea for accounts, credit, and access to international trade finance and wire-transfer services. Despite their economic isolation, the North Koreans had to be able to access and move capital outside of North Korea’s borders—especially if they wanted to proliferate missile and nuclear technology and profit from illicit activity.

  The network of banks was the key to our battle plan. All we needed was the right bank to target—one that was assisting the North Koreans to evade sanctions and engaging in illicit financial activity in its own right. As we had learned from past initiatives, by incapacitating that bank, we would effectively make doing business with Nort
h Korea toxic to the private sector. We wanted North Korean financial activity to be rejected like an infection by the antibodies we had built up in the international financial system.

  The bank of choice was Banco Delta Asia (BDA). BDA was a Macau-based bank held by the Delta Asia Group (Holdings) Ltd. and controlled by Stanley Ho.7 Macau was historically a crossroads for maritime commerce and trade, finance, and people—and in recent years had become a major international gambling center. In Macau’s growing casino industry, billions were invested and spent annually. Pods of “whales”—high-value gamblers—visited Macau from around Asia and the rest of the world. For many years, local operators and investors, like Stanley Ho, dominated the Macanese casino market. Major American and international casino moguls, such as Steve Wynn and MGM, had major properties or planned investments in Macau. This booming former colonial enclave of China is now four times as large as Las Vegas, producing more than $23 billion a year in revenues.8 With this cash and flow of goods and people from around the world came illicit trade, smuggling, and money laundering. Macau was known as a jurisdiction with lax money-laundering controls. Officials would look the other way as the economy prospered on the backs of both legitimate and illegitimate commerce. It was an ideal place for the North Koreans to do business.

  BDA would become the most important bad bank we would identify as part of our Bad Bank Initiative. It provided an ideal access point for North Korea into the international financial system. With little oversight in Macau, North Korea was able to pay a fee to the bank in exchange for access to its financial network. BDA was not the only bank doing business with North Korea. The regime also used the Bank of China, among others. But BDA handled a large sum of financial transfers for North Korea and most of the regime’s precious metal sales as well as cash deposits and withdrawals. The bank allowed North Korea to open bank accounts, wire and launder money, and deposit bags of cash—genuine or counterfeit. North Korea was dependent on BDA—which meant BDA was the perfect target.

  Because BDA was a small, private bank, its isolation was unlikely to have much effect on the United States. Chinese interests would certainly take notice, but were unlikely to deem action against BDA a direct assault on the financial sectors of Beijing or Hong Kong. The isolation would, however, send a message to the rest of North Korea’s bankers. Given a choice, banks doing business with North Korea would abandon that country’s business to avoid the stigma and financial sting of US regulatory action. The volume of business they did with North Korea and the related profit margins did not make it worth the risk. Targeting BDA would force Chinese banks and others to choose in favor of isolating North Korea for their own self-interest, even if Beijing didn’t like it. Perhaps the most important potential strategic impact of this plan would be that we would be employing the unwitting assistance of China to isolate North Korea. It was a strategy reflected well in an ancient Chinese proverb: we had found a way to “kill the chicken to scare the monkeys.”

  In 2004, we started work on a Section 311 regulatory package—readying the designation of BDA as a primary money-laundering concern to cut off any correspondent banking relationships in the United States. Importantly, we would not actually be freezing any accounts or transactions. Instead, our action would send a message to the international financial community that this bank was a financial pariah because of its illicit business with North Korea. The market would take care of the rest. As it turned out, this move would ultimately prove to be the most important Section 311 action we would ever unleash.

  At the same time, David Shedd, a senior director at the National Security Council who was responsible for intelligence policies, called me into his corner office in the Eisenhower Executive Office Building next to the White House to read me into a sensitive project. Shedd, the son of a missionary who had grown up in South America, was a longtime intelligence professional. We had become friends, but he was dead serious about his job and very matter-of-fact when it was time to get down to business. From his influential position managing sensitive intelligence issues for National Security Adviser Condoleezza Rice and the National Security Council, Shedd was a seminal figure in shaping the post-9/11 development of the intelligence community.

  When I arrived in his office, Shedd shut the door and proceeded to tell me that there was work underway regarding North Korea that needed Treasury’s input and help. I would be the only Treasury official read into the program for now. To my surprise, he told me that a small group at the State Department had already been leading an effort to look at North Korean illicit financial activity. He didn’t give me many details, but he advised me to meet David Asher, a senior adviser to the assistant secretary for East Asian and Pacific Affairs. Unaware that such an effort was underway, I was eager to find out what the team at State was doing.

  A few days later, I walked into a small conference room at the State Department, unsure what to expect from the department’s efforts, or from Asher. An Oxford PhD and hedge fund strategist, Asher was a protégé of deputy secretary of state Richard Armitage and an expert on East Asia and global financial and trading systems.

  Asher and his trusted and longtime intelligence analyst and economist from the Bureau of Intelligence and Research (INR), William Newcomb, were sitting at the table and welcomed me warmly. When I met them, Asher had a grin on his face, while Newcomb’s deep voice and thick glasses clashed with his soft demeanor. Asher started by complimenting the work we had been doing on terrorist financing, noting that he had been watching our campaign from afar. Then, taking on the air of a mad professor, Asher described for me what he and Newcomb had been doing.

  Asher explained that in December 2001, Deputy Secretary Armitage had authorized James A. Kelly, assistant secretary of state for East Asian and Pacific Affairs, and him to organize a closely held campaign to curtail North Korean illicit activity. Meanwhile, the president wanted to develop a new means of negotiating with North Korea. Mike Green, who helped to develop a road map for this new means of negotiation, recalls that President Bush had said, “You’re just rearranging the deck chairs on the Titanic. I want something big.” Offering rewards for good behavior clearly wasn’t working. Green wanted Asher to look at the supernote problem and develop a strategy to counter it that was tied to the plans for diplomatic engagement with North Korea.

  What Asher developed, with the help of Newcomb, was a broad assessment of the North Korean illicit financial networks. His theory was that these financial flows were important sources of funding for the regime. Newcomb, a trained economist, dug into the data. He uncovered interesting anomalies in North Korea’s economy and balance of trade, and they began to shape his view on the importance of the illicit flow of funds to the regime. Though North Korean industrial output had fallen dramatically, and the trade deficit typically ran at around a billion dollars per year, the North Korean economy had not collapsed. It was surviving, and it was not suffering from inflation. As Asher would later put it, “North Korea had a mysteriously large black hole in its trade accounts. . . . Some dark matter, in effect, had to be filling the void.”9 That dark matter was illicit financing.

  Asher had settled on the goal of stemming the illicit funding streams into Pyongyang. To do that, he wanted to use law enforcement—including the FBI and the Secret Service—in an unprecedented way. They would go after the North Korean networks, especially those tied to criminal networks abroad. The goal was to create an international enforcement model that would bring greater credibility and cooperation internationally to the efforts to shut down North Korean illicit financial flows. Once the illicit networks and activities were identified, the campaign to squeeze Pyongyang became less about politics and more about enforcement of the law. It would certainly be easier to convince foreign governments to make arrests and shut down front companies if the organizations involved were violating local criminal laws. This model was different from the classic campaign that relied primarily on political or diplomatic motivations and suasion to convince allies to
act. If we could stop these flows and shut down the networks, it might provide much-needed leverage to diplomats seeking a nuclear deal at the six-party talks that had begun in August 2003.

  As Asher continued his flurry of a presentation, Newcomb passed one of his large white binders to me to show me the data and links they had begun to find. I sat there and listened—amazed. I was in shock at the scope of the intelligence effort underway and the nature of the endeavor. I had been skeptical of their work at first, but the binders and the documents in them demonstrated that they had data to back up what they were concluding. They and the intelligence community had been doing their homework and knew what they were talking about.

  As the briefing proceeded, I felt as though I had found two long-lost brothers—both of whom were viewing the world through the same lens I was. Just as exciting was the fact that their work coincided neatly with the work we had already begun on North Korea’s banking relationships. I was already thinking about how our work on BDA could fit into their strategy. I had found in Asher and Newcomb a broader diplomatic and national security platform into which to inject our tools and financial isolation strategy against North Korea.

  When they finished, I took a moment, sat back, and told them how impressed I was with their efforts and approach. I then leaned forward and offered my own little briefing. I explained the research we had been doing into the banking relationships of the regime, and I emphasized the importance of squeezing North Korean access to foreign bank accounts. The banks needed to be at the center of our approach. I explained the Bad Bank Initiative and how Section 311 permitted us to target rogue financial actors. This was different from the campaign against terrorist financing that they were already aware of, but it built on it. I then mentioned BDA as our next 311 target and told them how designating BDA might affect North Korea’s access to the international financial system.