By Christian Berthelsen
U.S. shelved plan to sanction lenders seen as vital to system
Firm allegedly used AgBank, China Construction for laundering
U.S. officials alarmed by public displays of Pyongyang’s nuclear and missile technology last summer considered taking the provocative step of blacklisting two of China’s biggest banks from the U.S. financial system for doing business with North Korea, three people familiar with the matter said.
But the idea of a U.S. ban was soon shelved, primarily because of fears that punishing lenders of that size might send shock waves through the global financial system, the people said. After conducting an economic impact analysis, officials worried about potential systemic damage and retaliatory measures from China, they explained.
The Chinese lenders that were spared, at least for now, are Agricultural Bank of China and China Construction Bank, according to the people. The reluctance to sanction them demonstrates how integral they are to the global banking systems. It also highlights the tension between hard-liners in Congress, who argue that nothing short of a “maximum pressure” campaign to isolate North Korea will derail its nuclear ambition, and some former Treasury Department officials who caution that harsh action could result in severe secondary economic and diplomatic consequences.
The Treasury Department instead blacklisted two small banks in China and Latvia — with assets in the low billions, compared with trillions for AgBank and China Construction — that it said were aiding North Korea. In concert with the United Nations, the Treasury also sanctioned dozens of trading companies, cargo ships and people it said were trading with the country.
There’s wide support among lawmakers in both parties for strong efforts to contain North Korea’s nukes. President Donald Trump is preparing to meet with North Korean leader Kim Jong-un even as he amps up his rhetoric about a broader trade war with China. With relations among the three nations changing by the day, there’s no telling if U.S. officials might reconsider a bank ban.
“I assure you, we are reviewing information as it associates with banks that are doing illicit activities” involving North Korea, Treasury Secretary Steve Mnuchin said on Feb. 23 in announcing the cargo sanctions. He added that “Chinese entities, we will continue to look at them like everyone else.”
A Treasury spokeswoman declined to comment. AgBank and China Construction also declined to comment.
AgBank and China Construction are each bigger than JPMorgan Chase & Co., the U.S.’s largest bank by assets. They had been identified in a 2016 U.S. asset-seizure case as providing accounts for a Chinese trading company that helped North Korea launder its money.
A U.S. ban would crimp the banks’ ability to do business internationally by prohibiting them from dealing in U.S. dollars.
“What that would do to our relationship with China would be fairly dramatic,” said Dan Tannebaum, a former Treasury official and principal at PricewaterhouseCoopers LLP. “An action like that would be the most significant ratcheting up of sanctions I can think of.”
Treasury’s consideration of the move began around the time in September when three members of the House Foreign Affairs Committee, including Chairman Ed Royce, urged the department to take action against large Chinese banks, saying they were facilitating the most North Korean trade by value, the people said.
But by early this year, Treasury officials told Congress that the idea was too risky — even with modifications that could make the finding short of a total blacklisting, a person familiar with the deliberations said.
Some China hawks were left disappointed by the decision. “We have to get over this fear that we are going to cause the financial system to melt down, or some major rupture in U.S.-China relations, if we sanction some of the larger Chinese banks that serve North Korea and its fronts,” Representative Brad Sherman, Democrat of California and a member of the Foreign Affairs Committee, said in a statement to Bloomberg. “If we can hit them with tariffs, we should be able to target their banks unless they cut the North Koreans off.”
Even as Washington and Pyongyang move forward on plans for their leaders to meet as soon as next month, China remains key to cutting off North Korea’s access to the financial system as the North’s biggest trading partner. But forcing a change in North Korea’s behavior — which requires forcing China to turn the screws — may entail a level of brinkmanship that few can stomach.
The Treasury has shown an increasing willingness to issue financial sanctions, most recently against Russian oligarchs with ties to President Vladimir Putin. Under powers granted by the Patriot Act, the Treasury has the authority to brand a financial institution as a “primary money-laundering concern.” The finding, which the Treasury has imposed on financial institutions 18 times, can amount to a death penalty for a foreign bank, barring them from transacting through the U.S. financial system.
Most of the banks the Treasury has used its authority against have been small, out-of-the-way institutions of little import to the global financial system. For example, FBME Bank Ltd. was seized by regulators and is being wound down, while Banca Privada d’Andorra SA was seized and is being restructured.
AgBank and China Construction are the third- and fourth-largest of China’s so-called Big Four banks. They have billions of dollars in U.S. holdings and facilitate tens of billions of dollars in trade with U.S. counterparts every day.
When the Treasury develops a money-laundering case against a foreign bank, it often relies on classified intelligence it receives from clandestine services. But the civil U.S. asset-seizure lawsuit filed in 2016 alleges that a Chinese trading company, Dandong Hongxiang Industrial Development Co., used accounts at both AgBank and China Construction to help North Korea launder nearly $75 million through banks in the U.S.
Dandong was open about its North Korean business, with its chief executive, Ma Xiaohong, talking publicly about having “elite” clients who worked for North Korean state enterprises.
There was no allegation in the suit that either bank knowingly facilitated the transactions. Rather, after a decade of living under severe U.S. sanctions, North Korea has developed sophisticated methods of concealing its financial activity, according to U.S. officials.
North Korea employs foreign nationals to conduct its banking in third countries — often in places with limited regard for U.S. interests, including Russia, Cuba, Libya and Syria — and hiding its identity behind shell companies, according to a UN analysts’ report issued last month. The Dandong trading case involved the use of 22 separate shell companies, according to filings in the case.
But a key source of U.S. frustration has been continued weak anti-money-laundering practices at major Chinese banks that have allowed North Korea to slip through their cracks. Both China Construction and AgBank have been cited by U.S. and New York authorities for weak anti-money-laundering protections, with New York fining AgBank $215 million in 2016.
China has recently taken aggressive steps to crack down on North Korean trade. Yet while it wants to limit North Korea’s threat, it also fears the effects of destabilizing the regime — including a potentially huge refugee crisis on its border and threats to its own national security.
Chinese officials have also told their U.S. counterparts that it views a blacklisting of its banks as a “red line” that could invite severe retaliation, two people familiar with the interactions said. China holds nearly $1.2 trillion in U.S. Treasury debt, and a sell-off, which China’s ambassador to the U.S. says the government hasn’t ruled out, could place upward pressure on interest rates.
“I don’t think pressuring a major Chinese institution would be particularly successful in applying pressure to North Korea,” said Daniel Glaser, a former Treasury Department assistant secretary focused on terrorism funding.
“China will continue to give North Korea the financial access it needs,” Glaser said, “and the only way to prevent that is to put the broad U.S.-China financial relationship on the table, financial, economic and otherwise. I don’t think the U.S. would or should do that.”
— With assistance by Alfred Liu, and Greg Farrell