North Korean deposits moved from Macau bank (6/14/07) | McClatchy Washington Bureau

HONG KONG - A financial dispute that's stalled a nuclear disarmament deal with North Korea showed signs of easing Thursday as authorities in the gambling haven of Macau began returning funds to the North that were frozen for nearly two years at Washington's demand.

Macau's financial secretary, Francis Tam, said the bulk of North Korea's frozen funds at Banco Delta Asia, a Macau bank that's blacklisted by the U.S. Treasury Department, had been moved out of the country.

The U.S. Treasury Department contends that the North Korean deposits were largely the result of weapons trafficking and international criminal activity, including the sale of narcotics and counterfeiting of U.S. currency.

"According to government information, Banco Delta Asia transferred more than $20 million out of the bank this afternoon in accordance with the client's instruction," Tam told reporters in Macau.

Tam didn't say where the money had been transferred, but it appeared that the funds were taking a circuitous route back to North Korean hands and ending a stalemate that has blocked progress on a North Korea nuclear agreement that was reached on Feb. 13.

The six-nation deal requires North Korea to suspend all nuclear activity and accept inspectors from the International Atomic Energy Agency in return for economic and political incentives, including heavy fuel oil. China has acted as host since 2003 of the talks among the United States, North and South Korea, Japan and Russia.

The return of the North Korean funds dramatically improves the chances of getting the nuclear agreement back on track. North Korea has demanded its Macau deposits back and refused to suspend operations at its Yongbyon nuclear facility or to take other steps toward halting its nuclear program.

North Korea tested a nuclear device last October, sending shivers through much of East Asia.

South Korea's semi-official Yonhap news agency said the North Korean funds were to be wired to the New York branch of the U.S. Federal Reserve, then to the Russian Central Bank and finally to a North Korean account at an unidentified Russian bank.

Russia said Wednesday that it would help return the money to North Korea as long as it had guarantees that it wouldn't be punished under U.S. banking laws.

An independent Moscow radio station, Ekho Moskvy, said the funds were likely headed to the Dalnevostochniy Bank in Russia's Far East, which borders North Korea. The bank declined to confirm the report, the radio station said.

The banking dispute at first appeared tangential to the nuclear talks. But as a 60-day deadline passed in mid-April, it became a major obstacle to progress toward ending North Korea's pursuit of nuclear weapons.

Banks around the world balked at acting as a conduit for the North Korean money, fearing that the U.S. would close off their own access to global financial markets.

Christopher Hill, the chief U.S. envoy to the nuclear talks, said Wednesday that U.S. officials had been "in very close contact" with North Korea this week on the matter.

"I can go out on a limb and say I'm hopeful that we will have some news for you very soon on this," said Hill, who'll visit Seoul, Tokyo and Beijing next week.

The Bush administration, apparently suffering some internal divisions over how to deal with North Korea, could face a congressional backlash over letting the North Korean funds return.

Six House Republicans, led by Rep. Ileana Ros-Lehtinen of Florida, sent a letter Tuesday to the Government Accountability Office asking whether the return of the money is consistent with U.S. anti-money laundering and counterfeiting laws.