WASHINGTON • The United States is investigating hundreds of millions of dollars in financial transactions involving three big Chinese banks that allegedly helped finance North Korea's nuclear weapons programme, according to an appeals court opinion unsealed on Tuesday.
The appeals court said prosecutors do not "currently" suspect the Chinese banks of knowingly breaking the law, but that the banks "hold records that the US government thinks may clarify how North Korea finances its nuclear weapons programme".
US prosecutors suspect that a state-owned North Korean bank used a Chinese front company to export "hundreds of millions of dollars" in coal and other minerals, receiving revenue in US dollars it could use to buy materials vital to the dictatorship's weapons programme, according to the 44-page ruling.
The US has sought banking records from 2012 to 2017, suggesting the scheme spanned at least five years.
If the government finds evidence that the banks wilfully aided the operation, it could hit them with billions of dollars in fines "similar to those imposed against large European banks for Cuba, Iran and Sudan sanctions violations", said former Central Intelligence Agency and Treasury Department official Brian O'Toole, who is now a senior fellow at the Atlantic Council.
"That kind of action is preferable to sanctioning the Chinese banks" or freezing them out of the US financial system, Mr O'Toole said.
"That would have broader systemic issues for US-China trade, the Chinese economy and, by extension, the global economy."
US prosecutors suspect that a state-owned North Korean bank used a Chinese front company to export "hundreds of millions of dollars" in coal and other minerals, receiving revenue in US dollars it could use to buy materials vital to the dictatorship's weapons programme, according to the 44-page ruling. The US has sought banking records from 2012 to 2017, suggesting the scheme spanned at least five years.
The case, a barbed thicket of legal and foreign relations issues between the US, China and North Korea, comes at a precarious time for all three.
The US and China are engaged in a fast-escalating battle over trade, currency and economic supremacy, even as US President Donald Trump and North Korea leader Kim Jong Un seem to be slipping back towards confrontation.
Washington has hesitated to impose severe penalties over China's banking services to North Korea for fear of disrupting trillions of dollars in trade. With relations so rocky, that could now change.
The three banks, which have not been identified in court papers, appear to be China Merchants Bank, Bank of Communications and Shanghai Pudong Development Bank - all among China's top 10 banks by assets, based on a related asset-seizure case. They have issued statements saying they are not under investigation for sanctions violations.
Lower court judge Beryl A. Howell imposed a fine of US$50,000 (S$69,192) a day against each bank for failing to comply with subpoenas.
With the appeals court's decision upholding a contempt citation, the stiff fines are due to kick in tomorrow. The banks could seek a higher appeal, but that would not automatically keep the fines suspended.
The unsealed opinion, from the US Court of Appeals for the District of Columbia Circuit, lays bare details of a national security investigation that proceeded in secret for at least two years. Though it had been publicly hinted at in cryptic court rulings and related cases, the nature of the inquiry was not confirmed until Tuesday.
The period under investigation constitutes the final years leading up to North Korea's first successful documented tests of nuclear weaponry and missile systems capable of delivering warheads, including an intercontinental ballistic missile launched in 2017.
That year, US prosecutors seized US$1.9 million in bank accounts belonging to a Hong Kong company, Mingzheng International Trading, which it said operated as a front for North Korea's Foreign Trade Bank.
It was one of at least four front companies used by North Korea to send and receive US-dollar payments, according to court filings. The company is now defunct.
That action, combined with the Treasury bans, were tied to the investigation now under way.
The North Korean bank has been blacklisted from the US financial system and would not have been able to freely make or receive dollar-denominated payments.
The Chinese shell company had no legitimate business purpose beyond facilitating North Korean trade, the authorities suspect, and made more than US$100 million in US dollar payments on behalf of the North Korean bank in almost 700 transactions during a three-year period, the ruling said. It, too, has subsequently been blacklisted from the US financial system.