WASHINGTON — When the United States blacklisted a tiny bank in Macao for its dealings with North Korea nearly two years ago, the goal was to isolate the bank from the world’s financial system and squeeze the government in Pyongyang.
Little did the Bush administration appreciate the fatefulness of that step.
It has taken four months to transfer $25 million, contained in accounts frozen at the bank, to North Korea as part of a deal reached last February to persuade the north to begin dismantling its nuclear weapons program.
The money finally reached North Korea this week after several false starts. The transfer was negotiated by the State and Treasury departments, and it involved the central banks of Russia and Macao, the Far Eastern Commercial Bank, a privately held bank in Vladivostok, and the Federal Reserve Bank of New York.
The final arrangement also involved a general discussion of its terms between President Bush and President Vladimir Putin of Russia at the Group of Eight summit in Germany earlier this month.
It remains to be seen how quickly North Korea will live up to its promise on its nuclear program. But American officials say that Treasury Department financial sanctions are now proven to have an extraordinary reach, with implications for sanctions imposed and likely to be tightened for other countries, from Iran to Sudan.
“Our financial tools are sometimes the most powerful weapons our government has to help change behavior,” said James R. Wilkinson, chief of staff at the Treasury Department. “At the end of the day after this transaction, the diplomacy is moving forward and the world now sees just how powerful Treasury’s financial tools really are.”
For weeks, it did not look as if the United States would be able to make the transfer happen without formally lifting its sanctions on Banco Delta Asia in Macao, which would have been a step too far for Washington.
Administration officials say both Macao, a semi-autonomous region off the coast of China near Hong Kong , and the Chinese government, wanted Washington to withdraw its label of Banco Delta Asia as a money laundering bank, but the administration refused because of lingering concerns about control of the bank by people with a history of illicit activities.
Administration officials agreed to talk anonymously about some details in the transaction, saying they wanted to assure the public that the financial controls were not bent, and to send a message that the controls remain in effect for other targets, notably Iran.
“You can be sure that other countries like Iran will be drawing lessons from North Korea,” said a senior administration official. “What Banco Delta Asia demonstrates is that once you find yourself in this tar pit, it’s almost impossible to extract yourself. That has huge implications for banks we’ve targeted in Iran.”
The United States never froze the North Korean funds in the bank, Treasury officials noted. That was done by the authorities in Macao. By labeling Banco Delta Asia a money launderer for the north’s illicit activities, no reputable bank would do business with it, they said.
At issue in the North Korea negotiations was $25 million in the bank held by 52 account holders. The account holders did not include the government of North Korea itself. But nearly all had links with the government through business deals or other connections.
Of the 52 accounts, 35 held $13 million that was considered relatively legitimate. Another 17 accounts holding $12 million were believed to be derived from illicit activities like narcotics, counterfeiting and North Korea’s nuclear program.
When it was decided in February to return the money to North Korea, both State and Treasury officials thought mistakenly it could be done easily.
A team led by Mr. Wilkinson and also including Daniel Glaser, a deputy assistant secretary for terrorist financing and financial crimes, and James H. Freis Jr., director of the Financial Crimes Enforcement Network at Treasury, flew to Beijing in March to try to untangle the situation.
It turned out that the North Korean government, which promised to use the money for humanitarian purposes, was required by law to get permission from the 52 account holders to give up the money to Pyongyang. It took weeks to obtain releases from most of the account holders.
North Korea designated the Far Eastern Commercial Bank in Russia, where it had an account, to receive the funds, but that bank had no formal relationship with Banco Delta Asia that would allow for the funds to be wired.
No other bank would transfer the money, even when the Treasury Department sent signals that it would offer assurances to hold any bank harmless in participating in the transfer.
One paradox was that, according to administration officials, it fell to the State Department — notably Christopher R. Hill, the United States envoy to North Korea — to recruit banks for the job of executing the transfer. They said it was considered inappropriate for Treasury, as an enforcer of banking regulations, to ask banks to do so.
Mr. Hill spent weeks “flailing around” to find banks, at one point coming close to a deal involving Wachovia Bank, which backed out because of concerns about handling “hot money,” an administration official said.
Finally, administration officials said the Federal Reserve Bank of New York offered to become involved. It did so only after the Macao Bank first transferred the funds to the Macao Monetary Authority, the region’s own central bank.
The funds next were transferred from the Macao authority to the New York Fed, then to the Russian Central Bank and then to the Far Eastern bank in Vladivostok, where North Korea’s account was under the name of the North Korean Foreign Trade Bank.
Russia was willing to honor American requests to help, administration officials said, but it wanted assurances that its financial institutions would not be punished by any anti-money laundering statutes or regulations. These were given by the American ambassador in Moscow, William J. Burns.
Like Banco Delta Asia, two Iranian banks have been blacklisted by the Treasury Department, Bank Saderat because of allegations of involvement in financing Hezbollah and other terrorist organizations, and Bank Sepah because of reported involvement in Iran’s suspected nuclear arms program.
Treasury Secretary Henry M. Paulson Jr., since last September, has publicly called on banks in Europe, the Middle East and Asia to stop doing business with Bank Saderat and Bank Sepah even if the transactions do not involve dollars.
“Most of the world’s top financial institutions have now dramatically reduced their Iranian business or stopped it altogether,” Mr. Paulson said earlier in June in a speech at the Council on Foreign Relations in New York. He added that “the risk of transacting Iran’s business is present in every currency.”