Center for International Policy

North Korea’s Embarrassment
By Selig S. Harrison
July 7, 2006

For North Korean generals, it must have been increasingly exasperating to be told, year after year for the past eight years, not to conduct militarily-important missile tests because they would conflict with foreign policy priorities. For Kim Jong Il and his diplomats, who have blocked military pressures for testing until July 4, developments in recent months must have made it increasingly difficult to argue that the moratorium on long-range testing, in effect since 1998, has had a foreign policy payoff.

With the United States ignoring the six-party nuclear negotiations and actively seeking to block North Korean access to the international banking system, North Korea has felt increasingly cornered and decided to go ahead with the missile test in the apparent hope of capturing international attention and stimulating new bilateral negotiations with the United States.

What actually happened on July 4 proved to be disastrous for the generals and diplomats alike. Some of the generals involved could lose their jobs, and diplomatically, Pyongyang suffered a major embarrassment when the Taepodong-2 exploded 42 seconds after being launched.

Far from winning enhanced respect and diplomatic leverage as a formidable military power, Pyongyang has advertised its military incompetence, has demonstrated just how vulnerable it is to superior U.S., South Korean, and Japanese military and technological power, and has strengthened hard-liners in Washington, Seoul, and Tokyo opposed to negotiations.

To understand why Kim Jong Il was driven to take such a dangerous gamble, it is necessary to focus on the U.S. Treasury Department’s little-noticed, increasingly effective nine-month-old campaign to squeeze North Korea financially. There is talk now of new sanctions, but the missile tests were a response to the tightening noose of Treasury sanctions already being implemented. The test should not be viewed as a military event but rather as a symptom of the mood of growing alarm in Pyongyang in the face of the U.S. economic squeeze.

Treasury Undersecretary Stuart Levey boasts that his campaign is putting "huge pressure" on the Pyongyang regime. In a Newsweek article, Levey predicted that the campaign will have a "snowballing, avalanche effect" as banks learn about it. "Washington has finally found a strategy that is putting real pressure on the regime," concluded Newsweek, "going after its sources of cash all around the world."

It is well known that 24 million USD in North Korean assets in Banco Delta Asia in Macao was frozen by the Macao banking authorities last fall after the United States accused North Korea of using the bank to launder counterfeit $100 U.S. "supernotes."

What is not generally realized is that on December 13, 2005, the Treasury posted an advisory on its Web site that called on "financial institutions worldwide" to restrict or deny banking services to North Korea. The advisory warned that Pyongyang, cut off from its access to Banco Delta Asia, "may be seeking banking services elsewhere." The Kim Jong Il regime is "engaged in illicit activities," the advisory said, laundering the proceeds from alleged currency counterfeiting, narcotics trafficking, cigarette smuggling, and missile sales.

Financial institutions in the United States "should take reasonable steps to guard against the abuse of their financial services by North Korea," the advisory warned, "and we encourage financial institutions worldwide to take similar precautions."

In today’s tightly-wired financial world, a foreign bank blacklisted by the United States would be seriously crippled, since financial institutions anywhere doing business in dollars must maintain accounts in correspondent U.S. banks in order to complete transactions. So the December 13 advisory was undoubtedly a shock to Pyongyang.

Only tidbits of evidence of specific illicit North Korea transactions have been published by the Treasury Department, none of them recent. I asked for such evidence in a June 15 interview with Daniel L. Glaser, Deputy Assistant Secretary for Terrorist Financing and Financial Crimes. The only case he cited was one in 1996 in which a North Korean walked into Banco Delta Asia with a sack containing 600,000 USD in cash that did prove to be counterfeit.

I pressed him for proof that the 24 million USD in frozen assets from Banco Delta Asia related to counterfeit and other illicit activities. He said that the money was scattered in 50 different accounts that were not recorded electronically but in voluminous paper files that are now being scanned by the U.S. Secret Service in search of evidence.

Glaser declined to say how long the review of the 50 accounts would take, but a highly-placed U.S. intelligence source told me, "maybe three or four months."

I asked Glaser whether it is possible that most or even all of the 50 accounts relate to legitimate North Korean trade and investment activities. All he would say was, "we don’t know yet." When I suggested that the December 13 advisory would lead banks to lump together both legitimate and suspect North Korea transactions, he replied, "We never said, don’t do business with North Korea. We just said it’s a high-risk customer. Banks must re-analyze whether it’s worth doing business with North Korea. If I were a bank, I wouldn’t want to take that kind of risk."

Condoleezza Rice has done little, if anything, to slow down the Treasury campaign, and the Administration line is that the pressure will force North Korea to return to the six-party talks. But it is clear that no one in the State Department believes that. The reality is that the Bush Administration is now pursuing its "regime change" policy in a new form that China and South Korea find awkward to combat. By staging its missile gambit, Pyongyang has reacted predictably with a desperate and clumsy attempt to get attention and renewed negotiations in the hopes of ending the Treasury campaign.

The most bizarre result of the gambit was the proposal for a preemptive strike by former Defense Secretary William Perry and its rejection by Vice President Richard Cheney. It was a remarkable reversal of roles for Perry, who negotiated the 1998 missile testing moratorium, to call for preemption while the hawkish Cheney counseled restraint. Cheney, of course, has good reason to be relaxed about North Korea because he has now, at last, found a way to pursue a meaningful "regime change" policy in the form of the Treasury campaign, which he appears to be masterminding. Reading between the lines of his CNN comments on the Perry proposal, it is clear that Cheney is not really afraid of North Korea and does not regard it as very important, since it does not, after all, have big oil deposits, as Iraq and Iran do.

The July 4 launches remind me of North Korea’s unsuccessful August 16, 1998, launch of a satellite in international airspace over Japan. Then, as now, Pyongyang had previously tried and failed to get attention in other ways. On May 9, 1998, in the first of three warnings, Kim Yong Nam, then Foreign Minister and now Chairman of the Supreme People’s Assembly, told me that "your government takes us for granted because you think we are weak. You are not living up to the Agreed Framework. We are losing patience. Our generals insist that we must develop and demonstrate appropriate military capabilities, and if you do not act in good faith, there will be consequences."

Then, as now, the issue was economic pressure on the regime. The test of U.S. good faith, Kim said, would be ending economic sanctions and "showing us that you are serious about the normalization of relations. To us, it is clear that the sanctions are intended to pressure us because you hope we will collapse."

Selig S. Harrison is director of the Asia Program at the Center for International Policy and senior scholar of the Woodrow Wilson International Center for Scholars