Key test for N Korea nuclear vow

By Charles Scanlon

The Bush administration thought it had got lucky when it moved against North Korea's financial activities in the Chinese territory of Macau in September 2005.

The North Koreans reacted with such fury that one US official speculated they had hit one of the bank accounts of the North's "Dear Leader" Kim Jong-il himself.

But if the move was designed to exert pressure on North Korea over its nuclear weapons programme, it backfired.

"It was used as a lever with the North Koreans but at what a cost," said Wendy Sherman, who oversaw the North Korea policy in the Clinton Administration.

"The sanctions led to a North Korean nuclear test which greatly strengthened Kim Jong-il's negotiating position."

Now, 18 months later, the US has finally wrapped up its investigation into alleged money laundering activities at the Banco Delta Asia (BDA) in Macau.

It stands by its initial allegation that the bank handled dirty North Korean money, including counterfeit US dollars.

But the Treasury Department has now handed over the matter to the Macau authorities who are expected to free up at least some of the $24m that was frozen in North Korean accounts.

The US move was a crucial element in the 13 February nuclear agreement, under which North Korea undertook to shut down its one operational nuclear reactor at Yongbyon in return for economic aid.

It is not clear if the North Koreans are prepared to let the matter rest there.

The US move against BDA had a snowball effect that cut the North off from the world financial system.

But the United States appears to have concluded, for now, that pressure tactics have been counter-productive.

Alarming new reality

Observers in South Korea have been stunned by the turn-around in US policy.

President Bush's mistrust of Kim Jong-il and his treatment of North Korea as a criminal regime "persistently haunted the six-party talks, hastening an acute crisis escalation," says Professor Moon Chung-in, an adviser to the South Korean government.

Now the US has finally got serious about diplomacy - it has embraced bilateral negotiations with North Korea, added a peace treaty and diplomatic relations to the list of potential rewards, and attempted to resolve long-standing obstacles in the negotiations.

That puts the ball firmly in North Korea's court. It agreed under the 13 February agreement to shut down the reactor at Yongbyon by 14 April.

Mohammed ElBaradei, the head of International Atomic Energy Agency (IAEA), returned from a trip to Pyongyang saying the North was committed to fulfilling its side of the bargain, provided the US dropped its financial pressure.

But there is no sign of any move to shut down the reactor yet, and Mr ElBaradei was greeted with a blatant snub on his arrival in North Korea. The country's chief nuclear negotiator, Kim Kye-Kwan, was "too busy" to meet him.

It is a reminder that North Korea wants to keep the IAEA at arms length and conduct the serious business only with the US.

The IAEA is likely to be allowed a technical role to verify the shut down of the reactor at Yongbyon. But past experience suggests the North will do everything it can to restrict the agency's activities.

North Korea has always fiercely resisted giving the IAEA a free hand to go looking for other parts of its nuclear programme. Any international inspectors that are allowed in are likely to be kept bottled up in one part of the Yongbyon complex.

South Korean officials say they are confident that progress can be made.

"The incentives are built in to the process, the faster the North Koreans move, the faster they will get the energy aid that's been promised to them," the chief South Korean negotiator Chun Young-woo said.

But for any further steps, after the initial shut down at Yongbyon, North Korea is likely to resort to its familiar "salami-slicing" tactics, extracting maximum aid for every concession.

Many observers believe North Korea will hold on to at least a residual nuclear deterrent, as a final guarantor of the regime's security, even if it is prepared to surrender some elements of its nuclear programme.

The goal of a nuclear-free peninsula may be as far off as ever.

But optimists say at least there is now a diplomatic process that will help to manage an alarming new reality - a nuclear-armed and potentially unstable family regime in the heart of the world's most dynamic economic region.