The Audit conclusions are direct quotes from the report:

• Remittances of significant funds between the North Korean entities, and in particular North Korean banks, and the Macau businesses involved in North Korean business, that could not always be substantiated by known commercial activity. In many transactions, the movement of funds indicated the North Korean bank to be the beneficiary or ordering party within the transaction, rather than  the bank of the beneficiary, or bank of the ordering party, as would be expected in normal commercial transactions.

BDA responded that transactions from the bank's own accounts for customers is common and traditional banking business, in that in the communist controlled economy there is little chance that North Korean companies are engaged in money laundering, and that the North Korean banks involved are regulated, and supervised by regulators.

My own experience tells me that the use of BDA as a front for North Korean banks, who are themselves fronting for the North Korean businesses, provides an additional layer of protection. Overseas bankers assume that sufficient due diligence has been performed upon all parties. Otherwise, it is argued, why would BDA expose itself? They forget that the North Korean companies are most likely engaged in officially
supported criminal activities, and that the entire scheme facilitates money laundering of the illicit profits.

The audit also concludes:

• Banco Delta Asia extending credit lines to North Korean banks fully secured by deposits. prima facie, there appeared to be no need for such credit lines, and there was insufficient information on the bank's files to provide a cogent reason for the granting of such facilities.

BDA replied that North Korean banks wanted to show outside banks that there are banks granting them credit facilities, to show their credit worthiness.

I respond that the use of credit lines by banks that do not need them allows operational funds to be drawn from a legitimate source, in a regulated jurisdiction outside North Korea, giving those funds the appearance of a legitimate provenance.  Criminal enterprises prefer to draw upon "clean" money whenever possible, as it generally survives ordinary due diligence and source of funds enquiries.

The third finding of fact:

• Frequent high value transfers of funds between various foreign currency accounts of the North Korean entities.

The bank answered that it was engaged in foreign currency speculation, and alleged that it has staff members with over thirty years' experience in foreign exchange trading.

My feeling is that it was converting currencies to hide the place of origin of illicit profits earned in certain jurisdictions. Since it could not layer funds through tax haven banks, changing the type of currency could confuse or misdirect agencies conducting enquiries. Also, since it has been demonstrated that some of North Korea's illicit profits are earned through narcotics trafficking and counterfeit pharmaceuticals, it may be necessary to dispose of certain currencies obtained in high-risk jurisdictions, or jurisdictions in which possession of such large amounts of cash currency creates the correct presumption that it was illegally earned and/or violates currency controls, exchange or governmental regulations. 

Part Three of this series shall appear tomorrow.