Archive for the ‘Banking’ Category

Explaining North Korea’s exchange rate stability: it’s all about the companies

Thursday, September 13th, 2018

By Benjamin Katzeff Silberstein and Peter Ward 

The stability of the market exchange rate for won-to-US dollars has been one of the most puzzling features of the economy over the past few years, and particularly so during the so-called period of “maximum pressure” and heavy sanctions by the international community. The market exchange has not once moved out of its ordinary – also remarkably stabile – territory over the past few years, as the following graph shows with clarity:

Won for USD-rates on the markets, 2009–September 2018. Data source: Daily NK. Graph: NK Econ Watch.

Thus far, to my knowledge, there have been two main, potential explanations:

(1) Maximum pressure is not having a meaningful impact on the North Korean economy as a whole. Even though it can’t export coal, minerals or textiles under current sanctions, its main sources for foreign currency revenue, the sanctions aren’t being enforced strictly enough to impact the economy as a whole, and foreign currency keeps flowing into the economy.

This explanation is pretty easy to dismiss offhand, since we know with more or less certainty that North Korea’s exports of these goods have plunged as Chinese sanctions enforcement has been fairly strict since the late summer/early fall of last year, even though it’s waxed and waned as it always does.

(2) The second explanation, most notably put forward by Bill Brown, is that Pyongyang is much better at monetary policy management than they’re given credit for. Chiefly (but not solely) through decreasing the amount of won in circulation, by giving state-owned enterprises (SOEs) smaller loans and credits in won, the government is able to keep the exchange rate stabile.

Speaking with my friend and colleague Peter Ward, a researcher of North Korean economic policy under Kim Jong-un and avid reader of North Korean economics journals, he explained a third possibility, partially in line with the latter hypothesis posed above. Ward visited North Korea twice in the past year, and was able to confirm many of the economic policy developments he had first detected in the literature from Pyongyang.

In short, Ward’s explanation is as follows: the main holders and users of foreign exchange in North Korea are not individual citizens, but state-owned enterprises, which legally (since 2013) use foreign exchange in transactions amongst themselves. The quantities of foreign exchange held by SOEs make them, and not the foreign currency markets that individual citizens access and use, the main determinant of the market exchange rate for foreign currency. Therefore, most of the foreign currency in circulation has been there for several years, not entering or exiting monetary circulation.

I asked Ward to share some of his thoughts with the readers of North Korean Economy Watch. Below is a brief Q&A of sorts.

Benjamin Katzeff Silberstein (BKS): first, when did this practice of SOEs trading in foreign currency become common and legally permissive?

Peter Ward (PW): probably around early 2013. This is when the “policy to make domestic production and exports one” came into force. The idea is to align domestic input prices for manufacturing, and consumer goods prices, with prevailing prices on international markets. This is literally what North Korean economics literature says that they aim to do, despite ostensibly being a socialist system in theory.

BKS: How is the FX-market price in North Korea determined? And where do the FX-market for SOEs and that for private citizens intersect?

PW: We don’t know, but one could imagine that there are major foreign exchange markets in North Korea – regional markets, both markets on the ground, so to speak, and between enterprises within regions. How does the center know the prevailing price? The regional price department of the regional People’s Committee price office and market management office (they may either be separate or the same) probably simply calls the local People’s Committee, who supposedly gathers this information from the local market management offices. At any rate, there’s reporting of the prevailing local exchange rate throughout the system.

Major enterprises will also know how much their inputs costs in foreign exchange, and a sense of how much their products would sell for on the world market. In that way, they’re able to assess the costs of their inputs in the world market (or at least China), and know how much they need to charge to make a profit or break even.

The market for individual citizens and SOEs intersect at several levels. SOEs likely source much of their inputs from wholesale markets, and from domestic private traders. They also obtain some of their foreign exchange from loans from private individuals. Private citizens can legally lend money to SOEs, but investments in SOEs by private citizens also happen, though they’re technically not legal, and both these investments and loans probably happen quite often in foreign exchange.

So the market price equilibrium happens through all these conduits, and as on any market, it is determined by countless instances of bargaining between traders, SOEs, and to a proportionally smaller extent, private citizens.

BKS: so where is the FX coming from, to begin with?

PW: if most inter-enterprise contracts and transactions are denominated in foreign currency, they’d be insulated from any sudden, exogenous trade shocks, such as sanctions. They’re still trading amongst themselves with whatever FX-holdings they have. For all intents and purposes, foreign currency inside North Korea is the principal legal tender – that’s what’s likely used for all major transactions inside the country, so exogenous shocks such as sanctions, from the outside, don’t necessarily impact the market price for foreign currency inside the country.

BKS: Is it likely, in your view and judging from your observations in North Korea, that the government maintains a price ceiling on the market exchange rate?

PW: Yes, it is. The government maintains price ceilings on a range of commodities, at least that’s what people inside the country say. They probably have an informal peg to the RMB, since China is their principal trade partner. It looks like it, but we don’t know for sure if they do. One possibility is that have significant cash reserves of RMB…

BKS: is it possible that China is simply helping North Korea keep the won stabile, by simply funneling RMB in?

PW: that’s certainly a possibility. The North Korean government keep a very close eye on the exchange rate, both in terms of physical cash in circulation and deposits in bank accounts, which SOEs have – both domestic and foreign currency bank accounts. They’ll keep a tight control over domestic currency-denominated loans to SOEs – that’s certainly one way of doing it. State banks will probably be encouraged to denominate such loans in foreign currency.

The government can also keep a pretty tight rope around money in circulation, since enterprises now have their own individual accounting system. The central government isn’t constantly borrowing money from the central bank to pump into SOEs, so the amount of money created by the central bank to lend to SOEs has gone down a lot.

That, at least partially, explains how the government manages to keep domestic currency circulation down. It doesn’t look like they’re printing much money overall, I saw bills from the pre-2009 currency re-denomination being used as late as July this year. And the highest denomination of North Korean won in circulation is the 5,000 won note, which has a market value of around 60 US cents, hardly appropriate for anything more groceries.

Share

North Koreans are getting paid deposits on banking, scholar says

Wednesday, September 12th, 2018

By Benjamin Katzeff Silberstein

Daily NK recently reported on a conference in Seoul, where one scholar working on the North Korean economic system, Jung Eun Lee, said that there’s at least anecdotal evidence to suggest that some North Koreans, who have (bravely) chosen to deposit money in regular banks, are actually getting paid interest on their deposits:

Another researcher at the press conference stated that system-wide, market-friendly reforms have occurred in the financial sector following Kim’s rise to power. North Korea under Kim Jong Un has been implementing a policy where “idle currency” is absorbed into the official economy. The policy is significant because it shows that the state is partially adopting capitalist practices.

“The North Korean authorities are emphasizing bank credit and releasing articles saying that ‘banks do not ask about the state of [customers’] ownership or the source of their deposit balance,” said Jung Eun Lee, another research fellow at KINU. “There are more and more North Koreans who say they have received both the principal and interest from their money deposited in North Korean banks.”

“What is more interesting is that the North Korea’s Central Bank launched a domestic electronic payment card called the Jongsong Card in 2015, and the number of stores accepting the card is increasing […] The use of electronic payment cards is increasing in Pyongyang and their use is expanding because [consumers] benefit by being able to prevent exposure of their identities, and are not burdened by the need to accept change during their financial transactions,” Jung concluded.

Full article:
Increasing autonomy for North Korean enterprises
Ha Yoon Ah
Daily NK
2018-09-10

There is likely much more happening under the surface in North Korean financial development than what reaches the audience in South Korea in the rest of the world. (See, for example, Peter Ward’s recent twitter-thread on financing of state-owned enterprise operations). If this assessment is true – that North Koreans have, in sizable numbers, been receiving interest on their deposits, it’s pretty significant. I’m not fully sure it’s a new development, but given the backdrop of the past few years – not least the currency revaluation in 2009 – it would mean that the official banking system has been able to gain some hard-earned trust back from at least a portion of citizens.

Now, it’s entirely possible that people are primarily depositing money for other reasons than savings. For example, with the payment cards that have popped up in recent years, people by definition have to deposit their cash with state-owned banks to use these cards, which many may do simply out of convenience. And then, the deposits earn interest as a nice side-effect. It’s certainly notable if more North Koreans trust that state-owned banks won’t confiscate the hard-earned cash that they choose to deposit, but it might not be a revolutionary development.

Share

The prospects for commercial, mobile banking in North Korea

Friday, August 3rd, 2018

By Benjamin Katzeff Silberstein

A couple of days ago, Korea Times ran an interesting interview with Kim Young-hui of Korea Development Bank (KDB), on the prospects of commercial and mobile banking in North Korea. Kim was optimistic regarding the prospects for mobile banking to take off soon in North Korea:

“I think it could happen in the near future, within a year at most,” said Kim, Senior Research Fellow at KDB’s Korean Peninsula New Economy Center.

Kim’s forecast is based on the latest edition of the North Korean quarterly journal Economic Research, issued in June, which was about establishing a mobile banking system for smartphone users. The contents of the quarterly were reported by Yonhap.

“A commercial bank should be established first to enable customers to use mobile banking services,” she said. “Once it is established, individuals will be able to make transactions through their smart phones through their own bank accounts.”

In North Korea, the concept of individuals opening a bank account is alien.

Most of North Korean residents deposit their money with individual money traders, making it hard for the North Korean regime to account for the money it prints, Kim said.

Although North Korea established the Commercial Bank Law in 2006, it still does not have a separate commercial bank regulatory system. There are some “commercial” banks, but they only deal with foreign currency, not domestic currency, Kim said.

The Commercial Bank Law enables loan services for individuals, while working with domestic currency as well as foreign currency.

North Korea under Kim Jong-un is now trying to open up to the global economy as he declared in November that the completion of nuclear weapon development left him with one mission of economic development in his Byeongjin policy.

The new smartphone-based financial service would enable North Korean residents to check (their) bank accounts, withdraw cash, transfer money as well as pay at shops. The tool is a smartphone, an “indispensable information communication tools.”

The report also urged the mobile telecommunication organizations in the country to establish a communication infrastructure that can provide information on the purchase of goods while notifying financial transactions to mobile banking users. The infrastructure, once established, will also enable confirming of payments and settlements to both buyers and sellers.

“Unlike other countries where a series of steps have been taken before introducing mobile banking, North Korea is skipping them since smartphones are already prevalent in the country,” the researcher said.

The report also proposed the development and introduction of RFID (Radio Frequency Identification) and NFC (Near Field Communication) technologies as well as the installation of necessary devices to make payment using smart phones at stores and other facilities more quick and accurate.

Full article and source:
‘North Korea will soon open commercial bank, mobile banking’
Jung Da-min
Korea Times
2018-08-01

A few thoughts on this:

First, on methodology, I’m not entirely convinced that one can or should read the North Korean journal that this assessment is based on, Kyungje Yungoo (경제연구) as a blueprint for what policies are in place or will come in the future. For years, and particularly under Kim Jong-un, the journal has run a multitude of articles on private incentives and profits within enterprises and firms, and on topics such as the role of various technologies within the economy, with no large-scale, public policy announcement following. To be sure, much has already changed in the economic realm within most spheres of what the journal covers, but there doesn’t seem to be a clear line between articles there and consistent, thorough changes in economic management. Rather, Kyungje Yungoo is perhaps best read as a map of what topics of conversation and debate (yes, debate) are acceptable in the academic and policy realms in the country. In other words, the regime is clearly thinking about commercial banking and ways to make it work, but that doesn’t mean it’s necessarily on the horizon in the immediate future (which it could well be).

Second, on the issue itself: North Korea’s financial sector is seriously underdeveloped. The lack of a solid banking system is a huge stumbling block for economic development, as assets that could otherwise be used to fuel growth through investments often sit idle. (For those interested in the issue, I wrote about it in this report for the Center for a New American Security a couple of months ago). Part of the problem is that even if the state did take initiatives to create some form of commercial banking sector, public trust in the state is deeply eroded. The government isn’t really an entity that most people want to hand their hard-earned savings to, because economic policy has historically been so erratic and often changes on a whim. Look, for example, at the market crackdowns of the past few months. Much is done by decree and order rather than by law. And the laws that do exist don’t really mean much if there’s no credible mechanism to enforce them. Should the government institutions simply allow for the institutionalization of private, commercial banking, rather than participate in the game themselves, that would be a different story, but the history of economic development in North Korea shows that that’s usually not how things work.

Third: it does make sense that there could be a lot of leap-frogging in sectors like banking in North Korea, given the increasing prevalence of smartphones and other technology. So there’s certainly room for optimism here too.

Share

Pyongyang Bike Share

Wednesday, March 28th, 2018

UPDATE 1 (2018-3-30): A couple of recent visitors to North Korea have reached out to claim that the bike service still has yet to be put into use. I will update this post when I learn more.

ORIGINAL POST (2018-3-26):

 

Pictured Above (Russian Embassy): Two bike rental stations on Kwangbok Street and the Taehung Bicycle Rental and Storage Station (대흥 자전거 임대소 보관소) on Youth Street.

The Pyongyang Times (2018-3-8) has published an article on the new Pyongyang bike share program:

People riding brightly-coloured bikes along Kwangbok Street present an unusual scene in Mangyongdae District, Pyongyang.

Small yet cosy stations with blue roofs are seen in several places of the street, with lines of cute bicycles arranged and people bustling especially at rush hours.

They are part of service centres run by the Pyongyang bike-sharing company.

This year the company has started the bike rental service.

An online service management system, the bike-sharing system is expected to be one of the favoured public traffic service systems.

Customers need to buy cards to hire bikes at any of the stations.

They can pass the cards through card readers at any stations, input passwords to unlock the bikes and use them. They pay fees when they return them to any of the stations.

Bike-sharing is an environment-friendly and energy-saving service that suits the local conditions as it helps reduce urban pollution by vehicles and save fuel.

The stations generate electricity needed for service activities by utilizing solar energy.

“Bike-sharing is widely adopted by many countries as part of global efforts to reduce pollution,” said Myong Si Man, director of the company. “Our system helps not only satisfy the growing demand for traffic means but also promote public health. We plan to widen the coverage of bike-sharing service to other parts of the city and upgrade the method of service.”

Riding bike is good for health and some elders in the district share bikes just for an exercise, he added.

Stylish Ryomyong-brand bikes are helpful to ensuring clean environment of Pyongyang and providing convenience for passengers. It now adds a special touch of beauty to the city.

This is not the first mention in the North Korean media. In July of last year Tongil News reported the first bikes were brought in to the rental stations on the 1st of July 2017 and services were due to begin in late July 2017. According to this South Korean source, however, the service did not actually begin until January 15, 2018 (consistent with the claim in this PY Times article).

According to Tongil News,  the bikes are called Ryomyong (려명) bikes and come from a North Korean/Chinese joint venture called Phyongjin Bicycle Cooperative Company (평진자전거합영회사) located in Sosong District (서성구역), Pyongyang. The payment cards needed to rent the bikes are called Ryomyong Cards and need to be bought with a Jonsong Card at one of the five locations on Kwangbok-street. The overall operation is overseen by the Pyongyang Bicycle Rental Office (평양자전거임대관리소).

Share

A Chinese ban on North Korean imports damages the North Korean economy

Tuesday, March 13th, 2018

Institute for Far Eastern Studies (IFES)

The North Korean economy is expected to face serious difficulties due to China’s ban on imports from North Korea. Having analyzed China’s sanctions against North Korea, KOTRA’s Korea Trade Center in Shenyang recently suggested that while North Korea depends overwhelming on China for its export, its exports are expected to plummet due to China’s measures.

After Pyongyang made its fifth nuclear test on February 18, 2017, China joined the sanctions imposed by United Nations Security Council (UNSC) Resolution 2321 and halted its import of North Korean coal until December that year.

Consequently, China’s import of North Korean coal was reduced by 60 percent compared to the same period in the previous year.

Furthermore, China imposed a complete ban on the import of coal, iron ore, lead and fishery products from North Korea, in accordance with the sanctions by UNSC 2371 adopted in response to North Korea’s IBCM launch on August 14, 2017.

Moreover, in response to North Korea’s sixth nuclear test on September 22 and the launch of an ICBM on January 5, 2018, China put a restriction on the export of refined oil, crude oil and refined petroleum products to North Korea.

The restriction on the export of refined petroleum products is expected to be a serious blow to the North Korean industry. Keeping China’s exports below 10 percent of total North Korean demand for the products, the new sanction will hit the North Korean economy across the board, ranging from industry, transportation, cargo transportation and power supply.

In addition, North Korean households, which have lower priority in power supply, would face increasing difficulties in getting electricity and heating. In the meantime, North Koreans may not suffer greatly from the shortage of oil because China has limited its export of crude oil to North Korea to its annual level of supply.

North Korea’s foreign exchange shortage is also expected to be aggravated following the shutdown of North Korean businesses in China and the repatriation of North Korean workers, both of which have been main sources of funds for the North Korean leader.

On September 28, 2017, the Chinese Ministry of Commerce announced that all existing North Korean businesses and joint ventures in China, including those managed solely by North Korean companies and individuals, should be closed by January 9, 2018.

In accordance with the notification of closure, the Shenyang Municipal Bureau of Industry and Commerce Administration issued a letter of notification to North Korean businesses and joint ventures in the city, leading to the shutdown of the Chilbosan Hotel and several North Korean restaurants.

In addition, North Koreans currently employed in China are allowed to remain while they have a valid visa, but have been asked to return to North Korea upon expiration of their visa.

Although the Chinese Ministry of Commerce completely prohibited the import of North Korean textile products on September 22, 2017, the import ban has created little export-ban effects to date, because cargo that has not completed the customs clearance procedure is excluded from the ban.

Share

Developments in North Korea’s electronic payment systems

Monday, March 12th, 2018

I have recently published most of the information below in Radio Free Asia (in Korean), so here it is again in English.

As an economist with an interest in North Korea’s monetary policy, banking, and capital markets, I have kept an eye on developments in North Korea’s payment technologies.

In this area I have previously posted about Koryo Bank Card, Narae CardKumgil Card, Ryugyong Commercial Bank ATMs, Jonsong Card, Golden Triangle Bank Card, Mirae Bank toll-road payments, e-commerce platforms Okryu, Sangyon, and Kwangmyong, and loyalty card programs at Haemaji Restaurant, Kwangbok Supermarket, and Moran Shop. There are, of course, other examples I have not blogged about.

Recently, however, the North Korean media has highlighted continued developments in this field, and I wanted to capture some of that information for readers here.

According to the North Korean media (2018-1-21), the Pyongyang Information Technology Bureau (평양정보기술국) and a subordinate organization, the Card Research Institute (카드연구소), appear to be developing cards for North Korea’s electronic payment system. Perhaps rather ominously, KCTV mentions that the agency is working to  expand the use of cards with features like user identification. Below is a screenshot of some of the cards that they are producing. 

Below are the names of cards as best I can tell (L-R,T-B):
1. Koryo Bank
2. South Hamgyong Province Sci-Tech Library Card
3. Pyongyang Metro
4. KoryoLink
5. ?
6. ?
7. Yaksu (mineral water) Payment Card
8. Jonsong Card
9. Soson? Gas Station
10. Jangmi Health Complex
11. Jonsong Card (Duplicate)
12. ?
13.  Taedongmun Cinema?
14. ?
15. Mirae Health Card
16. “Juyu” Card

We already know that some of these cards are in use (KoryoLink, Jonsung) and others are apparently still in development (Pyongyang Metro Card) [As far as I am aware, people still pay for the metro with tokens]. Some of these are prepay cards for a specific service (KoryoLink for mobile phones), some are prepay cards for broader commercial transactions (Koryo Bank, Jonsong Card), others are probably a mix of loyalty and prepay cards.

A couple of recent articles in DPRK Today shed additional light these developments. The new smart card management system is called Ullim (Ulrim, 울림), presumably named after the famous waterfall in North Korea. The Ullim Network acts as a clearing house for outstanding fuel cards, bank payments, member card services, etc. The system is 100% locally developed (they claim).

I am unsure how the Ullim Network is related to the Narae Network which is managed by the Foreign Trade Bank. Narae Cards are noticeably absent from any of the information put out by/on the Pyongyang Information Technology Bureau. Since all of these products seem connected to the Jonsong Card, under the control of the Central Bank, it may be that the Central Bank and the Foreign Trade Bank, which are still legally separate organizations last I heard, are developing their own separate e-payment networks. But foreigners buy KoryoLink cards (featured in this material) with Narae Cards, so I am not sure what exactly is going on. Maybe KoryoLink Cards for North Koreans (as opposed to foreigners) can be bought on the Jonsong card on the Ullim Network and foreign KoryoLink cards care bought with Narae cards issued by FTB? Maybe I am just overthinking all of this… Here are  some other Ullim member cards featured in DPRK Today (KKG Bank was circled by me):

The cards featured in the lower image are (clock-wise from the top):
1. Koryo Bank
2. Jonsong Card
3. Pyongyang Children’s Hospital
4. Ryugyong Health Complex
5. Pyongyang Information Technology Bureau
6. Sci-Tech Complex

DPRK Today has also published information on the Pyongyang Bike Share Card, “Ryomyong” (려명자전거카드). This card is also part of the Ullim Network.

Recently, North Korean media also highlighted an electronic payment card for the Kwanghung Shop located in Rakrang District. It is unclear if the Kwanghung Shop card is related to the Ullim Network since it has not appeared in any of the marketing materials yet.

According to the report, the Kwanghung Shop card can be used offline and for online purchases. The shop also claims to offer delivery services for their goods if ordered online  or by phone.

According to KCTV news (2018-2-23), the Energy Information Research Institute (전력정보연구소) under the Ministry of Electric Power Industry (전력공업성) is developing a payment card and mobile phone payment app:

The research discussed in the video is part of the National Power Management System (국가통합전력관리체계) named Pulyagyung (불야경/Bright Night Lights). The phone payment system displayed is a prototype remote electricity allocation system that allows retail electricity consumers to order electricity service from their mobile device instead of going to a physical office to have power allocated to a specific location.

Implications: There is a bright and a dark side to this technology. On the light side, we can group benefits to consumers: Payments are facilitated, savings options are increased, transactions costs are lowered meaning consumers benefit even as individual firms may earn float from the technology.

The dark side of the technology is of course how it can be used by the government for purposes of control/appropriation. In the old days, North Korea (and many other communist and developing countries) kept foreign currency out of the hands of their people through the use of Foreign Exchange Certificates (FECs). People had to change their foreign exchange into “green” money (for capitalist countries) and “red” money (for communist countries) to spend in local hard currency shops. This allowed the spenders to use their hard currency value to purchase imported goods while the actual hard currency paper stayed out of the hands of the people in the shops. This system was scrapped in the early 2000s. Electronic payment technologies mark a return to the goals of the FEC system…People can have foreign exchange balances to spend on imported goods at hard currency shops, but the actual paper currency remains on deposit at a bank.

This is bad news for North Korea’s black market and unofficial economy as well. With electronic payments it is harder to hide income and transaction history from the government (for tax/appropriation purposes). It would be very easy for officials in an anti-corruption investigation to pull up a spreadsheet of ones legal income and transactions to see if there is a substantial mismatch with your assets and standard of living.

Anyway, we will see how this develops. There is still a great deal we do not know.

Share

FinCEN designates Latvian Bank for North Korea links

Wednesday, February 14th, 2018

UPDATE 1 (2018-2-19): According to the AFP:

The European Central Bank said Monday it has frozen payments by the third-largest bank in tiny Baltic state Latvia, as its finances have deteriorated in the wake of money laundering allegations from Washington.

“Temporarily, and until further notice, a prohibition of all payments by ABLV bank on its financial liabilities has been imposed, and is now in effect,” the ECB said in a statement.

It is the first time the ECB has used its power to impose a moratorium since taking on eurozone-wide banking supervision responsibilities in 2014.

The US Department of the Treasury last week named ABLV “an institution of primary money laundering concern” and accused it of connections to North Korea’s weapons development programme.

ABLV’s financial position, which had previously been stable, has rapidly deteriorated since as it found its access to the financial system cut off, even threatening the bank’s survival.

In late September 2017, the bank’s balance sheet stood at around 3.6 billion euros ($4.5 billion), with 1.0 billion euros of loans and 2.7 billion in deposits.

Just two days before the ECB’s moratorium, Latvian supervisor FCMC issued a statement saying the bank’s capital and liquidity ratios — key indicators of a bank’s financial health — were in good shape.

The ECB decision on Monday comes after Latvian central bank governor Ilmars Rimsevics, who sits on the ECB governing council, was arrested Saturday by the country’s Corruption Prevention Bureau (KNAB).

A source familiar with the case told AFP there was no connection between the ABLV case and the governor’s arrest.

ORIGINAL POST (2018-2-14): According to the FinCEN press release:

FinCEN Finds the Bank Orchestrates Money Laundering Schemes, Obstructs Regulatory Enforcement, and Has Conducted Activity Linked to North Korea

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) today issued a finding and notice of proposed rulemaking (NPRM), pursuant to Section 311 of the USA PATRIOT Act, seeking to prohibit the opening or maintaining of a correspondent account in the United States for, or on behalf of, ABLV Bank. FinCEN is proposing this action based on its finding set out in the NPRM that ABLV is a foreign bank of primary money laundering concern.

“FinCEN will continue to take action against foreign banks that disregard anti-money laundering safeguards and become conduits for widespread illicit activity,” said Steven T. Mnuchin, Secretary of the Treasury. “Deficient practices at banks foster a wide array of illicit conduct, including activity linked to North Korea’s weapons program and corruption connected to Russia and Ukraine. FinCEN is committed to protecting the U.S. financial system from these types of risks.”

As described in the finding, ABLV has institutionalized money laundering as a pillar of the bank’s business practices. ABLV’s management permits the bank and its employees to orchestrate money laundering schemes; solicits high-risk shell company activity that enables the bank and its customers to launder funds; maintains inadequate controls over high-risk shell company accounts; and seeks to obstruct enforcement of Latvian anti-money laundering and combating the financing of terrorism (AML/CFT) rules in order to protect these business practices.

ABLV’s failure to implement, and disregard for, effective AML/CFT and sanctions policies and procedures have made the bank attractive to a range of illicit actors engaged in organized crime, weapons proliferation, corruption, and sanctions evasion. Illicit financial activity at the bank includes transactions for parties connected to UN-designated entities, some of which are involved in North Korea’s procurement or export of ballistic missiles. In addition, ABLV has facilitated transactions for corrupt politically exposed persons and has funneled billions of dollars in public corruption and asset stripping proceeds through shell company accounts. ABLV failed to mitigate the risk stemming from these accounts, which involved large-scale illicit activity connected to Azerbaijan, Russia, and Ukraine.

Section 311 actions alert the U.S. financial sector to foreign institutions, such as ABLV, that are of primary concern and through the public rulemaking process, if necessary, cut them off from the U.S. financial sector.

Here is coverage in the Korea Herald:

Last year, an investigation by the US Federal Bureau of Investigation and Treasury found that five other Latvian banks, which mainly serve nonresident clients, violated the United Nations Security Council’s sanctions against North Korea and rules on anti-money laundering and the financing of terrorism.

Latvia’s Financial and Capital Market Commission confirmed the banks’ illicit activity and assigned it financial penalties totaling 3.5 million euros ($4.3 million).

It is the third time the US government has imposed sanctions against a foreign bank for dealing with North Korea.

In 2005, Macau-based Banco Delta Asia had some $25 million in North Korean funds frozen under US sanctions, as 24 companies including Chinese banks stopped dealing with the North, putting Pyongyang under severe financial strain. The US also blacklisted China’s Bank of Dandong in June last year for laundering money for North Korea.

“We have made clear to countries and companies around the world that they can choose to trade with North Korea or the United States, but not both,” the US Treasury’s Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker said in an anti-money laundering and financial crimes conference in New York on Tuesday.

“We will target not only companies that actually know they are being exploited, but also those that should know. We are resolved that anyone who knowingly aids North Korea faces being cut off from the US financial system.”

Read the full story here:
Latvian bank faces US sanctions for dealing with NK
Kim So-hyun
Korea Herald
2018-2-14

Share

Sanctioned Foreign Trade Bank can’t pay North Korea’s UN dues…

Tuesday, February 13th, 2018

Reuters reports that North Korea cannot pay its UN dues owing to sanctions on its official hard currency repository, the Foreign Trade Bank (FTB). According to the article:

North Korea’s U.N. Ambassador Ja Song Nam met with U.N. management chief Jan Beagle on Friday to ask the world body to help secure a bank transaction channel so Pyongyang could pay the nearly $184,000 it says it owes for 2018.

U.N. member states are required to pay assessed contributions to the world body’s regular and peacekeeping budgets, as well as a budget for international tribunals.

U.S. and U.N. sanctions on the Foreign Trade Bank, North Korea’s primary foreign exchange bank, were preventing the country ”from honoring its obligation as a U.N. member state by hindering even normal activities such as payment of the U.N. contribution,” the North Korean mission said in a statement late on Friday.

The United States sanctioned the Foreign Trade Bank in 2013, while the U.N. Security Council blacklisted the bank last August.

The 15-member U.N. Security Council has unanimously boosted sanctions on North Korea since 2006 in a bid to choke funding for Pyongyang’s nuclear and ballistic missile programs.

According to the U.N. Charter, countries in arrears in an amount that equals or exceeds the contributions due for two preceding years can lose their vote in the 193-member U.N. General Assembly. The General Assembly can grant an exception if a country can show that conditions beyond its control contributed to the inability to pay.

The U.N. website said that as of Jan. 28 there 12 countries in arrears of more than two years. Apart from its 2018 dues, North Korea said it is up to date with its payments.

I know that many in the diplomatic and NGO communities have been physically bringing in cash to fund their operations in Pyongyang since the FTB was sanctioned.

There was a Russian Bank, Bank Sputnik, that had maintained a financial link to the FTB to service the diplomatic community. However, this banking link was severed in September 2017 and apparently remains closed.

UPDATE (2018-2-21): A news site I was previously unaware of has some interesting information on the relationship between the DPRK’s Foreign Trade Bank and the Russian bank, Sputnik. According to Inner City News:

In the face of North Korea sanctions, the UN in December 2017 used the sanctioned Foreign Trade Bank and Russia’s Sputnik Bank to transfer EUR 3,974,920.62 into the country, documents obtained by Inner City Press show. A letter from Sputnik Bank states that “unauthorized person (I.V. Tonkih) led negotiations with Korean party on interbank correspondent relationship.” Photos here.

NK News did a better job reporting on the relationship between Sputnik and the FTB.

Read the full story here:
North Korea says unable to pay U.N. dues, blames sanctions
Reuters
2018-2-10

Share

North Korea opens its first toll expressway

Thursday, January 18th, 2018

 

Pictures above via @EricTalmadge (Jan 26, 2018)

Institute for Far Eastern Studies (IFES)

According to the Russian embassy in Pyongyang, starting January 20, 2018, North Korea will begin collecting tolls on the expressway between Pyongyang and Wonsan—a first time for the country to collect such tolls.

According to the Seoul-Pyongyang News, the Russian embassy explained in its Facebook on January 17 that it would be “the first time for the North Korean drivers to pay 8 euros (equivalent to 10,450 won in the South Korean currency) to take the Pyongyang-Wonsan Tourist Motorway.”

This recently resurfaced motorway first opened in September 1978, connecting Wonsan (Kangwon province) on the east and Pyongyang City on the west.

The recent photos provided by the embassy reveal an electronic payment station collecting the toll at the entrance of the expressway. They also reveal a map showing the Pyongchon Kwangmyong Technology Exchange Station, where drivers can purchase (or recharge) electronic payment cards and Mirae electronic cards issued by Mirae Bank.

In the meantime, more than one foreign diplomat in Pyongyang said that the North Korean authorities had sent a letter to the foreign missions and the representatives of international organizations in Pyongyang on January 15 to inform them of the new policy, Radio Free Asia reported.

Another Western diplomat in Pyongyang, who wanted to remain anonymous, said that the letter included the highway toll policy and detailed regulations, which explained that it would cost about 8 euros (0.02 euro per kilometer) or about USD10 for a total of 194 kilometers round trip between Pyongyang and Wonsan (or 3.88 euro for one way), if one is traveling by ordinary passenger car. However, large-sized buses will be charged a toll of about 27 euros for a roundtrip—Pyongyang to Wonsan and back—or 13.58 euros for a one-way trip.

The new tolls are expected to be applied to not only foreign residents in Pyongyang, such as diplomats and the agents of international organizations, but also the general public.

UPDATE: Here are most of the images posted by the Russian Embassy Facebook Page:

The toll fees are being managed by “Mirae Bank”. Mirae Bank Cards are available on Mirae Street.

 

This is the first toll booth outside of Pyongyang:

 

Share

DPRK resolves debt with Poland

Wednesday, October 25th, 2017

According to Yonhap:

North Korea cleared off its debt to Poland in 2012 after the European country signed a deal with the North to write off 61 percent of the debt the previous year, Voice of America reported Thursday.

The Polish Treasury Department told VOA’s Korean Service that Poland held talks with North Korea on a debt write-off in 2011 and the North implemented what it was required to do under the agreement the same year.

According to the contract obtained by VOA, the agreement, signed in Pyongyang on June 1, 2011, stipulates that the North’s debt amounted to roughly US$4.31 million as of the reported year, including the production and delivery costs of Mi-2 military helicopters for which the Polish communist regime struck a deal with the North in 1986.

The report also said Poland’s debt relief was linked to the North’s provision of US$1.5 million in cash to purchase a ship to a North Korea-Poland joint venture shipping firm established in 1967.

Under the debt write-off deal, the North was also required to foot the bill of $200,000 to repair the Polish Embassy in Pyongyang. The repair project was based on an agreement between representatives from the two countries’ foreign ministries and the North was obligated to transfer the money to the embassy’s account.

In case the obligations are fulfilled, the agreement says, Poland will write off 61 percent of the North’s debt that corresponds to around $2.61 million.

North Korea currently owes debts to Sweden, Switzerland and Finland. The countries earlier said they had no intention of writing off the North’s debts.

Read the full story here:
N. Korea settles bill with Poland in 2012 after 61 pct of its debt written off: report
Yonhap
2017-10-25

Share