North Korean Economy Watch

UPDATE 3:  Executive Order: Continuing Certain Restrictions with Respect to North Korea and North Korean Nationals

By the authority vested in me as President by the Constitution and the laws of the United States of America, including the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) (IEEPA), the National Emergencies Act (50 U.S.C. 1601 et seq.) (NEA), and section 301 of title 3, United States Code,

I, GEORGE W. BUSH, President of the United States of America, find that the current existence and risk of the proliferation of weapons-usable fissile material on the Korean Peninsula constitute an unusual and extraordinary threat to the national security and foreign policy of the United States, and I hereby declare a national emergency to deal with that threat. I further find that, as we deal with that threat through multilateral diplomacy, it is necessary to continue certain restrictions with respect to North Korea that would otherwise be lifted pursuant to a forthcoming proclamation that will terminate the exercise of authorities under the Trading With the Enemy Act (50 U.S.C. App. 1 et seq.) (TWEA) with respect to North Korea.

Accordingly, I hereby order:

Section 1. Except to the extent provided in statutes or in regulations, orders, directives, or licenses that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted prior to the date of this order, the following are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in:

all property and interests in property of North Korea or a North Korean national that, pursuant to the President’s authorities under the TWEA, the exercise of which has been continued in accordance with section 101(b) of Public Law 95-223 (91 Stat. 1625; 50 U.S.C. App. 5(b) note), were blocked as of June 16, 2000, and remained blocked immediately prior to the date of this order.

Sec. 2. Except to the extent provided in statutes or in regulations, orders, directives, or licenses that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted prior to the date of this order, United States persons may not register a vessel in North Korea, obtain authorization for a vessel to fly the North Korean flag, or own, lease, operate, or insure any vessel flagged by North Korea.

Sec. 3. (a) Any transaction by a United States person or within the United States that evades or avoids, has the purpose of evading or avoiding, or attempts to violate any of the prohibitions set forth in this order is prohibited.

(b) Any conspiracy formed to violate any of the prohibitions set forth in this order is prohibited.

Sec. 4. For the purposes of this order:

(a) the term “person” means an individual or entity;

(b) the term “entity” means a partnership, association, trust, joint venture, corporation, group, subgroup, or other organization; and

(c) the term “United States person” means any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.

Sec. 5. The Secretary of the Treasury, after consultation with the Secretary of State, is hereby authorized to take such actions, including the promulgation of rules and regulations, and to employ all powers granted to the President by IEEPA as may be necessary to carry out the purposes of this order. The Secretary of the Treasury may redelegate any of these functions to other officers and agencies of the United States Government consistent with applicable law. All agencies of the United States Government are hereby directed to take all appropriate measures within their authority to carry out the provisions of this order.

Sec. 6. The Secretary of the Treasury, after consultation with the Secretary of State, is hereby authorized to submit the recurring and final reports to the Congress on the national emergency declared in this order, consistent with section 401(c) of the NEA (50 U.S.C. 1641(c)) and section 204(c) of IEEPA (50 U.S.C. 1703(c)).

Sec. 7. This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, instrumentalities, or entities, its officers or employees, or any other person.

GEORGE W. BUSH

THE WHITE HOUSE,

June 26, 2008.

UPDATE 2: How much plutonium does the DPRK have?

From the Daily Times (Pakistan):

But there may be problems ahead with the declaration. Japan’s Asahi Shimbun newspaper reported an informed source as saying the North declared it produced around 30 kg (66 lbs) of plutonium, while US officials have said they think it is closer to 50 kg. Sung Kim, a State Department envoy who witnessed the cooling tower blast, told reporters in Seoul on Saturday that there might not be enough time to complete the North’s denuclearisation before President George W Bush leaves office in January 2009.

‘Emotionally attached’: Kim said North Koreans engineers appeared to have formed an “emotional attachment” to their atomic programme that has become apparent during international efforts to dismantle it. Kim told reporters that he saw emotion in Ri Yong-ho, head of the Yongbyon nuclear reactor, and his colleagues when they all witnessed Friday’s demolition of the plant’s cooling tower. “I think I detected a sense of sadness when the tower came down but I thought he put it well when he was asked what this all meant for him and he said that he just hoped this would contribute to peace and stability,” said Ri.  

UPDATE 1:
“US Treasury says N.Korea sanctions remain in place”
Reuters via Guardian
David Lawder
6/26/2008

U.S. Treasury financial sanctions aimed at ending North Korean money laundering, illicit financing activities and weapons proliferation remain in effect despite the easing of other sanctions against Pyongyang, a Treasury spokesman said on Thursday.

The move by the Bush administration to lift some sanctions after North Korea delivered a long-delayed account of its nuclear activities will not restore the country’s access to the international banking system, Treasury spokesman John Rankin said.

North Korea was largely cut off from the international banking system in 2005 when the Treasury named Banco Delta Asia, a small bank in the Chinese gambling enclave of Macau, as a primary money laundering concern.

The Treasury accused the bank of circulating counterfeit U.S. currency produced by North Korea, and of knowingly handling transactions by North Korean entities involved in illicit activities, including the narcotics trade and sales of counterfeit cigarettes and other goods.

Both North Korea and Banco Delta Asia have denied the Treasury’s allegations.

Although about $25 million in frozen North Korean funds in Banco Delta Asia was released last year, the sanctions against the bank, which prohibit transactions with U.S. banks, remain in effect, Rankin said. International banks have largely shunned Banco Delta Asia as well.

As recently as April, Treasury officials said so called “supernotes” — high quality counterfeit $100 bills produced by North Korea, were still surfacing.

“The lifting of sanctions associated with the Trading with the Enemy Act, and removing North Korea from the list of state sponsors of terrorism does not represent North Korea’s re-integration into the international financial system,” he said.

Sanctions that prohibit U.S. companies from owning, leasing, operating, insuring North Korean-flagged shipping vessels, as well as registering vessels in North Korea, remain in place. 

ORIGINAL POST: Today North Korean made the nuclear declaration required by the February 2007 six-party agreement.  This web site does not focus on the nuclear issue, but this turn of events represents a significant US policy shift with economic implications for the DPRK.  The coverage has been overwhelming, so below are media excerpts that cover most of the angles:

“Pyongyang Submits Nuclear Declaration”
Wall Street Journal
Evan Ramstad
6/26/2008

After keeping the U.S. and other countries waiting for 15 months, North Korea delivered a description of its efforts to develop nuclear weapons, setting up the next – and more difficult – stage in an international effort to disarm and reshape the isolated, authoritarian country.

North Korean diplomats gave a declaration of its nuclear-weapons program to Chinese counterparts in Beijing who have been coordinating the six-nation talks. In return, U.S. President George W. Bush announced the lifting of some trade sanctions and beginning of the process of removing North Korea from its list of state sponsors of terror. (Read the text of the White House statement here).

Under the February 2007 deal, North Korea also agreed to disable a nuclear plant that provided fuel for its nuclear weapons, a step that’s also nearly complete. On Friday, it plans to blow up the cooling tower at the nuclear plant and invited TV crews from several countries, including the U.S. and South Korea, to record the event.

The contents of North Korea’s declaration weren’t immediately disclosed. In recent weeks, U.S. diplomats have said they didn’t expect it to include a key piece of data – how many nuclear weapons the country has built. The document also is believed to be limited to North Korea’s efforts to develop plutonium as a nuclear fuel, but doesn’t mention suspected research into highly-enriched uranium as a fuel nor its suspected proliferation efforts to Syria.

“North Korea removed from US ‘axis of evil'”
London Times
Jeremy Page and Richard Lloyd Parry
6/26/008

The US move, which will also see a lifting of long-running sanctions, would mark the most significant thaw in relations between Washington and Pyongyang since the 1950-53 Korean War. Mr Bush said that it was intended to reward and encourage North Korean co-operation and accelerate the tangled negotiations on the country’s nuclear disarmament.

In the first instance, America will exempt North Korea from sanctions under the Trading with the Enemy Act, a piece of First World War legislation that was employed during the Korean War, and which restricts trade with Pyongyang by US companies and citizens. The only other country subject to its provisions is Cuba.

It also gave notice that it would start the 45-day process of removing North Korea from its list of state sponsors of terrorism, where it stands alongside Cuba, Iran, Sudan and Syria. Sanctions against them include a ban on arms sales, economic assistance, and an obligation on the US Government to oppose loans to listed countries by such international institutions as the World Bank.

“Diplomacy Is Working on North Korea”
Wall Street Journal
Condoleeza Rice
6/26/2008; Page A15

In its declaration, North Korea will state how much plutonium it possesses. We will not accept that statement on faith. We will insist on verification. North Korea has already turned over nearly 19,000 pages of production records from its Yongbyon reactor and associated facilities. With additional information we expect to receive – access to other documents, relevant sites, key personnel and the reactor itself – these records will help to verify the accuracy and completeness of Pyongyang’s declaration. North Korea’s plutonium program has been by far its largest nuclear effort over many decades, and we believe our policy could verifiably get the regime out of the plutonium-making business.

Getting a handle on North Korea’s uranium-enrichment program is harder, because we simply do not know its full scale or what it yielded. And yet, because of our current policy, we now know more about North Korea’s uranium-enrichment efforts than before, and we are learning more still – much of it troubling. North Korea acknowledges our concerns about its uranium-enrichment program, and we will insist on getting to the bottom of this issue.

Similarly, we know that North Korea proliferated nuclear technology to Syria, but we do not know whether that is the end of the story. Rather than just trying to address this threat unilaterally, we will be more effective in learning about North Korean proliferation and preventing its continuation through a cooperative effort with Japan, South Korea, China and Russia.

And in return for these steps, what have we given thus far? No significant economic assistance. No trade or investment cooperation. No security guarantees or normalized relations. And our many sanctions on North Korea, both bilateral and multilateral, remain in place.

“‘Good start’ to UN’s Syria probe”
BBC
6/25/2008

The head of a UN team investigating allegations that Syria has been working on a secret nuclear weapons programme says their work is off to a good start.

The IAEA official, Olli Heinonen, said inspectors had taken samples at the al-Kibar site in the Syrian desert.

“It was a good start, but there’s still work that remains to be done,” he said.

“For this trip we did what we agreed to. We achieved what we wanted on this first trip. We took samples which we wanted to take. Now it’s time to analyse them.”

Mr Heinonen also said he was generally satisfied with the level of co-operation by Syria.

Additional information: 

To read a hawk perspective, see Josh’s post at One Free Korea.  Also, the Telegraph (UK) reports that Vice President Cheney tried to block the deal.

David Kang spoke to NPR’s Market Place.

US move reduces Japan’s negotiation leverage over DPRK.

Yonhap reports on the DPRK’s efforts to create an education endowment:

North Korea, which is marking the 60th anniversary of its foundation this year, has stepped up efforts to improve educational facilities across the country with help from foreign countries and overseas Koreans, a pro-Pyongyang Korean-language daily in Japan said Monday.

The program is being actively supported by Australian, Swiss, Vietnamese and Finish charitable funds as well as Korean residents in Canada, said the daily of Chongryon, or the pro-Pyongyang Association of Korean Residents in Japan.

Much of the funding is being used to construct a new building for Koryo Songgyungwan, a university of light industry in Kaesong, south of Pyongyang, and modernize educational facilities at Kimchaek University of Technology with a history of 60 years in Pyongyang, according to the report.

When I visited the DPRK in 2005 for the “60th anniversary of the end of Japanese colonialism (aka the end of WWII),” I picked up a brochure from this foundation—scans below:

(Click on images to view)

It is interesting to notice just how much they have learned from the Western non-profit world, including how to reward donors:

“KEF acknowledges and appraises the donations from contributors in different ways such as citation, issue of certificates, availability on publications, and arranging visit to project sites as well as tourism.”

Contributions are not tax deductible.

UPDATE: I have not had a chance to review all this material yet, but here are some more links:

KEF official web site

Information from Naenara

From KCNA:

Korea Education Fund Set Up

Pyongyang, June 7 [2005] (KCNA) — The Korea Education Fund (KEF) has been established. It is a legal non-governmental organization for public interests. Its mission is to regulate and strengthen financial and material support necessary to develop education in accordance with the requirement of the times.

Many Koreans at home and abroad and famous political, public and educational figures and organizations have rendered a lot of material and financial backing to the DPRK in its educational work, proceeding from the lofty humanitarianism of loving peace and valuing the future.

It has made a contribution to the improvement of educational conditions and the balanced development of education.

And many figures have advanced a proposal to establish an organization in the form of humanitarian fund for the purpose of strengthening the support to the educational work and have exerted efforts to realize it. Their efforts have resulted in founding the Fund in January last through an agreement and working procedure with parties concerned.

The Fund does not fix the regional limit in general activities such as raising fund and performing support. And it decides personnel selection according to relevant program and the agreed plan on specific objects, transcending the differences in political view, religious belief, race, nationality and sex.

The KEF welcomes all donators at home and abroad who are based on good intentions and voluntary principle.

Its support will be given mainly to the insufficient educational apparatuses and school things, improvement of infrastructure of educational establishments and studying conditions at schools and to training of personnel.

The KEF regards it as a supreme principle of its work to ensure trust in donators, receivers and volunteers. And it respects all those at home and abroad that join the assistance directly or indirectly and positively cooperates with them.

It organizes the work of recognizing and appreciating the donators and volunteers in accordance with the will of receivers and the principle of the Fund’s activity. Such activities include citation, issue of certificate, hanging of board, introduction through publications and organization of tour of the objects and scenic spots.

The KEF has its accounts in the Koryo Commercial Bank and overseas agent banks.

The KEF will be conducive to developing education in the country and rearing well the rising generation, the future of the humankind. (Fax: 0085-02-3814410, E-mail: ksttc@co.chesin.com)

Read the Yonhap story here:
N.K. renovating schools with foreign donations
Yonhap
Shim Sun-ah
6/23/2008

According to Fox News:

After more than two years of accusations and probes into the operations of the United Nations Development Program in North Korea, a weighty report finally reveals how routinely, and systematically, the agency disregarded U.N. regulations on how it conducted itself in Kim Jong-Il’s brutal dictatorship, passing on millions of dollars to the regime in the process.

The 353-page report, by a three-member “External Independent Investigative Review Panel” appointed by UNDP to investigate itself, was published with much fanfare last week after nine months of political maneuvering and research.

The report depicts an organization that for years apparently considered itself immune from its own rules of procedure as well as the laws and regulations of countries that were trying to keep weapons of mass destruction out of Kim’s hands.

It also shows that UNDP apparently considered itself above the decisions of the United Nations Security Council itself when that organization tried — as it is still trying — to bar Kim from gaining the means to create more weapons of mass destruction.

That is the same Security Council whose decisions, U.N. officials argue, have the weight of international law when applied to the United States and the rest of the world.

Yet despite those rules, and in the midst of a growing international storm of concern over Kim’s behavior, UNDP’s North Korea office, as well as other UNDP offices, continued to hand over millions in hard currency to the Kim regime and to transfer sensitive equipment with potential for terrorist use or for use in creating weapons of mass destruction.

“What this report shows is that UNDP has operated lawlessly for far too long,” said Mark Wallace, the former U.S. ambassador to the United Nations who brought many of the original accusations against the U.N. anti-poverty agency to light in January 2007 after examining confidential UNDP internal audits of its North Korean operation.

“U.N. Secretary-General Ban Ki-moon has indicated that integrity is a high U.N. priority,” Wallace said. “It is now up to UNDP to follow that direction.”

The latest panel report initially was passed on to reporters on June 2 by UNDP boss Kemal Dervis at an unusual press conference where he hailed the report’s conclusions, saying that “we finally have some closure on the allegations made against UNDP.”

The actual authors of the report were not available for questioning or comment, Dervis said, until they presented the document to a meeting of UNDP’s supervisory executive board in Geneva. The meeting begins June 16.

But a close reading of the long and dense document, replete with mind-numbing footnotes, shows that Dervis is wrong.

Among other things, the report confirms that UNDP hired North Korean government employees to fill sensitive core staff posts, in violation of its own regulations, and that the Kim regime picked the staffers.

Previously this had been revealed by a report done by the United Nations Board of Auditors in May 2007 in the wake of Wallace’s concern. The 2007 report noted that the same violations had been reported in internal UNDP audits going back to 2001.

The UNDP office in North Korea paid the salaries of these staff directly to the government in hard currency — another forbidden practice. The report dryly notes, in a footnote on page 96, “It was not clear how much of these amounts were paid to the National Staff, if any.”

In an effort that may have been aimed at keeping at least some staffers from starving, UNDP gave them all hard-currency supplements in cash — another violation of its own rules.

The regime employees filled such critical jobs as UNDP finance officer; program officer slots that helped to design and oversee UNDP projects in the country; technology officer, who maintained all of UNDP’s internal and external communications and servers; and even the assistant to the head of the UNDP office, who presumably was in a position to see much, if not all, of the boss’ paperwork.

Those violations already were known, although only in the barest detail. But the latest report reveals a fact that makes matters much worse: The regime-appointed finance officer — the person who wrote UNDP’s checks for 10 years — also was responsible for reconciling UNDP’s bank statements with the checkbook.

These two functions are supposed to be separated as protection against fraud. The importance of that separation is strongly underlined in UNDP’s basic guidelines called the “Internal Control Framework for UNDP Offices.”

The potential for fraud by a North Korean government employee, however, is discussed in the report only in dry bureaucratic language.

Despite that the review panel brought documents showing millions of UNDP financial transactions out of North Korea, the report shows — in a footnote buried on page 53 — that the panelists never saw any of some roughly $16.6 million worth of cancelled checks that were signed by UNDP. The reason: Kim’s bankers won’t release the originals or copies.

Without the checks, it is impossible to see if the finance officer made them out to cash or if the names on them match UNDP payment records and bank statements.

The North Korean regime also refused to let the panelists interview the finance officer.

The potential fraud risks are huge. The report notes that in 78 percent of a transaction sample of UNDP payment records that they reviewed, the signature on payment receipts could not be verified. For all the rest there was no sign of a receipt at all.

The report declares, with great understatement, that “it is difficult to determine the ultimate beneficiaries of payments made by UNDP-DPRK on behalf of itself.”

The panel sharply hikes — by millions of dollars — the amount of hard currency that previous probes indicated UNDP had passed on to the nuclear-arming Kim regime from 1997 to 2007, as Kim was ramping up his nuclear weapons program and ultimately setting off a nuclear explosion.

Hard currency transfers to Kim of any kind supposedly were forbidden, but the 2007 investigation already had shown that the rule was violated not only by UNDP but other U.N. agencies in the country.

The latest report says that UNDP spent $23.8 million on behalf of itself and other U.N. entities in North Korea, almost all in hard currency that never was supposed to reach Kim. The panel estimates that 38 percent of this, or $9.12 million, went directly to the North Korean government.

But that is not all. The report also notes for the first time that other UNDP offices and agencies outside the country chipped in anywhere from $9.5 million to $27.4 million more in hard currency to the Kim regime over the same period, on behalf of the North Korean office.

Using the 38 percent yardstick that the panel applied to in-country spending, anywhere from $3.6 million to $10.4 million of those totals might have been directly passed on to the government.

In addition, the report makes passing mention of an even bigger flood of cash: $381 million that flowed into North Korea from non-U.N. donors through an arrangement called the Agriculture Recovery and Environmental Protection, or AREP, Cooperation Framework. UNDP projects in North Korea formed part of that framework and, more importantly, helped to support the entire arrangement. But the report goes no further in tracing those funds.

Unauthorized hard currency by no means was the only support UNDP was offering Kim. The report greatly raises the number of sensitive “dual use” items — good for civilian use and for terrorist purposes or helping to create weapons of mass destruction — that UNDP handed over to North Korea. These included computers, software, satellite-receiving equipment, spectrometers and other sensitive measuring devices: 95 items in all.

The policy of unquestioned transfer of dual use items continued even as the Kim regime in 2006 conducted ballistic missile tests and exploded a low-yield nuclear device to the outrage and dismay of the rest of the world; moreover, UNDP acquired at least some of the items in misleading fashion.

The report notes that when some items were purchased, “it was not explicitly stated … that the equipment would be utilized by DPRK nationals working under the auspices of UNDP projects in DPRK.”

In at least one instance, the report says, an employee with a UNDP sister agency even supplied false information to a Dutch manufacturer nervous about end-users in North Korea, telling him that the equipment would be used by the UNDP office in Pyongyang when it really was intended for a faraway rural location.

The report also shows that UNDP itself rarely asked its suppliers about any possible limits on the use of sensitive export goods and, even when it was explicitly informed, made little, if any, effort to keep records of dual use limitations on equipment.

(The report does not say so, but with North Korean government employees operating as program officers, the lack of conscientious record keeping might not come as much of a surprise.)

The report then dismisses any notion of holding anyone at UNDP accountable for these spectacular lapses by invoking a concept of blanket immunity.

UNDP and its officials, the report notes, are immune from the enforcement of U.S. and other national export control laws imposed for anti-terrorist or national security reasons, under an international U.N. Convention on Privileges and Immunities.

The document notes that despite that free pass, a U.N. legal opinion has held that the world organization can be bound by at least some export license limitations when it is retransferring those sensitive goods.

But the people really exposed to penalties for most of the transfers are UNDP vendors who supplied the goods, because they lack U.N. immunity. The panel notes that in many cases, lack of knowledge of the true use of the equipment is not considered a legal defense by many nations, including the U.S.

Having said that, the report tries to sweep under the rug the explosive topic of UNDP’s obligations to the U.N. itself when the U.N.’s chief executive body, the Security Council, calls — as it did twice in 2006 — for bans of sensitive technologies to Kim. Those bans are known as U.N. Resolution 1695, passed on April 15, 2006, after Kim sent test ballistic missiles in the direction of Japan; and Resolution 1718, passed on Oct. 14, 2006, five days after Kim’s low-yield nuclear blast.

Resolution 1695 applied to equipment that might be used in Kim’s ballistic missile program. Resolution 1718, however, was much more sweeping and called for bans on any equipment that might be used in any kind of weapons of mass destruction, as well as travel bans for officials associated with the weapons program.

The panel report tries to take as little note of these sanctions as possible. Resolution 1718, for example, is mentioned in a footnote on page 195 of the report. The footnote calls its applicability to UNDP programs “relatively minimal,” and adds, “a significant majority of the equipment bought in connection with the UNDP-DPRK program was purchased before the passage of this resolution such that [it] was inapplicable.”

Since the report also notes that the records were badly kept or non-existent, this is a hard assertion to contradict. But it is a highly questionable assumption, at best. The report earlier notes that any UNDP-purchased equipment in North Korea belonged to UNDP until it was officially transferred to a host government. That happened to all the items of dual use equipment in North Korea at the same time — in March 2007.

At that time, UNDP shut down its programs after the hue and cry over UNDP practices in North Korea caused the agency to amend some of its practices — changes that the regime refused to accept.

UNDP officials have argued, and the report tacitly echoes their view, that the transfer of equipment when agency projects are closed down is normal practice.

Hardly normal are Security Council calls for the world, presumably including the U.N. itself, to stop transfers of exactly the kinds of equipment UNDP gave to Kim. There is no sign, for example, that the agency gave any thought to finding another method of asserting its property rights until the sanctions were lifted or of asking other U.N. agencies in North Korea to try to keep tabs on the gear.

UNDP “normal practice” apparently trumped world peace and security. The report passes over that complication, involving a rogue regime that had conducted illegal atomic blasts, and that the U.N. itself had declared an outlaw, without comment.

With the same effect of sheltering UNDP from charges that it aided in endangering the peace and security of the world, the panel report declares that any charges that UNDP inadequately supervised the projects in North Korea under its care are untenable.

It based that conclusion on voluminous paperwork provided by UNDP that proved, the panelists said, that site visits to the project took place frequently and were unimpeded.

But the report fails to put those inspections in the context of the fact that four of UNDP’s program and liaison officers, who manage and help to create programs and perform liaison with institutions and vendors involved in the projects — also were North Korean government employees.

(The report is equally silent on the role of the Kim regime employee who served as UNDP technology officer, who was in charge of all of the UNDP offices’ internal and external communications and its computer servers. UNDP communications and computers are supposed to be sacrosanct in terms of host country snooping. Instead, in North Korea, the potential snoops were in charge of the equipment. The potential implications of that fact are completely unexplored.)

Overall, one of the most striking aspects of the report is its lack of curiosity about whether individual members of the UNDP staff should be held accountable for egregious, longstanding and dangerous violations of UNDP rules and international law, not to mention common sense.

This applied notably to the presence in UNDP’s North Korean safe for more than a decade of $3,500 in defaced U.S. counterfeit $100 bills — “Super-Note” fakes that the Kim regime famously passed around the world. Possession of counterfeit U.S. bills is a crime. Even given U.N. legal immunities, it might seem an important matter to bring to the attention of one of the organization’s biggest donors.

Yet no-one informed U.S. authorities and senior UNDP officials claimed no knowledge of the fake funds, even though the bogus money was listed on annual reports of the safe contents for years.

The report’s assessment: “There is no evidence that anyone acted in bad faith or in a fraudulent or deceptive manner. Instead, the Panel finds that there was a clear lack of attentiveness at the [office] and Headquarters levels and that communications between the Country Office and UNDP headquarters were inadequate.

“Inadequate communications” is the explanation often given in the report for failures that allowed rule-breaking to continue, even as Kim openly brandished his nuclear weapon. The report notes that in August 2006 — four months after the passage of U.N. sanctions Resolution 1695 — the UNDP office in North Korea asked headquarters for guidance on dual use equipment transmissions to North Korea. It never got any. The project, which was based in part on receiving satellite imagery, had equipment that the report says already had been purchased.

Then, on Oct. 11, 2006 — two days after the Korean nuclear blast — a UNDP regional supervisor in Thailand answered the guidance request. He ordered UNDP not to purchase any equipment and “to close down the project immediately.” In the same message, according to the panel, the supervisor, Romulo Garcia, said he had received clearance from his bosses to close down the project in late 2005.

As it happens, U.N. Resolution 1718, imposing more drastic sanctions on North Korea, went into effect three days after Garcia’s sudden desire to follow up on a two-month-old guidance request.

The panel report’s conclusion? The 2005 decision to shut down the project “does not seem to have been communicated to the UNDP-DPRK office, as equipment purchases continued throughout 2006, including some dual use items.”

That Garcia apparently did not double-check on whether this highly sensitive order was carried out until a nuclear device exploded and another U.N. sanctions resolution loomed is never discussed in the report.

But the lack of discussion speaks volumes, both about UNDP bureaucratic efficiency and about the apparent level of UNDP concern and internal discussion of Kim’s dangerous nuclear plans.

There is one prominent exception to the report’s attitude of sympathetic understanding toward UNDP lapses: the whistleblower who brought most of them to outside attention and inspired U.S. diplomats to call for multiple investigations, including the panel report.

The report concludes that the whistleblower, a former UNDP-DPRK operations manager named Artjon Shkurtaj did, in fact, perform a service when he brought the situation in the UNDP’s North Korea office to light. But the report emphatically denied there was any retaliation against Shkurtaj when a promotion he already had been given was withdrawn and other short-term contracts he held expired.

Such claims, the panel concluded, were “without merit,” as it also made attacks on Shkurtaj’s personal integrity.

At the same time, the report offers evidence that the North Korean regime may have been pressuring UNDP to keep Shkurtaj out of the job and reveals the alarming fact that the regime apparently had veto power over UNDP’s ability to fund the position.

For his part, Shkurtaj has declared that the authors of the report violated customary U.N. practice when they failed to show their conclusions to him prior to publication. He has appealed to the U.N. chief ethics officer, Robert Benson, to investigate.

So it may well be that the ultimate message of the report is that passing on potentially dangerous equipment to a ruthless dictator who threatened his neighbors and defied the U.N. itself apparently was regrettable but otherwise a lapse in communication. Talking about such things outside UNDP apparently was something else.

Rather than bringing “closure on the allegations against UNDP,” as the organization’s boss, Dervis, hopes, the North Korean investigative report ought to raise bigger and more urgent questions about UNDP operations around the world.

If Kim Jong Il’s despotic government was able to twist UNDP’s rules and its adherence to international law with such ease, what is going on in UNDP offices in dictatorships such as Zimbabwe and Syria?

Most urgently of all, as the U.N. wobbles toward further sanctions on the nuclear-ambitious Islamic regime in Iran, what is going on in UNDP offices in Tehran?

Additional Resources:

1. Here is the UNDP report published in May 2008 (PDF). 

2. UNDP Staff 2006 (2006).

Read the full story here:
Report Shows U.N. Development Program Violated U.N. Law, Routinely Passed on Millions to North Korean Regime
Fox News
George Russell
6/12/2008

North Korea’s anti-corruption campaigns have been thoroughly covered by North Korean Economy Watch (see here).  It is possible that these campaigns are simply efforts to stem financial leakages within the complex North Korean bureaucracy–making sure money continues to roll up hill.  It is more likely, however, that there is a political motivation behind them. 

In the past, we have speculated that these anti-corruption campaigns could be setting the stage for a purge, which is necessary before any serious policy change can occur within North Korea’s socialist system.  We have also speculated that these campaigns are related to the succession issue (who will take over after Kim Jong il).  Kim Jong il’s family members are disproportionately represented in party and government organizations, not the military.  After years of songun politics, in which the military was in ascention, it is now time to reign in their business operations and bring them under the scrutiny/control of the party and government (Kim’s family). 

Three weeks ago, we learned that Jang Song Taek (Kim Jong il’s brother-in-law) was running the campaign from Sinuiju.  Today, the Daily NK reports that Kim Jong il’s son, Kim Jong Chol (the Eric Clapton fan), has been running a parallel campaign in North Hamgyong Province.  Jang and Kim III have been mentioned as possible successors to Kim Jong il, and the fact that both of them are competing so directly leads the Daily NK to speculate that Kim Jong il is watching to see who is more adept at these tasks.

According to the Daily NK, Kim’s son is not doing well.  His anti-corruption campaign merely stoked local resentment, so he and his team were pulled before anybody knew Kim III was in charge.  Jang’s efforts in Sinuiju, however, seem to have been greeted with admiration.  If this is the case, things are looking up for Jang at the moment.

Details and the full story can be found here:
Kim Jong Cheol Left off the Inspection Due to Absence of Leadership
Daily NK
Moon Sung Hwee
6/9/2008

UPDATE: 
The Daily NK brings us up-to-date on the DPRK’s  anti-corruption drive.  The Daily NK analysis, however, gives the impression that Kim Jong Il is clamping down on the military, which again raises speculation that this policy is driven by concerns greater than financial leakage:

A source from Shinuiju reported in a telephone interview with Daily NK on May 14th that, “Director Jang Sung Taek has been staying at the Yalu River Hotel in Shinuiju since March, and has been directing inspections at Shinuiju Customs covering imports and exports made by rail, foreign currency-making activity organizations, and trade companies belonging to the army.”

“This inspection is decidedly different in scale and scope from previous inspections which are usually carried out every spring at Shinuiju Customs and various trading companies. The inspection usually targets simple private corruption as well as all fields related to business with China,” said the source.

The inspection group reportedly consists of some 100 agents dispatched from the Ministry of Administration, the Central Prosecutor’s Office, the National Security Agency, the People’s Safety Agency, and the Imports & Exports Guidance Bureau of the State External Economic Affairs Commission. Some 50 other agents were sent as reinforcements in late April.

…

The inspection group withdrew all trade certificates with exception of those certificates belonging to the families of anti-Japanese guerilla fighters, and those certificates issued by the Ministry of Finance or the Shinuiju Municipal Administrative Committee.  Therefore, presently at Shinuiju Customs, all import items without trade certificates issued by the above mentioned three groups have to be sent back to China.

The whole article is worth reading here.  If any readers have a thoughtful take on these events, please share them.

ORIGINAL POST:
North Korean Economy Watch has thoroughly covered news of the DPRK’s anti-corruption drive (here, here, here, here, and here).  We have speculated as to whether this campaign is motivated by primarily fiscal concerns or whether it is a broader realignment of state, party, and military portfolios necessary for a policy/personnel change within North Korea’s socialist system.

Hideko Takayama at Bloomberg highlights the fiscal aspect of the anti-corruption campaign and is the first to announce the Kim Jong Il’s brother-in-law is leading it:

Jang, 62, was sent to Beijing and the Chinese city of Dandong near the border with North Korea in February to root out corruption at North Korean corporations operating in China, the businessmen and officials said.

Jang, who was dismissed from Kim Jong Il’s power circle in 2004, was rehabilitated in December 2005 and appointed to be Director of Administration of the Workers’ party last October, an official at Chosensoren, a North Korean organization in Japan which acts as a de facto embassy, said, requesting anonymity.

The leader’s brother-in-law is also responsible for the State Security Department, the People’s Security Ministry and the Central Prosecutor’s Office, according to the Chosensoren official. In addition, Jang runs a campaign against what the government calls anti-socialist activities.

Jang’s mission was to find and punish people who were diverting profits that were supposed to be repatriated to the North Korean capital, Pyongyang.

“Jang is familiar with how the business is done outside the country and knows all about money and corrupt ways of making money,” Lee Young Hwa, professor of developing economies at Osaka’s Kansai University, said. “His assignment is like sending a thief to catch a thief.”

Read the full stories here:
Kim’s Brother-in-Law Heads North Korea Anti-Corruption Campaign
Bloomberg
Hideko Takayama
5/2/2008

Shinuiju Inspectors Investigate Corruption
Daily NK
Jung Kwon Ho, Park In Ho
5/16/2008

 “Nosotek is the first European-invested software development & research company in the DPRK, with the head office in Pyongyang.” – Interview with Mr. Ju Jong Chol (Vice-President of Nosotek)

Klaus-Martin Meyer: Mr. Ju, you are the Vice President of a very interesting company named Nosotek (www.nosotek.com). Could you please tell us something about this venture?

Ju Jong Chol: Nosotek is the first European-invested software development & research company in the DPRK, with the head office in Pyongyang.

It is founded by the General Federation of Science and Technology (GFST) of DPRK and experienced European IT-entrepreneurs. Felix Abt, the president of the European Business Association (www.eba-pyongyang.org) is one of Nosotek’s directors.

Nosotek is jointly run by European IT engineers together with their Korean counterparts. We have presently 50 engineers and a strong production line. We expect rapid growth thanks to our qualified, experienced and committed staff.

Klaus-Martin Meyer: What are Nosotek’s main products?

Ju Jong Chol: As we specialize on offshore IT outsourcing services we already have produced a large range of software products. Among our finished products, you find scientific software, video games, web applications, embedded software and 3D virtualization tools.

In case our customer needs a field of service where we don’t have experienced engineers in our own staff, the GFST will help us finding good people among the scientists of the universities. We can rely on sustainable DPRK and European engineering and business ressoucces.

Klaus-Martin Meyer: The DPRK is not the Silicon Valley or Bangalore. What are the customer’s benefits to do Business with Nosotek?

Ju Jong Chol: Of course, we’re not Silicon Valley or Bangalore. But we take the challenge to compete with these locations. The DPRK government took the strategic decision to give strong support to our IT industry which now bears fruits.

In the DPRK, software engineers have an average academic math level superior to their western or Indian counterparts.

Computer science education involves understanding of deep low level processes: when was the last time you hired a PHP programmer to realize he was quite at ease in assembler?

Klaus-Martin Meyer: Outsourcing to Asia is often identified with a risk of IP leak. Many western companies are complaining that after outsourcing their partners start copying their technology.

Ju Jong Chol: Then they are all invited to do their outsourcing projects in the DPRK! Our country is well known to have strong laws to protect secrets and we respect the value of IPs. And unlike what is common in other countries like China, there is only very little fluctuation of the workforce. Like in Japanese companies, our employees usually enter the company after university and stay their entire business life with the high personal motivation. This does not only help to keep trade secrets, it also helps to keep the experienced persons, who are needed for long-term partnership.

Klaus-Martin Meyer: How are the working conditions at Nosotek?

Ju Jong Chol: Our employee’s working conditions are far better than average, compared with both domestic and international standards: They work with state-of-the-art hardware, have free lunch, more holidays than in Europe and even a one-week vacation trip to a touristic place every summer, which is completely paid by the company.

Klaus-Martin Meyer: How difficult is it for you to acquire international business? What exactly are the main challenges?

Ju Jong Chol: Currently the main problem is the US sanctions against our country. For example, western customers are threatened by the US to prevent doing business with us. At the moment, it is very difficult to transfer money to DPRK. Luckily, together with our European partners we found good solutions and our customers will make their contracts with companies outside of DPRK.

Klaus-Martin Meyer: Is it possible to name some of your reference projects?

Ju Jong Chol: Unfortunately, this is not possible. Our policy is not only to respect our customer’s trade secrets and software IP, but also not to disclose the names of our customers. But please be assured, that some of our work products are used in large public companies, all over the world including USA.

Klaus-Martin Meyer: There are quite a lot companies from South Korea and also international companies working at the Kaesong special economic zone in North Korea. Are these Companies potential customers for Nosotek?

Ju Jong Chol: We are doing business all other the world. Of course, companies from Kaesong may be potential customers. Currently, our main focus is on Europe and Japan.

Klaus-Martin Meyer: The last question is our famous 5-years-questions. What is Nosotek’s outlook for the next five years?

Ju Jong Chol: Our goal is to create public awareness of the DPRK as a place where IT outsourcing can be done at the best ratio between price and quality. Nosotek will grow and the business volume will highly increase.

Source here.

The Daily NK, reports on a interesting claim by Kim Kwang Jin, senior fellow at the Institute for National Security Strategy:

In his article “The Dollarization of North Korean Economy and Dependence on Foreign Currency by the Residents,” [Kim Kwang Jin] analyzed “dollarization of North Korean economy is a result of the disintegration of the official economy and the subsequent spread of foreign currency rather than the government’s foreign currency policy.”

The total amount of U.S. dollars circulated and amassed by North Korean people was estimated 500 to 600 million dollars (100 per each household), [Kim Kwang Jin] suggested.

Kim’s further specification is as follows: “In the China-Korean border region, the Yuan is particularly popular, while in Wonsan (a seaport on the East Sea)[where the Mangyongbong 92 docks], the Japanese yen is attractive.”

According to Kim’s article, the North Korean people fully realize impossibility of withdrawing North Korean won from their bank accounts and the depreciation rate is too fast. Kim’s estimate was that “each North Korean household is secretly holding 100 dollars in average.”

Methodologically, I am not sure how valuable we should find the claim that the North Korean economy is dollarized to the tune of $100 per household (max of 6,000,000 households).  Averages do not tell us much in large populations because they do not address distribution questions (which are fairly significant).  For instance, a few individuals might have lots of cash, while most have relatively little.  What is the median distribution of dollars, and what is the mode? This data would tell us much more about grass-roots financial conditions in the DPRK, but this information is not available.

Also, Mr. Kim claims that North Korea has “foreign currency areas” along the Chinese border (Yuan) and around Wonsan (Yen).  This claim at least seems plausible for obvious reasons: These are areas where lots of trade and exchange take place.  So where is the dollar currency area?  With no major trading relations, why would there be one (outside of Pyongyang)? Where would all these $USD come from?

Finally, it seems that in the last couple of decades the Yuan and the Yen would be a superior mechanism than the dollar for protecting one’s savings in North Korea.  These currencies are used by the DPRK’s major (current and former) trading partners; these currencies have experienced low inflation in the last couple of decades (the Yen obviously doing a better job); and North Koreans could probably better explain to any curious officials why they have them if they were under scrutiny.

All of these topics might have been addressed in the paper, but I have been unable to find a copy in English.

Last week we discussed the growing presence of North Korean companies in Russia.  This week, the Daily NK reports on China’s first steps at financial integration with North Korea:

China has introduced a new settlement system which allows North Korean business to open bank accounts in China and settle business transactions in Yuan, the Nikkei reported on Sunday.

With the adoption of the system, North Korean people and companies can open Yuan bank accounts within China after some formalities and use the accounts for trade settlement with their Chinese business partners. Accordingly, North Korea is now able to buy foreign currencies such as dollars and euros with its Yuan income from trade. In addition, North Korea can legally bring in foreign currencies or send them to third countries.

North Korean companies used to have difficulties of making a trade settlement with China in cash or by barter since the U.S. enacted financial sanctions on North Korea and China imposed economic sanctions regarding remittance and bank accounts after North Korea’s nuclear tests. However, China too suffered from the sanctions as the amount of Yuan smuggled into North Korea has skyrocketed proportional to the increasing volume of trade between North Korea and China.

The new settlement system will help reinvigorate the trade between two countries. However, the system can cause concerns at the Six Party Talks as it lowers the bargaining power needed to pressure North Korea to give up its nuclear programs, the Nikkei said.

Meanwhile, the People’s Government of Yanbian Korean Autonomous Prefecture announced last February that Jilin Province would allow North Korean people and companies operating in China to open Yuan bank accounts for trade purpose starting with February 20, 2008.

You can read the full article here:
China Lifts Sanctions on North Korea
Daily NK
Park Eun Jae
4/9/2008

Last Friday, Yonhap reported that Kim Jong Il has ordered an anti-corruption investigation of two key agencies, both of which manage South Korean investments in the DPRK: the United Front Department (which Lankov claims is involved in clandestine operations) and the National Economic Cooperation Council.

North Korea is in the midst of a massive anti-corruption drive which has already resulted in the arrest of one of its top officials handling business with South Korea, informed sources in Seoul said Saturday.

The campaign, ordered by leader Kim Jong-il, was prompted by widespread allegations that some top party and administration officials took bribes as they pushed business projects with South Korean industrialists, said the sources well versed in North Korean affairs.

“The probe was launched as National Defense Commission Chairman Kim Jong-il said there was a lack of supervision over the United Front Department [a key party organization that supervises inter-Korean affairs], although lots of suspicions were raised over the department’s corruption,” one source told Yonhap News Agency.

According to the sources in Seoul, the North Korean leader was enraged after getting a report that some party and government officials allegedly pocketed bribes and diverted food and other aid from South Korea to black markets.

Also under investigation is the National Economic Cooperation Council, a government body that handles business with South Korean entrepreneurs, the sources said.

The Council’s chief, Jeong Woon-eop, remains under arrest pending investigation into allegations that he took “huge amounts” of bribes, said the sources, who wanted to remain anonymous. (Yonhap excerpted)

Frequently “anti-corruption campaigns” in developing countries have nothing to do with making the bureaucracy more accountable or responsive to public demands, but rather are political maneuvers to prevent “rents” or funds from being channeled to uses that lie outside the leadership’s control (or some faction of the leadership).  In other words, they are regime enhancing.  The announcement of this campaign demonstrates two important principles that deserve explicit mention:

1. Not all profits earned by North Korean joint ventures are channeled to the leadership, and in fact many of them are siphoned off by middlemen who actually control the financial machinery.  Once skimmed off the top, it is likely that these funds are used in illicit private commercial operations since they cannot be legally declared by the owner (unless there are domestic channels for laundering money in North Korea).

2.  If funds are being siphoned off of high-profile official joint venture operations, then the leadership is not in control of its internal fiscal affairs.  Indeed it is likely that, as in the Soviet Union, the people who keep the private economy running are the trusted mid- to senior-level officials who can skirt the rules and know how to actually get things done within the system.

Update 2/24/2008:

North Korean authorities have been investigating the chief of a North Korean committee in charge of inter-Korean economic cooperation for months after seizing $20 million from his house, a report said Friday.

The full article can be found here:
NK Official Suspected of Embezzling Funds From Seoul
Korea Times
Jung Sung-ki

Update 2/12/2008:

The chief of Daesung General Bureau, a division of the 39th Department which manages foreign transactions, was fired on suspicion of embezzling US$1.4 million last fall.” (Daily NK)

The full article can be found here:
North Korea launching massive anti-corruption drive
Yonhap
2/9/2008

From Naenara:

The Law of the DPRK on Foreign-invested Bank was adopted by Decision No. 42 of the Standing Committee of the Supreme People’s Assembly on November 24, 1993 and amended by Decree No. 484 of the Presidium of the SPA on February 26, 1999. It was amended by Decree No. 3400 of the Presidium of the SPA on November 7, 2002.

The law consists of 32 articles in 5 chapters.

Chapter 1. Fundamentals (Articles 1-7)

This chapter stipulates that the law shall contribute to the expansion and development of cooperation with different countries the world over in the area of finance.

A foreign investor may establish and operate a foreign-invested bank within the territory of the DPRK.

Foreign-invested banks include joint venture banks, wholly foreign-owned banks and branches of foreign banks.

The state shall protect the legal rights and interests of foreign-invested banks established in the territory of the DPRK.

Chapter 2. Establishment and Dissolution of Foreign-invested Banks (Articles 8-17)

This chapter stipulates that an investor who intends to establish a foreign-invested bank in the territory of the DPRK shall file an application to the DPRK Central Bank, declaring the name of the bank, the name and curriculum vitae of its president, the registered capital, paid-up capital, operation fund, investment rate, details of business, etc.

The Central Bank of the DPRK shall decide upon the approval or rejection of the application within 50 days from its receipt.

A foreign-invested bank shall be dissolved when it cannot continue its operation due to such reasons as the expiry of the term approved, merger of the banks, insolvency, defaulting of the contract and natural calamities.

Chapter 3. Capital and Reserve Funds of Foreign-invested Banks (Articles 18 – 22)

This chapter stipulates that a foreign-invested bank shall deposit the primary paid-up capital and operating capital with a bank designated by the Central Bank of the DPRK within 30 days from the date when it obtained the approval of establishment and shall have it confirmed by a certified public accountant.

A joint venture bank and a wholly foreign-owned bank shall set aside as reserve fund 5 per cent of its annual profits each year until the reserve fund grows to 25 per cent of the registered capital and a foreign-invested bank may reserve such funds in need as bonus fund, welfare fund and R&D fund.

Chapter 4. Transactions and Settlement of Foreign-invested Banks (Articles 23 – 28)

This chapter stipulates that a foreign-invested bank may engage in part or whole of the following transactions:

A·  Accepting deposits of foreign currencies of foreign-invested enterprises, foreign enterprises and
         foreigners,

B· Granting loans in foreign currencies, overdrafting on the current account excess payment and
         discounting of foreign currency bills,

C· Dealing in foreign exchange,

D· Investment in foreign currencies,

E ·Guarantee against liabilities in foreign currencies and defaulting of contract obligations,

F· Remittance of foreign currencies,

G· Transactions of securities in foreign currencies,

H· Trust banking,

I· Credit survey and consultation.

A foreign-invested bank shall open an account with the branch of the Central Bank of the DPRK in the area where it is located and deposit the reserve fund for deposit payment.

A foreign-invested bank shall submit to the foreign exchange control organ the annual balance sheet and profit and loss account confirmed by a certified public accountant within 30 days from the date of the completion of the annual business settlement, and the quarterly financial statement and necessary statistics by the 15th day of the first month of the ensuing quarter of the year.

Chapter 5. Penalties and Settlement of Disputes (Articles 29 – 32)

This chapter stipulates that a foreign-invested bank shall be liable to fining in the following cases:

J · In case it has changed its president or vice-president or the location of the bank without approval,

K· In case it has failed to set aside the reserve fund of required amount,

L· In case it has obstructed or caused difficulties in inspection, and

M· In case it has failed to submit regular reports within a fixed period of time, or submitted false ones.

In case a foreign-invested bank engages in other transactions than those approved, or revises the memorandum, or increases or decreases the registered capital and operating capital without approval, it may be ordered out of operation.

In case an applicant for establishment of a bank fails to commence banking business within 10 months from the date of the approval, the approval granted for establishment of the bank may be withdrawn.

The Law of the DPRK on Foreign-invested Bank shall ensure stability of activities of foreign-investors and contribute to the expansion and development of the external economic relations by establishing system and order for foreign-invested banks.