North Korean Money-Laundering Probe Focuses on U.S. Bank Transactions

By Jacob Gershman, Ian Talley and Aruna Viswanantha Features Dow Jones Newswires

A federal court in Washington, D.C., has granted the Justice Department sweeping authority to investigate alleged North Korean money laundering involving a Chinese coal-trading network.

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A search warrant approved in May and revealed in documents unsealed Thursday allowed federal prosecutors to secretly monitor transactions at eight major banks in the U.S. with accounts owned by a web of entities suspected of evading trade sanctions against North Korea.

In court papers, the government said hundreds of millions of dollars of illegal transactions flowed through the banks, most of which are based in the U.S. and haven't been accused of unlawful activity.

Prosecutors alleged in court papers that U.S. currency routed through the banks showed "patterns of North Korean money laundering identified by" two North Korean defectors and supported North Korea's weapons programs.

The warrants are part of a broader effort by Washington to choke financing for Pyongyang's weapons program and turn up pressure on China as North Korea's prime trade and finance partner.

Last week, the Treasury Department imposed sanctions against China's Bank of Dandong, operating near the North Korean border. The Trump administration accused it of facilitating financing for companies involved in Pyongyang's weapons program.

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That move intensified already frosty relations between the world's two largest economies. U.S. Treasury Secretary Steven Mnuchin also said Washington planned to roll out further penalties.

The search warrants approved in May gave prosecutors a two-week window to spy on bank accounts tied to Dandong Zhicheng Metallic Material Co., a Chinese coal exporter, and "four related front companies" -- together referred to as the "Chi Yupeng Network," referring to a Chinese national who owns 90% of Dandong Zhicheng. The Chi Yupeng network isn't itself under U.S. sanctions.

The Justice Department sought a special kind of warrant called a "damming seizure," a tactic most often deployed against drug smugglers. Unlike a conventional warrant, it was based on probable cause of crime occurring at some future time.

The damming seizure functioned like a wiretap, secretly monitoring bank transactions rather than conversations, "catch[ing] all incoming funds...while preventing any funds from exiting the financial institution," prosecutors stated in an affidavit cited in court papers.

It is unclear whether the searches were fruitful.

Initially, prosecutors were denied permission to intercept transactions. A magistrate judge in April blocked the warrants because the targeted funds weren't currently located in the U.S., according to court papers.

On May 22, U.S. District Judge Beryl Howell of Washington overruled the magistrate, stating that such "anticipatory warrants" were constitutional under the Fourth Amendment, citing a 2006 U.S. Supreme Court ruling.

David Thompson, a senior analyst at the Washington-based nonprofit that studies transnational illicit threats, C4ADS, said Dandong Zhicheng was the biggest importer of North Korean goods into China, most of which is coal.

In an affidavit in support of the warrants, the Justice Department cited a "reliable" North Korean defector as saying North Korean leader Kim Jong Un channels 95% of North Korea's foreign-currency earnings generated from coal exports toward the country's military, nuclear missiles and weapons programs.

The warrants are latest evidence of the Trump administration attempting to curb the flow of money in and around North Korea.

The Justice Department late last year indicted a prominent Chinese businesswoman, three other Chinese nationals and a trading company based in Dandong for helping blacklisted North Korean companies the U.S. said was evading sanctions. That effort coincided with Treasury adding those entities to its sanctions list.

Write to Jacob Gershman at jacob.gershman@wsj.com and Ian Talley at ian.talley@wsj.com

(END) Dow Jones Newswires

July 06, 2017 20:52 ET (00:52 GMT)