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Money laundering allegations by U.S. false, report says

WASHINGTON—The U.S. Treasury Department's charges that a small bank in Macau knowingly laundered counterfeit U.S. currency for North Korea have no basis in fact, according to a confidential audit ordered by the government of the Chinese enclave.

The audit, obtained by McClatchy Newspapers, also suggests that the Treasury overstated claims that North Korea laundered "hundreds of millions" of dollars in ill-gotten gains through Banco Delta Asia.

On the basis of its allegations, the Treasury Department in September 2005 blacklisted the family-controlled bank, which went into government receivership, and effectively froze $25 million in accounts linked to North Korea. Last month, Treasury issued a final ruling that prevented the bank from having any transactions with the U.S. banking system and, in effect, the global financial system.

The ruling takes effect Thursday; the bank is appealing the ruling.

The dispute over the Macau bank accounts led the Pyongyang government to walk out of six-nation talks on dismantling its nuclear weapons program. North Korea agreed on Feb. 13 to dismantle its nuclear weapons program if the funds were unfrozen. The Bush administration agreed, but regime leaders apparently haven't received all of the funds, and this past weekend, North Korea failed to begin dismantling its nuclear reactor as promised.

Now the release of the bank audit by the giant Ernst & Young accounting firm raises broader questions, among them the credibility of the Bush administration's charges against North Korea and the Macau bank.

The allegation that North Korea was counterfeiting U.S. currency was at the center of the U.S. Treasury's concerns when it first threatened to blacklist the bank in 2005. It said then that "sources show that senior officials at Banco Delta Asia are working with (North Korea) officials to accept large deposits of cash, including counterfeit currency, and agreeing to place that currency in circulation."

Last August, President Bush made a similar allegation. Asked why he continued to focus on alleged money laundering instead of nuclear arms reduction, he told reporters: "Well, counterfeiting U.S. dollars is an issue that every president ought to be concerned about. And when you catch people counterfeiting your money, you need to do something about it."

But the audit showed that the bank, a primary conduit for North Korea's financial dealings with the rest of the world, played no obvious role in laundering counterfeit U.S. currency.

"From our investigations it is apparent that ... the Bank did not introduce counterfeit U.S. currency notes into circulation," the Ernst & Young audit said, noting that large cash deposits from North Korea were routinely screened for counterfeits by the Hong Kong branch of an unidentified bank with U.S. operations.

Moreover, the audit confirmed that the only time Banco Delta knowingly handled counterfeit U.S. notes was in 1994 when its inspectors discovered 100 counterfeit $100 bills and turned over the money to local authorities. The $10,000 was far from the $15 million in counterfeit U.S. currency that the Bush administration said North Korea was manufacturing annually.

The Treasury said front companies for North Korea were suspected of laundering "hundreds of millions of dollars in cash" through the bank, the proceeds of illicit trade in counterfeit U.S. currency, smuggled cigarettes and narcotics.

But the audit found no evidence that this was true.

The Treasury Department is sticking to its guns. "We have complete confidence in the strength of our case, as demonstrated by the final rule" blacklisting Banco Delta Asia, spokeswoman Molly Millerwise said.

Until now, the story of Banco Delta's travails has played out behind a wall of secrecy imposed by U.S., Chinese and Macanese regulators, and as part of broader and complex international negotiations about North Korea's nuclear program. But the audit, aspects of which were reported earlier by McClatchy Newspapers, for the first time spells out exactly what Treasury's concerns were and what international auditors discovered.

Banco Delta Asia is a private, family-run bank whose major shareholder is Stanley Au. Its deposits were about $318 million before Treasury took action against it in 2005, and by last July its deposits had dwindled to $205 million. The audit reveals that the bank has handled North Korean accounts for decades. However, North Korean entities or Macanese firms doing business with North Korea accounted for less than 8 percent of the bank's deposits and slightly more than 22 percent of its business volume, it said.

Ernst & Young presented the audit to Macanese banking regulators in December 2005 in response to concerns raised in Treasury's September 2005 proposal to blacklist the Macau bank. The bank's lawyers offered to present the report to Treasury officials in October 2006 but insisted that it be kept secret from the media. Treasury refused the offer.

The copy of the audit obtained by McClatchy Newspapers excises the names of North Korean entities and officials to protect their identities. The names of some banks with U.S. ties are also redacted.

The audit is hardly a clean bill of health for Banco Delta. It found that the enterprise lacked sufficient information technology and knowledge about the underlying nature of the businesses for which North Korean companies or their partners in Macau were depositing large sums of cash.

For reasons not stipulated in the audit, Macanese monetary authorities in September 2004 asked Banco Delta to strengthen its internal controls over North Korea-related accounts or end the risky business of transferring North Korea's cash deposits and gold bullions. The bank apparently didn't heed that advice.

In response to auditors, Au maintained that North Korea is a communist country whose government operates on a cash basis and doesn't discuss the source of its funding.

Treasury cited the bank's lack of internal controls when it moved against Banco Delta in September 2005. Treasury issued a final ruling against the bank on March 14, but hinted that it would be willing to let North Korea have its money back. Then, on April 10, it issued a statement saying it wouldn't oppose Macau's returning more than $12 million in frozen funds, which the United States had considered the fruit of illicit activities.

Lawyers for Banco Delta late Friday seized on the about-face in presenting an appeal of the final ruling.

"At the very least, Treasury's nearly simultaneous condemnation and approval of the release of funds proves (if any more proof was necessary) that the issuance of the final rule was arbitrary and capricious," Banco Delta's law firm, Heller Ehrman of New York, argued in a 39-page petition.

The law firm insisted that the bank has addressed nearly every concern raised by Treasury, but remains blacklisted.


(c) 2007, McClatchy-Tribune Information Services.

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