Pocketbook Policing

Swiss businessman and Asian-art collector Jakob Steiger never figured in headlines before last month. But his low profile ended with a bang when the U.S. Treasury announced that it was imposing sanctions against his firm, Kohas AG, for acting as a "technology broker" for the North Korean military. The Bush administration claims that the company, based in the university town of Fribourg, is half-owned by a North Korean firm that was named on a previous U.S. blacklist of entities suspected of involvement in "the proliferation of goods with weapons-related applications."

On its own the action against Kohas might seem like a sideshow in the much larger U.S. effort to eliminate Kim Jong Il's nuclear-weapons program. But in fact, the move is just the latest twist in an intense American offensive against North Korea--one that experts believe is finally beginning to squeeze the regime. Numerous U.S. government agencies, including the FBI, Treasury, State Department and CIA, have been working for three years to curtail Pyongyang's vast network of black-market activities--from the sale of missile technology to heroin trafficking to the manufacture of fake cigarettes and bogus Viagra--and to cut off the financial conduits by which the proceeds are laundered. David Asher, who ran the Bush administration's interagency effort, says that criminal North Korean businesses were targeted as part of "the largest undercover investigation against Asian organized crime in a decade." Washington has raised the possibility of sanctions against financial institutions that deal with Pyongyang, and has arrested or indicted dozens of figures linked to Chinese triads and the Irish Republican Army, among other groups.

Whether this effort to squeeze Kim will persuade him to abandon his nuclear arsenal remains to be seen. But Washington officials believe that this campaign of "targeted sanctions" is proving very effective. "From what we've seen, this has been affecting the North Korean elite in particular," says Peter Beck, a Seoul-based analyst with the International Crisis Group (ICG). Indeed, according to an unclassified U.S. government document obtained by NEWSWEEK, during Kim Jong Il's January trip to China, he reportedly told Chinese President Hu Jintao that "his regime might collapse under the weight of the U.S. crackdown on his financial dealings."

If nothing else, the latest U.S. actions have given Washington a powerful card to play in the negotiations with Pyongyang, known as the Six-Party Talks. In recent years North Korea's two neighbors, China and South Korea, have held most of the leverage in the on-again, off-again negotiations. They insist on engaging the Pyongyang regime (meaning, primarily, propping it up with political favors, aid and investment) rather than confronting it. But the engagement policy has had mixed results, at best.

The U.S. decision to ratchet up the pressure on North Korea's illicit activities was taken shortly after George W. Bush was first elected. Asher, a former banker and State Department official, started leading what became known as the North Korea Illicit Activities Initiative in late 2001, and it immediately conducted a study of the North Korean economy. Investigators found that the country's official revenues couldn't cover a "black hole" of about $500 million--equivalent to half the country's annual exports. Pyongyang was plugging that shortfall in its balance sheet, the experts concluded, through a broad network of criminal business dealings.

In particular, Washington confirmed what had long been suspected in many quarters: Pyongyang was printing and distributing large quantities of high-quality counterfeit U.S. $100 bills, known as supernotes, which are almost impossible to detect without sophisticated equipment. Sources say that the number of fake supernotes in circulation has spiked in recent years. Many have been found in South Korea, China and Taiwan. In August 2005, customs officials in Kaohsiung, Taiwan's southern port city, searched a shipping container of goods in transit from mainland China to Los Angeles. They discovered $2 million in fake greenbacks hidden in seven suitcase-size cardboard boxes. The Taiwanese officials were acting on a tip from the FBI. Altogether, Treasury officials say, the U.S. campaign has confiscated some $48 million in fake $100 bills around the world over the past four years.

But the Americans didn't stop there. On Sept. 15 the Treasury Department issued a blandly worded announcement designating a bank in the Chinese gambling haven of Macau as a "primary money laundering concern" for North Korea. Strictly speaking, the measure didn't amount to sanctions--merely a warning that the bank in question, known as Banco Delta Asia SARL (BDA), was under suspicion. U.S. banks can still do business with BDA, but the threat that they might yet be ordered to cut off dealings with the Macau bank has made them wary. In today's interconnected financial world, an official U.S. move to blacklist a foreign bank would be the kiss of death, since any financial institution doing business in dollars needs to hold accounts in correspondent U.S. banks in order to complete transactions.

Nervous depositors immediately staged a run on BDA, withdrawing nearly 40 percent of its deposits within a week. In a desperate attempt to salvage its reputation, BDA announced it was cutting all ties with Pyongyang and froze nearly 50 accounts linked with North Korean companies and institutions--including nine belonging to presumably high-ranking members of the Pyongyang government. A U.S. official tells NEWSWEEK that at least some of the names on the frozen accounts, both corporate and individual, were not the real names of the assets' owners. The official says there was some reason to believe that those nine accounts handled personal business for Kim Jong Il or members of his immediate circle. (How much money was in the accounts has not been disclosed.) In a recent statement, BDA said that it "will not resume relationships with North Korean or related entities going forward. The bank is implementing new, enhanced anti-money-laundering procedures."

The BDA move clearly stung Pyongyang. Within weeks after BDA froze the accounts, North Korean emissaries began arriving in Macau, demanding that the money in the accounts be released. Macau authorities expelled them. Then, in February, a North Korean spokesman complained that the United States had effectively banned the North "from having normal financial transactions such as remittance of dollars to banks and settlement by credit cards." (Not many ordinary North Koreans, needless to say, use plastic money.) Following the BDA action, other banks around the world have begun to cut ties with North Korea for fear that the United States might retaliate. U.S. Treasury Department Under Secretary Stuart Levy says the targeted sanctions, or threat of sanctions, has put "huge pressure" on the Pyongyang regime. He predicts that as more business people and governments learn about the risks of dealing with North Korea, the U.S. campaign will have a "snowballing ... avalanche effect."

In another measure of the campaign's effectiveness, Pyongyang soon declared that lifting the sanctions would be the precondition for resuming the stalled Six-Party Talks. The ICG's Beck visited Pyongyang not long after the original sanctions were imposed, and says that he immediately noticed a change. "Our minder complained about the financial clampdown more than anything else. He mentioned it several times over several days." Adds Ahn Ye Hong, a North Korea expert at the Bank of Korea in Seoul: "Usually the North Koreans don't admit problems, even if they're starving."

Pyongyang is trying to wriggle its way out of the crisis. In recent weeks the regime has claimed that it, too, has been a "victim" of counterfeiting, and promised to punish any North Korean citizens shown to have been involved. Citing an anonymous government intelligence source, Seoul's Chosun Ilbo newspaper reported recently that Kim Jong Il ordered the execution of anyone manufacturing counterfeit money. In response, the U.S. ambassador to Seoul, Alexander Vershbow, coolly suggested that Washington might be willing to talk if the North Koreans hand over the plates from their illicit supernote printing plant.

Some experts say that the real target of America's new financial crackdown isn't Pyongyang but Beijing, which is Kim Jong Il's most important patron. The American sanctions campaign puts the Chinese "in a very delicate situation," says Lee Dong Bok, a former South Korean intelligence official who is active in a human-rights group called the North Korea Democratization Forum. In February the U.S. targeted a small Hong Kong subsidiary of the Bank of China, for holding what was said to be up to $2.7 million in fake U.S. currency, presumably from North Korea. (A Bank of China spokeswoman in Hong Kong said: "We have no knowledge of any investigation. We've always attached great importance to anti-money-laundering policies.") What's more, U.S. investigators have suspicions that Macau casinos have been used for money laundering in general, and money laundering by North Korea in particular.

China's thriving trade with America would be impossible without good relations with the U.S. financial system. Beijing is desperately trying to build credibility for its shaky banking sector, and therefore wants to avoid the taint of dirty dealings with Pyongyang. Indeed, the Bank of China, for example, is planning an initial public offering later this month, likely to be partially underwritten by U.S. investment bank Goldman Sachs. "This is really about the Bank of China," says one Western financial expert in Tokyo. And the Americans show no sign of letting up. "You can't negotiate on crime," says Levy of the Treasury Department, adding: "We're just starting."

Japan, where Pyongyang reaps an estimated $300 million a year from illicit activities, is starting a crackdown of its own. One Japanese court has eliminated a tax exemption once granted to Pyongyang-related organizations. And financial regulators have been subjecting money transfers to the North to closer scrutiny. But like the Chinese, the Japanese are worried that pushing too hard could result in North Korea's collapse, with all sorts of undesirable knock-on effects for the region. For their part, the Americans say they're just trying to get North Korea back to the negotiating table, and that the sanctions are a way of pressuring them to give up their nukes, rather than to foment regime change. Finding the right balance will be tricky--but in the meantime, Pyongyang will continue to feel the pinch.