UPDATE 1-European banks stop sending money to North Korea - aid groups
* NGOs say European banks won't send money to North Korea
* Main problem was Bank of China move to shut account of North's Foreign Trade Bank
* Bank of China was key intermediary for fund transfers
* Millions of North Koreans could be affected, one aid group says
* Indications some European embassies in Pyongyang having similar difficulties with funds
By Megha Rajagopalan
BEIJING, May 23 (Reuters) - European aid groups said their banks in Europe had stopped sending money to North Korea in the wake of U.S. sanctions on Pyongyang's main foreign exchange bank, leaving them scrambling for a solution short of hand-carrying cash into the impoverished country.
Aid groups said if it became impossible to send enough money to operate, donors might withdraw support for their programmes.
"This could eventually reduce our ability to carry out projects or even force a complete close down," Mathias Mogge, director of programmes for German aid group Welthungerhilfe, told the Thomson Reuters Foundation.
"If all the agencies had to pull out, it would affect millions of people," said Mogge, who has just returned from the reclusive state.
The biggest problem had been the Bank of China's recent decision to shut the account of the North's Foreign Trade Bank, EU officials and non-governmental organisations said. Money to North Korea was routed through China's biggest foreign exchange bank, they said.
Chinese firms doing business in North Korea said they were also finding it difficult because Chinese banks were becoming increasingly reluctant to deal with their North Korean counterparts, whether it was the Foreign Trade Bank or other banks.
Washington imposed sanctions on the Foreign Trade Bank in March after accusing it of helping fund Pyongyang's banned nuclear weapons programme. The measures prohibit any transactions between U.S. entities or individuals and the bank.
Experts have said Washington's move was designed to make international banks that do business in the United States think twice about dealing with North Korea, in much the same way banks have become wary about having ties with financial institutions in sanctions-hit Iran.
All NGOs, U.N. agencies and embassies in Pyongyang have to use the Foreign Trade Bank, aid workers and other officials have said.
One EU source said there were indications some European embassies in Pyongyang were having similar difficulties with transferring funds. A representative for U.N. agencies in Pyongyang did not have any immediate comment.
U.S. officials have urged the European Union to put sanctions on the bank. EU diplomats have discussed the issue but are worried about the impact.
"We are concerned regarding possible unintended effects of certain sanctions such as the designation of the FTB, in particular with regard to humanitarian assistance, and we are looking into possible means to overcome the unintended effects," said a spokeswoman for EU foreign policy chief Catherine Ashton.
One source familiar with the matter said a possibility being examined by EU officials was to issue a so-called "letter of comfort" which would explicitly say funding was for humanitarian and development use. The idea is this would provide cover for a bank to make a transaction, said the source, who declined to be identified because of the sensitivity of the issue.
"CASH RUN" TO CHINA
French NGO Triangle Generation Humanitaire said its French bank would no longer send funds for its operating expenses even though the EU had not yet imposed sanctions, said Anne Trehondart, desk officer in charge of Asia for the group.
"According to the sanctions, it's not forbidden. This makes plain that some banks are just reluctant to transfer money there," said Trehondart, declining to name the French bank.
A representative from another European NGO, who asked not to be identified because of the sensitivity of the matter, said he had "little hope" that a recent money transfer would reach North Korea. He declined to name the group's European bank.
The only alternative would be to send an expatriate employee on a "cash run" from China to North Korea - a limited option because Chinese customs only allow foreigners to take a few thousand dollars out of the country at a time, he said.
Most of the limited number of flights to North Korea originate in China.
Six European NGOs have offices in North Korea. American NGOs work in North Korea but none have a permanent office in the country. Aid groups in North Korea work to alleviate poverty and malnutrition as well as the impact of natural disasters.
BANK OF CHINA MOVE A BIG STEP
The Bank of China announced it was shutting the Foreign Trade Bank account earlier this month. It gave no reason for the move.
"So far all our bank accounts with North Korea have been channelled through the Bank of China. This option is closed now for us," said Simone Pott, a spokeswoman for Welthungerhilfe.
Welthungerhilfe said routine transfers amounting to 300,000 euros ($386,300) had been blocked in recent weeks and attempts to use other international banks had also failed because of the U.S. sanctions.
The Bank of China decision was the first significant step taken by a Chinese entity to curb dealings with North Korea following growing international pressure to punish Pyongyang over its banned nuclear and ballistic missile programmes.
Washington had raised the issue of the Foreign Trade Bank with China, although Beijing has not commented publicly on the matter. Japan has imposed sanctions on the bank and Australia is expected to follow suit.
The latest U.N. sanctions on North Korea don't mention the bank, but say all countries should freeze or block any financial transaction or service that could assist Pyongyang's illicit activities.
China has become increasingly frustrated with North Korea. It agreed to the new U.N. sanctions after Pyongyang conducted its third nuclear test in February.
The U.S. Treasury Department has said it had no intention of hindering aid work in North Korea, although NGOs say this is precisely what is starting to happen.
"We will work through any concerns that arise related to purchases of humanitarian goods, but it is critically important that we isolate FTB for its facilitation of proliferation activities," a Treasury official said, repeating an earlier statement on the matter.
CHINESE FIRMS SCRAMBLE FOR SOLUTION TOO
Chinese companies involved in joint ventures in North Korea said Chinese banks had also become loathe to transfer funds to the country.
China is North Korea's biggest trading partner, with annual trade worth around $6 billion. It is not clear how much trade between China and North Korea gets cleared through North Korean banks versus the use of cash and barter deals along their 1,400 km (875 mile) land border.
A source at Shenyang-based Liaoning Wellhope Agri-Tech Co. Ltd, a mid-sized unlisted producer of livestock feed, said the company had been unable to send payments to North Korea, although its feed mill in the country continued to operate.
"We have stopped payments temporarily and are waiting for a solution," the source said.
The source declined to name the North Korean bank the company used.
A businessman in the Chinese border city of Dandong, which accounts for as much as 80 percent of China's trade with North Korea, said sanctions had made conditions worse.
The unwillingness of Chinese banks to deal with North Korean banks was part of the problem, he said, as were stepped-up checks by Chinese customs on products headed across the border.
Dandong Bank's main branch, which deals with foreign exchange, said it had stopped working with North Korea.
Not much is known about the Foreign Trade Bank, whose assets and investments are a state secret.
"The tricky thing is that the Foreign Trade Bank is the clearinghouse for all foreign transactions, whether they're related to weapons or not, so there's a lot of legitimate business that goes through it," said Andray Abrahamian of the NGO Choson Exchange, which has trained officials from the bank.
"Sanctioning this bank is going to force more and more business underground."
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