In response to North Korea's recent launch of an intercontinental ballistic missile, a recent U.S. Federal Court granted the Treasury Department's request to put into effect a "damming seizure" related to a North Korean coal mining company, the Dandong Zhicheng Metallic Material Co.
Bank of America, Bank of New York Mellon, Wells Fargo and Citigroup are among the eight banks involved. Hundreds of millions of dollars are at stake according to U.S. Treasury documents.
A damming seizure occurs when the Treasury orders its biggest banks to accept all money flowing into them from wire transfers and other mechanisms and then refuses to let that money out to the intended recipient, basically trapping the funds in the American banking system.
It has been reported that 95 percent of the North Korean company's foreign exchange profits from coal exports are used to fund that country's weapons program. For years North Korea has used a series of sophisticated maneuvers to avoid sanctions.
The Treasury Department also imposed sanctions against China's Bank of Dandong which is located near the North Korean border. The complaint is that this bank was laundering money that was ultimately used in North Korea's weapons program.
One might argue that the United States' control of the global financial system is perhaps its strongest non-military weapon when it wishes to confront an "enemy" to U.S. interests. This "weapon" was first believed to be used against China in 1949 when Mao Tse-tung's revolution rested control of China from Chiang Kai-shek's government and Mao tried to gain control of China's bank accounts.
The weapon was also prominent in the United States' more recent sanctions against Iran. French bank BNP Paribas paid a fine of $8.9 billion to the United States Treasury for violating the U.S. sanctions.
Has the United States lost this tool?
There is a great deal of data that suggests that the United States has lost this weapon thanks to the Dodd Frank Act regulations that were put in place following the financial crisis.
The capital requirements of the biggest banks have slowed their growth. The liquidity requirements have removed their ability to lend funds freely. The determined use of the Bank Secrecy Act and the Anti-Money Laundering Laws (BSA/AML) has chilled the ability of these banks to operate overseas.
In this country, the nation's biggest four banks have seen their share of U.S. banking assets shrink from 57 percent in 2010 to 51 percent today according to FDIC numbers. The reduction overseas is more startling. At the beginning of the financial crisis, the four big U.S. banks' assets were equal to 158 percent of the assets of the four biggest Chinese banks. This is now down to 72 percent.
Forget China. In 2008 the assets of the four biggest U.S. banks were 4.0 times the size of the biggest four Canadian banks. They are now 2.9 times the size of the Canadians. U.S. banks are giving ground just about everywhere.
The situation is so bad that even the Economist Magazine, in a recent issue, has an editorial basically asking the United States to stop. "A financial system that lets dirty money flow freely is a bad one. One that blocks clean money is even worse" it says.
Reserve Currency
Chinese banks are filling the vacuum. While the United States pundits constantly deride these banks as being filled with questionable loans and even more questionable accounting, the international financial regulators do not agree. Last October, the IMF granted China's request to make the yuan the fifth global reserve currency. The Financial Stability Board, which sets risk ratings on international banks, has rated the big Chinese banks safer than the big American banks (an unbelievable farce worthy of a separate comment).
History indicates that the financial sanctions used by the United States have been very effective. They kept the Soviet economy from entering world markets. They were the most critical factor in bringing Iran to the negotiating table on nuclear weapons.
However, for financial sanctions to work, critical mass is needed in the global markets. In 1952, IMF numbers indicate that 88 percent of the world's convertible currencies was simply the dollar and the dollar could only be easily obtained by working with U.S. banks, which were the biggest in the world.
Today the dollar is only 20 percent of the world's convertible currencies and the United States banks are far from the biggest in the world. Now, the United States must work with a coalition of governments to make any sanctions work.
There are multiple currencies and banking systems that will allow North Korea to obtain the money to build its weapons systems. The United States has started to try to make financial sanctions work against North Korea but without the help of these other banks the successes of the past will not be repeated. North Korea will continue to find the funding to build its bombs and missiles while we sit on the sidelines and complain at a United Nations that has no interest in listening.
As a starting point, the United States needs to rebuild its banks. It needs banks that can compete with the Canadians, French, British and Chinese. This is necessary to help this country regain lost control of the financial markets. But it's for more than just foreign affairs. It is necessary for U.S. companies to expand globally.
Commentary by Richard X. Bove, an equity research analyst at Rafferty Capital Markets and the author of "Guardians of Prosperity: Why America Needs Big Banks" (2013).
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