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A new type of anti-air guided weapon system is fired in this undated photo released by North Korea's Korean Central News Agency (KCNA) on April 2, 2016. REUTERS/KCNA

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SEOUL (Reuters) - A British banker with ties to North Korea set up an offshore company allegedly used by the isolated and heavily sanctioned state to fund its nuclear quest and sell weapons, the Guardian newspaper reported, citing leaked Panamanian documents.

Nigel Cowie, who lived in the North for more than 20 years and had been the head of its first foreign bank, registered a company for the bank in the British Virgin Islands, the British newspaper said.

Cowie did not immediately respond to a request for comment from Reuters.

The Guardian is among media organisations that studied the massive leak of law firm documents known as the Panama Papers, which have cast light on the financial arrangements of public figures around the world and the companies they use.

Cowie denied any knowledge of transactions with blacklisted entities while he was associated with the institution, which was used for legitimate business, the paper quoted his lawyer as saying.

Cowie was the head of Daedong Credit Bank, which later figured on U.N. and U.S. blacklists for engaging in millions of dollars in financial transactions for North Korean companies involved in the country's nuclear and missile programmes.

In 2006, he took a majority stake in Daedong Credit Bank and, with a senior North Korean banking official, Kim Chol Sam, registered DCB Finance Limited, an offshoot of the bank, with the aid of Panamanian law firm Mossack Fonseca, the paper said.

Later that year, North Korea held its first nuclear test, under then-leader Kim Jong Il, prompting the U.N. Security Council to impose sanctions banning the country's arms trade.

In subsequent moves to blacklist Daedong Credit Bank and DCB Finance, the U.S. Treasury Department said DCB Finance was used at least since 2006 to deal with other banks that tried to avoid doing business with the North.

The two companies were responsible for millions of dollars in transactions that supported illicit activities by North Korea, the U.S. Treasury said in 2013, when it imposed sanctions against the firms.

Kim, the North Korean banking official, was named in the 2013 Treasury action targeting the bank and the finance company, over a period starting in 2006, the U.S. Treasury said in a statement at the time.

Cowie was not named in the U.S. Treasury sanctions action.

Cowie, who had previously worked for HSBC in Hong Kong, left the banking industry in 2011, according to the Guardian.

Mossack Fonseca failed to notice DCB Finance was linked to North Korea until 2010, when it resigned as agent, the paper said, adding that Cowie sold his bank stake the following year.

In January, North Korea conducted its fourth nuclear test, prompting new U.N. sanctions that blacklisted Daedong Credit Bank for facilitating millions of dollars in transactions for North Korean companies involved in the country's arms programme.

(Reporting by Jack Kim; Editing by Tony Munroe and Clarence Fernandez)

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