With less people than California, North Korea has the 197th lowest GDP in the world, yet until 2003, was responsible for over 1,400 provocations and the deaths of 90 US servicemen. The U.S. has not retaliated; it provided North Korea with aid.
The country’s disproportionate military might and geostrategic location grant it freedom to vex the U.S. At 22.3%, North Korea has the largest defense budget per GDP on earth. Seoul, the capital of South Korea and an American ally, is an hour from the border; its ten million people would suffer tremendously in a conflict. Any attack could draw in China, Pyongyang’s backer. This reality has curbed American clout over the regime.
One strategy is economic sanctions. From 2003 to 2005, the State Department led the Illicit Activities Initiative (IAI), a law enforcement taskforce with the Treasury Department, targeting North Korea’s access to the world financial system. Meant to weaken the regime’s elites, its primary success was Banco Delta Asia (BDA), a bank in Macao involved with Pyongyang. During IAI’s peak in 2006, North Korea’s leader, then Kim Jong Il, told China’s president Hu Jintao, he feared sanctions would collapse his government.
As much as a third of the North’s economy is criminal activities: drug dealing, counterfeiting and trafficking arms. The regime established Office #39 to earn foreign currency. Its current leader, Kim Jong Un, has slush funds in European banks, worth billions to support his lavish lifestyle. In 2012, he spent $645 million on luxury goods.
Long subject to sanctions, North Korea, with few natural resources or manufactured goods,needs to launder its money. This makes Pyongyang vulnerable to asset freezes abroad or blocked access to the dollar. As these transactions go through U.S.-regulated banks, America is well-positioned to target its funds.
Kim’s finances operate like a mafia. So to launder them, the state uses front companies and a network of banks, worldwide. The Treasury’s plan, with the IAI, was to find its weak point and incapacitate it. They chose BDA, a small, privately-owned bank; it worked with the North’s front companies for decades, accepting large deposits, facilitating transactions, and it helped put counterfeit currency into circulation. Importantly, the BDA was too puny to damage the financial system or threaten China.
On September 15, 2005, Treasury labeled BDA a primary money laundering concern, under the Patriot Act. The next day, thousands of customers rushed to the bank’s eight branches to withdraw their savings, $133 million, a third of the bank’s total. Authorities in Macao setup a committee to takeover BDA, freezing $25 million in North Korean assets. A paltry sum in global terms, but the action was designed to send a message: business with Kim Jong Il is not worth the risk. The Patriot Act can sink banks. Industrywide, compliance officers increased scrutiny for North Korean-related clients, sequestering millions of dollars. In China, state-run banks froze the North’s accounts, lest the Treasury target them. Pyongyang was pushed out of its network.
But the BDA operation occurred during the Six Party Talks. These negotiations started in 2003, when the North withdrew from the Nuclear Non-Proliferation Treaty; they aimed to persuade the regime to relinquish its nuclear arsenal for aid and normalized ties. Christopher Hill, the Assistant Secretary for East Asia, headed the U.S. delegation, and was a firm believer of diplomacy. In meetings, he told Sec. of State Condoleezza Rice, “just let me go to Pyongyang, I’ll get you a deal.”