SEOUL: Chinese regulators appear to have issued a warning shot to North Korean banks, telling them to stay within the remit of their permitted operations in China or risk penalties after a new round of U.N. sanctions sought to cut Pyongyang's funding.

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 programmes.

The report said Chinese authorities had so far turned a blind eye to the short-term lending and remittance operations by the banks, which may have allowed the North to save on fees and have access to preferred exchange rates.

Asked to confirm the report, Chinese Foreign Ministry spokesman Hong Lei said he was unaware of it. If true, the measures would not amount to anything close to the kind of clampdown called for in new U.N. sanctions aimed at curtailing North Korea's nuclear and ballistic missile programmes.

The March 7 sanctions tighten financial curbs on North Korea and order mandatory checks of suspicious cargo.

"But I want to stress that China is a responsible country and has consistently, in accordance with domestic law and including the U.N. Security Council resolutions and its international obligations, handled the relevant problem," Hong told reporters in Beijing.

The China Banking Regulatory Commission and the central bank did not immediately respond to a request for comment.

Yonhap said Tanchon Commercial Bank, Korea Kwangson Banking Corp (KKBC), Korea Daesong Bank and Golden Triangle Bank had received notices from the banking regulator ordering them to conduct business according to their permits.

"These Chinese measures that ban illegal operations by North Korean banks in China came about as part of implementing U.N. Security Council resolutions, so it would be difficult to see them as bilateral sanctions imposed by China," the source in Beijing said.

"China is in effect putting pressure on North Korea by saying they'll do things according to the law."

The report came ahead of a visit to Beijing by a senior U.S. Treasury official amid Washington's push for implementation of the U.N. sanctions.

CHINA KEY TO SANCTIONS

Kwangson is legally authorised to handle border trade settlement in China in the yuan and North Korean won currencies, according to the website of the government of the Chinese border city of Dandong.

An employee at a freight forwarding company in Dandong told Reuters on condition of anonymity that he had heard the restrictions would start on May 1, and were still under discussion.

The company last settled through Kwangson Bank about two weeks ago, and had no direct knowledge of whether it was still doing business, he added.

China is Pyongyang's sole diplomatic and economic ally, although it negotiated the latest sanctions with Washington and has said it wanted them implemented. The measures were announced in the wake of North Korea's Feb. 12 nuclear test, its third and most powerful to date.

Beijing has joined every round of U.N. sanctions although questions remain over how closely it imposes restraints on its neighbour.

Tanchon is listed in the latest round of U.N. sanctions for its role in facilitating North Korea's weapons programmes. KKBC and Korea Daesong Bank are on U.S. blacklists.

China's trade with North Korea, at almost $6 billion a year according to South Korean calculations, is greater than any other country. That makes China key to financial flows to Pyongyang.

The U.S. undersecretary at the Treasury for terrorism and financial intelligence, David Cohen, is in Japan and will go to Seoul later on Tuesday ahead of meetings in Beijing.

A senior South Korean official familiar with Cohen's plans said the meetings in Seoul and Tokyo were largely courtesy calls to allies, but that the "Beijing visit is for work".

U.S. embassies in Tokyo and Seoul declined to comment on Cohen's visit.

The task of tackling illegal money flowing into North Korea is complicated by the use of couriers carrying cash.

Pyongyang has also learnt from a U.S. Treasury-inspired raid on its cash in 2005 when $25 million of the regime's money was frozen at a Macau bank called Banco Delta Asia (BDA).

"The North's thinking is that it's no use having money in a bank when they cannot anticipate a situation where they cannot use the money," said the South Korean official, who is directly involved with formulating North Korea sanctions.