North Korean Economy Watch

Pictured above is the location of the First Caribbean International Bank

According to the Daily NK:

The existence of a secret bank account operated by the No.39 Department of the Chosun Workers’ Party has been publicly confirmed for the first time, bringing yet more attention to bear on the activities of banks in one of the western world’s renowned tax havens.

The No.39 Department, which is responsible for the management of Kim Jong Il’s private funds, holds the bank account with the British Virgin Islands branch of First Caribbean International Bank (FCIB), a prominent bank in the Caribbean region.

According to an expert source familiar with China and North Korea, the No. 39 Department’s secret overseas account exists under the name “Hana Holdings”. It is apparently held with the Road Town branch of the bank, which is based in Barbados and has branches in 17 countries.

Explaining the importance to North Korea of the No.39 Department account, the source told Daily NK, “Due to recent UN Security Council sanctions, the No. 39 Department is experiencing considerable difficulties with its overseas financial trade. Currently, excluding Chinese banks, their only active overseas account is that held with FirstCaribbean International Bank.”

Also, he added, “The only bank through which the No. 39 Department can make overseas transfers is FirstCaribbean International Bank in the British Virgin Islands, since their other secret bank accounts are all blocked.”

He said, “In cases of normal trade relationships with other companies, it used to be possible to transfer the money overseas from China. However, those routes are blocked as well. Since United Nation’s financial sanctions against North Korea make it difficult for North Korea to transfer money to accounts in third countries from Chinese banks, all foreign currency earning units including the No. 39 Department are experiencing the same difficulties.”

Generally, the No. 39 Department works by transferring money from secret overseas bank accounts to accounts with Chinese banks for money laundering.

The source explained, “No. 39 Department moves the management funds from third countries to FirstCaribbean International Bank, then sends the money to the Bank of China until it can be transferred to a North Korean bank or withdrawn.”

According to the source, the person in charge of transfers between FirstCaribbean International Bank and Bank of China is dispatched by the No. 39 Department under a false name. Also, the official allegedly travels to China frequently to deal with problems involving trade with the Chinese bank.

News of the FCIB account will not be too surprising to North Korea economy watchers. Entities in the British Virgin Islands were already suspected of doing business with the North Korean regime before this latest revelation because of the islands’ connection to the activities of Taepung International Investment Group.

The annual returns of the Taepung Group, as it is more commonly known, show that it was originally set up in September, 2006. However, it became better known early in 2010 when it was placed at the center of efforts to revive the North Korean economy through the creation of a state development bank.

Registered in Hong Kong, its only shareholder as of its 2010 Annual Return was Taepung International Investment Holdings Ltd, whose registered address is in Road Town, British Virgin Islands.

According to the same return, obtained by a keen observer of North Korea’s illegal activities, Ken Kato, the Taepung Group’s corporate secretary is Sai Ying Company Ltd, whose only shareholder, and corporate director, is JYBD Holdings Ltd. JYBD Holdings Ltd’s registered address is the same one in Road Town, British Virgin Islands.

This is not the first time that FirstCaribbean International Bank has run into trouble, either. In 2008, it was indicted on 113 charges of “failure to report suspicious transactions” between 2001 and 2005 by the Belize Financial Intelligence Unit (FIU).

However, the charges were dropped because, according to a Belize newspaper, they were threatening to destabilize the country’s financial sector. Instead, First International was ordered to pay for both an electronic reporting system for the country and the refurbishment of two parks.

There are known to be a substantial number of other North Korean accounts held in countries around the world. At the time of the report completed by the 1718 Committee (North Korea sanctions committee) under the UN Security Council last July, North Korean banks were said to hold a total of 39 accounts with 18 banks located in 14 countries. Allegedly, these accounts include a considerable number managed by the No. 39 Department.

17 of the 39 accounts were located with big Chinese banks like Bank of China, China Construction Bank and HSBC, according to the report. Bank of China in Macao had the largest number of North Korean accounts, while some other accounts were held with Beijing and Dandong branches.

In addition, at the time, North Korea had 18 accounts with 11 banks in 8 countries in Europe; Russia, Switzerland, Denmark, Hungary, Poland, Italy, Germany, and Belarus; also, it had one account each in Malaysia and Kazakhstan.

As the 1718 Committee report explained, “The DPRK… employs a broad range of techniques to mask its financial transactions, including the use of overseas entities, shell companies, informal transfer mechanisms, cash couriers and barter arrangements. However, it must still, in most cases, rely on access to the international financial system to complete its financial operations. In structuring these transactions, attempts are made to mix illicit transactions with otherwise legitimate business activities in such a way as to hide the illicit activity.”

And also according to the Daily NK:

The newly revealed secret overseas bank account held by the No. 39 Department is just one of several accounts set up in various locations around the world to manage Kim Jong Il’s funds.

However, due to the financial sanctions brought about by two nuclear tests and multiple missile launches, the No. 39 Department’s secret overseas accounts are continuously shrinking. As one North Korean source in China put it, “Due to United Nation’s financial sanction against North Korea, the No. 39 Department’s management of its overseas secret accounts has become difficult.”

Now, due to the Cheonan incident, the U.S. is planning to put in place “customized” financial sanctions which incorporate existing UN Security Council and EU financial sanctions, so the No. 39 Department’s overseas accounts will only get more difficult to manage in the future.

The No. 39 Department’s overseas accounts, which allegedly contribute much to Kim Jong Il’s governing funds, are prime targets for financial sanction since they are key to transferring those funds generated by illegal activity.

According to intelligence authorities, the No.39 Department has a bank account with Daesung Bank in Pyongyang, and manages capital in some of the world’s most influential banks in Macao, Hong Kong, Germany, Japan, and England through a subsidiary of Daesung Bank, Gold Star Bank (Geumbyeol Bank) in Vienna, Austria.

The $25 million which was frozen in Banco Delta Asia in 2005 was allegedly known to be some of Kim Jong Il’s governing funds managed by the No. 39 Department.

Radio Free Asia reports that even the Luxembourg government seems likely to implement any new sanctions, quoting them as saying, “We are keeping a close eye on the illegal activities which can take place through North Korea’s overseas accounts.”

The No. 39 Department has 17 overseas branches, 100 trading companies and banks under its auspices. They generate foreign currency through loyalty funds collected from each agency and management of hotels and foreign currency stores. Also, they trade the country’s natural resources including pine mushrooms, gold and silver.

The department is also in charge of the production of “supernotes,” high quality counterfeit $100 bills, and has a role in weapons and the illegal drugs trade.

The funds are mostly spent on the living costs of the Kim family and the patronage network required to maintain his coterie of high officials. In 2008, the sum of luxury goods purchased by North Korea was estimated to be more than $100 million. For example, immediately prior to the anniversary of Kim Il Sung’s birth on April 15th, North Korea imported approximately 200 high grade vehicles from China.

Since foreign currency generation started to become difficult due to the sanctions, Kim Jong Il has allegedly revived the No. 38 Department, which used to be in charge of overseas currency earning and was only merged with the No. 39 Department in September of 2009, and replaced the head of No. 39 Department with Jeon Il Choon, an old high school friend.

As Kim Kwang Jin, a North Korean defector who worked for the Northeast Asia Bank of North Korea, pointed out in a recent press interview, “The UN Security’s North Korea sanctions and the United States’ Banco Delta Asia sanctions must have caused the shrinking of North Korea’s overseas accounts. It is possible that North Korea could try to open accounts under phantom company names to continue with its financial trades.”

According to the Daily NK:

It has been suggested that pets should added to the list of “luxury goods” sanctioned and supposedly out of reach of the Kim Jong Il regime.

While “thoroughbred horses” are already a luxury good on the EU’s list of banned products published in the final version of the “Report to the Security Council from the Panel of Experts Established Pursuant to Resolution 1874”, there is nothing about pets.

However, according to one anonymous source well-versed in North Korea matters, Kim Jong Il has been known to spend hundreds of thousands of dollars on pets from France and Switzerland.

The money for his purchases apparently comes from the No. 39 Department of the Central Committee of the Party, according to a Daily NK source, and since the funds generated by the No. 39 Department come from illicit activities such as selling weapons, drugs, counterfeit cigarettes and super notes, he believes this pet-related trading must also be put on the list of sanctioned “luxury goods.”

Among dogs, for example, Kim apparently has a preference for the Shitzu and has spent many thousands of dollars purchasing and raising them. Kim Chun Hyung, a Seoul-based veterinarian, confirmed the price of such fine breeds, saying, “The price of pets is very diverse, but when you import a purebred you may need to pay tens of thousands of dollars.”

Jang Jin Sung, a poet who was said to be Kim Jong Il’s favorite poet in North Korea until he defected in 2004, described how much Kim Jong Il loves his pet dogs in an interview on Wednesday, explaining, “I was invited to a no.1 event, in which Kim Jong Il is set to appear, at Kim’s Kalmacheon Villa in Wonsan, Kangwon Province. Security was so fussy that they forced us to disinfect our hands, and then I waited for him nervously.”

“All of sudden a small white puppy appeared, which made me wonder, but then Kim Jong Il entered the hall behind it,” Jang said. “While Kim was having dinner, the puppy walked around without restriction. When it approached Kim, he petted it many times.”

The anonymous source said that Kim is always accompanied by dogs to his onsite inspections, adding that their food and shampoo is all imported, from France in the case of shampoo.

When the animals fall sick, top quality vets from foreign countries are invited to Pyongyang or the animals are taken overseas for treatment, the source said, adding, “The reason why they go by plane is for ease of customs clearance.”

The responsibility for importing pets is the job of overseas-based officials, but due to Kim Jong Il’s picky taste, especially in cats, they find it hard to match the color of fur or eyes that Kim likes, according to the source. 

Read the full story here:
Pets Are Luxury Goods, Too
Daily NK
Shin Joo Hyun
8/12/2010

According to the Daily NK:

The 1718 Committee of the UN Security Council has published the final version of its “Report to the Security Council from the Panel of Experts established Pursuant to Resolution 1874,”

In the report, of which the Daily NK has obtained a copy, the 1718 Committee revealed North Korean overseas accounts which had likely been used for North Korea’s illicit activities such as conventional weapons transactions and luxury goods, and the names of entities and individuals involved in those activities. The lists were submitted by UN member states.

The report singles out 17 North Korean officials thought likely to violate UN Resolutions 1718 and 1874, and outlines the reasons why they were designated by the UN member states.

They are Jang Sung Taek, Vice-chairman of the National Defense Commission and the closest associate of Kim Jong Il, Vice-chairman of the National Defense Commission Oh Keuk Ryul, Kim Young Chun, the Minister for the People’s Armed Forces, Director of No. 39 Department Kim Dong Woon, Military Supplies Secretary in the Central Committee of the Party Jeon Byung Ho, former Yongbyon technical director Jeon Chi Bu, First Vice-director of the Ministry of the Munitions Industry Chu Kyu Chang, Standing Vice-director of the People’s Army’s General Political Department Hyun Cheul Hae, President of the Tanchon Commercial Bank Kim Dong Myung, Member of the National Defence Commission Baek Se Bong, Deputy Director of the General Political Department of the People’s Armed Forces Park Jae Kyung, President of the Academy of Science Byeon Youong Rip, Director of the General Bureau of Atomic Energy Ryeom Young, Head of the Department of Nuclear Physics of Kim Il Sung University Seo Sang Il, President of Kohas AG Jacop Steiger and Alex H.T. Tsai, who is known to have provided financial, technological and other support for KOMID, and his wife, Su Lu-chi.

It also released a list of autonomous designations provided by member states, covering 19 North Korean entities. That list was made based on information collected as of April 30th this year.

They are Amroggang Development Banking Corporation, Global Interface Company Inc., Hesong Trading Corporation, Korea Complex Equipment Import Corporation, Kohas AG, Korea International Chemical Joint Venture Company, Korea Kwangson Banking Corp, Korea Kwangsong Trading Corporation, Korea Pugang Trading Corporation, Korea Pugang Mining and Machinery Corporation ltd., Korea Ryongwang Trading Corporation, Korea Ryonha Machinery Joint Venture Corporation, Korea Tonghae Shipping Company, Ponghwa Hospital, Pyongyang Informatics Centre, Sobaeku United Corp., Tosong Technology Trading Corporation, Trans Merits Co. Ltd., and Yongbyon Nuclear Research Centre.

13 out of the 19 have direct or indirect links to Tanchon Commercial Bank and Korea Mining Development Trading Corporation (KOMID).

Amroggang Development Banking Corporation is the financial arm of KOMID and related to Tanchon Commercial Bank, which has also been designated by the 1718 Committee. Additionally, Global Interface Company Inc. is owned by Alex Tsai, who is thought to have provided, or attempted to provide, support to KOMID.

Sobaeku United Corp. is involved in activities related to natural graphite, producing graphite blocks that can be used in missiles.

The report points out, “North Korea has established a highly sophisticated international network for the acquisition, marketing and sale of arms and military equipment, and arms exports have become one of the country’s principal sources for obtaining foreign exchange,” and goes on to say, “Agencies under the National Defense Commission (NDC), the Workers’ Party of Korea (WPK) and the Korean People’s Army (KPA) are most active in this regard.”

The report explains, “The Second Economic Committee of the National Defense Commission plays the largest and most prominent role in nuclear, other WMD and missile-related development programs as well as in arranging and conducting arms-related exports.”

It adds, “The General Bureau of Surveillance of the Korean People’s Army is involved in the production and sale of conventional armaments.”

The report points out that North Korea has opened 39 accounts with 18 overseas banks in 14 countries. 17 of which are held with Chinese banks.

Besides China, 11 banks in eight European and former Soviet countries (Russia, Switzerland, Denmark, Hungary, Poland, Italy, German, Belarus and Kazakhstan) hold 18 North Korean accounts. There is one account in Malaysia.

“The DPRK also employs a broad range of techniques to mask its financial transactions, including the use of overseas entities, shell companies, informal transfer mechanisms, cash couriers and barter arrangements,” the report notes.

According to experts on North Korea, since North Korean overseas illegal activities are all led by the loyal group surrounding Kim Jong Il, U.S. financial sanctions in accordance with UN Security Council resolutions 1817 and 1874 and also U.S. Executive Order (E.O.) 13382 have the potential to be a great pressure on the Kim Jong Il regime.

The Panel of Experts, which was appointed by the UN Secretary-General on 12 August 2009 to author the report, are David J. Birch (United Kingdom of Great Britain and Northern Ireland, coordinator), Masahiko Asada (Japan), Victor D. Comras (United States of America), Erik Marzolf (France), Young Wan Song (Republic of Korea), Alexander Vilnin (Russian Federation), and Xiaodong Xue (People’s Republic of China).

Read the full story here:
Report Explains Sanctions Decisions
Daily NK
Kim Yong Hun
8/6/2010

According to the Daily NK:

North Korea has earned more than $160 million in the last ten years thanks to the construction of sculptures and other edifices in countries across Africa.

A Daily NK source in China revealed on the 18th, “Since 2000, North Korea has been earning colossal quantities of dollars through contracts for the Mansudae Overseas Project Group of Companies under the Mansudae Art Institute to construct sculptures.”

Mansudae Art Institute is an organization primarily dedicated to the idolization of Kim Il Sung and Kim Jong Il through public works, one whose construction of edifices such as the Juche Tower and Arch of Triumph in Pyongyang has added to the status of the country.

It has also been building revolutionary monuments in African countries such as Ethiopia since the 1970s in order to maintain cordial relations with socialist states, but in the early 2000s started doing work in African countries to earn foreign currency as well.

According to the source, North Korea has earned $66.03 million from Namibia alone thanks to the construction of the Presidential Palace ($49 million); the Cemetery of National Heroes ($5.23 million); a military museum ($1.8 million); and Independence Hall ($10 million).

It has also earned almost $55 million from Angola via the António Agostinho Neto culture center ($40 million); Cabinda Park ($13 million); and the Peace Monument ($1.5 million).

Additionally, the North has constructed a basketball stadium ($14.4 million) and an athlete academic center ($4.8 million) in the Congo, earning almost $20 million dollars in total.

Thanks to the Monument to the African Renaissance in Senegal, the North has made another $12 million dollars.

There are around 19.8㎢ set aside for a vacation spot for the president of Equatorial Guinea, which is supposed to earn Mansudae around $800,000, not to mention a government office building ($1.5 million), Luba Stadium ($6.74 million) and conference halls ($3.5 million).

The source also reported, “The money earned from these construction projects is managed by the No. 39 Department. Some of these dollars are used for domestic governance, while the rest go to secret accounts in Switzerland or Macau to become Kim Jong Il’s secret funds.”

Here are the images from the story including a table of financial data (which I would take with a grain of salt):

Additional Information:

1. I blogged here about the Derg Monument in Ethiopia.

2. I have located some of the Mansudae Overseas projects mentioned in this story (as well as numerous other places not menioned in this story: Egypt and Syria, Zimbabwe, DR Congo). However, here are GeoEye satellite images of some of the Namibia and Angola projects mentioned above courtesy of Google Earth:  

Namibia National Heroes Acre (22°39’46.02″S,  17° 4’41.06″E):

Namibia State House (22°35’28.83″S,  17° 6’2.76″E)

Cultural Center of António Agostinho Neto (Mausoleum) (8°49’24.73″S,  13°13’8.52″E)

According ot the Choson Ilbo:

North Korea in March restored a special department in the Workers Party codenamed Room 38 which manages leader Kim Jong-il’s coffers and personal slush funds, it emerged Monday. The North last fall merged Room 38 with Room 39, which manages party slush funds.

“Rooms 38 and 39 were merged to simplify Kim Jong-il’s slush funds,” said a North Korean source. “But when it became difficult to secure hard currency due to international sanctions, Room 38 seems to have been restored because there was a feeling that Room 39 alone can’t meet the need.”

Room 38 is reportedly led by Kim Tong-il, who heads three regional departments in charge of earning hard currency.

Room 39 tries to maximize earnings from gold and zinc mining and farming and fisheries. It also manages stores and hotels exclusively for foreigners in Pyongyang. Room 39 seems to have suffered badly due to the recent suspension of inter-Korean trade. “Taesong Bank and Zokwang Trading, which received remittances from Mt. Kumgang tourism, are both controlled by Room 39, and is also in charge of the exports of agricultural and fisheries products,” said a government source.

Kim Jong-il needs dollars to maintain the party elite’s loyalty to him and his heir presumptive. He is said to have told party bigwigs in February, “From now on I will judge your loyalty based on the amount you contribute to the fund.” His son Jong-un is also said to be amassing separate slush funds for his own use.

But international sanctions on exports of weapons, counterfeit dollars, fake cigarettes and drugs remain in place, and the United States is pushing ahead with additional financial sanctions over the North’s sinking of the South Korean Navy corvette Cheonan in March. Pyongyang was dealt a heavy blow in 2005 when the U.S. froze US$25 million in the Banco Delta Asia in Macao which was apparently for Kim’s personal use.

Kim earlier this year appointed his high school friend Jon Il-chun head of Room 39. Jon was also named chairman of the National Development Bank, established early this year with a view to conducting normal international financial transactions to induce foreign investment. “North Korea seems to be planning to divert part of foreign investment to Kim’s slush fund,” said a government official.

NK Leadership Watch has more. 

Read the full story here:
Kim Jong-il Restores Special Department to Swell Coffers
Choson Ilbo
6/24/2010

According to the Daily NK:

The chairman of North Korea’s State Development Bank, Jeon Il Chun visited China on April 8, reportedly to try and bring Chinese investment to Daebong Mine, located near Hyesan, Yangkang Province.

Daebong Mine is one of North Korea’s major gold mines, managed under the auspices of the No. 39 Department of the Central Committee, a special department charged with raising funds for Kim Jong Il’s personal use. Jeon Il Chun is the person in charge of the No. 39 Department.

Attempts to sell shares in a gold mine directly controlled by the 39 Department, Kim Jong Il’s own private safe, to China seem to indirectly imply that Kim is suffering from a debilitating foreign currency supply crisis.

One Daily NK source in China who is well-acquainted with North Korean affairs reported that while Jeon was in China, he met with the management of three or four Chinese enterprises which already have investments in North Korea, and suggested investment conditions under which the North could transfer some of its mineral rights to them and receive capital investments in return.

The source said, “For now, as far as I know, executive managers of the No. 39 Department have been in contact with Chinese enterprises. Since the Workers’ Party is trying to sell shares in a gold mine, it seems the funding of the Party might be serious.”

“It is not clear whether or not this attempt was done on Kim Jong Il’s instructions, but attracting foreign investment in a gold mine is not a commonplace affair,” the source pointed out, adding that an investor has not yet been put in place.

What is the Daebong Mine for?

The Daebong Mine is a relatively large gold mine on the border of Woonheung and Gapsan in Yangkang Province. Until 2001, a Yangkang provincial foreign currency earning enterprise and the foreign currency earning department of the People’s Safety Agency jointly managed it. However, in May, 2002, it became a No. 39 Department affiliated enterprise.

The No. 39 Department has been raising private funds for the leader and Party operations under the Finance and Accounting Department of the Central Committee since the mid-1970s. According to defectors, it has the highest authority and the largest funds of all North Korea’s foreign currency earning enterprises. Especially, it has the ability to mobilize tremendous financial resources since it manages and controls supplies of gold and silver and rare non-ferrous metals.

A source from Yangkang Province explained, “According to Chongjin University of Mining and Metals and Kim Chaek University of Technology, the purity of the gold from the Daebong Mine is more than 76 percent, while production from Hoichang and Eunsan in South Pyongang Province is 63 percent and 61 percent respectively. More than 150kg of solid gold is produced annually, so this mine is known as the ‘loyalty mine’.”

“People say that the government earns four or five million dollars a year through this mine. Neither Yangkang Provincial Committee nor Hyesan Municipal Committee is involved with the business of the mine.”

The source added, “Since the No. 39 Department deals with the mine, only those discharged soldiers with good family backgrounds are dispatched there by the Central Committee. In October of last year, around 200 discharged soldiers with good family backgrounds came to the mine.”

Almost all the gold produced in the Daebong Mine is stored in Swiss and Austrian banks in gold bars.

A Chinese company had a contract with the DPRK’s Musan Mine which has been canceled for an unknown reason.

Click here to see what I believe is the mine’s location.

Read the full article here:
No. 39 Department Hawking Shares in Key Gold Mine
Daily NK
5/3/010
Lee Sung Jin

According to the Choson Ilbo:

North Korean leader Kim Jong-il’s youngest son and the heir apparent Kim Jong-un is already said to be busy amassing his own slush fund. Despite North Korea’s dire economic difficulties, Kim Jong-il himself is said to have stashed away between US$200-300 million every year to finance his lavish lifestyle and maintain the party elite’s loyalty to him.

With the money, North Korea would be able to import between 400,000 to 600,000 tons of rice, which would be enough to cover half the country’s food shortage of 1 million tons of rice per year.

Key departments within the Workers Party are pressuring agencies under their control to offer “loyalty funds” for the successor, a source familiar with North Korean affairs said. “A separate company has been established under the leadership of Kim Jong-un to secretly amass foreign currency.”

The source said Kim senior uses his slush fund to finance his expensive tastes, build monuments in his own honor and buy gifts for his loyal aides. Faced with increasing difficulties bolstering his slush funds under international sanctions, the Kim is said to have issued an ultimatum to his top officials in February, saying from now on he would judge their loyalty based on the amount they contribute to the fund.

The North is estimated to have imported more than $100 million worth of high-quality liquor, cars and other luxury goods in 2008. And also on the list are pet dogs, which the Kim family are said to adore. Kim buys dozens of German shepherds, Shih Tzus and other breeds from France and Switzerland every year. He also buys dog food, shampoo and other pet products as well as medical equipment for the dogs and has foreign veterinarians check their health.

Before nation founder Kim Il-sung’s birthday on April 15 this year, Kim imported around 200 high-end cars from China at a cost of some $5 million. A North Korean source said secret funds are also used to finance nuclear missile development and other state projects Kim Jong-il orders personally.

It is difficult to estimate the total amount of Kim’s slush fund. Experts can only guess that Kim has stashed huge sums of money in Swiss or Luxembourg bank accounts, as did other dictators like former president of the Philippines Ferdinand Marcos and ex-Iraqi leader Saddam Hussein. The international press estimates Kim’s slush fund to be worth around $4 billion.

Kim started amassing his slush fund as soon as he was picked as the next leader of North Korea in 1974 to be able to buy the loyalty of top officials. A special department within North Korea’s Workers’ Party called Room 39 which manages Kim’s slush fund by collecting the loyalty funds, exporting local staples including pine mushrooms and operating stores in hotels. A large portion of the $100 million to $200 million North Korea makes each year from exporting weapons, producing counterfeit dollars, smuggling fake cigarettes and selling drugs are also put into Kim’s slush fund.

A North Korean source said a lot of the cash profits generated by the joint tourism business with South Korea end up inside Kim’s personal slush fund too, judging by the fact that Daesong Bank and Zokwang Trading, which do business with the South, are both controlled by Room 39.

Early this year, Kim appointed his high school friend Jon Il-chun to head Room 39. Jon was made the chief of a state development bank North Korea opened recently to lure foreign investment. A South Korean government official said there are suspicions that Kim is diverting some of the profits of the state development bank into his own slush fund as well.

Read the full story here:
How N.Korea’s Ruling Family Swells Its Private Coffers
Choson Ilbo
4/28/2010

According to the Guardian:

It is the nerve centre of North Korea’s money-making operations, the department dedicated to raising hard currency for Kim Jong-il while his country teeters on the brink of collapse.

Room 39 is responsible for some legal ventures, such as the country’s limited exports of ginseng and other items. But according to defectors, most of its energy goes into drug-trafficking, sales of weapons and missile technology, and the production of counterfeit US dollar bills.

Today, it was reported the department’s head – Kim Jong-il’s personal finance manager – has been sacked, possibly in response to international action against the alleged illegal moneymaking. South Korea’s Yonhap news agency said Kim Dong-un was dismissed because he had been blacklisted by so many foreign governments, including the EU in December, leaving him unable to travel on behalf of Room 39′s legal companies. He has been replaced by his deputy, Jon Il-chun, Yonhap said, citing an unidentified source.

Housed in an unremarkable government compound in Pyongyang, Room 39 oversees 120 companies and mines, accounting for a quarter of all North Korean trade and employing 50,000 people, according to Lim Soo-ho, a research fellow at the Samsung Economic Research Institute. He said Kim’s dismissal may be part of attempts to get around international sanctions.

While its inner workings remain a mystery to all but its occupants and the family they serve, Room 39′s role in enabling the regime to survive even in times of widespread famine and international pressure, has come under greater scrutiny since the imposition last year of tough UN sanctions over its nuclear programme.

…

Some of the money generated by Room 39 is used to buy the loyalty of senior party officials, a role that may take on greater prominence as Kim Jong-il, who suffered a stroke in 2008, prepares to hand over power to his third son, Kim Jong-un. Analysts have estimated that illegal activities account for up to 40% of all North Korean trade and an even higher share of total cash earnings.

Additional information: 

1. More on the EU travel ban is here.

2. Office 39 is reportedly located here.  Kim Jong Il’s office is reportedly nearby here.

3. This week the KWP’s finance director, Pak Nam-gi, was also let go.

4. Mike Madden notes the new director’s  appearance with KJI at an “On the Spot Guidance” visit this week.  Mike also points to a possible appearance the Korea Taepung International Investment Group meeting.

Vanity Fair has published a lengthy article about the DPRK’s mysterious Bureau 39 which is allegedly behind a number of illicit activities such as counterfeiting US currency and cigarettes, smuggling drugs and bilking western insurance companies with fraudulent claims. The full article is worth reading here.  (h/t DPRK Studies)

Of immediate interest, here is the supposed location of Bureau 39 just south of the Grand People’s Study House:

Hamer’s three-year investigation—code-named Operation Smoking Dragon—began not with supernotes but with counterfeit cigarettes, which were being shipped by freight container from China into California ports by the millions. These, too, says Asher, originated in North Korea, and were the subject of a report by the Coalition of Tobacco Companies, one of whose investigators made an undercover visit, posing as a buyer, to North Korean factories in Pyongyang and the northeastern city of Rajin. These turn out fake Western brands, such as Marlboros, in such quantities that they generate as much as $720 million in gross revenue each year. Hamer set up a number of front operations to get inside the cigarette-smuggling business, and soon had many contacts who dealt with him as if he were a smuggler, too. In the spring of 2004, Hamer and his colleagues were asked by F.B.I. headquarters to see if they could acquire North Korean supernotes. One of Hamer’s best customers, Chao Tung “John” Wu, who eventually pleaded guilty to smuggling counterfeit currency, cigarettes, and narcotics, as well as conspiring to broker a deal for Chinese-made, shoulder-fired missiles, but died before he was sentenced, promised he could supply them with the help of a man who was a frequent visitor to North Korea—Wilson Liu. The notes were so good, Wu said at a secretly recorded meeting, “you can even go to Las Vegas and slide them into the machines—they take them right away.”

In December 2008 this blog discussed how the DPRK’s Korea National Insurance Corporation (KNIC) received USD$58 million from several European reinsurance companies in a legal settlement.

Well, the Washington Post offers an update on how the money is being moved and even highlights the story of a defector who claims to be involved in the DPRK’s insurance racket:

For Kim Jong Il’s birthday, North Korean insurance managers prepared a special gift.

In Singapore, they stuffed $20 million in cash into two heavy-duty bags and sent them, via Beijing, to their leader in Pyongyang, said Kim Kwang Jin, who worked as a manager for Korea National Insurance Corp., a state-owned monopoly.

Kim said he helped arrange the shipment and watched in February 2003 as the cash was packed. After the money arrived, Kim Jong Il sent a letter of thanks to the managers and arranged for some of them to receive gifts that included oranges, apples, DVD players and blankets, Kim said.

“It was a great celebration,” he said.

The $20 million birthday present and the gratitude of its recipient, who is known as the Dear Leader, were annual highlights of a sophisticated global insurance fraud that North Korea has concocted to provide its communist leadership with hard currency, said Kim, who spent five years as an executive of the state insurance company in Pyongyang and worked for a year at its banking subsidiary in Singapore before defecting to South Korea.

The British court ruled the way it did [NKeconWatch: this might be an error as the court did not rule on the case--it was settled] because the reinsurance companies contractually agreed to be bound by the North Korean court system (which to nobody’s surprise systematically rules in favor of domestic agencies and firms).  Since the western reinsurance firms could not prove that the DPRK was committing fraud, they had to pay up.

And how does this program work?

While working for North Korea’s insurance monopoly, Kim Kwang Jin said, he and other managers had a tightly focused mission: to find reinsurance companies and brokers in different parts of the world who would accept high premiums to reinsure KNIC’s policies.

Those policies, he said, usually covered losses from common North Korean disasters such as mining accidents, industrial fires, transportation crashes and crop losses due to floods.

“The major point of the reinsurance operation is that they are banking on disaster,” he said. “Whenever there is a disaster, it becomes a source of hard currency.”

According to Kim, KNIC would target a different potential disaster and a different reinsurance company each year. “We pass it around,” he said. “One year, it might be Lloyd’s; the next year, it might be Swiss Re; and the next, Munich Re.”

In London, the expert on the insurance industry familiar with the helicopter case echoed Kim’s assessment of how KNIC operated. He spoke on the condition of anonymity because he was not authorized by reinsurers to talk about the case.

“They pay good premiums, and they are very sophisticated, very clever,” he said. “They would divvy business up into very small bites and use different brokers in different places. The division of losses was such that it would never be apparent to a prospective reinsurer just how bad the business was.”

The North Koreans were known in the reinsurance industry for their capacity to prepare meticulously documented claims, speed them through puppet courts in Pyongyang and demand quick payment from international reinsurers. The North sometimes restricts the ability of reinsurers to dispatch investigators to verify claims.

The North Korean insurance monopoly sometimes took advantage of the geographical and political ignorance of brokers and reinsurers, according to the London-based insurance expert. Some brokers and companies, he said, thought they were dealing with a company from South Korea, while others were unaware that North Korea is a secretive totalitarian state with one of the world’s worst human rights records.

…

When he worked at KNIC, Kim said, annual revenue from North Korea’s reinsurance claims was about $50 million to $60 million. Most of that money, he said, was used to scout out potential disasters inside North Korea, to buy more reinsurance on the global market and to pay premiums.

“The remaining hard currency should have been used to help people recover from disasters and accidents, but it was not used that way,” Kim said. “It is just going into the pocket of Kim Jong Il.”

He said cash shipments of $20 million arrived yearly in Pyongyang, usually in the week before Feb. 16, which is Kim Jong Il’s birthday and a national holiday. In his six years at KNIC, Kim said, bags of cash arrived in Pyongyang from Singapore, Switzerland, France and Austria.

The money, he added, was delivered to an entity called Bureau 39 of the Korean Workers’ Party Central Committee. It was created by Kim Jong Il in the 1970s to collect hard currency and give him an independent power base, according to defectors, Seoul-based analysts and published reports. These sources agree that Bureau 39 spends foreign currency on luxury goods for the North Korean elite, components for missiles and other weapons programs.

With Bureau 39 skimming off hard-currency earnings returned to North Korea by KNIC’s global operation, Kim said, claims to disaster victims had to be paid in won, North Korea’s currency.

“That money is nearly worthless at present, because the economy has collapsed,” he said. “This means that little is done to help people recover from fires or whatever.”

But Kim Jong Il has been pleased with the state insurance company, Kim said.

“It brings him large amounts of hard currency,” Kim said. “Working in insurance is one of the best professions in North Korea. Many people want to do it.”

Mr. Kim is working in the Washington DC area this year with the Committee for Human Rights in North Korea.

Read the full artocle here:
Global Insurance Fraud By North Korea Outlined
Washington Post 
Blane Harden
6/18/2009