The author is a senior editorial writer of the JoongAng Ilbo.
Korean banks have turned extra careful. They received somewhat unusual calls from the U.S. Treasury Department reminding them of their obligations to abide by international as well as U.S.-led sanctions on North Korea. In a recent parliamentary questioning session, the government said the calls were routine. It claimed any misunderstandings with Washington had been cleared up. The government tried to play down the significance of the calls. But the opposite is true. The following is what I have pieced together after gathering information from executives of the banks that received “the call.”
Around Sept. 19, when the inter-Korean summit meeting in Pyongyang was set, the U.S. Treasury Department sent emails to the New York offices of seven Korean banks, asking for contact numbers for the person in charge of regulation compliance at their Seoul headquarters. The Treasury Department wanted to talk to them. The seven were state banks Korea Development Bank and Industrial Bank of Korea and commercial banks Kookmin, Shinhan, Nonghyup, Woori and Hana. Their New York operations handle remittances and foreign exchange businesses. The Export-Import Bank of Korea was excluded because its New York office was not engaged in direct banking business.
The Treasury Department held conference calls with four banks on Sept. 20 and the other three on the following day. Some were grouped together for conference calls and some were called individually. From Washington, a woman and a middle-aged man talked to vice president-level executives of Korean banks for about 20 minutes. Seoul authorities assume the callers were Deputy Treasury Secretary Sigal Mandelker, who is deputy secretary in the Treasury Office of Terrorism and Financial Intelligence, and Daniel Moger, deputy assistant secretary on terrorist financing and financial crimes. The two are behind the U.S.-led financial sanctions campaign that has pressured banking institutions around the globe to support either the United States or North Korea.
The South Korean bankers admitted they had been eager to prepare for inter-Korean economic cooperation in support of the Moon Jae-in administration’s détente policy. The Treasury officials checked on news reports — whether they were preparing to open offices in Mt. Kumgang to support tour program or in Kaesong, where the suspended inter-Korean industrial complex is located. They asked whether they were selling financial products from which some of the profits would be taken out for South Korea’s national unification fund. They ended the conversation with the formal reminder that U.S. sanctions on North Korea remain intact.
So how rare are such calls? The banks said their New York offices fall under the jurisdiction of the Federal Reserve Board. It was the first time the Treasury Department made direct contact, bypassing authorities like the Ministry of Strategy, the Finance or the Financial Services Commission or the Financial Supervisory Service. The department reminded them that their New York operations have been endorsed under the condition that they follow U.S. federal laws. In other words, they have been warned that any violation of the sanctions could lead to business suspension or fines.
How big is their threat? Some 90 percent of Korean banks’ foreign exchange dealings are done in U.S. dollars. The New York offices trade dollars in accounts with major lenders like Citibank, JP Morgan, and Wells Fargo. If any of the accounts are frozen, the foreign exchange business can come screeching to a halt. Korean banks would be cut off from the world if that happens. They also could face enormous penalties.
Can the U.S. go that far, given the traditional alliance with South Korea? French bank BNP Paribas had to settle $8.9 billion in fines with the U.S. government for violating the U.S. sanctions in 2014, and France is an older historical ally of the United States. President Barack Obama reduced the fine by only $100 million after a plea from his French counterpart, Francois Hollande. There is no wiggle room in U.S. sanctions. Unlike United Nations sanctions, cheaters can be penalized through a presidential executive order.
Will the Blue House press ahead with its plans? When the U.S. froze about $24 million of North Korean money in the Macau-based Banco Delta Asia in 2005, aides of then President Roh Moo-hyun suggested South Korea help out through the Export-Import Bank of Korea. Then-vice finance minister Chin Dong-soo strongly opposed the plan. Chin was dismissed later and could not get the CEO job at the state-run Industrial Bank of Korea as he wished. Similar risky moves are being sensed among the leftists at the Blue House right now, the bankers said.
Can inter-Korean ventures progress without an endorsement from Washington? South and North Korean officials recently agreed to hold a groundbreaking ceremony by early December to modernize and connect roads and railways along the coastlines of the two Koreas. But railway construction requires heavy equipment like bulldozers, which fall under the sanctions. They need fuel, which is also sanctioned. A forestation project in the North also cannot be as easy as South Korean authorities think. If groundwork is not done properly before trees are planted, they will not last long. Hiring North Koreans to plant trees also goes against sanctions.
Banks are actually relieved that this happened. They were frustrated and nervous about the way the Unification Ministry and the Land, Infrastructure and Transport Ministry are bulldozing through ventures in the North. The calls from the U.S. Treasury Department may slow down the pace of working with North Korea. Bank heads inevitably have to take orders, but the employees — having seen the consequences of the power-abuse scandal of former President Park Geun-hye, her aides, and secret friend Choi Soon-sil — will tape-record any pressure from outside for their later protection.
Despite the Moon administration’s downplaying of the incident, major South Korean banks have taken the calls very seriously. They realize they could pay for any imprudent moves by the government in penalties levied by the Trump administration.