Treasury's War Read online

  Asher and Newcomb were clearly intrigued. Though Section 311 was new to them, they were certainly focused on BDA. They invited me to participate in the small interagency group dedicated to the North Korea Illicit Activity Initiative, and I eagerly accepted.

  At the first meeting I attended in late 2003—and thereafter at each meeting for nearly two years—I would explain the range of Treasury powers available, how the intelligence and law-enforcement cases we were building could be leveraged to isolate an illicit financing regime, and the possible use and impact of Section 311 against Banco Delta Asia. Most of the people in the room were aware generally of our sanctions powers, but had no experience with Treasury’s tools, and so did not see what more we could do to a country that had been economically sanctioned and isolated for decades. For most in the group, what I was telling them—that targeting Banco Delta Asia, a private bank in Macau with little activity in the United States, would really impact North Korea, even though we were not sanctioning the country with anything new and would not have multilateral support for whatever we were planning—seemed counterintuitive.

  The talk about our ability to use Section 311 to force an isolation of North Korea’s broader illicit financial network seemed almost fanciful to them and disconnected from what the US government could actually order or control. Yet, as I assured them, this wasn’t about classic sanctions or freezing assets, or even arrests or seizures. It was a modern act of financial warfare intended to isolate North Korean commercial and illicit activity from the international financial system using the subtle power of regulation and financial suasion.

  A year later, the group would be taken over by the National Security Council, which brought the effort (now called the North Korean Illicit Finance Action Group, or NORKAG) into the White House orbit, with David Shedd leading the meetings and Asher serving as his deputy. National Security Adviser Condoleezza Rice and Deputy National Security Adviser Steve Hadley asked Shedd to make sure the efforts were well coordinated, while Asher tried to push for more actions to squeeze the North Koreans.

  Besides making the case to the interagency group, I soon began to brief Treasury’s leadership and others in the Treasury Department about the consequences of the possible 311 action. My principal concern was that the key leaders be aware of the impact this action could have on US relations with China. Targeting BDA would not only put Macau in a negative spotlight—Chinese banks would instantly realize that they might be next on the target list. The move would be sure to upset the Chinese government. The chairman of the New York Federal Reserve Bank, Tim Geithner, and the bank’s longtime general counsel, Tom Baxter, were worried that the action would have unintended consequences with the Chinese. But Geithner didn’t object, and Treasury Secretary Snow remained confident that we could manage any Chinese fallout. The Chinese banks would have to adapt to the reality that we would no longer tolerate North Korean financial criminal behavior. Snow, in meetings with the president and his cabinet counterparts in the Situation Room, would later describe the Treasury tools that could be brought to bear on North Korea, highlighting the purpose and workings of the 311. Defense Secretary Donald Rumsfeld pooh-poohed the notion that this kind of action could work. Nevertheless, President Bush was quite interested in and engaged with on this idea, and certainly preferred it to a military solution. Any pressure we could engineer would give our diplomats more leverage to press for a nuclear deal.

  What emerged from our collaboration was a pressure campaign against the North Korean regime that consisted of three distinct stages. The first had begun in 2002 and was well underway. This stage involved investigative and intelligence operations targeting specific elements of North Korea’s criminal networks. Treasury would play a role in the second stage, which would involve cutting off certain funding routes used by the regime. Our use of Section 311 action against BDA would serve as the catalyst for this stage of the campaign. The third and final stage would amount to an explicit effort to hunt down North Korea’s leadership assets and shut down the engines of its illicit financing, such as Office 39. The pressure would increase with each stage as we tightened the vice on the country’s financial escape routes around the world.

  The first stage had already produced results, largely because of the cooperation that took place between intelligence and law-enforcement agencies and diplomats from various nations. Investigators scrutinized Golden Star Bank in Vienna, Austria, and determined that it had been not only the primary financial center for North Korean business in Europe but the front for a variety of covert and fraudulent businesses that generated foreign funds for the regime. In 2003, the Austrian authorities quietly shut the bank down and disallowed its operations. But the pressure on North Korea’s overseas banking access was just beginning.

  In April 2003, Australian authorities tracked a North Korean cargo vessel as it illegally entered Australian waters. Members of the Australian special forces, among the best in the world, later stopped and raided the Pong Su as it attempted to flee into international waters. What they found was revealing. The Pong Su had attempted to smuggle 150 kilograms of heroin into Australia. The shipment was tied to the Asian narcotics trade in Southeast Asia and Australia. Some of the Pong Su crew members had been offloaded, and they had already been arrested on shore in possession of large amounts of heroin. The drug-trafficking state had been caught red-handed. The Pong Su was impounded, and, in 2006, it was sunk by the Royal Australian Air Force in a military exercise. The world was now plainly on notice of North Korea’s drug-trafficking and smuggling role.

  Treasury contributed to stage one by making a public case about North Korean counterfeiting, with the primary intent being to make it harder for North Korea to acquire the equipment and materials it needed to upgrade its counterfeiting operation. I contacted Ron Noble, the secretary general of Interpol and a former treasury assistant secretary, an impressive, articulate law-enforcement official who had helped oversee the old Treasury Enforcement office and agencies in the late 1990s—including the Secret Service. We had developed a close relationship with Noble right after 9/11, when we agreed to share information about terrorist financing designations that would be fed into Interpol databases. We ultimately worked with Noble to tie Interpol’s travel notice system to the travel ban required for terrorists and financiers designated under United Nations Security Council Resolution 1267.

  I brought in the two leading Secret Service investigators on the supernote cases, who gave Noble a briefing on the counterfeit bill. We made it clear that we knew North Korea was producing these notes at will. Noble, who was quite familiar with the Secret Service’s expertise, suggested that we think about an “Orange Notice” to the private sector coming from Interpol, which would advise the key industries impacted—especially the producers of large-scale industrial printers—of the contours of the cases and our concerns. This would conceal the full scope of our cases but nevertheless aid in constricting the environment in which the North was operating. The Orange Notice, published in March 2005, warned the international community and the private sector not to sell banknote production equipment to North Korea.

  At the same time, we wanted to put direct pressure on the private sector. Sam Bodman, the deputy secretary of the treasury, sent a letter reminding German printing companies of existing US laws and sanctions and explaining the concern we had about North Korea’s demonstrated and wanton counterfeiting of US currency. These companies, whom we suspected of selling equipment to North Korea, were now on notice of what we suspected. We were slowly but surely shaping the environment to isolate North Korean activities.

  All the while, the Secret Service and the FBI were successfully disrupting North Korea’s organized crime connections inside America—specifically, the counterfeiting operations on both the west and east coasts. The Secret Service had been uncovering the networks and the organized crime groups that were using supernotes and possibly acting as pass-throughs for the North Koreans. At the same time, the FBI was digging into
significant additional organized crime activity, with a focus on the growing ties between Asian organized crime and La Cosa Nostra—the Mafia—in the United States. The FBI had deep expertise in bringing down mob families in the United States and cracking Asian triads, and its agents had begun to see signs of counterfeiting—of both cigarettes and currency—in the dealings of the groups. In a globalized criminal world, criminal networks were willing to collude with counterfeiters for profit and market access. It was a marriage of convenience. Though there was tension regarding who would lead the investigations, the Secret Service and the FBI would begin to work together on two major cases that would lead to the discovery of even deeper links between North Korea and organized crime.

  The cases were known by their operational names, “Royal Charm” and “Smoking Dragon.” On the East Coast, the Royal Charm investigation was underway, with the FBI using “a false-front Mafia group in northern New Jersey, reminiscent of the one on the hit television show, the Sopranos,” to uncover North Korean illicit financial ties. Kim Jong Il was a fan of The Sopranos, so the agents used the allure of the Italian Mafia as bait.

  On the West Coast, the FBI had launched Smoking Dragon to investigate Asian organized crime activity—including the import of counterfeit goods into California. The investigation soon discovered that the organized crime network on the West Coast was engaged with the group on the East Coast.

  We would sit down often with Department of Justice senior officials, led by Bruce Swartz, who was managing these cases and ensuring that they were integrated with the North Korean strategy. They and the investigating agents were concerned that a public action like a Section 311 designation would spook the organized crime figures and signal that we were watching the flows of illicit funds through Macau, where there was significant organized crime presence and activity. Some of the financial activity in Macau was tied directly to the organizations and activities under investigation. We agreed not to move forward with the BDA 311 until these cases were brought to fruition. It wasn’t yet clear when the State Department and the White House would want to unleash BDA.

  In early 2004, it appeared the cases would be brought to a conclusion during a wedding in New Jersey. The wedding would bring together many of the key figures in organized crime who were being taken down. It was a scenario right out of The Sopranos. The wedding became the key event around which all the law-enforcement team’s efforts turned. We agreed to wait until after the wedding to launch the 311. The “wedding” was in reality a grand sting operation, and arrests were planned for those traveling from around the world to attend. It took place on August 22, 2005, and officers arrested fifty-nine people as they arrived.

  The undercover operations targeting North Korean illicit activity in the United States found counterfeit cigarettes and counterfeit pharmaceuticals along with more than $4 million in supernotes. These were operations befitting of the country known as a “Mafia state.” Stage one was coming off without a hitch, and the law-enforcement barriers to action had been lifted. Now all we needed to get before putting stage two into action was the consent of the diplomats. During almost two years of discussions, we had been sitting on the 311, waiting for a moment that wouldn’t upset the applecart that was the six-party talks.

  In my last meeting as a Treasury official in May 2005, I went to Foggy Bottom to meet the new assistant secretary of state for East Asian and Pacific Affairs, Chris Hill. Hill was a distinguished career diplomat who had seen negotiating success in the Balkans in the 1990s and had been ambassador to South Korea. Condoleezza Rice, who was now secretary of state, believed that Hill would be the one finally to broker a deal with Pyongyang. She wanted a breakthrough, and Hill was brought in to make it happen. He was driven by his single-minded focus on getting that deal—but this single-mindedness would also be his greatest deficit. As our long-standing State Department contacts, David Asher and Jim Kelly, stepped aside to make room for Hill and his team, it soon became clear that Hill did not much appreciate the campaign of constriction that we had spent so much time building.

  When Hill arrived, he was forty-five minutes late. He apologized and noted that he had been with the secretary, and we proceeded to talk about the work underway in the illicit financing field. We went around the table to explain who we were and what we were working on that impacted North Korean illicit financing activity. The intelligence representatives gave their briefing on the state of North Korean finances and illicit activity. The State Department representatives explained the diplomacy and outreach it had built around the issue of North Korean illicit financing. The Department of Justice described its ongoing investigations in very general terms, without a hint in the broader group that they were close to making arrests. When my time came, I could see that Hill was either distracted or uninterested. I went on to explain the 311 action we had ready to go and told him why we thought this was a critical part of the pressure campaign, but it was clear that Hill, like so many of his colleagues, had little understanding of the strategic impact that this brand of financial warfare could have.

  We had set the stage for what promised to be the greatest demonstration of Treasury’s most potent financial weapon to date, but as I left the meeting, I was somewhat demoralized. I was leaving Treasury to serve as the deputy national security adviser. Asher, who had worked so hard on this campaign, was literally sitting on the sidelines and on his way out of the State Department. And Hill seemed uninterested in moving our plan forward. BDA would need to wait for another day—and fortunately, that day would come.

  10

  THE AWAKENING

  The time for action came on September 15, 2005. After getting the go-ahead from the State Department and the White House, the Treasury Department launched a direct financial assault on Pyongyang unlike anything the North Koreans—or anyone else—had ever seen. Simply by publishing a Section 311 regulation advising US banks to end relationships with BDA, a small, private bank in Macau, the United States set powerful shock waves into motion across the banking world, isolating Pyongyang from the international financial system to an unprecedented degree. The North Koreans didn’t know what hit them.

  The Section 311 regulation labeled BDA a primary money-laundering concern and described the bank’s role in facilitating North Korean drug trafficking, counterfeiting, and nuclear technology, not to mention related money laundering in the hundreds of millions of dollars.

  It exposed the illicit activities of the “Soprano State” and Banco Delta Asia as one of the key banks it was using to launder its dirty money, deposit its counterfeit currency, and engage in smuggling and front operations: “Banco Delta Asia has provided financial services for over 20 years to multiple North Korean government agencies and front companies that are engaged in illicit activities, and continues to develop these relationships. In fact, such account holders comprise a significant amount of Banco Delta Asia’s business. Banco Delta Asia has tailored its services to the DPRK’s [Democratic People’s Republic of Korea’s] demands. . . . Banco Delta Asia’s special relationship with the DPRK has specifically facilitated the criminal activities of North Korean government agencies and front companies.”1

  In a single stroke the bank was converted into a financial pariah in the US and international financial system. The tool we had been using to such great effect against bad banks since 2003 would now demonstrate its full potential.

  The North Koreans certainly did not expect such an action. The regime had endured decades of financial isolation and sanctions while retaining the comfortable lifestyles expected by the leadership and military, even though they only did so at the expense of the vast majority of North Koreans. But this was something new. Unlike previous sanctions, the Section 311 regulation acted like a public financial indictment of the bank and of North Korea’s illicit financial activity. Once news of the regulation circulated around the banking world, it sparked a chain of market-driven rejections of North Korean accounts and transactions. The taint of Section 311 unleashed
financial furies the likes of which the regime had never experienced.

  It began in Macau, where authorities shut down BDA and froze almost $25 million in North Korean assets held by fifty-two separate account holders. Depositors who feared for their own assets quickly made a run on the bank. Traders were instantly concerned that similar investigations would implicate the Bank of China, Seng Heng Bank, and other international markets. In a matter of days, BDA was being attacked from all sides. Reeling in the aftermath of the Treasury action, BDA sought the government of Macau’s assistance in maintaining basic cash flow, which was running $60 million to $75 million short.2

  The BDA board of directors abdicated its administrative and managerial responsibilities over the bank and gave governing authority to a Macau government-appointed committee. The Macau government appointed a three-member committee to take control of the bank and return its operations to normal as soon as possible. On September 30, 2005, a BDA spokesman said that all DPRK accounts had been closed.

  The ramifications of cutting off BDA were just beginning. The compliance officers and general counsels of other international banks with North Korean clients quickly realized the reputational risks they faced. Austria had previously shuttered the only North Korean bank operating in Europe, Golden Star Bank. Now that the Treasury appeared to be openly hunting banks associated with North Korean illicit activity, no bank wanted to be seen as Pyongyang’s financial lifeline. There was no interest or business reason to wait around to be the next target for the US Treasury. The volume or value of North Korean business to any particular institution or country certainly was not worth the risk.

  In Singapore, Hong Kong, and other banking hubs around the world, regulators and compliance officers began to close or freeze North Korean bank accounts and transactions, subjecting North Korean individuals and entities to intense financial scrutiny. Millions of dollars’ worth of assets were frozen or locked out of the banking system. Officials in key banking and commercial centers recognized the broader implications of this action and its impact—these kinds of targeted actions against dirty money could expose them to scrutiny and liability, costing them billions of dollars. As noted by Mike Green, then senior director for Asia for the National Security Council, “They weren’t comfortable with this. Today it’s North Korea, next it could be Iran and Burma that had billions in their systems.”