TRAIL LED TO MACAO AS FOCUS OF NORTH KOREAN CORRUPTION

HONG KONG -- For American law enforcement agencies the smuggling
investigations were among their most elaborate, producing dozens of
arrests and hard evidence that Chinese criminal gangs had smuggled
counterfeit United States currency, cigarettes and drugs made in North
Korea into the United States.

The investigations, concluded 20 months ago, also produced a money
trail that led to the Chinese gambling enclave of Macao, where
American investigators concluded that criminals linked to North Korea
were laundering their earnings.

This effort produced the hard evidence for the United States to place
financial sanctions against Banco Delta Asia, a small, family-owned
bank in Macao, near Hong Kong. But those sanctions became a major
sticking point in international efforts to dismantle North Korea's
nuclear weapons program.

The investigations "were just incontrovertible proof of the role of
Macao banks, Macao gangsters, North Koreans in Macao," said David
Asher, an outspoken critic of North Korea who at the time of the
investigation was one of the most senior State Department officials
dealing with the country.

"In effect, they also demonstrated the awareness of the Macao
authorities to these things," he said. "This stuff was going on on
such a large scale, going through several different banks."

As a result of the sanctions, accounts linked to North Korea at Banco
Delta Asia holding about $25 million were frozen.

North Korea had refused to move ahead with a plan to deal with its
nuclear program unless the funds were released, and this week, after
protracted wrangling, the last obstacles were removed.

But information collected in the course of the Treasury Department's
investigations gave it the grounds to designate Banco Delta Asia as a
"primary money-laundering concern" under the USA Patriot Act and to
consider applying the same designation to much larger banks operating
in Macao, including the local branch of the Bank of China. The owners
of Banco Delta Asia have denied any wrongdoing.

The Bush administration has not acted against the Bank of China, and
its officials in Beijing did not respond to questions about the
American findings.

The declaration against Banco Delta Asia had immediate and
far-reaching results, though. A run on the bank by customers drained
about $133 million, about one-third of its deposits, said the bank's
lawyers.

The Monetary Authority of Macao replaced the management of the bank
and froze the $25 million held in North Korea-linked accounts. Macao,
which has attracted billions of dollars of American and other foreign
investment into a casino-building boom, was forced to tighten laws
against money laundering and criminal banking activity.

The Macao Government Information Bureau did not respond to questions
about the bank, and a request for an interview with the head of the
Monetary Authority of Macao went unanswered.

Banks around the world, fearing exclusion from the American banking
system, started to shun business with North Korea, setting off an
informal financial embargo of that country.

By the time North Korea tested a nuclear device in October and
returned to nuclear disarmament talks, one of its chief demands was
that the frozen funds be released.

When the United States moved against the bank, it was clear that the
Bush administration believed it had a strong case. North Korea's links
to trafficking narcotics and counterfeit products were widely
documented in numerous law enforcement investigations and prosecutions
over many years, including in Japan and Taiwan.

In its action, the Treasury Department accused the bank of a range of
financial crimes on behalf of North Korean clients. It also accused
some of the bank's North Korean clients of involvement in drug
trafficking, facilitating the sale of unconventional weapons and
smuggling counterfeit cigarettes.

But American officials made no mention of the two racketeering
investigations that had ended a month earlier, which produced evidence
of illicit financial transactions through Macao that was strong enough
to be presented in court and meet the test for designating banks as
money-laundering concerns, said American officials who reviewed the
results of the investigations.

According to briefings given in August 2005 by Justice Department
officials, the investigations produced 59 arrests as a result of more
than four years of work involving the use of undercover agents who
posed as members of an organized crime group.

The contraband seized by law enforcement agencies included about $4.5
million in counterfeit $100 bills, and millions of dollars of
counterfeit cigarettes, Ecstasy pills and fake Viagra.

During one phase of the undercover operation, Justice Department
officials said two agents had acted as lovers and had led their
contacts in the smuggling ring to believe they planned a wedding
aboard a boat moored off Atlantic City. Many of the arrests were made
as guests showed up for the wedding.

Large parts of the indictments prepared by federal prosecutors in New
Jersey and California, including details of financial transactions and
banks used by the criminal organization, remain sealed.

But Mr. Asher, who at the time of the investigations was coordinator
of the State Department's North Korea Working Group, said in an
interview that investigators had been able to track the financial
pathways used by the smuggling operation. "Banco Delta was one place
they put their money," he said. But he added that the investigations
also pointed to almost every bank in Macao.

Another former State Department official, Matthew Daley, agreed with
Mr. Asher's account of the evidence produced by the investigations. "I
am personally convinced it is a really solid case," said Mr. Daley,
who was deputy assistant secretary of state for East Asian and Pacific
affairs until January 2005.

Officials from the United States Justice Department and the Treasury
Department declined to respond to written questions about Mr. Asher's
statements.

But from the outset, the owner of Banco Delta Asia, Stanley Au, who
has a high profile in Macao and is an adviser to China's central
government, has said his bank did nothing wrong. "There was no
evidence that B.D.A. and its subsidiaries participated or were
involved in the illicit activities as stated, and B.D.A. and its
subsidiaries deny such allegations," Mr. Au said in a statement on
March 26.

Still, the Macao government removed him from the bank's management,
and the bank immediately cut all ties with North Korea. The accounts
of about 50 entities were closed, including North Korean banks,
companies and individuals, according to a letter from the bank's
lawyers to the Treasury Department.

The Treasury Department has praised Macao's get-tough stance,
including new anti-money-laundering laws, but Treasury finalized a
ruling against the bank last month that barred it from doing any
business with American financial institutions. Treasury said its
"primary concern" was that Macao had not taken steps to bar Mr. Au
from returning to the bank.

Yet Banco Delta Asia had never been the main offender in Macao. "The
fact is that Banco Delta was an easy target in the sense that it was
not so large that its failure would bring down the financial system,"
said Mr. Asher, who is now a senior associate fellow with the Asian
Studies Center of the Heritage Foundation.

"Banco Delta may be a sacrificial lamb in some people's minds, but it
is not about Banco Delta," he said. "It's about Macao, Macao's
government, China, the Chinese government and their complicity and
their accommodative behavior toward North Korea's illegal activities,
proliferation activities and leadership financial activities."