Why is the US Treasury Department unilaterally sanctioning a bank that conducts no direct business with the United States? And why does this seemingly phantom action represent a major escalation on the part of the US? Park Hyun at Hankyoreh offers some particularly cogent reporting that correctly explains Treasury’s bet.
Since it was established in 1959, the Foreign Trade Bank has served as North Korea’s main foreign exchange bank, with branch offices purported to exist in France, Australia, Kuwait, Hong Kong and Beijing; let’s just say they don’t pop up in a Google search. In this capacity, the bank undertakes foreign exchange transactions, including those related to trade of various state-owned enterprises involved in the country’s WMD programs. The banks with which the Foreign Trade Bank deals are opaque to us, but those banks in turn typically need to maintain their correspondent relations with American banks because of the continuing role of the dollar in the international clearing system. When Treasury identified Macau-based Banco Delta Asia as a bank of primary money-laundering concern in connection with its North Korea business in 2005, the bank immediately experienced a severe run as depositors and other customers feared for its future ability to access the US financial markets; effectively, a two-page Treasury designation had driven a small bank holding North Korean accounts into the ground.
Under UNSC 1874, passed following the 2009 nuclear test, member countries were “called upon” to prevent the provision of financial services or any financial or other assets or resources that could contribute to North Korea’s nuclear, ballistic missile, or other WMD-related programs or activities. This language did not constitute a firm obligation. But the US quickly issued language that did everything in its power to discourage transactions with any North Korean financial institutions, warning that they were potentially engaged not only in activity related to WMD but also counterfeiting, other illicit activities and money laundering. The FinCEN (Financial Crimes Enforcement Network) circular is worth quoting because it provides a sense of how Treasury is seeking to throw sand in the gears:
“FinCEN advises all U.S. financial institutions to take commensurate risk mitigation measures. FinCEN notes that with respect to correspondent accounts held for North Korean financial institutions [SH; note, all North Korean financial institutions, with a detailed list provided], as well as their foreign branches and subsidiaries, there is now an increased likelihood that such vehicles may be used to hide illicit conduct and related financial proceeds in an attempt to circumvent existing sanctions. Financial institutions should apply enhanced scrutiny to any such correspondent accounts they maintain, including with respect to transaction monitoring…The Treasury Department encourages financial institutions worldwide to take similar precautions.
In addition, Treasury is concerned that in an attempt to evade U.N. Security Council Resolution provisions, North Korea may increasingly rely on cash transactions. All financial institutions should remain vigilant regarding attempts by North Korean customers to make large cash deposits into new or existing accounts, as well as the associated risk of the passing of counterfeit currency.”
And so on. You get the drift: this swipe at the Foreign Trade Bank is designed to get other banking institutions with correspondent banking relations with the US—namely, virtually any bank of any size—to think twice about its North Korea portfolio, even if not technically required to do so.
By internal accounts, the effectiveness of the BDA sanctions was a bit of a surprise even to those engaged in the financial sanctions effort. It spawned a new confidence that such extra-territorial measures–driven by the commercial interests of private players and not government bureaucracies—could have wide-ranging effects.
Whether they do this time, however, will depend—as always—on how the Chinese banking system manages the FTB. The US is rightly loath to move outright to third-party sanctions, and there is already a testy, low-level diplomacy on the issue. In a strongly-worded statement on the draft Iran, the DPRK and Syria Nonproliferation Act, the Chinese Foreign Ministry denounced any effort to move toward secondary sanctions that would target Chinese companies doing business with North Korea. The statement noted that “China has put in place a whole set of laws and measures on export control which are in conformity with those of the international community and have been rigorously and effectively enforced.”
But as in the BDA case, the Chinese Foreign Ministry is not in the driver’s seat. If any government entity is relevant it is the bank regulators (China Banking Regulatory Commission) and the People’s Bank of China. Like its client commercial banks, the PBOC looks at its stakes in its relationships with the US and North Korea through a very different lens than the Foreign Ministry. There are at least preliminary reports that Chinese regulators may be clamping down on the activities of North Korean banks. Although they look more like warning shots than serious restraints to us, this could still be good; Beijing just needs to make the point in a serious way. We’re waiting.
Unlike the BDA sanctions, the effects of the FTB measure—and whatever steps the Chinese might take–cannot be so easily observed. They will ripple through institutions we don’t even know. Nonetheless, the measures are likely to have some effect, which should be observed in the black market exchange rate. Stay posted.
Some other resources:
NK Economy Watch coverage of financial troubles between the FTB and a Taiwanese bank.
Our skeptical view of the financial components of the new UN Security Council resolution.
A Sanctions Wiki that has excellent coverage of sanctions against North Korea and other countries; an interesting feature of the site is that it is not limited to US efforts but covers other advanced industrial states as well.