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  The Japanese and South Koreans were heartened by the BDA action. They appreciated the willingness of the US government to pressure the North Koreans and the creative effects of US actions. The Japanese took it as a signal to take additional steps of their own to tighten the financial screws on Pyongyang. They saw resolution of the case to include a wholesale resolution of Japanese grievances with North Korea—including the thorny and emotional issue of Japanese abductees who were yet unaccounted for. For America’s allies, the BDA action was not a one-off step but part of a broader strategy to change North Korean behavior and the dynamics of diplomacy. Resolution could not be complete unless a number of other issues were addressed.

  North Korea matched its diplomacy with a show of martial defiance. On July 4, 2006, North Korea launched ballistic missiles, including a Taepo Dong 2, a missile capable of targeting the West Coast of the United States.2 On October 6, 2006, North Korea conducted its first nuclear test, which was quickly condemned by the United States and the United Nations.3 The North Koreans were thrashing about in an effort to seek relief from the financial shackles and made it their priority in negotiations. By November 1, 2006, an uneasy agreement had been reached to move forward on the next round of six-party talks, with North Korea’s foreign ministry announcing that it was returning to negotiations “on the premise that the issue of lifting financial sanctions will be discussed and settled.”4 There arose some debate as to whether the BDA action had prompted North Korea to test its nuclear weapons. Many experts, including Victor Cha and Mike Green, argued that North Korea had been marching toward a test regardless of the BDA action. According to Cha, “they would have done a test anyway, sooner or later.”

  In the end, President Bush saw this as a moment when we could use our leverage—to get the North Koreans back to the table. So it was that by 2007, the United States had prepared a plan to help the North Koreans unfreeze and transfer the assets held in Banco Delta Asia.

  Now it was up to Glaser to finalize a resolution. He was put in the unenviable position of negotiating with the North Koreans on the “technical” matters tied to resolution of the BDA matter. Diplomats tended to think of this as little more than paperwork. Those of us who had designed the 311 action and the financial pressure campaign knew better.

  What few outside of Treasury understood was that it was impossible to put the genie fully back in the bottle. The Section 311 action had unleashed the private sector to isolate rogue financial behavior—like antibodies in the international financial system, rejecting the virus of North Korean contact and business. Our move against BDA had been an act of systemic inoculation, not a singular political act that could be easily reversed. There was no on-off switch to this kind of pressure, and unwinding would prove problematic. This was a lesson that Chris Hill and the State Department would learn the hard way.

  The North Korean embassy in Beijing was perhaps the most important diplomatic post for the DPRK, given the central importance of the country’s political and economic relationship with China. Everything about the embassy building was intended to convey a sense of grandeur emblematic of North Korea’s view of its own power, its resistance to the rest of the world, and the majesty of the Kim dynasty. For Glaser and the three other young Americans who made up the delegation, it was comically gigantic.

  When Glaser entered the embassy, he was led to a room where the discussions would be held. It was a gymnasium-sized room, with a huge multicolored mural on the wall of a crashing wave on the North Korean shoreline. The table set up was overly large for the group that would assemble. Later in the discussions, the North Korean hosts would place a giant bowl of candy on the table. The unrecognizably large pieces of candy were wrapped in fluorescent paper and looked like cartoonish props from Willy Wonka and the Chocolate Factory. One of the North Korean delegates, who was likely an intelligence operative, repeatedly offered the Americans candies from the bowl—digging his unusually thick, large hands into the mix like claws. The delegation soon began to refer to this official affectionately as “Meathooks.”

  This was not the first time Glaser had met with the North Koreans. He had participated in a first round of technical discussions in New York, and a technical working group had been formed to resolve the underlying concerns about North Korean illicit financial activity. The negotiators had learned to respect the Treasury delegation. At one point in the negotiations, the North Korean lead negotiator revealed his respect for Glaser in a characteristically North Korean way. He told Glaser, “You are like a pockmark on someone’s face that is bothersome and annoying at first but which one gets used to over time.” He would later reveal that there were two officials that the North Koreans had initially hated—Glaser and Stuart Levey. Now, it was only Stuart Levey they hated. Glaser made a point of ensuring that this tidbit was cabled back to the State Department.

  In these negotiations, the North Koreans were attempting to pull off a very clever strategy—and the stakes were high. As Victor Cha noted, “the North Koreans were on the ropes, they were scared.” Their goal was to shift the onus back to the American side to “resolve” the problem of the financial pressure. They first fixated on the approximately $25 million of assets frozen by the Macanese authorities in BDA. From the perspective of a nation—even one as economically hobbled as North Korea—this was not very much money at all. Secretary Paulson—who had previously been at the helm of Goldman Sachs—was often called the “$700 million man” because of his immense accumulated wealth. In this light, the amount of frozen BDA assets seemed like a rounding error. When briefed on the North Korean demands, American senior officials would often ask if the briefers were misstating “million” instead of “billion.” Twenty-five million dollars seemed a small price to pay to bring the North Koreans back to the six-party talks.

  But the North Koreans knew exactly what they were doing. The amount of money wasn’t the issue—they wanted the frozen assets returned so as to remove the scarlet letter from their reputation. The North Korean connection to the international financial system had been shattered, their ability to do business paralyzed. They had no intention of changing the nature of their illicit financial activity. The release of the money became a proxy for the first step in restoring their ability to do business with banks. And they knew they could only do this with America’s help.

  The frozen money drove the agenda, and it was clear that nothing would change until it was unfrozen. Unfortunately, what few seemed to grasp was that the United States had not frozen any money—nor did it have any jurisdiction to release it.

  There were three fundamental problems with focusing on the frozen money as the point of resolution. This point—that the United States had not frozen anything—was the most basic of these. A misperception that prevails, even among experts to this day, was that the US Treasury had ordered North Korean assets nested in BDA to be frozen. This revealed a fundamental misconception of what had happened and what type of resolution was feasible. The Section 311 action—as had been described within the US government over the course of two years—was not a freezing order. Instead, it was a domestic regulatory action to cut BDA off from the US financial system.

  The United States didn’t control the market reaction. It simply prompted it. In this case, the Macanese authorities froze the assets as a prophylactic regulatory step to aid in their investigation of BDA. They needed to contain the damage.

  The false assumption, therefore—prevalent even within the US government—was that the United States could quickly issue an unfreezing order. This was dead wrong and mechanically impossible. With the United States agreeing to resolve the issue, it committed itself to resolving quite complicated legal and financial regulatory matters—and to using US diplomatic and financial capital to release pressure on the North Koreans. Chris Hill certainly didn’t realize this at first, and he became increasingly frustrated by how seemingly complicated the unwinding had become. Despite the close relationship between Secretary Paulson and Secretary Rice, t
his pernicious misunderstanding became a major source of tension between the Treasury and State departments.

  A second misperception—and one of which the North Koreans took full advantage—was that the assets in the bank all belonged to the North Koreans. They did not. Out of the 52 accounts, 35 of them, worth $13 million, were determined to be legitimate accounts; 17 of them, worth $12 million, were tied to illicit activity. Not all of them were held officially by the North Korean government. Most were held by other owners and interests (most related to the North Korean regime). The DPRK wanted the entirety of the assets to be unfrozen.

  Regardless, the number of accounts and accountholders created additional legal complications. Separate agreements had to be negotiated with the accountholders that weren’t obviously North Korean state institutions. Those accountholders had to agree to have their frozen assets in BDA unfrozen and returned to the North Korean state. The North Koreans were trying to take full advantage of the confusion by laying claim to assets that were not obviously theirs.

  The final problem with fixating on the return of the $25 million was that it confused what the North Koreans really wanted and divorced the 311 action from the underlying illicit financial activity that was the focus of the financial pressure. Return of the assets represented both a first step to restoring North Korea’s financial reputation and a means of shifting the debate from the topic of what other actions might be taken to isolate North Korean financial activity. The North Koreans had no intention of taking any steps toward actual reform, so they needed to find another way to signal to the financial community that they were once again relatively safe to do business with. They believed that if the assets were returned in full to Pyongyang via international banks, it would serve as a signal that their assets were no longer toxic and could be touched again without fear of subsequent Section 311 actions. This was what the North Koreans really meant by “resolution”—and it had little to do with the actual money being frozen.

  As a result, Glaser’s talks with the North Koreans appeared to be hopeless. The North Korean negotiators did little more than read from scripts. They were in no position to seriously address American concerns over counterfeiting of US currency, money laundering, drug trafficking, or the smuggling of counterfeit cigarettes. Glaser also was not in a position to promise anything permanent or to suggest that he could orchestrate any deals, especially when the actors that were impacting North Korea’s access to the international financial system were the banks themselves. Glaser would return again and again to Beijing—four times in the span of two months—in his attempts to resolve this matter.

  The North Koreans remained insistent, however, that the assets needed to be unfrozen before any talks could continue. The State Department wanted this issue resolved—regardless of the status of the 311 action. One way or another, it seemed that the United States was going to help with the return of the assets. Glaser was called back once again to Beijing in early March 2007 to help manage the financial diplomacy that was still in process. Now the problem would be managing the return of the money to the North Koreans. The DPRK did not want to simply “pick up” the $25 million at BDA in Macau. Nor did Pyongyang want to be put in a position of inadvertently admitting some form of wrongdoing by showing up at BDA’s doorstep to collect a cashier’s check. The North Koreans demanded nothing less than an act of reintegration into the financial system—a first step in allowing them full access to the system. The $25 million would have to be wired back to a bank in Pyongyang. Glaser’s problem was that no bank in their right mind would even touch such a transaction without ironclad assurances from the US Treasury that they would not be subject to some form of sanction or additional attention in the future.

  Just as confusion had plagued the initial response to the BDA action, an unnecessary misunderstanding arose once again to divide the US government’s response. When Glaser and his team arrived in Beijing, the assembled State Department team informed him that the issue had already been resolved. The Chinese had agreed to transfer the money back to North Korea through a Chinese bank. In the White House, I had heard the same report given in the Situation Room. None of this made any sense, since it had been clear that the Chinese did not want to be implicated or drawn directly into the resolution of this matter. They, too, were worried about the taint of North Korean accounts and the reputational impact this could all have on Chinese banks.

  Nevertheless, the State Department team assured Glaser that it was all resolved, and that there would be a press conference the next day to announce the agreement. Glaser reviewed the proposed resolution, and sure enough, it did not make sense to him. The idea of the Chinese agreeing to use one of their banks to transfer the money back to North Korea ran counter to everything Glaser had heard from the Chinese directly. They did not want to be in the middle of this transaction—that much was clear.

  At one in the morning, Glaser met with Tom Gibbons, one of Chris Hill’s deputies, and raised concerns. He questioned whether the right elements of the Chinese government—namely, the central bank and finance ministry—had signed off on the deal.

  Gibbons responded by going into attack mode. “Why are you causing problems?” he said. “You are going to crash the entire deal!” He lashed out, saying Glaser was purposely trying to scuttle the six-party talks and calling Glaser’s motivations and professionalism into question. He accused Glaser of having his own agenda and noted that “everyone in Washington knows what you are trying to do.” It was the worst verbal assault Glaser had endured in his career.

  As had been the case with the State Department all too often, this attack was divorced from the realities and complications of the deal being discussed. The State team was single-mindedly fixated on getting a deal at all costs. Any impediment to talks, whether frozen assets or Glaser himself, had to be removed. Hill and his team’s mission had come straight from Secretary Rice and the president—to forge a deal. But this was a complicated situation that was not in the diplomats’ control. Without a clear understanding of how American financial power had been used in this case, they found it all too easy to ascribe underhanded bureaucratic, personal, or political motives to Treasury officials who seemed privy to the secret world of financial transactions.

  At last, Glaser broke down in tears, and Gibbons left the room. The direct assault on Glaser’s motivations and the pure fatigue and frustration of the negotiations, along with the thousands of miles of travel he had logged over the past few days, contributed to the emotional response. Most acutely, Glaser felt isolated—as if no one understood what was really happening or wanted to listen. Meiners, along with Jennifer Fowler and Amit Sharma of the Treasury Department, tried to calm him, but he could not be consoled. The delegation had never seen the steely jawed, confident Glaser so emotionally shaken. The small Treasury delegation felt alone and isolated—caught in a game of high-stakes diplomacy and under attack by their own side.

  Glaser asked the delegation to get Stuart Levey, the relatively new undersecretary of the treasury and Glaser’s boss, on the phone to get guidance and protection. When Levey heard Glaser’s shaking voice and his account of what had happened, he was livid. Levey had already been upset about the diplomats’ actions over the course of the past several months. Chris Hill had not only appeared to misunderstand the leverage Treasury had given him, he was besmirching the Treasury Department to the White House and others to excuse diplomatic missteps. For Glaser to be treated this way was the last straw. Levey called Secretary Paulson to ensure that he and Secretary Rice were aware of this incident and to say that Glaser would be called back to Washington unless Hill made amends. Glaser talked to Paulson, who reassured Glaser that he had his backing in Washington. This broke the sense of utter isolation for the delegation. Paulson would later call Secretary Rice to inform her of the incident. Secretary Rice then instructed Chris Hill to apologize and fix the mess.

  While these calls were being made in Washington, a debate ensued within the Treasury delegation
in the hallways and rooms of the Beijing hotel. The team from State still had their agreement, which they intended to publicize in spite of Glaser’s fundamental concerns. Should Glaser even participate in their press conference, when he knew it was likely not going to work? Would he be putting Treasury’s credibility on the line to go along with this plan when he knew Hill was leading the US government into a diplomatic mess? Meiners argued that the delegation should go home and allow the State Department to put its own credibility on the line. After calming down, Glaser decided to be the good soldier and participate, but he knew that what Hill and he were announcing would not survive the complications of unwinding the 311 action.

  After about two hours of sleep, Glaser awoke to meet Chris Hill and the State delegation for breakfast. Cordial and businesslike, Hill and Glaser shared breakfast together without mention of the incident the previous evening. The press conference would be an important moment for Hill, signaling that pesky issues like the BDA action were being resolved, and allowing the real work of the six-party talks to resume. Hill held the press conference. Glaser knew Hill was making a big mistake, but he joined him at the podium anyway and announced the following:

  The United States and North Korean Governments have reached an understanding on the disposition of DPRK-related funds frozen at Banco Delta Asia.

  The DPRK has proposed the transfer of the roughly $25 million frozen in BDA into an account held by North Korea’s Foreign Trade Bank at the Bank of China in Beijing.

  North Korea has pledged, within the framework of the Six-Party Talks, that these funds will be used solely for the betterment of the North Korean people, including for humanitarian and educational purposes. We believe this resolves the issue of the DPRK-related frozen funds.5

  When the press conference ended, Glaser was dispatched to see his counterparts in the Chinese government before going home. He sat down with officials in the Chinese central bank and finance ministry—to receive a scolding. The Chinese finance officials demanded to know why US negotiators were now attempting to unwind the BDA action. They saw this as a moment to insulate the Chinese banking system from North Korea’s illicit financial activity. They could not understand why the United States, which had rightly argued for the protection of the international financial system and the isolation of BDA, would now try to convince Chinese banks to help BDA and the North Koreans with unsavory bank transfers.