Financial Sanctions Against North Korea

Abstract

On September 15, 2005 the Treasury Department of the United States designated the small Macau-registered bank, Banco Delta Asia (BDA), a primary money laundering concern and warned US financial institutions to guard against their abuse by North Korea. As a consequence of this so-called reputational sanction, the Macau government seized $25million worth of DPRK (Democratic Peoples Republic of Korea) assets while bank and institutions in over twenty countries took measures to deny financial services to the DRPK. Though the US claimed the sanction was related to international crime and not denuclearization, North Korea linked it to Six-Party Talks and blocked progress made on negotiations for an end to its nuclear program.

The sanction was initially supported both domestically and abroad and can be seen to have been a success in seriously damaging the financial capabilities of the North Korean illicit profit-making network. However, it quickly became part of a broader strategy when it was adopted by Washington hardliners as part of a policy this paper terms hawk coercion that aimed to squeeze the DPRK financially while talking to them about denuclearization. This coercive diplomacy ultimately failed, and after missile launches and a nuclear test, the sanction was withdrawn.

This paper will analyze the reasons why this reputational sanction, which devalues the market commodity of trust to great financial effect, failed as a coercive tool. Bruce Jentlesons coercive diplomacy framework will show that the policy, of which BDA sanction firstly was central, lacked proportionality, reciprocity and coercive coercion. Proportionality, as its initial objective was expanded from one of international crime to coercive denuclearization. Reciprocity, as ill timing and the ignoring of signaling meant that reciprocal trust was not attained. Coercive credibility, as a common interest and a reasonable objective was absent. In conclusion, the most fundamental reason that led to the failure of the BDA sanction will be identified. This has implications for the role of allied support and domestic political factions within coercer states in the imposition of reputational sanctions in coercive diplomacy.