* 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
* Aid groups say worried donors will withdraw support for programmes
* Indications some European embassies in Pyongyang having similar difficulties
By Megha Rajagopalan
BEIJING, May 23 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 country.
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 often routed through China's biggest foreign exchange bank, they said.
Chinese firms doing business in the reclusive state 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.
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 on European aid groups, which form a significant segment of the humanitarian community in Pyongyang.
"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.
European banks had already stopped transfers, officials from European NGOs told Reuters. NGOs said if it became impossible to send enough money to North Korea to operate, donors might withdraw support for their programmes.
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.
About 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.
One EU source said there were indications that 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.
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.
An EU document obtained by Reuters said the European Commission's development branch and diplomatic missions in Pyongyang were working to find a solution for European NGOs affected by the Bank of China's decision.
"So far all our bank accounts with North Korea have been channelled through the Bank of China," said Simone Pott, a spokeswoman for German development and humanitarian aid group Welthungerhilfe. "This option is closed now for us."
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.
Aid groups have held talks with EU officials, but say hand-carrying cash might end up being the only option.
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.
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."