One more thing before Marc and Matt take over for the week …
As many of you know, the US-DPRK agreement to shutter the Yongbyon reactor is being held hostage by a very arcane dispute over the return of $25 million dollars in a North Korean account frozen at the now insolvent Banco Delta Asia.
The bottom line is that no bank is willing to accept North Korea’s dirty money and the NORKS aren’t willing to truck it out in gold bullion. (China Hand has been covering the BDA mess in exquisite detail.)
The whole fiasco has been a fascinating and brutal tutorial on the role of implementation and interagency competition in the policy process.
Chris Hill just met with his counterpart Wu Dawei in Beijing last week to try to find a way out of the BDA quagmire that’s been holding up the Six-Party Talks.
My friend John Park, Coordinator of the Korea Working Group at the U.S. Institute of Peace, argues that Hill and the State Department will not find a bank to take the dirty money. Instead, John proposes selling BDA to as a way to resolve the concerns that foreign banks may have about taking the NORK cash.
John has discussed this proposal in a series of meetings with senior investment bankers in Hong Kong experienced in dealing with distressed Asian banks in receivership and thinks the whole sale could put Hill and co. in position to resolve the dispute in a matter of weeks.
This, by the way, is a great example of what’s wrong with the op-ed pages these days—newspaper editors keep telling JP that the BDA issue will be solved “any day” just as soon as the State Department finds a bank gullible … er, interested … enough to the handle the transaction.
Utilizing a Market Mechanism to Resolve the BDA Deadlock
No one expected that the implementation of the February 13 denuclearization agreement with North Korea would be easy. The deal, however, has stalled before the hard part of disabling North Korea’s nuclear programs even begins because of a seemingly arcane banking dispute. Unless this is resolved soon, the larger agreement could unravel completely.
The problem revolves around how to return $25 million in North Korean accounts at Banco Delta Asia (BDA) in Macau that was promised as a precursor to the nuclear deal. The original plan was to wire the money to a North Korean account at a Beijing branch of the Bank of China. However, after $12 million of the total was declared by the US Treasury to have been acquired through illicit activities, the Bank of China refused to receive the funds. They were particularly concerned about the risk of being sanctioned at a later date for laundering dirty money.
The Chinese concerns are well founded. The Bank of China – as some of its New York-listed Chinese competitors have done – may seek to do a public offering in the United States in the near future. This would subject them to intense scrutiny under Sarbanes-Oxley and other regulatory measures – an already arduous process intended to ensure that a company has followed stringent auditing and accounting practices. The slightest hint of a Treasury investigation or reports about links to illicit North Korean funds, irrespective of the special circumstances, would make for a long drawn out process. It could also scare off potential investors regardless of the high growth potential of the Chinese banking sector.
The irony of the present situation is that in trying to be a responsible global stakeholder, the Bank of China’s refusal to accept North Korean funds has, in effect, prevented the Kim Jong Il regime from receiving its promised money. Being a responsible global stakeholder is interpreted as adhering to the practices and norms of the international system. Intent on securing domestic partnerships with American and European financial institutions, as well as access to overseas capital markets, Chinese banks will continue to be the country’s leading responsible stakeholders. In the context of the Six-Party Talks, that has not boded well for the U.S. and Chinese governments’ efforts to finally resolve the BDA issue and move forward to the next phase of the nuclear deal.
Having seen the devastating effect of the original Treasury rule identifying BDA as a repository of illicit funds, no financial institution in any country will now want to be associated with these North Korean funds. The funds have become as toxic as nuclear waste.
Is there a way out of the BDA quagmire?
Frequent reports of an imminent solution over the past month have not materialized. (After failed attempts to have Chinese, Russian and Italian banks process the transfer, Wachovia, a U.S. bank, was recently approached by the State Department. Wachovia is currently reviewing the request). This has sparked an ongoing debate about whether the North Koreans are unwilling or unable to transfer their funds out of BDA. Most of the suggested pathways largely center on an inter-bank wire transfer. Should such a solution be attempted, technical obstacles to full implementation remain due to the funds’ toxic nature.
A proposal that is generating interest among investment bankers in Hong Kong takes the approach of treating BDA as a distressed bank. First, the Monetary Authority of Macau (MAM) would carve out the contentious $25 million in North Korean accounts and put the funds in a special purpose vehicle. Second, the MAM would then inject fresh capital into the bank and put an auction process in place like the one utilized by the Korea Asset Management Corporation (KAMCO), which was launched to deal primarily with ailing Korean banks following the Asian financial crisis. The MAM would invite potential buyers to bid on the newly-capitalized bank.
Third, as this process is taking place, a bridge loan would be made to the North Koreans for a sum equivalent to the funds in their accounts at BDA. This bridge loan would effectively be a one-time payment that the MAM would recoup from the proceeds of the banking license sale – a sale that could garner an amount far exceeding the problematic $25 million. Each of the core parties could realize a significant win from this auction process.
For the North Koreans, since the MAM would be drawing on a different source of funds for the bridge loan that has no legacy related to the Treasury rulings, a wire transfer to a bank of their choosing could be completed in a manner that is in full compliance with international banking standards. For Stanley Au, a one-time, newly-issued banking license from the MAM which he could purchase with his share of the proceeds from the sale of the original banking license, would effectively resolve his dispute with the Treasury rulings. For the Macanese authorities, the sale would end a chronic deadlock that has damaged the reputation of this Special Administrative Region with high-profile media coverage of its checkered past – a period that the Macanese are eager to distance themselves from as they prosper from the massive inflow of Las Vegas casino investment and leisure industry management expertise.
Most importantly, this private sector-based proposal could provide a face-saving way for the U.S., Chinese and North Korean governments to effectively, transparently and quickly move beyond the BDA impasse. In doing so, a technical solution to a technical problem could clear the way for important work to resume on implementing the February 13 nuclear accord.
John S. Park is Coordinator of the Korea Working Group at the U.S. Institute of Peace.
