Treasury's War Page 26
In China, officials were not sure exactly what had happened, let alone how to respond. We had given ample advance warning to officials at the People’s Bank of China about our growing concerns over North Korean illicit financial activity. Secretary Snow had spoken with the central bank governor, Zhou Xiaochuan. According to Snow, the Chinese were not surprised and did not react to the assertion that there was North Korean illicit capital coursing through the Chinese banking system. The day before the 311 announcement, Secretary Snow had even made a courtesy call to let the Chinese People’s Bank know what was coming. Even with these warnings, Chinese officials had not anticipated the gravity of this action or its ripple effects, including within the Chinese financial system.
Nevertheless, Chinese state-run banks reacted to the regulation just like other banks. They, too, were worried about appearing to be facilitating North Korean illicit financial activity, and they began to close and scrutinize North Korean accounts and transactions. Chinese banks wanted access to New York and wanted to be perceived as legitimate international financial institutions. Soon after the Treasury’s 311 action was made public, the Bank of China in Macau froze all North Korean accounts. Despite the consternation of Chinese officials who wanted to support North Korea, market forces compelled Chinese banks to make a choice—appear legitimate by scrutinizing North Korean illicit financial activity in their banks, or risk appearing like a financial rogue and losing access to the US financial system. Officials ultimately came down on the side of protecting the Chinese banks, and on July 25, 2006, the Bank of China announced that it had frozen accounts relating to North Korean transactions in BDA.
The 311 action revealed an important cleavage in the Chinese system. On the one hand, the Chinese financial system and actors had clear economic and financial interests that required them to preserve the perceived legitimacy of their system. They wanted Chinese banks to be accepted by the United States as serious actors on the right side of the line of financial legitimacy. On the other hand, Chinese Ministry of Foreign Affairs and political officials were not pleased that this issue was interrupting the diplomatic dance with North Korea. On March 16, 2007, the Chinese foreign ministry spokesman, Qin Gang, expressed his “deep regret” that the United States had issued such a ruling. Meanwhile, the Chinese foreign ministry and political establishment campaigned to unwind the BDA action and return the North Koreans to the six-party talks.
Perhaps the most important lesson was that the Chinese could in fact be moved to follow the US Treasury’s lead and act against their own stated foreign policy and political interests. The predominance of American market dominance and financial power had leapfrogged traditional notions of financial sanctions. It was a lesson the Chinese certainly would not forget.
The Section 311 ruling had an impact that lasted well beyond its initial effects. On February 16, 2006, Banco Delta Asia terminated its business with DPRK entities and requested that the United States remove its financial sanctions against the bank. In April 2006, Daedong Credit Bank—the only foreign-owned bank operating in North Korea—announced that its revenue had been cut in half by US actions. On September 7, 2006, reports emerged that Koryo Asia Ltd., a British investment company, was going to purchase Daedong Credit Bank. And in August 2006, Vietnamese banks shut down North Korean accounts. Finally, on December 26, 2007, the East Asia Commercial Bank—which had functioned as a correspondent bank to North Korea—instructed its Pyongyang customers to close their accounts within a week.
US Treasury Secretary Henry Paulson later explained in a speech that “worldwide, private financial institutions decided to terminate their business relationships with the designated entities, as well as others suspected of engaging in similar conduct. The result is North Korea’s virtual isolation from the global financial system. The effect on North Korea has been significant, because even the most reclusive regime depends on access to the international financial system.”3
A country that found itself able to manage under international sanctions for decades was now under a new financial assault whose basis was North Korea’s own illicit financial activity. Banks around the world made a simple decision not to touch tainted North Korean capital. The North Koreans may have been dismissive of the action, at the beginning. However, within about four weeks, they realized they had a major problem on their hands.
About a month after the Section 311, the North Koreans called the State Department through their UN offices in New York expressing a desire to talk. According to Victor Cha, the Georgetown University professor and National Security Council director charged with handling North Korean policy, this was a first. To his recollection, the North Koreans had never called the United States first to talk about anything. Something had happened.
As soon as it dawned on the North Koreans that what they had been hit with was no ordinary sanction, they went on a diplomatic offensive. On center stage was the removal of the financial pressure campaign. The focal point of their demands was the unfreezing of the $25 million in the fifty-two accounts in Macau. Every conversation began and ended with the same question: “When will we get our money back?”
For most American foreign policy and national security experts outside of the Treasury Department, the ripple effects of this regulatory action were far beyond what they would have expected. Those who were aware of Section 311 tended to think of it as working like traditional sanctions—and it was accepted wisdom that sanctions had little effect on the North Koreans. The method of its effectiveness was hard to understand. The financial isolation did not come from a classic trade-based sanction or law; nor did it derive from a UN sanctions resolution. The bank had no assets in the United States, and the United States had not frozen $25 million. Instead, the essence of this power came from banks’ decisions to stop doing business with North Korea—prompted by the Treasury’s unilateral 311 action. It was clear that something new had happened. In the words of then CIA director Michael Hayden, “This was a twenty-first-century precision-guided munition.”
Even those who had long been involved in discussions to apply financial pressure against North Korea were surprised at the scope of the impact of the regulatory action. In the words of an intelligence veteran with over two decades of experience working on illicit financing, “We had anticipated a single or a double. This was a home run.” In meeting after meeting from 2003 to 2005, I had explained to the small group of North Korea policy experts, led by David Asher at the State Department and later the National Security Council’s David Shedd, what the potential effects of this action would be. In those meetings, neither my deputy, Danny Glaser, nor I had wanted to overstate the impact of the proposed 311 regulatory action against BDA. We remained conservative in our estimates of what might happen and how banks would respond. Still, we attempted to be absolutely clear that this would have a serious, real-world ripple effect that would usher in the first wave of North Korea’s financial isolation.
For national security professionals in Washington, the strategic impact and effects of these actions were a revelation. Victor Cha describes a conversation in the winter of 2005 at the six-party talks: “After much ceremonial toasting with Chinese baiju, an inebriated member of the North Korean delegation leaned over to us and mumbled, “You . . . you Americans finally have found a way to hurt us.”4 As Cha would later describe it, “It was a smash in the mouth, a slap in the face. When they first heard about the action, they just thought it was another sanction, but four weeks later they realized what had hit them. It really got the North Koreans to sit up and notice that this was a tool they’d never seen before, and frankly, it scared the shit out of them.”5 For perhaps the first time, the scales were lifted from the eyes of the national security community to the devastating potential of this brand of financial warfare.
I witnessed all of these effects and reactions from a privileged position in the White House. From that vantage point, I watched how Treasury’s handiwork was perceived in the top echelons of US government. In a m
eeting shortly after the BDA action in the fall of 2005, my new boss, Steve Hadley, the quiet and brilliant national security adviser, said that no one had anticipated the remarkable effects from the Treasury action. I looked at him and said directly, “We did.” He looked surprised, but listened intently as I explained why we knew this action would work against North Korea. I explained that the strategy against North Korea and the effects of the BDA action derived directly from the changing shape of financial power and suasion since 9/11. What happened to North Korea was absolutely according to plan and was part of a natural evolution in the use of US financial power.
Remarking that he had never heard the issue explained this way, Hadley asked me to write a memo to the president explaining what had transpired. I did just that—detailing how the very nature of financial pressure and suasion had been reshaped after 9/11 into a sharper and now essential tool for US national security. I wrote a second memo in 2008, updating the president on the use of these powers to pressure and isolate rogue actors in the international financial system.
The early promise of Treasury’s financial suasion had now come to full fruition. A power that fell uniquely to the Treasury Department—Section 311—had been used against a target that was uniquely suited to Treasury’s work—a bank—to influence a constituency that was uniquely part of Treasury’s expertise—the international financial community—to protect the US financial system. This was the moment of awakening to the power of the Treasury Department and the point of graduation for the Treasury Department. Treasury regained its seat with the national security heavy-weights. This was the coming-of-age of a new era of financial pressure and warfare. The tools that our small team at Treasury had created had now been unveiled to a wider audience.
This was the high-water mark of the campaign, however, and based on what followed, one might even conclude that Treasury’s power had worked too well. Our supercharged financial pressure campaign had leapfrogged the stages of the three-part financial campaign. The unexpected success would lead to new friction between those who ran the financial pressure campaign and the diplomats. Already skeptical of Treasury’s plans, Chris Hill and others at the State Department would soon come to see our handiwork as an outright hindrance to diplomacy.
Soon, government agencies would be at cross-purposes, disagreeing about strategies and goals. In contrast, the North Koreans knew exactly what they wanted—restoration of their ability to access the international financial system. They would soon take full advantage of fissures on the US side to reverse the effects of Treasury’s targeted strike.
11
PUTTING THE GENIE BACK IN THE BOTTLE
A throng of press was ready to pounce, cameras and microphones in hand, in the lobby of the opulent Hotel St. Regis in Beijing. The lobby was abuzz with their excitement. Daniel Craig, the famed British actor who is the latest to play the role of James Bond, was staying in the hotel. The reporters were fixated on the hotel elevators and exits like predators waiting for their prey to emerge. And Craig did emerge. He came out of one of the elevators and walked through the lobby, trying his best to hide his identity with a hat and sunglasses. He walked quickly, heading toward the rear exit. Nothing happened. There was not a flash of a camera to be seen, nor any question or comment uttered. No one pursued him. Though they saw the famous actor, the press simply ignored him. Instead, the cameras and microphones were waiting for a different Daniel—Daniel Glaser, a deputy assistant secretary of the US Treasury.
Glaser, a career Treasury civil servant and lawyer, had been sent to Beijing in March 2006 by Secretary Paulson, at the direction of President Bush, to sit down with the North Koreans and resolve the “technical issues” of the Banco Delta Asia crisis. The North Koreans refused to return to the six-party talks unless the financial pressure was eased and the approximately $25 million in frozen assets unfrozen. Glaser was there to negotiate the fix, and all of Asia was watching.
Glaser, a barrel-chested, balding thirty-eight-year-old, looked like a younger, smaller version of Richard Armitage, the famed, weightlifting deputy secretary of state under Colin Powell. Glaser started his career as a lawyer for the Secret Service and later rose into the policy ranks of Treasury’s Office of Enforcement. He had become a pillar of Treasury’s policy and international work, especially after 9/11. He did not suffer fools lightly, and he frequently remarked that the Treasury Department was the most prepared and technically proficient of any agency in the US government, if not the world. I had made Danny my deputy because there was nobody better in the business. He was someone I could trust. He was a true professional and took his role as a Treasury official and expert as a defining feature of his identity. He also became a close friend.
Glaser, a veteran of sensitive financial diplomatic negotiations and the head of the US delegation to the Financial Action Task Force (FATF), had received overseas attention in the past, but never anything like this. Neither had the Treasury press representative, Molly Millerwise Meiners, who was watching it all from the lobby. Meiners was a striking green-eyed, twenty-six-year-old native of Michigan who had quickly become a seasoned public affairs specialist traveling around the world. She had worked with me—and then later with Stuart Levey—on the Treasury Department’s financial pressure campaigns and some of the most sensitive of issues, such as our dealings with the Saudi government. Meiners had been dispatched to accompany Glaser and had already advised Glaser to ditch his usual hard-rock T-shirts and Wayfarer sunglasses for the duration of the trip. There was too much press attention and too much at stake in this mission.
As Glaser emerged from the elevator, the reporters immediately surrounded him, blinding him with camera flashes and peppering him with questions. Meiners jumped into the middle of the throng and pulled Danny out and to the door, as the press followed quickly behind. Hurrying into the embassy van, they escaped their pursuers—for the moment.
The members of the press were principally from Asian outlets, primarily in China, Japan, and South Korea, and they knew these negotiations were critical. Before the six-party talks could resume, the financial pressure on North Korean illicit activity had to be resolved. For the first time, the United States had real leverage with the North Koreans.
It was difficult, however, for US representatives to press their advantage when the action against BDA was so widely misunderstood. Commentators, analysts, and even many US diplomats habitually referred to the campaign of constriction alternately as a sanction, a freezing action by the Treasury, or a technical law-enforcement action. It was none of the above.
No one had ever seen this kind of measure before—a domestic proposed regulation that impelled the private sector to isolate rogue financial behavior. The tendency was to liken the measure to a classic state-based sanction. And for most in the diplomatic corps, this meant a classic state-based sanction like those of the 1980s and 1990s, which were often trade-based, reliant on UN authorities to have effect, or focused squarely on the assets of key political leaders. Experience with traditional sanctions had taught diplomats that their coercive impact was determined largely by political decisions. But these were not classic sanctions that could be turned on and off like a light switch. What the State Department had a hard time grasping was that Treasury had unleashed the financial furies.
We had not frozen anything; nor had we obtained a UN sanctions resolution to isolate North Korean activity. This was a new brand of twenty-first-century financial warfare. The only real cure was for the North Koreans to stop engaging in illicit activity and cease using the banking system to launder their funds. What the North Koreans wanted was an antidote. And unfortunately, our diplomatic team was only too eager to give it to them, if only they could achieve some kind of “resolution.”
The trouble was that the various actors involved, including within the US government, had different perceptions of what “resolution” meant. For Treasury, the underlying illicit activity needed to be resolved. Because the 311 action was based on underlying North
Korean criminality, the pressure could not be credibly unwound until the illicit financial behavior was resolved. For State Department diplomats, such as Chris Hill, and the Chinese foreign policy and political establishment, resolution meant lifting the financial pressure and unfreezing any North Korean assets. Hill had been assigned this job by Condoleezza Rice, and his mandate was to forge an agreement with the North Koreans. It was little wonder that he had been displeased when the BDA action halted all progress in the six-party meetings. The BDA action was seen as an unfortunate interlude that had complicated talks at a moment when progress seemed to be taking place. The State Department wanted a calming of the tension and a return to talks.
Not long before, negotiations had been moving in a positive direction. In September 2005, the North Koreans had agreed to eventually dismantle their nuclear program and allow the return of monitors from the International Atomic Energy Agency (IAEA). This concession would be made in return for food aid, normalized relations with the United States and Japan, and resumption of peace negotiations between North and South Korea. After the BDA action was launched, prospects for this deal being implemented were slim.1