North Korean Economy Watch

Korea Times
Donald Kirk
1/24/2007

Gold fever is rampaging through the ruling elite of North Korea in the quest for relief from seemingly incurable economic malaise exacerbated by more than a year as a total outcast from the international financial community.

Word from Pyongyang is that trading companies and even individuals are offering payments in gold for imports from across the border with China and also in barter deals for products imported from elsewhere. Gold also has become a form of currency in the internal reward system of payoffs and bribes manipulated by Dear Leader Kim Jong-il to guarantee the loyalty of high-ranking officials.

The rush to sell gold – and, to a lesser extent, silver – has sharply escalated in the 16 months since the US Treasury Department blacklisted Banco Delta Asia (BDA) in Macau, banning all firms doing business with US firms from dealings with that bank. The Treasury Department charged that the BDA had been the principal conduit through which North Korea was shipping counterfeit US$100 “supernotes” printed on a highly sophisticated Swiss-made press in Pyongyang.

It’s well known that the US ban forced the BDA to impose a freeze on North Korean accounts totaling $24 million, but less well known that the bank also stopped purchasing gold produced by North Korea’s historic gold mines, in operation, sporadically, since the late 19th century.

Output of the mines, in mountains about 160 kilometers north of Pyongyang, fell sharply in the late 1990s as a result of flood and famine but, with foreign expertise, has begun to pick up in the past few years.

The impact of the ban, moreover, goes far beyond a single bank in Macau. Although North Korea last spring sold $38 million in gold and silver in Thailand, Pyongyang has been frustrated in reviving its presence on the London bullion market, the world’s largest marketplace for precious metals, amid increased US pressure on the large international banks that are the major buyers of gold.

It was in the aftermath of the ban on the BDA that North Korea’s Chosun Central Bank coughed up the information required by the London Bullion Markets Association (LBMA) for listing as a “good deliverer” of gold. North Korea from 1983 to 1993 had been in the LBMA’s good graces, averaging a ton a month in sales to London buyers that included some of the world’s leading banks, but had slipped off the list after failing to keep up deliveries.

The fact that the Chosun Central Bank again is listed with the LBMA, however, is no guarantee North Korea will be able to sell its gold. The US Treasury ban on dealings with the BDA – as well as sanctions unanimously imposed by the United Nations Security Council after North Korea conducted an underground nuclear test in October – has spooked buyers in London.

While the LBMA disavows “political criteria” in deciding on eligibility for its “good delivery list”, an LBMA memorandum leaves no doubt how buyers are likely to respond to overtures from a country or company on an international blacklist. None of them, according to Stewart Murray, the LBMA’s chief executive, is willing to take delivery from a company or country that is subject to sanctions.

Or, as the LBMA memorandum puts it, “If, for instance, a bullion custodian considered that it was bound by national or international sanctions that were in force against a particular country, it would have to refuse to accept bars from a refiner in that country.”

The memorandum, moreover, does not mince words when it comes to stating the importance of a “good deliverer” rating. “Given the status of London as the world’s leading center for bullion trading,” it says, “the LBMA List has become the de facto world list of quality refiners and Good Delivery accreditation is a highly sought-after accolade.”

In recent years, “the List” – capitalized in the memo – “has grown primarily due to the listing of refiners in China and Russia” and now totals 77 refiners in 31 countries.

Investors see North Korea as competing on a world stage once sanctions are lifted. “What we’re doing is normal business,” said Roger Barrett, whose firm, Korea Business Consultants, operates in North Korea from headquarters in Beijing. By reviving old minesand developing new ones, he argued, “We’re creating jobs for people, in line with the UN basic charter, in line with economic growth.”

Barrett also believes North Korea may somehow get around the sanctions by finding new markets. “Why would you go to the trouble of going to London?” he asked. “They’re totally entitled to sell their gold.” The fact is, however, that London remains the place to sell gold in significant quantities on a regular basis.

Under the circumstances, Colin McAskill, chairman of Hong Kong’s Koryo Asia Ltd and the guiding light of the Chosun Development and Investment Fund, dedicated to investing in North Korea, accused top US Treasury officials of waging a campaign to make sure the ban on banks dealing with the BDA extends to gold and silver.

McAskill accused US officials, led by Treasury Secretary Henry Paulson and Stuart Levey, under secretary for terrorism and financial intelligence, of “using coercion, innuendo and sheer force to intimidate banks from dealing with North Korea”.

Among the victims of the US campaign is one of Koryo Asia’s projects, the Daedong Credit Bank, the only foreign bank based in North Korea, set up primarily to deal with accounts of foreign firms and embassies in Pyongyang. The freeze of North Korean accounts in the BDA, according to McAskill, includes about $7 million funds of Daedong Bank customers.

McAskill avidly supports North Korean demands for the US to lift the ban on the BDA – a move that would not only open up the frozen North Korean accounts but would provide the opening needed for Pyongyang to trade in a wide range of products around the world.

The financial issue is assumed to have ranked at the top of an agenda discussed in meetings in Berlin between the chief US envoy, Christopher Hill, and his North Korean counterpart, Kim Kye-gwan. Hill, reporting on the Berlin talks in stop-offs in Seoul, in Tokyo and Beijing, seemed hopeful about “progress” in the next round of six-party talks on North Korea’s nuclear weapons, expected to open in Beijing next month, after the failure of negotiators to get anywhere in the last round before Christmas.

South Korean media said North Korea had agreed to shut down its five-megawatt reactor at its nuclear complex Yongbyon in return for the US promise of massive aid, the crux of the 1994 Geneva Framework Agreement that blew up in 2002 amid US charges of a separate, secret North Korean program for developing warheads from enriched uranium.

There was no assurance, however, that the US is ready to relent on the BDA or that the UN Security Council will consider lifting its own sanction – enough to dissuade banks in London from buying North Korean gold regardless of the US ban on the BDA.

McAskill believes the rationale for the crackdown on the BDA is flawed. He questions the validity of the counterfeit charge and, in any case, says most of the frozen funds are not those of the North Korean government, even though they’re tired up in North Korean accounts. “We want to get a breakthrough on the six-party talks by getting the sanctions eased or lifted entirely,” he said. “We’re at a very delicate stage.”

Whatever happens, McAskill sees North Korea as ripe for investment, with precious metals high on the list of potential exports. “North Korea wants to move back into legitimate business,” he said. “They have a wealth of minerals – gold, silver, zinc, magnesite, copper, uranium, platinum – that needs investment to extract.”

Christian Science monitor
Donald Kirk
1/22/2007

More than a century after American mining engineers first opened up North Korea’s gold mines, a fortune in gold and other metals and minerals offers the prospect for North Korea to ease the pressures of financial sanctions.

The question, however, is whether North Korea can navigate around a US Treasury order that forbids institutions doing business in the United States from dealing with Banco Delta Asia in Macao, the main avenue for North Korean financial dealings.

The Treasury ban, first promulgated in 2002, has effectively frozen the North’s efforts to conduct international business. While it doesn’t extend to gold, market experts say that US officials have made it clear that banks should not buy North Korean gold.

“The US has been using coercion, innuendo, and sheer force to intimidate banks from dealing with North Korea,” says Colin McAskill, chairman of Koryo Asia Ltd., which invests in North Korea through the Chosun Development & Investment Fund. “We want to get a breakthrough on the six-party talks by getting the sanctions eased or lifted entirely. We’re at a very delicate stage.”

North Korea, says Mr. McAskill, “wants to move back into legitimate business.” Selling gold on the London market – the world’s largest – “is one way they can prove that,” he adds. “They have a wealth of minerals – gold, silver, zinc, magnesite, copper, uranium, platinum – that needs investment to extract.”

One indication of North Korea’s need to sell gold was its decision to provide information needed by the London Bullion Market Association (LBMA) to list the North’s central bank as a “good deliverer” of gold and silver. Listing with the LBMA is essential for refiners who want to sell their products in London. The bank’s listing was suspended 2-1/2 years ago when it failed to respond to LBMA requests for “proactive monitoring.”

The LBMA said it does not “take into account any political criteria,” and will keep the bank on its rolls for another three years without monitoring.

Despite the listing, market experts say the big banks that are major buyers of gold – and form the LBMA’s core membership – are not likely to flout the spirit of the US Treasury order against Banco Delta Asia, through which North Korea exported gold prior to the ban.

“The fact that they’re on the list does not mean they can deliver to the London market,” says Stewart Murray, the LBMA’s chief executive. “When we have sanctions, none of the facilities will accept delivery from a company or a country that is subject to these sanctions,”

Trying to build momentum for talks

The reluctance of buyers in London to deal in North Korean gold, widely seen as the likeliest legal way to mitigate the impact of the banking ban, adds urgency to another effort at six-party talks on North Korea’s nuclear weapons.

The chief US negotiator, Christopher Hill, has been traveling through northeast Asia, stopping off here, in Tokyo, and in Beijing after talks in Berlin last week with his North Korean counterpart, Kim Kye-Gwan. The Chinese are expected to set a date for renewing the talks, which broke off before Christmas amid North Korean demands for the US to lift the ban on Banco Delta Asia.

North Korea raised hopes for renewed six-party talks, saying “a certain agreement” was reached in Berlin last week. Neither Mr. Kim nor Mr. Hill have provided details, but analysts suspect that the two discussed the financial issue and its relationship to the ultimate purpose of six-party talks: getting North Korea to give up its nuclear weapons.

North Korea has been renewing its drive to sell gold for the past year since submitting to the LBMA’s monitoring requirements. At the same time, the North has sold relatively small amounts of gold in Thailand, with which it has developed a strong trading relationship in recent years. Last spring, North Korea exported 1.3 tons of gold to Thailand for nearly $30 million while also looking for markets elsewhere in the region.

“Why would you go to the trouble of going to London,” asks Roger Barrett, whose firm, Korea Business Consultants in Beijing, is helping to develop gold mining in North Korea. “They’re totally entitled to sell their gold.”

No reports of exports since July

Yet there have been no reports that North Korea has exported any gold since testing seven long-range missiles in July. Since the North conducted an underground nuclear test in October, which resulted in deeper sanctions from the UN Security Council, dealers have reportedly been even more reluctant to buy North Korean gold.

Estimates of North Korea’s gold reserves range as high as 2,000 tons, but mining has been sporadic since British, American, and then Japanese interests mined for gold beginning in the 19th century. With foreign expertise, North Korean mining may return to the period between 1983 to 1993, when its central bank sold an average of one ton a month on the London market.

“What we’re doing is normal business,” says Mr. Barrett in Beijing, explaining the efforts at reviving the mining industry. “We’re creating jobs for people, in line with the UN basic charter, in line with economic growth.”

Asia Times
Bertil Lintner
1/18/2007

While the West and Japan have targeted North Korea’s overseas bank accounts to curtail its weapons program, Pyongyang has recently turned to more ingenious ways of maintaining its international businesses through substantial exports of gold, silver and other valuable metals.

Pyongyang has apparently found a willing conduit to global buyers through its many business connections in Thailand, which has recently emerged as the isolated state’s third-largest trading partner after China and South Korea. According to official Thai Customs Department statistics, North Korea shipped 500 kilograms of gold worth 398 million baht (US$11 million) to Thailand last April.

The following month, another 800kg of gold worth 635 million baht landed in Thailand courtesy of North Korea. Also, in June, 10 tons of silver worth 148 million baht was sent from North Korea to Thailand, followed by 12 tons worth 166 million baht last October.

In sum, North Korea exported 1.35 billion baht – or nearly $40 million – worth of precious metals to Thailand last year.

That is a substantial figure for North Korea, a country with an estimated gross domestic product of about $22 billion and whose total exports amounted to just over $1 billion, according to official statistics. Thailand is bound by the international sanctions imposed last October against North Korea by the United Nations in response to Pyongyang’s exploding an atomic bomb.

According to official Thai statistics, the gold and first consignment of silver were shipped to Thailand before the UN sanctions were imposed. But there is nothing illegal in North Korea exporting precious metals, unless, of course, the income from the sale can be tied directly to the country’s controversial weapons programs, which anyway would be extremely hard to prove.

Untapped riches
North Korea’s gold and silver mines remain largely untapped. According to Tse Pui-kwan, a Chinese-American chemist who joined the US Bureau of Mines in 1990, North Korea has significant deposits of copper, gold, graphite, iron, lead, magnesite, tungsten and zinc. When the Cold War ended and North Korea lost large amounts of foreign aid from both the Soviet Union and China, its mining industry fell into disrepair and extraction activities sharply declined.

But with new foreign cooperation, production has resumed, which the recent exports to Thailand clearly demonstrate. North Korea’s main gold mine is in Unsan county in North Pyongan province, about 150 kilometers north of Pyongyang. It was originally opened by a US firm in 1896, when Korea was still an independent and unified kingdom, and was later taken over by a Japanese company when the peninsula became a colony ruled by Tokyo in 1910.

Nearly a century later, consultants from Clough Engineering of Australia in 2001 inspected the same mine under the sponsorship of the United Nations Office for Project Services. They estimated that Unsan held 1,000 tons of gold reserves, which if true would make it one of the world’s major gold mines. Silver is also mined in the same area, while iron ore and magnesite are found in North and South Hamgyong provinces in the northeast.

North Korea’s extraction techniques are sometimes controversial. According to witnesses interviewed by the US Committee for Human Rights in North Korea for its 2003 report “The Hidden Gulag: Exposing North Korea’s Prison Camps”, there is a gold-mining labor camp near Danchun in South Hamgyong province, where thousands of prisoners are being held and forced to work under abysmal conditions.

In that same report, several witnesses claimed that “some of the mine shafts dated back to the early days of the Japanese occupation of Korea in the early 1900s. Accessing the veins of minable gold required descending and, later, ascending a wooden staircase 500 meters in length, using gas lanterns for light. Deaths from mining accidents were a daily occurrence, including multiple deaths from the partial collapse of mine shafts.”

The first attempt to modernize North Korea’s gold-mining industry was made by an Italian financier and former Foreign Ministry official, Carlo Baeli, who traveled to the country in the early 1990s and claims to be the first Westerner to do business with Pyongyang since the Korean War. He later wrote a book called Kim Jong-il and the People’s Democratic Republic of Korea, which was published in Pyongyang in 1990, obviously with official permission as it was printed by the state-owned Foreign Languages Publishing House.

Apart from painting a flattering portrait of the North Korean leader, the book describes Baeli’s first trip to Pyongyang in 1990, of which he wrote, “We were interested in investing in the mining industry, mainly in the extraction of gold and granite.” Baeli later signed a contract for a loan of $118 million to purchase mining equipment, and the goal was to resurrect no fewer than six gold mines across North Korea. The money was to be provided by international banks such as Midland Bank and the Naples International Bank. He also arranged for the mining equipment to be shipped from Italy.

But heavy flooding in the mid-1990s damaged both the equipment and the mines and, according to a 2006 report in Forbes magazine, Baeli today works as an adviser to the Pyongyang government at a tire-recycling plant. The car and truck tires are imported from Japan, get ground into granulate in North Korea, and are sold to China for road resurfacing, car mats and shoe soles. A lucrative business, perhaps, but not quite the golden dream Baeli had when he first arrived in Pyongyang nearly 17 years ago.

Another unusual partner in North Korea’s gold trade may have been the late Philippine dictator Ferdinand Marcos. In August 2001, the right-wing South Korean newspaper Munhwa Ilbo published a story claiming that Marcos in September 1970 had deposited 940 tons of gold bars at a Swiss bank in the name of the late North Korean dictator, Kim Il-sung. The report came from a former Marcos aide, and Munhwa Ilbo carried a copy of the bank-account certificate on its front page. The alleged gold bars were part of what a Japanese army general had looted from Asia during World War II, Munhwa Ilbo claimed.

That report was never independently confirmed, but it nevertheless reflects the mystique and speculation that still surround North Korea’s gold industry – and how little the outside world actually knows about it.

Financial pressures
When the US took action against Banco Delta Asia in Macau in September 2005, labeling it a “primary money-laundering concern” for North Korean funds, very little evidence to substantiate the charges was ever produced. North Korea lost $24 million when the accounts it held with the bank in the name of a front company, Zokwang Trading, were frozen. Zokwang, which had been operating in Macau for decades, also closed its office and relocated to Zhuhai province across the border in China proper.

The action against Banco Delta Asia, a privately owned bank that the Macau government later had to prop up to prevent it from collapsing, was the second move against North Korea’s assets abroad. In a much less publicized action, North Korea’s only bank located in a foreign country – the Golden Star Bank in Vienna – was forced to suspend its operations in June 2004. The Golden Star was 100% owned by the Korea Daesong Bank, a state enterprise headquartered in Pyongyang, and was allowed to set up a branch in the Austrian capital in 1982.

For more than two decades, Austrian police kept a close eye on the bank, but there was no law that forbade the North Koreans from operating a bank in the country. Nevertheless, Austria’s police intelligence department stated in a 1997 report: “This bank [Golden Star] has been mentioned repeatedly in connection with everything from money-laundering and distribution of fake currency notes to involvement in the illegal trade in radioactive material.”

Eventually the international pressure to close the bank became too strong. Sources in Vienna believe the US played an important behind-the-scenes role in finally shuttering Golden Star’s modest office on 12 Kaiserstrasse in the Austrian capital. Until then, Vienna had been North Korea’s center for financial transactions in Europe and the Middle East. Visitors to North Korea have noted that euro coins in circulation in the country – the US dollar is not welcome in Pyongyang – invariably came from Austria. (Euro notes are the same in all European Union countries, but coins designate individual member countries.)

Last October, in response to Pyongyang’s nuclear tests, Japan froze a dollar-denominated account that North Korea’s Tanchon Commercial Bank held with an unnamed Japanese bank. The account had a balance of $1,000 and had not been active for nearly a decade, so the move was mainly symbolic: to demonstrate to North Korea that it cannot use banks in Japan for any deposits, big or small.

So it is hardly surprising that North Korea is looking for new ways to manage and maintain its international business interests and for new partners when it is increasingly locked out of most foreign countries. That is where Thailand apparently comes into the picture.

In 2004, trade between Thailand and North Korea for the first time overtook trade between Japan and North Korea. Previously, a string of North Korean-controlled front companies, managed by the Chosen Soren, or the Pyongyang General Association of Korean Residents in Japan, had supplied North Korea with computers, electronic goods and other vital items.

In 2003, North Korea’s total trade volume to Japan was just over $265 million and fell even lower in 2004. At the same time, trade between Thailand and North Korea rose to more than $331 million in 2004. Two-way trade between Thailand and North Korea totaled $328 million in 2005, with Thai exports to North Korea amounting to $207 million and North Korean imports to Thailand totaling $121 million.

During January-November 2006 – the latest statistics available from the Thai Customs Department – trade totaled about $345 million, with Thai exports accounting for $200 million and North Korean imports $145 million. Thai imports of gold and silver have pushed those trade figures higher.

North Korea’s trade with Thailand grew mainly under the previous government of Thaksin Shinawatra, who at one point proposed signing a free-trade agreement between the two countries. In August 2005, Thaksin was formally invited by Kim Jong-il to visit Pyongyang. The visit never materialized, and since Thaksin was ousted last year in a military coup, the future of Thai-North Korean relations is very much in doubt.

But gold and silver are highly fungible and North Korea apparently has lots of the commodities. It appears Kim Jong-il has for now found at least one golden path around the international sanctions imposed against his regime’s nuclear tests.

Heritage 2007 Index of Economic Freedom

North Korea’s economy is 3% free, according to our 2007 assessment, which makes it the world’s least free economy, or 157th out of 157 countries. North Korea is ranked 30th out of 30 countries in the Asia–Pacific region, and its overall score is the lowest in the world.

North Korea does not score well in a single area of economic freedom, although it does score 10 percent in investment freedom and property rights. The opening of the Kaesong industrial venture in cooperation with South Korea has been a start in foreign investment.

Business freedom, investment freedom, trade freedom, financial freedom, freedom from corruption, and labor freedom are nonexistent. All aspects of business operations are totally controlled and dominated by the government. Normal foreign trade is almost zero. No courts are independent of political interference, and private property (particularly land) is strictly regulated by the state. Corruption is virtually immeasurable and, in the case of North Korea, hard to distinguish from necessity. Much of North Korea’s economy cannot be measured, and world bodies like the International Monetary Fund and World Bank are not permitted to gather information. Our policy is to give countries low marks for specific freedoms when it is country policy to restrict measurement of those freedoms.

Background:
The Democratic People’s Republic of Korea has maintained its Communist system since its founding in 1948. A serious economic decline began in the early 1990s with the end of economic support from the Soviet Union and other Communist-bloc countries, including China. Floods and droughts all but destroyed the agricultural infrastructure and led to severe famine and dislocation of the population during the 1990s. South Korean and Chinese investments in the economy have alleviated dire conditions. The government continues to rely on counterfeiting foreign currency and sales of missiles for money. That and the nuclear ambitions and isolationism of Kim Jong Il reinforce North Korea’s status as the hermit kingdom.

Business Freedom – 0.0%
The state regulates the economy heavily through central planning. The economic reforms implemented in 2002 allegedly brought some changes at the enterprise and industrial level, but government regulations make the creation of any entrepreneurial activities virtually impossible. The overall freedom to start, operate, and close a business is extremely restricted by the national regulatory environment.

Trade Freedom – 0.0%
The government controls all imports and exports, and formal trade is minimal. Data on North Korean trade are limited and compiled from trading partners’ statistics. Most North Korean trade is de facto aid, mainly from North Korea’s two main trading partners, China and South Korea. Non-tariff barriers are significant. Inter-Korean trade remains constrained in scope by North Korea’s difficulties with implementing needed reform. Given the lack of necessary tariff data, a score of zero is assigned.

Fiscal Freedom – 0.0%
No data on income or corporate tax rates are available. Given the absence of published official macroeconomic data, such figures as are available with respect to North Korea’s government expenditures are highly suspect and outdated.

Freedom from Government – 0.0%
The government owns all property and sets production levels for most products, and state-owned industries account for nearly all GDP. The state directs all significant economic activity. The government implemented limited economic reforms, such as changes in foreign investment codes and restructuring in industry and management, in 2002.

Monetary Freedom – 0.0%
In July 2002, North Korea introduced price and wage reforms that consisted of reducing government subsidies and telling producers to charge prices that more closely reflect costs. However, without matching supply-side measures to boost output, the result of these measures has been rampant inflation for many staple goods. With the ongoing crisis in agriculture, the government has banned sales of grain at markets and returned to a rationing system. Given the lack of necessary inflation data, a score of zero is assigned.

Investment Freedom – 10.0%
North Korea does not welcome foreign investment. One attempt to open the economy to foreigners was its first special economic zone, located at Rajin-Sonbong in the northeast. However, Rajin-Sonbong is remote and still lacks basic infrastructure. Wage rates in the special zone are unrealistically high, as the state controls the labor supply and insists on taking its share. More recent special zones at Mt. Kumgang and Kaesong are more enticing. Aside from these few economic zones where investment is approved on a case-by-case basis, foreign investment is prohibited.

Financial Freedom – 0.0%
North Korea is a Communist command economy and lacks a private financial sector. The central bank also serves as a commercial bank with a network of local branches. The government provides most funding for industries and takes a percentage from enterprises. There is an increasing preference for foreign currency. Foreign aid agencies have set up microcredit schemes to lend to farmers and small businesses. A rumored overhaul of the financial system to permit firms to borrow from banks has not materialized. Because of debts dating back to the 1970s, most foreign banks will not consider entering North Korea. A South Korean bank has opened a branch in the Kaesong zone. The state holds a monopoly on insurance, and there are no equity markets.

Property Rights – 10.0%
Property rights are not guaranteed in North Korea. Almost all property belongs to the state, and the judiciary is not independent.

Freedom from Corruption – 10.0%
North Korea’s informal market is immense, especially in agricultural goods, as a result of famines and oppressive government policies. There is also an active informal market in currency and in trade with China.

Labor Freedom – 0.0%
The government controls and determines all wages. Since the 2002 economic reforms, factory managers have had more autonomy to set wages and offer incentives, but the labor market still operates under highly restrictive employment regulations that seriously hinder employment and productivity growth.

Korea Herald
12/27/2006

North Korea, desperate for foreign currency under U.S.-imposed sanctions, has started to sell its gold reserves on international markets, a Japanese newspaper said Tuesday.

The United States last year blacklisted a Pyongyang-linked bank in Macau, infuriating the communist regime which walked out of disarmament talks for 13 months during which it tested an atom bomb.

Since the US crackdown on the bank, North Korea has earned 28 million dollars in foreign cash by exporting gold to Thailand, which had not imported gold from Pyongyang for the previous five years, the Yomiuri Shimbun said.

North Korea exported 500 kilograms of bullion to Thailand in April and another 800 kilograms a month later, the conservative Japanese daily said without identifying its sources.

North Korea’s central bank, Choson Central Bank was also re-listed on May 12 for trading on the London Bullion Market, said the newspaper, quoting a spokesman for the London market.

The North Korean central bank, which can issue currency, joined the London gold market in 1976 but was de-listed in June 2004 due to inactive trading, the newspaper said.

The Yomiuri, citing South Korean data, said North Korea was estimated to have between 1,000 and 2,000 tons of gold reserves.

The United States blacklisted Macau’s Banco Delta Asia in September 2005, saying it suspected that 24 million dollars in North Korean accounts were linked to counterfeiting or money-laundering.

The accounts have been frozen and other Asian banks have taken similar moves.

The financial sanctions were a main topic during six-nation talks, aimed at persuading North Korea to end its nuclear program, which ended in deadlock last week in Beijing.

Bloomberg
Bradley K. Martin

Koryo Asia Ltd., a London-based financial adviser, said it will buy North Korea’s Daedong Credit Bank for an undisclosed amount and lobby the U.S. to lift sanctions on the foreign-run bank.

Daedong Credit is among North Korean banks whose accounts in Macau’s Banco Delta Asia SARL have been frozen since September 2005 after the U.S. Treasury Department alleged Banco Delta laundered money from North Korea and worked with front companies trafficking drugs for the communist state. The Macau government has taken control of the bank.

The value of Daedong Credit “would be enhanced if we can resolve the sanctions issue with the U.S.,” Koryo Asia chairman Colin McAskill said in an e-mail interview. Koryo Asia is adviser to London-based Chosun Development & Investment Fund LP, which aims to raise $50 million for investments in North Korea.

North Korea has demanded removal of the financial sanctions before it will return to six-nation talks to prevent the country from developing nuclear weapons. The U.S. and China urged North Korea to resume the talks that include South Korea, Russia and Japan, after the country in July tested a missile that may have the capability to reach the U.S.

Daedong Credit’s general manager Nigel Cowie confirmed the sale and that he would stay on. He declined further comment. Cowie said in an interview last year that the bank’s assets –including those frozen in Macau — totaled around $10 million.

A former HSBC Holding Plc banker, Cowie was hired in the mid- 1990s by Peregrine Investment Holdings Ltd. to start the bank. Following Peregrine’s 1998 collapse, Cowie and three other investors bought the 70 percent foreign stake from the liquidator in 2000.

Transparent

Koryo Asia signed an agreement to buy the majority share in Daedong through a wholly owned subsidiary that McAskill, 65, did not name. The majority shareholders had approached Koryo Asia to propose the sale, he said.

McAskill said he won’t take a direct management role in the bank, instead serving as a consultant to persuade U.S. officials to release as much as $7 million of Daedong’s and its customers’ assets in Macau. The total of frozen North Korean bank assets in Macau is about $24 million.

McAskill’s argument that Daedong Credit Bank serves only foreign, not North Korean, customers and that its transactions are legal and transparent may not win an audience at the U.S. Treasury Department.

“Given the regime’s counterfeiting of U.S. currency, narcotics trafficking and use of accounts worldwide to conduct proliferation-related transactions, the line between illicit and licit North Korean money is nearly invisible,” Stuart Levey, Treasury’s undersecretary for terrorism and financial intelligence, said last month.

Asked if the purchase of Daedong Credit Bank is a big gamble, McAskill said, “Not a gamble — a gambit.”

He said his strategy is to demonstrate that Levey’s blanket condemnation of all North Korea-related finance is counter to U.S. interests.

Exempting Daedong on its merits from the sanctions would bring a potentially big payoff, he said, “an atmosphere in which Kim Jong-il can consider a return to the six-party talks.”

Anselmo Teng, chairman of the Macau Monetary Authority, didn’t immediately return a phone call and e-mail to his office seeking comment on the sale and any impact the ownership change may have on the status of Daedong’s Banco Delta Asia accounts.

Korean Investment

McAskill said the Chosun Development & Investment Fund LP aims to raise funds for “transaction-based” investments, such as procuring mining equipment and receiving mine output in return.

“We believe we will fully subscribe the fund from investors in Europe, Asia, the People’s Republic of China and possibly South Korea,” he said. “Global investor interest in this potential emerging market was not affected by the missile launches in July,” he said, without giving details.

Taking over the bank “gives us a legitimate foothold and provides a conduit for investment in the country, whether through Chosun Fund or other sources,” McAskill said. “In the long term, the goal is to facilitate the resuscitation of the legitimate economy.”

Chosun Fund, managed by London-based Anglo-Sino Capital Partners Limited, is denominated in U.S. dollars. If the sanctions issue cannot be resolved, the fund has the option to switch to denomination in euros or pounds sterling, McAskill said.

“There’s no point in taking in U.S. funds if the United States is going to try and block them,” he said.

Room 39

The minority owner of Daedong Credit is Korea Daesong Bank, a unit of North Korea’s Daesong Group.

A 1995 U.S. government study cited close ties between Daesong and Room 39, an office of the ruling North Korean Workers’ Party said to handle foreign exchange-gathering projects for the country’s leader.

McAskill said the minority owner does not run the bank. Daedong is “not only majority foreign-owned and foreign- controlled but also foreign-managed,” he said, adding he was given access to all of Daedong’s activities and concluded it’s a legitimate business.

Only North Korean-owned banks can do business with state enterprises and North Korean individuals, Cowie said last year, so Daedong’s customers are all foreign — mostly Chinese, Japanese and Western individuals and institutions.

As of Aug. 17, that had not convinced Levey at the U.S. Treasury.

“The U.S. continues to encourage financial institutions to carefully assess the risk of holding any North Korea-related accounts,” he said.

The undersecretary traveled in Asia in July to push that line, which resulted in the closure of some North Korean banks’ accounts in Vietnam.

FDI Magazine
Stephen Timewell
12/12/2005

On my journey to Pyongyang a Beijing receptionist remarked that the Democratic People’s Republic of Korea (DPRK) is very much like China was 25 years ago. And as the motorcade of China’s president Hu Jintao passed thousands of flower-waving North Koreans on his visit to the world’s most secretive and politically isolated country at the end of October, he may well have agreed.

Visiting Pyongyang is like going back decades in a time machine, to a land with no advertising, no Nokia, Microsoft or McDonald’s billboards and almost no cars. Impressive grand avenues and massive public monuments dominate the landscape but there is no new construction or shops.

The streets are scrubbed clean by hand and are full of hundreds of orderly people wearing their ‘Great Leader’ badges and walking everywhere. Curiously, bicycles are discouraged because of bad accidents and the government encourages power walking for good health, or so I am told. In a country said to spend 30% of its GDP on defence, there is no visual military presence (or overt police presence) in the capital at all.

The ‘traffic ladies’ standing at major intersections are a welcome replacement for traffic lights but there are precious few cars to direct.

Questions greatly outnumber answers in this capital where visitors are duly dazzled by the spectacular grand mass gymnastics and artistic performance (called Arirang) by almost 70,000 children in the massive 150,000-seat May Day Stadium. But visitors are also aware of serious food shortages and cannot ignore the capital’s tallest building, a magnificent 105-floor pyramid tower with a crane on top, left unfinished many years ago, I was informed, due to financial problems.

Winds of change

Whether the DPRK is seen as the last Stalinist communist state or as a Confucian nationalist monarchy or even, as it describes itself, as a “powerful socialist nation”, visitors can feel the winds of change, particularly on the economic front. For more than 50 years the iconic stature of the late ‘Great Leader’ Kim Il Sung and that of his successor son Kim Jong Il have dominated the political landscape; the question going forward is how the country’s dire economic circumstances can be improved and whether the regime has the capability to create the new structures needed.

Pyongyang was playing host not only to Mr Hu but also to an increasing number of foreign delegations and journalists, all keen to understand the trends taking place in probably the last country to have massive pictures of Marx and Lenin hanging outside its Ministry of Trade. For many, however, the current focus is progress in the Six-Party Talks on the nuclear weapons programmes of the DPRK.

In the fourth round of talks in September between the two Koreas, China, Japan, Russia and the US a landmark agreement appeared to have been reached. “All six parties emphasised that to realise the inspectable non-nuclearisation of the Korean Peninsula is the target of the Six-Party Talks,” a joint statement said. “The DPRK promised to drop all nuclear weapons and current nuclear programmes and to get back to the non-proliferation treaty as soon as possible and to accept inspections from the International Atomic Energy Agency.”

At the time of going to press in November a fifth round of talks was expected to move a final agreement closer but detailed negotiations over implementation of the above agreement were not expected to be easy or to be concluded quickly. The DPRK, unsurprisingly, wants some payback, be it light-water reactors from the US or other economic incentives.

The core issue is that the DPRK’s publicly acknowledged plutonium programme, believed to provide enough radioactive material for about six bombs, is probably also the country’s key card in trying to rebuild the economy. Kim Jong Il needs to gain maximum advantage from giving up his nuclear threat, but even then, what does his economy have to offer?

Information hollow

For a financial journalist the DPRK represents a serious challenge. Understanding the economy and the banking sector of a country is never easy, but when no data is published by the government or the central bank it becomes significantly more difficult. I knew information was scarce but believed that the two very agreeable government minders, assigned to monitor my every move in my four-day visit, would be able to help me extract a simple list of banks operating in the country. No such luck. Although my visit was welcomed, the central bank (which acts as both the issuing bank and as a fully operational commercial bank in the traditional socialist model) failed to provide the list (or anything else), despite numerous requests.

Although the consensus after several interviews was that around 20 banks of various types exist, I can only vouch for the handful listed here. Clearly the Foreign Trade Bank (FTB) represents a pivotal bank in the financial system and Ko Chol Man, director of the FTB, was keen to explain the peculiarities of the DPRK banking system. “The domestic and foreign exchange settlement systems are completely separate. The central bank deals with the domestic market and money issuance and it also has a commercial banking role; the FTB has complete control over foreign exchange matters and trade and also holds the country’s foreign exchange reserves.”

Unlike other banking systems, the FTB in the DPRK acts as a clearing house for the foreign exchange activities of the banks in the country. It does not report to the central bank but, like all banks, reports to the State Fiscal and Financial Committee (SFFC), the overall banking regulator.

Mr Ko was pleased to note that the FTB had around 500 correspondent banks worldwide and, along with its 600 staff (including 11 branches) in North Korea, had six representative offices outside the country (including offices in Austria, Russia and China) and planned to establish a UK representative office in London. However, when asked for details of FTB’s banking activities he replied bluntly that no banking institution had published its figures in terms of activities or balance sheet. “We cannot give figures about the size of our assets because it is a regulation of the state. If the situation becomes better we can make them public but up to now it is impossible.”

Economic estimates

Despite the absence of official economic and banking data, various estimates help make the picture a little less murky. A recent Standard Chartered Bank report places North Korea’s nominal GDP at the end of 2004 at $22bn or $957 in GDP per capita terms for the country’s 23 million population; by comparison, South Korea’s nominal GDP is put at $680bn or $14,167 per capita for its 48 million population. While the unification of the two Koreas is seen as an important political objective, especially in Pyongyang, the startling economic gap between the two states could mean that the North becomes a huge burden on the South, and Seoul well recognises the economic problems that emerged from the reunification of Germany in the 1990s.

Meanwhile, Jong Msong Pil, of the Institute of Economy at the Academy of Social Science, explained how the economy had declined dramatically from a GDP per capita of $2500 in the mid-1980s to $480 per capita in 2000.

“The big drop was caused by the disappearance of the socialist market worldwide in the early 1990s; the collapse of our socialist barter trade system led to the failure of many enterprises and a decline in living standards,” he said.

Dr Jong noted that, following the hard times of the mid-1990s, the first target of the national economy has been self-reliance. He added that no economic data had been published since 2000. He believed, however, that 10% economic growth occurred in 2004 and, responding to reports from the World Food Programme (WFP) that a third of the population were malnourished, he said the food situation was improving. “In our country, all people have a job so for this reason no one has died of starvation or hunger. Our country is a socialist planned economy so the government takes care of people’s living.”

Acknowledging shortages in the past, Dr Jong said that in October the government had normalised the public food distribution system, which indicated the government was now supplying sufficient food.

Is the DPRK’s food crisis over? Driving around Pyongyang’s spacious avenues (with two minders) there was no visual evidence of malnutrition – but the capital is likely to be much better served than elsewhere. A supermarket was shown but the goods were only available for foreign currency, hardly food for the masses. Cha Yong Sik, deputy director general at the Ministry of Foreign Trade, said the government had not imported food on a commercial basis in 2005, unlike previous years, but neighbouring countries are still providing significant food aid. Richard Ragan, country director of the WFP, said food production in 2005 was up 10%, with cereals up 6.6%. But while the food situation may have improved, the DPRK is said to be still dependent on food aid.

Trade predictions

So what are the DPRK’s prospects? Much depends on the outcome of the nuclear negotiations but estimates from the Seoul-based Korea Trade-Investment Promotion Agency (KOTRA) say the DPRK’s trade volume in 2005 is expected to pass $3bn for the first time since the fall of the Soviet Union with the figure likely to reach $4bn if inter-Korean trade is included. Trade with China, the DPRK’s largest trading partner, grew by more than 40% in the first half of 2005, indicating Pyongyang’s growing dependency on Beijing.

Upbeat on trade prospects, Mr Cha explained that the recently opened Tae-an Friendship Glass Factory, built with a $32m donation from the Chinese government, would export 40% of its 300-ton capacity, mainly to Siberia. Also Pyongyang’s first autumn international trade exhibition in October included companies from six European countries, the focus being on the country’s mineral potential rather than its manufacturing abilities, which are a long way off.

As for banks, the group of up to 15 joint venture banks are helping to finance the country’s 150 or so international companies. But do not expect miracles. The latest, Koryo Global Credit Bank, set up in June, is a joint venture between the UK-based Global Group, headed by Hong Kong businessman Johnny Hon, with 70%, and the state-owned Koryo Bank with 30%. Established with a paid-up capital of e10m, KGC Bank is ambitious in its plans to engage the DPRK in trade and commercial relations with the rest of the world, especially Asia, the Middle East and Europe.

KGCB’s first correspondent banking relationship in Europe is with Germany’s Helababank. The bank, the first product of cooperation in the finance field between the DPRK and the UK, has a staff of five and is also interested in investing in property. It was also able to produce, at the instigation of US authorities, a comprehensive anti-money laundering file.

Another local venture is North East Asia Bank (NEAB), which was set up by ING Group in 1995 but is now wholly owned by the Korean BOHOM Group. Amazingly, Kim Hyon Il, NEAB’s president, produced a balance sheet showing total assets of e79m at the end of 2004 and a paid-up capital of e25m. He also showed me the bank’s newest product, a chip-based cash/debit card, the first in the DPRK. The card demonstrates perhaps that the country is slowly joining the real world – but with only 100 issued and only 13 outlets available, the service has a long way to go.

Political effects
 
At Daedong Credit Bank, chief executive Nigel Cowie explained how international politics can have a dramatic impact on banking even in the isolated DPRK. In September, just before the conclusion of the fourth round of the Six-Party Talks, the US Treasury accused Banco Delta Asia (BDA), a Macao-based bank, of aiding the DPRK in a series of ‘money laundering’ cases. The Wall Street Journal had said the Macao crackdown was Washington’s method of cutting off Pyongyang’s financial sources for its nuclear weapons programme.

Mr Cowie, a former HSBC banker, explained that all DPRK banks had accounts with BDA for the purposes of remitting funds and, as a result, the accounts were suspended pending an inquiry in mid-November. While Stanley Au, chairman of BDA’s parent, denied the US allegations and BDA’s involvement in any illegal business relations with DPRK banks, the damage is done. “It affects our customers because it affects people’s ability to remit money to and from the country. I imagine that this will cause people doing legitimate business to give up,” says Mr Cowie.

The nuclear negotiations remain critical to the country’s future and the Chinese, in particular, want them to succeed. But that is just a start. There is evidence that the DPRK is opening up and changing with reports that there are 300 open markets operating across the country, 30 in Pyongyang. But whether the DPRK follows the China model of 25 years ago and can restructure its ‘powerful socialist nation’ doctrine remains doubtful under the current leadership.

The Banker and FDI magazine
12/1/2005

[excerpt]
Information hollow

For a financial journalist the DPRK represents a serious challenge. Understanding the economy and the banking sector of a country is never easy, but when no data is published by the government or the central bank it becomes significantly more difficult. I knew information was scarce but believed that the two very agreeable government minders, assigned to monitor my every move in my four-day visit, would be able to help me extract a simple list of banks operating in the country. No such luck. Although my visit was welcomed, the central bank (which acts as both the issuing bank and as a fully operational commercial bank in the traditional socialist model) failed to provide the list (or anything else), despite numerous requests.

Although the consensus after several interviews was that around 20 banks of various types exist, I can only vouch for the handful listed here. Clearly the Foreign Trade Bank (FTB) represents a pivotal bank in the financial system and Ko Chol Man, director of the FTB, was keen to explain the peculiarities of the DPRK banking system. “The domestic and foreign exchange settlement systems are completely separate. The central bank deals with the domestic market and money issuance and it also has a commercial banking role; the FTB has complete control over foreign exchange matters and trade and also holds the country’s foreign exchange reserves.”

Unlike other banking systems, the FTB in the DPRK acts as a clearing house for the foreign exchange activities of the banks in the country. It does not report to the central bank but, like all banks, reports to the State Fiscal and Financial Committee (SFFC), the overall banking regulator.

Mr Ko was pleased to note that the FTB had around 500 correspondent banks worldwide and, along with its 600 staff (including 11 branches) in North Korea, had six representative offices outside the country (including offices in Austria, Russia and China) and planned to establish a UK representative office in London. However, when asked for details of FTB’s banking activities he replied bluntly that no banking institution had published its figures in terms of activities or balance sheet. “We cannot give figures about the size of our assets because it is a regulation of the state. If the situation becomes better we can make them public but up to now it is impossible.”
Economic estimates

Despite the absence of official economic and banking data, various estimates help make the picture a little less murky. A recent Standard Chartered Bank report places North Korea’s nominal GDP at the end of 2004 at $22bn or $957 in GDP per capita terms for the country’s 23 million population; by comparison, South Korea’s nominal GDP is put at $680bn or $14,167 per capita for its 48 million population. While the unification of the two Koreas is seen as an important political objective, especially in Pyongyang, the startling economic gap between the two states could mean that the North becomes a huge burden on the South, and Seoul well recognises the economic problems that emerged from the reunification of Germany in the 1990s.

Meanwhile, Jong Msong Pil, of the Institute of Economy at the Academy of Social Science, explained how the economy had declined dramatically from a GDP per capita of $2500 in the mid-1980s to $480 per capita in 2000.

“The big drop was caused by the disappearance of the socialist market worldwide in the early 1990s; the collapse of our socialist barter trade system led to the failure of many enterprises and a decline in living standards,” he said.

Dr Jong noted that, following the hard times of the mid-1990s, the first target of the national economy has been self-reliance. He added that no economic data had been published since 2000. He believed, however, that 10% economic growth occurred in 2004 and, responding to reports from the World Food Programme (WFP) that a third of the population were malnourished, he said the food situation was improving. “In our country, all people have a job so for this reason no one has died of starvation or hunger. Our country is a socialist planned economy so the government takes care of people’s living.”

Acknowledging shortages in the past, Dr Jong said that in October the government had normalised the public food distribution system, which indicated the government was now supplying sufficient food.

Is the DPRK’s food crisis over? Driving around Pyongyang’s spacious avenues (with two minders) there was no visual evidence of malnutrition – but the capital is likely to be much better served than elsewhere. A supermarket was shown but the goods were only available for foreign currency, hardly food for the masses. Cha Yong Sik, deputy director general at the Ministry of Foreign Trade, said the government had not imported food on a commercial basis in 2005, unlike previous years, but neighbouring countries are still providing significant food aid. Richard Ragan, country director of the WFP, said food production in 2005 was up 10%, with cereals up 6.6%. But while the food situation may have improved, the DPRK is said to be still dependent on food aid.
Trade predictions

So what are the DPRK’s prospects? Much depends on the outcome of the nuclear negotiations but estimates from the Seoul-based Korea Trade-Investment Promotion Agency (KOTRA) say the DPRK’s trade volume in 2005 is expected to pass $3bn for the first time since the fall of the Soviet Union with the figure likely to reach $4bn if inter-Korean trade is included. Trade with China, the DPRK’s largest trading partner, grew by more than 40% in the first half of 2005, indicating Pyongyang’s growing dependency on Beijing.

Upbeat on trade prospects, Mr Cha explained that the recently opened Tae-an Friendship Glass Factory, built with a $32m donation from the Chinese government, would export 40% of its 300-ton capacity, mainly to Siberia. Also Pyongyang’s first autumn international trade exhibition in October included companies from six European countries, the focus being on the country’s mineral potential rather than its manufacturing abilities, which are a long way off.

As for banks, the group of up to 15 joint venture banks are helping to finance the country’s 150 or so international companies. But do not expect miracles. The latest, Koryo Global Credit Bank, set up in June, is a joint venture between the UK-based Global Group, headed by Hong Kong businessman Johnny Hon, with 70%, and the state-owned Koryo Bank with 30%. Established with a paid-up capital of e10m, KGC Bank is ambitious in its plans to engage the DPRK in trade and commercial relations with the rest of the world, especially Asia, the Middle East and Europe.

KGCB’s first correspondent banking relationship in Europe is with Germany’s Helababank. The bank, the first product of cooperation in the finance field between the DPRK and the UK, has a staff of five and is also interested in investing in property. It was also able to produce, at the instigation of US authorities, a comprehensive anti-money laundering file.

Another local venture is North East Asia Bank (NEAB), which was set up by ING Group in 1995 but is now wholly owned by the Korean BOHOM Group. Amazingly, Kim Hyon Il, NEAB’s president, produced a balance sheet showing total assets of e79m at the end of 2004 and a paid-up capital of e25m. He also showed me the bank’s newest product, a chip-based cash/debit card, the first in the DPRK. The card demonstrates perhaps that the country is slowly joining the real world – but with only 100 issued and only 13 outlets available, the service has a long way to go.

Political effects

At Daedong Credit Bank, chief executive Nigel Cowie explained how international politics can have a dramatic impact on banking even in the isolated DPRK. In September, just before the conclusion of the fourth round of the Six-Party Talks, the US Treasury accused Banco Delta Asia (BDA), a Macao-based bank, of aiding the DPRK in a series of ‘money laundering’ cases. The Wall Street Journal had said the Macao crackdown was Washington’s method of cutting off Pyongyang’s financial sources for its nuclear weapons programme.

Mr Cowie, a former HSBC banker, explained that all DPRK banks had accounts with BDA for the purposes of remitting funds and, as a result, the accounts were suspended pending an inquiry in mid-November. While Stanley Au, chairman of BDA’s parent, denied the US allegations and BDA’s involvement in any illegal business relations with DPRK banks, the damage is done. “It affects our customers because it affects people’s ability to remit money to and from the country. I imagine that this will cause people doing legitimate business to give up,” says Mr Cowie.

The nuclear negotiations remain critical to the country’s future and the Chinese, in particular, want them to succeed. But that is just a start. There is evidence that the DPRK is opening up and changing with reports that there are 300 open markets operating across the country, 30 in Pyongyang. But whether the DPRK follows the China model of 25 years ago and can restructure its ‘powerful socialist nation’ doctrine remains doubtful under the current leadership.

Far Eastern Economic Review
Bertil Lintner
2/13/2003 

One of the few things that Kim Kum Jin and Sun Hui Ri didn’t leave behind when they fled Slovakia in August last year was their collection of bank records. Their invoices came to millions of dollars, but the documents recovered by Slovak police don’t make clear where all the money went. Some answers could probably be found just up the Danube River from Bratislava. Since 1982, the North Koreans have had their own bank in Austria’s capital, Vienna. It’s called the Golden Star Bank–almost the same name as a North Korean company in Beijing that was used by Kim.

According to official Austrian bank documents seen by the REVIEW, the Golden Star Bank is 100% owned by the Korea Daesong Bank, a state enterprise headquartered in Pyongyang. Kim Dok Hong, a top North Korean official who fled to South Korea in 1997, says that both banks come under the jurisdiction of Bureau 39, a shadowy wing of the ruling Korean Workers’ Party controlled by North Korean leader Kim Jong Il. Western and Asian intelligence services believe it was set up in 1994 to generate hard currency for Kim’s impoverished nation.

For more than two decades, the Austrian police have kept a close eye on the Golden Star Bank, but there is no law that forbids the North Koreans from operating a nonretail financial institution in the country. Nevertheless, Austria’s police intelligence department stated in a 1997 report: “This bank [Golden Star] has been mentioned repeatedly in connection with everything from money laundering and distribution of fake currency notes to involvement in the illegal trade in radioactive material.”

But finding hard evidence of illegal activity is another matter and the bank continues trading in the Austrian capital. While documents left behind in Bratislava by Kim Kum Jin and Sun show dealings with respected banks such as the Bank of China and the National Bank of Egypt, there is no paperwork connecting them directly to the Golden Star Bank. But the Austrian police report’s assertion that “Vienna must be seen as North Korea’s centre for financial transactions in Europe” remains relevant today.

The former Portuguese enclave of Macau–where the North Koreans have had a discreet but solid presence since the mid-1970s–plays a similar role in East Asia, according to Western and Asian intelligence officials. The North Koreans do not have their own bank in the largely autonomous Chinese territory, but they operate through locally owned family banks, the officials believe.

In an October 2000 conference paper, Marcus Noland of the Washington-based Institute for International Economics asserted that money owed by South Korea’s Hyundai company to the North Korean government had gone “into the Macau bank account of ‘Bureau 39′.” The payments were for permission to operate tourist trips to Mt. Kumgang in the North. An official at Hyundai Asan, which organizes the tours, says only that royalties are paid to North Korea through Korea Exchange Bank’s branches in unspecified third countries.

The Congressional Research Service–which provides United States congressmen with background briefings–reported on March 5 last year that “the U.S. military command and the Central Intelligence Agency reportedly believe that North Korea is using for military purposes the large cash payments, over $400 million since 1998, that the Hyundai Corporation has to pay for the right to operate [the] tourist project.”

Noland, an expert on Korean affairs, asserted in his paper that this income was used for “regime maintenance,” or to strengthen the government and its armed forces. Bankers and Western security officials believe this is also the case with money earned from the operations in Europe and the Middle East.
The Macau Connection
The Former Portuguese Colony was a Terrorist Base for Pyongyang

Avenida de Sidonio Pais is not Macau’s busiest street. And the trading company that is located on the fifth floor in a nondescript concrete building doesn’t even have a sign outside. But this is where Zokwang Trading is located–and from where the North Koreans have conducted some of their more nefarious activities in East Asia. The company was set up shortly after the Carnation Revolution in Portugal in 1974, when the old fascist dictatorship was overthrown and the new, left-leaning leaders recognized North Korea.

But Zokwang, which ironically means “morning light” in Korean, has always been more than a trading company. This was the alleged planning base for the 1983 bombing in which North Korean agents killed 17 South Korean officials, including four cabinet ministers, who were visiting the Burmese capital, Rangoon. In 1987, another set of North Korean agents bombed a Korean Air jet, killing all 115 people on board. One of those agents, Kim Hyun Hee, now lives in Seoul and describes in her autobiography, The Tears of My Soul, how she was trained in Macau. There, she and other North Korean agents learnt Cantonese so that they would be able to pose as Macau or Hong Kong Chinese when sent on overseas missions. They were also trained to shop in supermarkets, use credit cards and visit discos–amenities that did not exist in their homeland.

In 1994, the head of Zokwang and four other North Koreans were arrested in Macau for depositing millions of dollars worth of counterfeit $100 bills. But nothing came of the investigation and in 1999, more counterfeit dollars were discovered in Macau. The North Koreans were also suspected of peddling drugs and guns through the then Portuguese enclave. Once a week, the North Korean national carrier Air Koryo flew from Bangkok to Pyongyang with a stopover in Macau. The flights, now monthly, carried few passengers–but plenty of cargo.

So Western and Japanese intelligence agencies were apprehensive when North Korea was allowed by the Chinese government to open a new consulate general in Hong Kong on February 16. Air Koryo had applied in April last year for permission to use Hong Kong’s new Chek Lap Kok airport instead. But the airport authorities turned the request down. Air Koryo’s old Tupolev Tu-154 aircraft were just too noisy.

But those who thought Hong Kong would become a new centre for North Korean crime have so far been proven wrong. Perhaps under Chinese pressure, the North Koreans in Hong Kong have become model diplomats: open, approachable and eager to forge links with the local business community. Hong Kong has also eclipsed Macau as the centre for North Korean businesses in East Asia, and the new style may serve as a harbinger for change. No one wants to see another terrorist state emerge in Asia.

Issue cover-dated October 25, 2001

From our friends at the U.S. Embassy in Seoul:

North Korean financial institutions
U.S. Embassy; Seoul, South Korea
Flash Fax Document Number: 5711
Date: April, 1995
——————————————————————————–

1. This cable summarizes information obtained from meetings with Korean Development Institute (KDI) officials as well as from two unclassified publications:
– “Status of North Korea’s financial system and expected reform in North Korea’s financial world in case economic integration takes place,” written by Dr. Chun Hong-Taek, and published by KDI in January 1994. Chun notes that his information is from open sources as well as interviews with South Korean companies that have done business with North Korea.

– “North Korean trading companies and financial institutions,” published by the National Unification Board (NUB) in October 1994. The NUB notes that the data in its publication is based on contract forms between South and North Korean trading corporations and other open sources, such as “Foreign trade of the DPRK” (published by the DPRK International Trade Promotion Committee, editions of January 1993 to June 1994) and “Directory of DPRK Foreign Trade Organizations,” (published in March 1994 by Japan’s East Asian Trade Society).

2. A few observations about the information:

– It provides a snapshot of individual North Korean financial institutions, such as a bank’s areas of specialization (if any), its address, key personnel, and its correspondent banks overseas. It does not provide information on current financial transactions.

– There are some differences in the information provided by the KDI and NUB, especially regarding subordination/jurisdiction. For example, the KDI publication notes that all banks are subordinate to the Central Bank, which itself is subordinate to the State Administration Council (SAC). The NUB, however, indicates that some banks are directly responsible to the Central Bank, while others are responsible to the SAC.

– Neither the KDI nor NUB publication lists any North Korean financial institution as having a correspondent agreement with Ashikaga Bank in Japan — a relationship that has been discussed in the press.

– Because of the date of information, newly created banks, such as the Ing-North East Asia Bank (reftel), are not included below.

– Likewise, the KDI and NUB include the names of several banks that may not be currently operating (such as Lyongaksan Bank), may have merged, or may have been renamed. 3. According to KDI officials and the two documents mentioned above, North Korean financial institutions include:

The Central Bank
4. Its title in English is the “Central Bank of the Democratic People’s Republic of Korea.” The CB is located In the central district of Pyongyang. Its telegraphic address is central bank. The CB operates 227 branches throughout North Korea, including P’yongyang, Ch’ongjin, Haeju, Hamhung, Hyesan, Kaesong, Kanggye, Namp’o, Najin, Sariwon, Sinuiju, and Wonsan. According to NUB, CB’s President is Chong Song-t’aek.

5. Established in 1946, the CB falls under the jurisdiction of the State Administration Council. Organizationally, the CB consists of three departments (Cadre Affairs, Material Supply, and Finance) and 14 Offices (coordination/planning, floating fund, Construction fund, repair fund, technology, currency control, banknote issue, fixed assets, savings/insurance, bookkeeping, inspection, business, and mobilization).

6. As a central bank, it is responsible for issuing bank notes, regulating currency in circulation, handling matters related to payment of accounts on a national level, making the government’s budgetary payments, and purchasing/managing precious metals. The Central Bank also operates as: a “special bank” by supplying state funds; a “commercial bank” by accepting deposits and lending money; a “state auditor” by exercising financial control in matters regarding the use of state funds; a “state property manager” by registering and evaluating the fixed assets of state institutions and enterprises; and as an “insurance institution” by handling domestic insurance matters–including property insurance for cooperative farms and factories and accident insurance for working Persons between 16 and 65 years old.

7. (FYI: according to KDI, there are four kinds of savings accounts available at the CB and north Korean Post Offices: ordinary savings accounts carrying 3.0 percent interest per year; long-term savings accounts carrying 3.6 percent interest per year; time deposit accounts carrying 4.0 percent interest per year; and a lottery-type deposit whereby the subscriber-if he/she draws a winning number in a lottery held every quarter–is paid a prize instead of interest.)

8. Funds lent by the CB to North Korean enterprises come from three sources, including the state budget, savings accounts, and insurance premiums. If an enterprise suffers a temporary cash flow problem while implementing Its projected economic plan, it can go to the CB because — according to KDI — the CB is the only supplier of state budgetary funds and money needed for financing national economic plans comes out of the state budget.

9. The NUB publication lists a firm named “Eunbyol Corporation of the Central Bank of the Democratic People’s Republic of Korea.” It is located in the central district of P’yongyang, its telex number is 5965 zu kp, and its telephone numbers are 33946 and 36882. According to the NUB, Eunbyol accepts orders for the manufacture of memorial coins. (Comment: The relationship between Eunbyol and the Central Bank is not further defined.)

Trade Bank (aka Korea Trade Bank)
10. The Korea Trade Bank’s (KTB) title in English is the “Foreign Trade Bank of the Democratic People’s Republic of Korea.” The bank is located in the central district of P’yongyang. Its telegraphic address is Mooyokbank Pyongyang; its telephone numbers are 32588, 34531, and 36508; its telex is 5460, 5465, 5477 and 36032 muyok bk kp; and its fax number is 814467. KTB’s president is Kim Ung-ch’ol, and its vice presidents are Kim Chun-ch’ol, Kim Myong-po, Pak Yang-sok, and Kim Yun-sik.

11. KTB was established in November 1959. The bank comes under the Central Bank’s jurisdiction, although KDI officials believe that the bank is now operating with less Central Bank oversight. According to KDI — KTB actually functions like a central bank’s foreign exchange department because its responsibilities include settling accounts in trade and invisible transactions, exercising control in matters regarding foreign exchange acquisition and disbursement, setting and announcing foreign exchange rates, and issuing foreign exchange convertible notes that can be used only by foreigners while staying in north Korea. According to NUB, KTB was once involved in trade with South Korea, such as selling gold and silver nuggets.

12. In order to settle its trade accounts overseas, KTB has correspondent agreements with foreign banks, including 18 banks in Japan, which (as of March 1993) the NUB identified as Sanwa, Tokyo, Sakura, Mitsubishi, Fuji, Daiichi-kangyo, Tokai, Sumitomo, Asahi, Saiwa, Hokkaido Takushoku, Nihon Kogyo, Nihon Long-term Credit Bank, Itsui Trust, Sokuri, Hyogo, Hokkuriku, and Norin Chuou Kinko. According to KDI, other foreign banks include Great Britain’s Lloyds and Standard Chartered, Germany’s Deutsche and Commerze, France’s BNP and Credit lyonnaise, Switzerland’s SBC and UBS, Austria’s Creditanstalt Bankverein and Girozentrale Vienna. KTB also has correspondent agreements with unidentified banks in Hong Kong.

Daesong Bank
13. This bank’s title in English is “Korea Daesong Bank” (KDB. It is located in the central district of P’yongyang. Its telegraphic address is Daesongbank Pyongyang; its telephone number is 43002; and its telex is 36023 and 37041 kdb kp. According to the NUB, KDB’s President is Kim Myong-hui, its vice president is Chang Kon-il, and its chief managing director is Ch’oe Su-kil. (comment: according to KDI, the KDB’s top managers traditionally hold high posts within the KWP, and these persons are typically more influential than other government officials.)

14. Established in November 1978, KDP comes under the Central Bank’s jurisdiction. The bank settles accounts for trading and shipping companies, such as Korea Daesong Trading Corporation, Korea Tonghae Shipping Company, and Korea Mangyong Trading Corporation. The bank was also once involved in trade with South Korea, such as selling gold and silver nuggets

15. (Comment: the KDI and NUB publications say that KDB is under the Central Bank’s jurisdiction, but the NUB write-up on Korea Daesong General Trading Corporation (KDGTC) notes that KDGTC operates a bank, most likely referring to Korea Daesong bank. Moreover, the NUB says That kdgtc itself is under the jurisdiction of the Daesong General Bureau, Office 39, KWP Central Committee.)

16. KDB operates a branch/affiliate in Vienna, Austria, named the Golden Star Bank. It also operates a branch of the Korea Daesong Trading Corporation in Hong Kong, according to KDI. In addition, KDB has correspondent relations with banks in Japan (Tokyo, Sanwa, and Sokuri), In the United Kingdom (Midland, National Westminister, and Standard Chartered), in Germany (Deutsche Bank) and in Switzerland (Swiss Bancorp). It also has correspondent relations with unidentified banks in Bombay, Frankfurt, Hong Kong, London, Paris, Singapore, Stockholm, and Vienna.

Changgwang Credit Bank
17. Its title in English is “Korea Changgwang Credit Bank” (KCCB). The bank is located in P’yongyang. Its telegraphic address is Changgwang credit; its telephone number is 31477; its telex is 36016 kccbc kp; and its fax number is 814414. According to NUB, the chairman of Korea Changgwang Credit Bank (KCCB) is Sin Ho and its president is Maeng Pok-sik.

18. According to NUB, KCCB was established on 25 February 1983 and deals in international financing – making exchange transactions in Beijing, Copenhagen, Frankfurt, Geneva, Hong Kong, London, Milan, Rome, Singapore, Stockholm, Tokyo, and Vienna. KCCBC also has 172 branches. (Comment: the NUB publication does not specify whether these branches are located in North Korea or overseas.)

19. (Comment: Although KDI’s banking document does not contain any details on KCCB or its activities, a KDI official told Emboffs that he considers KCCB to be the richest bank operating in North Korea — primarily because it is associated with the military (NFI).)

Koryo Commercial Bank
20. The bank’s title in English is “Koryo Commercial Bank Ltd.” This bank is located in Taedonggang District, P’yongyang. Its telegraphic address is Koryo bank; its telephone number is 32060; its telex is 36019 kcb kp; and its fax number is 814441. According to NUB, the bank was established in 1988, jointly financed by the DPRK and a Group of Korean residents in the United States. Its business reportedly is to issue “National Reunification Fund” bonds.

Credit Bank
21. The Credit Bank’s title in English is “Credit Bank Of Korea.” It is located in the Taedonggang District of P’yongyang. Its telegraphic address is credit bank; its telephone number is 814285; its telex is 5939 cbk kp; and its fax number is 817806. The president of Credit Bank is Pak Ki-chu.

22. Credit Bank was first established in September 1986. It was initially called the International Credit Bank, but its name was changed to its present form on 23 August 1989. Dealing in international finance, the Credit Bank does exchange transactions in cities around the world, including Amsterdam, Brussels, Frankfurt, Hong Kong, London, Milan, Moscow, New York, Paris, Tokyo, Vienna, and Zurich. The Credit Bank also was once Involved in trade with South Korea, selling gold nuggets to it.

Kumgang Bank
23. Kumgang bank is located in the central district, P’yongyang. Its telegraphic address is Kumgang Pyongyang; Its telephone numbers are 32029 and 32797; its telex is 5355 kgbk kp. Kumgang Bank settles accounts for export-import transactions of North Korean trading corporations, including Korea Pyongyang Trading Corporation and Korea Ponghwa General Trading Corporation.

24. According to the NUB, Kumgang bank was established in September 1978. Its subordination is not clear as the NUB says it is under the state administration council’s jurisdiction, while KDI says it is under the Central Bank’s. (Comment: to further complicate the issue, the NUB document notes in its write-up of Korea Ponghwa General Corporation (SEPTEL) that Ponghwa itself operates the Kumgang Bank.)

Nagwon Financial Joint Venture Corporation
25. According to the NUB publication, Nagwon was established in October 1987, jointly financed by Korea Nagwon Trading Corporation and a Japanese firm “Palace.” Its subordination is not clear as NUB says it is under the State Administration Council jurisdiction, while KDI says it is under the Central Bank’s. The bank accepts deposits, remits money, and provides financial services to joint venture projects, trading corporations, and companies run by overseas compatriots.

26. (Comment: The KDI publication does not provide information on this firm. Instead, it notes that a bank named Korea Ragwon Kumyung Company (aka Korea Ragwon Financing Company) operates in North Korea, but information on its activities is not available. It is not clear whether the NUB and the KDI firms are one and the same.)

Yongaksan Bank (aka Lyongaksan Bank)
27. This bank was established in February 1983. It settles trade accounts of trading companies, including Yongaksan Trading Corporation.  T’ongil Palchon Bank (aka Korea Tongil Paljon Bank)

28. (Comment: T’ongil Palchon means “reunification and development.” Based on the information below, this bank is probably the same as “United Development Bank” which was formed in November 1991 between Ruby Holdings (now known as China Strategic Investments) and Osandok General Trading Corporation.)

29. According to NUB and KDI, T’ongil Palchon Bank (TPB) is a joint venture between Hong Kong’s Ruby Holdings Company and North Korea’s Osandok General Bureau. The two publications differ regarding the bank’s financing and subordination: –NUB says that TPB was jointly financed; KDI indicates that Ruby Holdings financed 51 percent of TPB’s US $30 million capital, with Osandok financing the remaining 49 percent. (Comment: According to the KDI publication, China’s International Trust and Investment Corporation (CITIC) had an option to buy into the joint venture, but it is not clear whether CITIC ever did so.)

– The NUB says TPB falls under the State Administration Council’s jurisdiction; KDI says TPB is subordinate to the Central Bank.

30. According to KDI, TPB deals in general trade, including the import of advanced technologies (NFI). It also operates an affiliate, Korea International Trust Investment Corporation (KITIC). KDI notes that North Korea appears interested in learning market financing techniques because the holding company of the joint venture partner (Ruby Holdings) is Indonesia’s Sinarmas (phonetic) Business Group which owns the Bank International Indonesia. (Comment: KDI defines “financing techniques” as ones required for inducing foreign capital.)

Habyong Bank
31. Habyong Bank’s title in English is “Korea Joint Venture Bank” (KJVB). It is located in the Central District, P’yongyang. KJVB’s telephone numbers are 33052 and 39620; its telex is 36001 kjb kp; and its fax number is 814497. The bank’s vice president is Pak Il-nak, who the NUB document says is from the Chosen Soren.

32. KJVB was established in April 1989. The NUB and the KDI publications differ on the names of the joint venture partners:

– The NUB says that the bank was formed by the Chosen Soren and its affiliate, the Federation of Korean Traders and Industrialists in Japan. The North Korean partner is the State Administration Council’s Joint Venture Industry General Bureau.

– KDI notes that KJVB was jointly financed by the Chosen Soren’s Joint Ventures Promotion Committee and North Korea’s Korea International Joint Venture Company.

33. The bank functions as an international financial institution, providing financial assistance for North Korea’s joint venture projects and settling domestic and foreign accounts for joint venture companies. According to NUB, the bank also conducts economic surveys. KJVB operates branches in North Korea, including Hamhung, Sariwon, Sinuiju, Wonsan, P’yongsong, and Ch’ongjin. It also has correspondent relationships with some 30 foreign banks, including Japan’s Sokuri Bank, Hong Kong’s Maritime Commercial Bank, and China’s Bank of China.

Kukche Insurance Company
34. This firm’s title in English is “Korea Foreign Insurance Company” (KFIC). It is located in P’yongch’on District in P’yongyang. Its telegraphic address is chosunbohom; its telephone numbers are 36147, 38805, and 45501; and its telex number is 5464 bohom kp. KFIC’s president is Paek Myong-non, and its vice presidents are Yi Sang-chu and Pak Kun-pae.

35. According to NUB, KFIC handles insurance matters involving ships and export-import cargos and reinsurance issues involving foreign insurance companies. It also does business with some non-life insurance companies in Japan regarding reinsurance matters. KFIC operates branches at major ports, including Namp’o, Hungnam, Ch’ongjin, Najin, and Haeju.