By Terril Yue Jones
BEIJING (Reuters) - The United States is optimistic China will take strong action against North Korea by increasing scrutiny of financial transactions with Pyongyang that could contravene fresh U.N. sanctions, a senior U.S. official said on Friday.
David Cohen, the U.S. Treasury undersecretary for terrorism and financial intelligence, said he was confident Chinese banks and regulators would pay attention to the new U.N. Security Council resolution.
Stopping illicit money flows to North Korea is a key part of the sanctions imposed in response to Pyongyang's February 12 nuclear test. China is North Korea's sole diplomatic ally and its major trading partner, although it negotiated the latest sanctions with Washington and has said it wants them implemented.
"We've heard nothing but the strong intention to implement the Security Council resolution, and we fully expect to work very cooperatively with the Chinese in the robust implementation of that resolution," Cohen told reporters in Beijing.
China has become increasingly frustrated with North Korea, Chinese experts have said. Besides the latest nuclear test, North Korea tested a long-range missile in December and has stepped up its rhetoric against the United States and South Korea.
"From the perspective of China, we'll always attach importance to North Korea, and we also have a lot of respect for them (North Koreans)," said Jin Canrong, associate dean of the School of International Studies at Renmin University in Beijing.
"But China has its own interests and the third nuclear test has damaged China's interests. Therefore, China has to show its dissatisfaction."
The measures announced on March 7 tighten financial restrictions on North Korea, including the illicit transfer of bulk cash, and crack down on its attempts to ship and receive banned cargo. The aim is to curtail the North's nuclear and ballistic missile programs.
The success of the measures depends to a large extent on China, U.N. diplomats have said.
Cohen, visiting Beijing after meetings with officials in South Korea and Japan, said he asked China for enhanced scrutiny of Chinese financial institutions in North Korea.
"It's no secret that there is a fair amount of financial relationship between China and North Korea and Chinese financial institutions in North Korea," Cohen said.
"We are hopeful that Chinese banks and Chinese regulators will take heed of the Security Council resolution. I have every confidence that they will."
Chinese Foreign Ministry spokesman Hong Lei said the government had not changed its position on North Korea despite signing up to the new sanctions, adding that dialogue was the best way forward.
"All parties should work to reduce tensions and bring about a turnaround on the Korean peninsula," he told reporters.
One of the challenges for the international community is stopping the transfer of bulk cash to North Korea, which U.N. diplomats say is one of Pyongyang's preferred methods of moving money - often in briefcases carried by its diplomats.
Asked about South Korean media reports that North Korean leader Kim Jong-un had millions of dollars stashed in secret bank accounts in China, another U.S. official said he was aware of the reports but did not comment on whether he thought they were true.
"We are well aware of the past habits of the Kim family, especially with respect to luxury goods," Dan Fried, the State Department's new coordinator of sanctions policy, told reporters.
"Our intention is to affect the behavior of the regime - which comes down to the behavior of the leader - and the decisions they're making."
The new sanctions include a ban on the shipment of luxury goods to North Korea, such as yachts and racing cars.
Chinese regulators appear to have recently issued a warning shot to North Korean banks, telling them to stay within the remit of their permitted operations in China or risk penalties.
A report from South Korea's Yonhap news agency on Tuesday cited a Beijing-based source as saying the warning had been given to four North Korean financial institutions, some of whom have been named in United Nations and United States sanctions for aiding Pyongyang in its nuclear and missile programs.
The report said the banks may have been able to save on fees and get access to preferred exchange rates through their short-term lending and remittance operations.
Clamping down on such practices would not amount to anything close to what the new U.N. sanctions call for.
North Korea's official Rodong Sinmun newspaper called the sanctions "an unpardonable provocation to infringe upon the dignity and sovereignty of the DPRK and bring down the socialist system chosen by its people".
North Korea's formal name is the Democratic People's Republic of Korea.
Fried said Washington hoped ultimately to reach a diplomatic solution with North Korea.
"We will work closely with our friends and allies in the region, and also we seek ultimately a diplomatic solution, and we hold open the possibility of a different approach should North Korea change its approach," he said.
Beijing has joined every round of U.N. sanctions against North Korea although questions still remain over how closely it imposes restraints on its neighbor.
"Our sense is that the Chinese government has been looking at what's been happening in North Korea recently as threatening the stability on the (Korean) peninsula in a real way that implicates Chinese interests," Cohen said.
"But I think there is a real reason to believe that the Chinese are looking at the threat in a new and different way."
(Additional reporting by Sui-Lee Wee, and David Chance in SEOUL; Writing by Ben Blanchard; Editing by Dean Yates and Nick Macfie)