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The U.S. Department of the Treasury on March 14, 2007, announced a final rule designating North Korea-connected Banco Delta Asia (BDA) of the Macau Special Administrative Region, China, an “institution of primary money laundering concern.” The move has both complicated and, in the long run, possibly revived the Six Party Talks on North Korean nuclear proliferation.
Treasury detailed its concerns over BDA with a March 14, 2007, news conference and news release, as well as the text of the final rule itself, which builds upon a proposed rule of Sept. 15, 2005. The issuance of the proposed rule had prompted Macau to freeze at least $25 million in North Korean accounts.
While, in the past, U.S. agencies have sought to distinguish the BDA matter from the nuclear talks, in the prepared remarks for the press conference announcing the final rule, Treasury indicated that its investigation, in addition to confirming the original allegations in the proposed rule, also discovered linkage between BDA and weapons of mass destruction (WMD) proliferation:
The information gleaned from that investigation did in fact confirm the findings we put forth in September 2005. It also revealed additional illicit financial conduct at BDA beyond that spelled out in our designation – including activity related to entities facilitating weapons of mass destruction proliferation.
(emphasis added)
The impact of the banking issue on the Six Party Talks on North Korean nuclear proliferation has unclear. North Korea may well have been spurred into “coming back to the table” by the action, only to refuse to go further unless the funds were unfrozen, albeit with related Six Party working groups still soldiering on. Thus far, it looks like BDA itself will continue to suffer for its past problems, but that the funds are being unfrozen, although some obstacles have arisen over the transfer of the North Korean funds to new accounts at a bank in China. Treasury has announced that Deputy Assistant Secretary for Terrorist Financing and Financial Crimes Daniel Glaser has traveled to China to offer assistance with some of the technical difficulties involved with transferring the funds.
Ironically, the Joint Statement of the Fourth Round of the Six-Party Talks, in which North Korea agreed to forego nuclear weapons, was entered into Sept. 19, 2005, several days after the Sept. 15, 2005, proposed rule that began the official action against BDA.
The North Korea - Denuclearization Action Plan of Feb. 13, 2007, builds upon and seeks to carry forward the Joint Statement from 2005.
The now-finalized Treasury action aims to cut off BDA from the U.S. financial system, due to what the Treasury Department has characterized as generally lax institutional practices, along with BDA’s money laundering for illicit North Korean activities such as counterfeiting, narcotics trafficking, and weapons of mass destruction (WMD)-related activities. North Korean transactions, including massive cash deposits, are said to have made up a substantial part of BDA’s business, and its relationship with North Korea is said to have gone on for two decades. The “meat” of the Treasury action is to revise the Code of Federal Regulations to require financial institutions to not provide correspondent accounts for BDA, engage in basic due diligence, provide notifications to relevant business partners, cancel accounts if need be and document their compliance with the new regulation with appropriate record keeping.
The relevant statute defines “correspondent account” as an account established to receive deposits from, or make payments on behalf of, a foreign financial institution, or handle other financial transactions related to such institution. A correspondent account therefore provides a foreign bank a pipeline into the U.S. financial system.
Since Sept. 11, 2001, there has been a growing awareness that weak rule of law is a security threat -- whether it is a failed state providing fertile ground for terrorist havens; porous borders or weak regulatory schemes making it easier for malefactors to move themselves or dangerous items about; or weak financial frameworks permitting the movement of illicit funds or funds used to facilitate illicit ends. And it has become increasingly apparent that, for such reasons, weak rule of law anywhere on the globe can mean aggravated threats for everyone else, including the United States. In this case, financial bureaucrats insisting on sound accounting practices for the global financial system, and insisting that the global financial system serve only licit activities, “ferreting out” suspicious transactions, have ended up “lighting a fire” under North Korea and its confederates, threatening North Korea’s already anemic financial flows.
The action momentarily stalled, but perhaps ultimately has forced progress on, nuclear talks. Unless there is progress on the nuclear talks, North Korea faces severe obstacles to economic advancement, without the aid of BDA facilitating North Korea tapping into illegal cash sources. Removing the BDA factor therefore could help induce North Korean engagement, making it even more important for North Korea to cooperate with a diplomatic solution to open opportunities for legitimate economic progress.
Nevertheless, in the short term especially, the Treasury action’s impact on the Six Party Talks on North Korean proliferation is not immediately clear to all parties. As of March 20, 2007, it appeared that the Six Party Talks were stalled not over BDA, but over North Korea being forced to complete various paperwork to transfer its BDA accounts, including funds previously frozen by Macau, to a bank in Beijing. The lead U.S. diplomat on the evening of March 20, 2007, indicated that it appeared the North Korean delegation was under strict orders not to make much progress until funds were freed up, but that China had asked the parties to stay at least another day based on hopes the account transfer could be completed and the North Korean delegation hopefully would cease stonewalling. The next day, however, China would call a recess of the nuclear talks, which it nevertheless had extended for a day longer than planned to begin with. News reports suggested that the bank in Beijing, the Bank of China, had created confusion by seemingly denying that it was accepting the North Korean funds after all, amid hints it might be expressing scruples against involvement with accounts that could tarnish its reputation in the international financial community. The United States on March 22, 2007, pointed out, however, that working groups still had been able to meet. The United States also took the position that delays involving the North Korean funds involved technical banking matters relating to the transfers themselves, and that it was still possible to meet the 60-day window spelled out for certain goals in the North Korea - Denuclearization Action Plan of Feb. 13, 2007.
As of March 29, 2007, the State Department indicated the belief that the goal of holding ministerial-level meetings 60 days after the announcement of the Feb.13, 2007, action plan would be met.
The rulemaking
Generally speaking, the rulemaking process by federal agencies involves the more in-depth implementation of statutory law by a quasi-legislative process in which an agency proposes rules, published in the Federal Register and elsewhere, such as on the agency web site. The agency generally invites public comment, perhaps including hearings, and then the agency issues final rules based upon further investigation and public comments.
In this case, however, the rulemaking apparently came to resemble a kind of quasi-adjudication in that the focus was a generalized rule by action taken against a specific entity, BDA, and apparently, with the exception of a submission by an unnamed academic, apparently the only public comments were made on behalf of BDA itself, some made after the deadline but still considered by Treasury. Treasury indicates that, in the interim period, it also had been carrying forward and finalizing its ongoing BDA-specific investigations, including findings that, despite past U.S. protests that financial crimes such as counterfeiting of U.S. currency by North Korea were a matter separate from nuclear proliferation, BDA in fact also turned out to have been involved in financial activity relating to WMD activities themselves.
The rulemaking and the Six-Party talks
As mentioned above, the final rule completes a process begun with a proposed rule of Sept. 15, 2005, that had prompted Macau to “crack down” on BDA, ultimately placing it in receivership, and freezing at least $25 million in North Korean BDA accounts. This action in turn led North Korea to argue for linkage between the BDA issue and progress in the Six Party Talks.
The March 14, 2007, final rule, when it takes full effect 30 days after its issuance, will cut off BDA from the U.S. financial system and prohibit U.S. institutions from having correspondent accounts directly or indirectly serving BDA.
But with respect to the Six Party Talks, U.S. agencies nevertheless argued that the action could help satisfy a North Korean desire for the BDA matter to move forward, and possibly even free up some North Korean funds, as appears to be happening. While China, with ultimate control over supposedly semi-autonomous Macau, apparently has questioned -- or expressed confusion over -- the whole configuration of the matter, the rationale from U.S. agencies seems to be that it is Macau which regulates BDA and has seized the North Korean funds, that the Treasury Department action has stabilized what had been an open question, and that Treasury has completed its investigation and is sharing findings and evidence with Macau so that Macau can act with greater precision in deciding how to treat the North Korean funds and various accounts. And note that, with BDA in receivership and its business practices subject to being “cleaned up,” BDA’s capacity to function as a business entity may now be improving, despite its being cut off from the U.S. financial system.
But, as indicated above, North Korea’s accounts already are being forced elsewhere, where their business will be conducted under much greater scrutiny, while BDA is being held out as an example of how not to do business. The action against BDA, and side-effects such as a run on the bank by its customers and a takeover by the Macau government, promise harsh results for financial institutions found to have participated in rogue state “shady practices” with a “wink and a nod.”
Interestingly, the North Korean accounts are being taken to the mainland of the People’s Republic of China, which a half-century ago fought a war on North Korea’s behalf against the United States, and in fact against the UN Security Council and a UN-mandated coalition force. With U.S. forces and Gen. Douglas McArthur at one point pushing to the Yalu River, North Korea and its Stalinist regime might not have continued to exist as a separate state without the Chinese military intervention, coupled with a U.S. decision not to go “all-out” against China. At this time, China, with its decades of economic liberalization spurring economic development, wishes a strong trading relationship with the United States and the rest of the world, and wishes to be respected as not only an ancient society but as modern global leader with respectable and competent financial practices. It will fall to China, working with the United States and others, to help “clean up” North Korea’s “act” financially, and ensure the situation stays that way.
Whether this means some kind of amnesty for North Korean BDA funds involved with illicit activities is unclear, but it seems unlikely that, heading into the future, going through the Chinese bank would enable North Korea to simply side-step the ban on BDA’s access to the U.S. financial system, especially if China and the United States continue to work together to address technical requirements. Treasury on March 23, 2007, announced that Deputy Assistant Secretary for Terrorist Financing and Financial Crimes Daniel Glaser was traveling to China to offer assistance with some of the technical difficulties involved with transferring the BDA funds to their new financial institution.
As mentioned above, there is a 30-day window before the final decision takes effect. This 30-day Treasury Department window loosely overlaps another set of 30- and 60-day windows relating to a Feb. 13, 2007, North Korea Denuclearization Act Plan within the Six Party Talks, which includes aspirations to normalize relations between North Korea and the United States.
Glaser reportedly has met three times with the North Koreans in the past year, including two under the auspices of what has been termed a Bilateral Financial Working Group. The State Department recently characterized Treasury Department-North Korean meetings in December 2006 and January 2007 as “useful discussions.”
The State Department has persisted in characterizing the financial discussions regarding the BDA matter as a “separate track” from the Six Party Talks. Nevertheless, in the February Six Party joint roadmap it was agreed that the latest stage in the Six Party Talks would include discussions by subject-oriented working groups, and the talks involving Treasury, beginning before that time, dovetail with that concept.
BDA activities
As mentioned above, the final rule itself does not reference nuclear matters or WMD. In the prepared remarks for the press conference announcing the final rule, however, Treasury indicated that, in the interim period since the issuance of the proposed rule, the ongoing Treasury investigation, in addition to confirming Treasury’s original allegations, also discovered linkage between BDA and WMD proliferation:
The information gleaned from that investigation did in fact confirm the findings we put forth in September 2005. It also revealed additional illicit financial conduct at BDA beyond that spelled out in our designation – including activity related to entities facilitating weapons of mass destruction proliferation.
(emphasis added)
In the final rule itself, the Treasury Department indicates, among other things, that BDA:
- provided financial services for more than 20 years to multiple North Korean entities tied to illicit activities, offering, in exchange for a fee, financial access to the banking system with little oversight or control and surreptitious multi-million dollar cash deposits and withdrawals
- without conducting due diligence to verify the source of unusually large cash deposits, served North Korean clients connected to entities involved with trade in narcotics, counterfeit U.S. currency and counterfeit cigarettes, including front companies suspected of laundering millions of dollars in cash through BDA
- serviced business accounts knowing the accountholders were a front for North Korean banks that had formed the accounts as a cover to disguise the North Korean connection, with BDA helping to obscure the connection to the North Korean banks and acting as if the accounts were business accounts, rather than what they actually were, conduits for North Korean banks to link into the international financial system
- failed to take corrective action when illicit activity was detected
- serviced the account of a known international drug trafficker
- continued its ongoing relationship with a company after the company’s head was charged with attempting to deposit large amounts of counterfeit currency into BDA and was expelled from Macau
- facilitated multiple multi-million dollar wire transfers connected with criminal activity
- in some cases when lower-level bank employees actually documented concerns over money laundering potential when entities made commercially unjustifiable large cash deposits or engaged in other suspicious conduct, had senior management vouch for the customers verbally and order the transactions to go forward, while still avoiding documentation as to why they were vouching for the transaction’s legitimacy
- facilitated unusual or deceptive financial practices by the North Korean clients, such as:
- the routine use of couriers to move large amounts of cash, usually U.S. currency, with no credible explanation of the origin or purpose of the transaction, including one North Korean entity in 2002 depositing over $50 million in cash, more than half of BDA’s cash deposits for the year
- repeated transfers of large, round-figure sums to and from accounts at other banks not appearing to have a licit purpose
- suppressing the identity and location of the originators of transactions, and arranging for transfers through third parties
- large, internal, round-sum transfers shifting funds among BDA accounts, including transfers between commercial and personal accounts
- provided a discount as an incentive to attract a high-risk North Korean-related bulk currency depositor rejected by another institution
- apparently with respect to general institutional practices:
- failed to obtain and keep adequate information about identity verification and customer business activities
- failed to retain and control documents relating to its largest bulk cash customers
- failed to take reasonable measures to identify suspicious activity and bulk cash transactions inconsistent with the stated business of its clients
- failed to follow its own policies, such as screening for counterfeit currency
- failed to rate the risk of its clients and monitor high-risk clients
- failed to use sufficient information technology when manual systems were inadequate
- failed to audit the adequacy of its compliance department
- failed to regularly update BDA anti-money-laundering policies with new information and best practices
- had its legitimate business activities significantly outweighed by its involvement with money laundering and other financial crimes
Bank Secrecy Act
Treasury’s March 14, 2007, action was taken under §311 of the USA PATRIOT Act, which amended the Bank Secrecy Act by adding a new section codified at 31 U.S.C. §5318A.
These efforts fit within a broader Sept. 11, 2001, campaign to strengthen safeguards against money-laundering in global financial systems, whether specifically related to the “laundering” of funds gained from illicit activities, or the processing of funds that might have been obtained more legitimately but are used to fund illicit conduct.
And in fact, while Treasury insisted that the problem was BDA, not Macau, the action against BDA nevertheless has prompted Macau to adopt new laws and enforcement mechanisms more consistent with evolving best practices to preempt, detect and stop money-laundering.
The Bank Secrecy Act is administered by the Treasury Department’s Financial Crime Enforcement Network (FINCEN), and its implementing regulations are in the Code of Federal Regulations at 31 C.F.R. Part 103. The Bank Secrecy Act grants the Secretary of the Treasury the authority to implement the Bank Secrecy Act and its regulations, authority delegated to the FINCEN director. The regulatory scheme involves balancing tests and purports to be flexible, collaborative and directly or indirectly multilateral.
For cases such as BDA the FINCEN director is to investigate whether reasonable grounds exist to conclude that a foreign jurisdiction, institution, class of transactions, or type of account is of primary money laundering concern, with the statute providing factors to consider and requiring consultation with other agencies, such as the Secretary of State and the Attorney General. The factors imply a balancing test considering the extent of a subject’s involvement with money-laundering, the extent of its legitimate business activities, and the sufficiency of Treasury action to counter money laundering and other financial crimes, and otherwise fulfill the purposes of the Bank Secrecy Act.
If such a finding is made, then similar factors and consultations are to guide the measures to be imposed in response to the finding. They include considerations of the impact of a Treasury action on U.S. national security and foreign policy, how other nations and multilateral groups have already acted in the matter, and whether the Treasury action would unduly burden U.S. financial institutions, adversely impact legitimate business activity, or adversely impact the international financial system.
31 U.S.C. §5318A offers a range of options for action, set out in 31 U.S.C. §5318A(b). The Treasury action in the BDA matter, under 31 U.S.C. §5318A(b), bars U.S. financial institutions from providing correspondent accounts on behalf of BDA.
As noted above, the statute, at 31 U.S.C. §5318A(e)(B), defines correspondent accounts as “an account established to receive deposits from, make payments on behalf of a foreign financial institution, or handle other financial transactions related to such institution.”
Code of Federal Regulations revised
The “meat” of the Treasury action is to revise 31 C.F.R. Part 103 to add a new §103.193 that consists of two main parts, one setting out definitions of BDA, correspondent account, and the financial institutions covered by the regulation, and another part saying what the financial institutions affected by the regulation are to do.
Loosely speaking, they are to:
- terminate any correspondent accounts held by, or on behalf of, BDA, presumably immediately
- if they learn BDA has indirect use of an account, terminate it within a “commercially reasonably time” permitting only transactions needed to close out the account
- engage in due diligence to guard against indirect use of correspondent accounts by BDA; but the due diligence is only required to include:
- simply notifying the accountholder that the account cannot serve BDA
- take “reasonable steps” to determine whether account records indicate indirect use by BDA
- take a “risk-based” approach to determine if additional due diligence is needed
- document compliance with this regulation, but not report it
The final rule also indicates that entities subject to the rule are not required to report any related information not otherwise required by laws or regulations.
Rulemaking process
As an aside, Treasury, in its final rule on BDA, has claimed that the prohibition on correspondent accounts, is the only option in the range offered by 31 U.S.C. §5318A(b) requiring the issuance of a final regulation. But note that, under the statute, the other options, which involve information-gathering and reporting, in fact do require a proposed rule be issued, and require a final rule to be issued to continue in effect past an initial 120-day period. But during the 120 days Treasury can require the information gathering and reporting accompanied just by a proposed rule. The prohibition of correspondent accounts in the BDA matter is not under that rubric.
Six Party Talks
With respect to the nuclear talks, the latest templates for action on North Korean denuclearization include the North Korea - Denuclearization Action Plan of Feb. 13, 2007, in part a way forward towards implementing the Joint Statement of the Fourth Round of the Six-Party Talks, issued Sept. 19, 2005.
Joint Statement from 2005
Some highlights of the Joint Statement of the Fourth Round of the Six-Party Talks, issued Sept. 19, 2005; note that elements common to most or all of the six parties are listed first, and additional elements of significance are listed below by relevant party:
- the goal of the Six-Party Talks is the peaceful and verifiable denuclearization of the Korean Peninsula
- the 1992 Joint Declaration of the Denuclearization of the Korean Peninsula should be observed and implemented
- all parties undertook to respect the purposes and principles goals of the UN Charter and recognized norms of international relations
- all parties committed to joint efforts for lasting peace and stability in Northeast Asia, and to explore ways and means for promoting security cooperation in Northeast Asia
- relevant parties pledged to work towards a permanent peace regime at an appropriate separate forum
- all parties undertook to promote economic cooperation in the fields of energy, trade and investment, bilaterally and/or multilaterally, with China, Japan, South Korea, Russia and the United stating their willingness to provide energy assistance to North Korea, and South Korea specifically reaffirming a July 12, 2005, proposal concerning the provision of 2 million kilowatts of electric power to North Korea
- in response to North Korean declaring a right to peaceful uses of nuclear energy, other parties expressed respect and agreed to discuss, at an appropriate time, the provision of a light-water reactor North Korea
- all parties apparently agreed that the concept of coordinated steps to implement agreed-upon provisions in a phased manner, in line with the principle of "commitment for commitment, action for action"
- North Korea:
- affirmed that it has no nuclear weapons on the Korean Peninsula
- affirmed it has no intention to attack or invade the DPRK with nuclear or conventional weapons
- South Korea
· North Korea and the United States:
o undertook to respect each other's sovereignty, peacefully coexist, and take steps to normalize relations
· North Korea and Japan:
o undertook to take steps to normalize their relations in accordance with the Pyongyang Declaration, and settle outstanding issues (note that one outstanding issue is the abduction by North Korea of Japanese citizens)
2007 action plan
Elements of the North Korea - Denuclearization Action Plan of Feb. 13, 2007:
Overall:
- the goal of the Six-Party Talks is the peaceful and verifiable denuclearization of the Korean Peninsula
- the action plan aims at the fulfillment of the 2005 Joint Statement, in a phased manner, "action for action"
- all parties promise to take positive steps to increase mutual trust, and to make joint efforts for lasting peace and stability in Northeast Asia
- relevant parties will negotiate a permanent peace regime on the Korean Peninsula at a separate forum
- once initial actions are implemented, the Six Parties are to promptly hold a ministerial meeting to confirm implementation of the Joint Statement and explore ways and means for promoting security cooperation in Northeast Asia
Within 60 days of the Feb. 13, 2007, announcement:
North Korean steps towards denuclearization
- North Korea shuts down, seals and abandons the Yongbyon nuclear facility, including a reprocessing facility
- North Korea invites International Atomic Energy Agency (IAEA) personnel to conduct all necessary monitoring and verifications, envisioning a North Korean-IAEA agreement on the matter
- North Korea lists all its nuclear programs, as described in the Joint Statement, including plutonium extracted from used fuel rods, to be abandoned pursuant to the Joint Statement
U.S.-North Korea relations
- U.S.-North Korea bilateral talks towards resolving pending bilateral issues and moving toward full diplomatic relations
- U.S. movement towards removing the North Korean designation as a state-sponsor of terrorism and termination of the application of the Trading with the Enemy Act to North Korea
Japan-North Korea relations
- Japan-North Korea bilateral talks towards normalization of relations in accordance with the Pyongyang Declaration, based on settling outstanding issues (as above, note that this includes North Korean abductions of Japanese citizens)
Energy, Economic, Humanitarian Assistance
- cooperation on energy, economic and humanitarian assistance to North Korea, with an initial phase including emergency energy assistance, including the energy equivalent of 50,000 tons of heavy fuel oil (HFO) was to commence within 60 days of the Feb. 13 announcement
Within 30 days of the Feb. 13 announcement:
Working groups
- to discuss and formulate plans to implement the 2005 Joint Statement, and report back to the Six Party Talks main meetings, the formation of five working groups (apparently with lower-level personnel) on:
o denuclearization of the Korean Peninsula
o normalization of U.S.-North Korea relations
o normalization of Japan-North Korea relations
o economic, energy cooperation
o Northeast Asia peace and security
March 19, 2007, meeting
There had been agreement to hold the Sixth Round of the Six-Party Talks on March 19, 2007, but the talks themselves were held off by North Korea because of delays in their efforts to transfer their BDA accounts to the Bank of China. Nevertheless, there apparently were working group meetings.
Initial phases overlapping with later phase:
North Korea denuclearization and additional energy assistance
· during the initial actions phase and a follow-on phase, explicitly in response to North Korea providing “a complete declaration of all nuclear programs and disablement of all existing nuclear facilities,” specifically including (but clearly not limited to) graphite-moderated reactors and reprocessing plant, the other parties promise economic, energy and humanitarian assistance up to the equivalent of 1 million tons of heavy fuel oil (HFO) to North Korea (including the initial equivalent to 50,000 tons of HFO mentioned above); the logistical details are to be worked out by the economic and energy working group
Additional frameworks
Among the additional relevant frameworks to recall are the Treaty on the Non-Proliferation of Nuclear Weapons (Nuclear Nonproliferation Treaty, or NPT), from which North Korea purportedly withdrew on Jan.11, 2003, but which North Korea violated prior to withdrawal, and which North Korea has promised to rejoin.
In addition, there is the UN Charter, under which the UN Security Council (UNSC) has the authority to address threats to the peace, and, for that matter, the authority to investigate matters that merely could give rise to international friction. Under UN Charter Chapter VI the UNSC may investigate matters with the potential merely to cause friction among states, and under Chapter VII the UNSC may exercise a broad discretion to address threats to international peace and security, including economic sanctions and varying degrees of force.
There has been ongoing debate over the “default setting” in international law with respect to nuclear weapons, their possession and their use, the question of legal standards overall and that of the legal status one falls into upon withdrawal from the NPT. But in any event the UNSC has authority under the UN Charter to declare North Korean nuclear an
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