WASHINGTON (BLOOMBERG) - 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 (Aug 6).
The July 30 ruling upheld an earlier order by a Washington district-court judge directing the banks to comply with subpoenas for information about the transactions.
The appeals court said prosecutors don't "currently" suspect the Chinese banks of knowingly breaking the law but that the banks "hold records that the United States 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 Mr Brian O'Toole, a former CIA and Treasury Department official 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."
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 President Donald Trump and North Korea's 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.
Meanwhile, a new United Nations report found that North Korea has perfected its technology for hacking into financial systems to shunt billions of dollars to its nuclear weapons programme.
The three banks, which haven't 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.
Defence lawyers listed on the case declined to comment or did not respond to requests for comment. It was not clear which lawyers were representing which banks.
Lower-court judge Beryl A. Howell imposed a fine of US$50,000 (S$69,000) a day against each bank for failing to comply with the subpoenas. With the appeals court's decision upholding a contempt citation, the stiff fines are due to kick in on Friday. The banks could seek a higher appeal, but that wouldn't automatically keep the fines suspended. The US attorney's office in Washington said the fines will start on Friday and declined to comment further.
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 wasn't confirmed until Tuesday.
"The US is putting these banks between a rock and a hard place," Mr Jesse R. Morton, a specialist in money-laundering countermeasures at the Stout consulting firm in Atlanta, said in a recent interview.
Prosecutors will respond aggressively if they find the lenders played a role like that of the Swiss banks that helped Americans evade taxes.
"When it comes to foreign banks that knowingly facilitate fraud, money laundering, tax evasion and a host of other crimes, the US will take a heavy hand," he said.
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, that 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. Because of its stability, the dollar is the preferred currency for global business.
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.
In declining to comply with the subpoenas, the banks in the case have said Chinese law prohibits them from producing client records in response to foreign government investigations.
The court rejected that claim, finding that two of the banks, which have opened US branches, agreed to abide by American law as a condition of doing business in the US. The same jurisdiction extended to the third bank, the panel said, because it was conducting transactions through a correspondent account at a US bank.
The banks also argued that the US should seek the evidence it wants through a treaty governing legal assistance in criminal investigations between the two countries. The US has said the agreement is essentially useless, with China failing to produce substantive evidence in response to 50 requests in the past decade. The appellate court agreed.