Breaking News: Treasury Issues Money Laundering Alert Against North Korea
This is going to be a big deal. By the time I have time to update this post, the world financial system will have started purging itself of its links to North Korea. More later.
Update: Call it Plan B light, and quite possibly a prelude to better things, but this by itself will have a significant effect.
Why, you ask? After all, this alert doesn’t freeze anything. It’s merely a warning:
The U.N. Security Council’s adoption of specific financial measures to address this conduct reinforces long-standing Treasury Department concerns regarding North Korea’s involvement, through government agencies and associated front companies, in financial activities in furtherance of a wide range of illicit activities. These activities include currency counterfeiting, drug trafficking, and the laundering of related proceeds. FinCEN has previously noted such conduct, most recently in 2007. The Treasury Department remains especially concerned about the use of deceptive financial practices by North Korea and North Korean entities, as well as individuals acting on their behalf. Such deceptive practices may include North Korean clients’ suppression of the identity and location of originators of transactions; their practice of arranging for funds transfers via third parties; repeated bank transfers that appear to have no legitimate purpose; and routine use of cash couriers to move large amounts of currency in the absence of any credible explanation of the origin or purpose for the cash transactions.
First, this warns U.S. financial institutions not to hold accounts or correspondent accounts for North Korean entities. By itself, that shouldn’t matter much, because few do anyway:
In light of the financial measures in UNSCR 1718 and UNSCR 1874, and the use of deceptive financial practices by North Korea and North Korean entities, as well as individuals acting on their behalf, to hide illicit conduct, 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, 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. Financial institutions should also continue to ensure that they are not providing financial services for North Korea’s procurement of luxury goods. This vigilance will help ensure compliance with UNSCR 1718, which prohibits North Korea’s procurement of such goods. In order to assist in applying enhanced scrutiny, a list of North Korean banks is included below. The Treasury Department encourages financial institutions worldwide to take similar precautions.
Much more importantly, however, it warns banks worldwide — banks that have correspondent accounts with American banks — about due diligence requirements that apply to their North customers, especially those handling large cash transactions, and those connected to the listed banks, which are North Korea’s only portals to the global financial system. There’s also a veiled threat of investigations, perhaps by IRS or the Secret Service. Note that unlike the previous paragraph, which warns “all U.S. financial institutions,” this warning is for “all financial institutions:”
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. The Treasury Department remains concerned about North Korean production and distribution of high-quality counterfeit U.S. currency. The U.S. government is ready to assist with the investigation of North Korean counterfeiting of U.S. currency wherever it is detected. For assistance with counterfeit U.S. currency-related investigations, please contact your local U.S. Secret Service office.
As of yesterday, every bank in Europe and Asia that services North Korean clients has been asking itself whether that business is really worth the risk of being the next Banco Delta Asia. BDA experienced instant insolvency in September 2005, following an alert much like this one. Here is Treasury’s final ruling, cutting BDA out of the international financial system for laundering North Korean money.
The effect will be to scare most banks into purging themselves of any North Korean connections that may draw unwanted attention. After all, the last thing those banks’ legitimate depositors and shareholders want is any hint that they’ll experience a BDA-style run, or summarily lose their access to their U.S. correspondent accounts. That would deprive them of the ability to do wire transfers and drive away most of their legitimate business. The few banks that are not immediately scared off could become targets for Secret Service investigations and PATRIOT Act special measures. I’d expect Treasury people will also be fanning out across the globe to emphasize those points, just as Levey did in 2005 and 2006.
One business I’ll be watching very closely is the Egyptian conglomerate Orascom, which was already looking like the latest in a long parade of businesses to invest in North Korea and lose a fortune there. One wonders how Orascom will be able to continue to fund its ambitious projects in North Korea without running afoul of UNSCR 1874 or Treasury’s coming squeeze. Another question: in light of the new attitude in Seoul, how will this affect what’s left of the Kaesong Industrial Complex? Even less certain is the question of how Chinese mining companies investing in North Korea will be affected.
What will the North Koreans do about this? Like before, they’ll resort to dealing in precious metals, either on exchange markets or by selling their reserves to banks. Another hot trend for money launderers these days is the use of stored value cards, like the gift cards you can get from major stores, or “secured” credit cards some banks issue. Those methods can fund a drug trafficking syndicate, but those organizations are already highly profitable and have relatively little overhead. North Korea still has to maintain, feed, and fuel one of the world’s largest standing armies and keep an entire country under the jackboot. We probably can’t find all of North Korea’s illicit income, but we probably don’t have to. All we have to do is disrupt enough of that income’s flow that large portions of the regime’s power structure become neglected. That, in turn, could destabilize the power structure itself as factions fight over increasingly scarce resources.
This kind of blacklisting is not easily reversed. Recall that after Chris Hill lifted those BDA sanctions in 2007, banks did not suddenly embrace Kim Jong Il; the risk of Treasury sanctions at some future date continued to deter most legitimate financial institutions from dealing with North Korea more than a year after the BDA funds were unblocked. For that reason, the impact of Treasury sanctions may not produce dramatic results instantly this time. North Korea’s finances still may not have recovered since 2007, and some undoubtedly remain underground. Still, Treasury has learned plenty about tracking down hidden finances since 9/11, and the North Koreans will have to be very sophisticated to avoid a dramatic disruption to their system.