The North Korean Nuclear and Financial Squeeze

To appreciate the recent North Korean nuclear development, and U.S. leverage in its diplomacy over the issue, first one needs to understand a unit within the US Treasury Department, the Financial Crimes Enforcement Network (FinCEN), as explained in an ICH article by John McGlynn.

To understand what FinCEN does, [we go] back in history to September 2005, when the US Treasury Department, based on the investigatory work of FinCEN, sanctioned a small bank in Macau, which in turn got North Korea really upset.

On September 20, 2005 FinCEN issued a finding under Section 311 that Banco Delta Asia (BDA) was a "primary money laundering concern." BDA was alleged to have knowingly allowed its North Korean clients to use the bank to engage in deceptive financial practices and a variety of financial crimes (such as money laundering of profits from drug trafficking and counterfeit US $100 "supernotes").

By publicizing its allegations, FinCEN let the world know that BDA was now at risk of having all "correspondent relationships" with US banks severed, a disaster for any bank wanting to remain networked to the largest financial market in the world. Frightened BDA customers reacted by staging a run on the bank's assets. In the interest of self-preservation, BDA was forced to act. After a quick conference with Macau financial authorities the bank decided to freeze North Korean funds on deposit.

It just so happened that the day before the FinCEN finding was made public, the US and North Korea, working through the Six-Party talks process (also involving host China, Russia, South Korea and Japan), had formally agreed on a new diplomatic roadmap that promised to lead to a denuclearized and permanently peaceful Northeast Asia. But because of Treasury's BDA sanctions, North Korea was now labeled an international financial outlaw and the Six Party process stalled.

Other banks began severing their business ties with North Korea, leaving the country more isolated than ever from global commerce and finance. These other banks had no choice. Treasury repeatedly made clear that any bank that continued to do business with North Korea was a potential Patriot Act Section 311 target.

In anger, North Korea withdrew from the Six-Party process.

Treasury had come up with a way to go beyond governments to use the global banking sector to privatize banking sector sanctions against an entire country. Through a little extraterritorial legal arm-twisting of the international banking community the US was able to put "enormous pressure on the [North Korean] regime – even the most reclusive government depends on access to the international financial system" said [a Treasury official].