North Korean Economy Watch

According to the Daily NK:

The North Korean authorities have ordered Party cadres to ensure the distribution of at least fifteen specific products to the people to celebrate this weekend’s 100th anniversary of the birth of Kim Il Sung. Local cadres are trying everything to meet the target, having been made aware that success or failure will be taken as a measure of their Party loyalty.

According to a source from North Hamkyung Province, the fifteen compulsory items on the list are: glutinous rice (2kg), soybean oil (1kg), pork (2kg), sugar (1kg), soju (2 bottles), fish (1kg), snacks (1kg), candies (1kg), 10 eggs, fruit (1kg), seaweed or Chinese cabbage (2kg), bean sprouts (1kg), wild herbs, soap and toothpaste. The list stands in stark contrast with ordinary years, when distribution generally consists of two or three products, frequently including alcohol and soybean oil.

Moreover, there are plans to ensure that items including soap, towels, socks and shoes are available for purchase from state stores at low prices.

“Party secretaries in factories are totally lost; I mean, they have received the special instructions but haven’t been given any money,” a source from North Hamkyung Province told Daily NK last night. “Some are borrowing the money, while others are even collecting it from their workers to buy pork in the market. Bean sprouts are being cultivated privately by factories.”

However, the source also relayed news of trading organs that have been doing well in the run-up to the holiday period adding items to the distribution list, including Chinese DVD players worth more than $100 and Chinese-made bicycles worth up to $180.

The authorities have also reportedly mobilized the Union of Democratic Women to produce cabbage and spinach in vinyl greenhouses. Women have also been ordered to gather wild herbs from local mountainsides.

Read the full article here:
15 Items on 4.15 Distribution List
Daily NK
Choi Song Min
2012-4-11

According to Yonhap:

North Korea has established an investment insurance firm recently in what is believed to be an effort to attract more foreign investment by reducing risks stemming from uncertainties in the communist nation, a source said Sunday.

The North’s firm is expected to purchase reinsurance from an international company, the source said. The system is similar to an insurance measure that South Korea’s government has been operating to compensate its businesspeople for lost investment in the North.

It marks the first time Pyongyang has introduced such an insurance system for foreign investors.

“For foreign investors, this could ease concerns about investment loss risks stemming from uncertainties of North Korea,” said the source familiar with economic affairs in the communist nation. The source said, however, that it is questionable how effective the measure will be in drawing outside investment.

North Korea has long sought to attract foreign investment to revive its broken economy, but with little success because investors stayed away from one of the most closed nations, which is under international sanctions over its pursuit of nuclear and weapons of mass destruction.

The source also said that the word, “reform,” has been used among North Korean bureaucrats, and that this could signal that Pyongyang may announce a set of bold economic reform measures around April’s commemoration of the 100th birthday of late North Korean founder Kim Il-sung.

“Reform” has been considered a taboo word in the North, along with the term, “openness,” because Pyongyang has rejected international calls for it to reform and open up to the outside world as part of a U.S.-led attempt to topple the autocratic regime.

Should Pyongyang take any economic reform measures, they would mark the first such steps since new leader Kim Jong-un took over the isolated nation after his late father Kim Jong-il died of a heart attack in December.

Read the full story here:
N. Korea sets up insurance firm to attract more foreign investment
Yonhap
2012-3-11

Sheena Chestnut Greitens writes in the New York Times:

What kind of deal do you make with a 20-something who just inherited not only a country, but also the mantle of one of the world’s most sophisticated crime families? When Kim Jong-un, who is thought to be 28 or 29, became North Korea’s leader in December after the death of his father, Kim Jong-il, he became the de facto head of a mafia state.

(more…)

UPDATE 1 (2012-2-21): According to the Korea Times, this store is now providing people with a legal window to exchange local for hard currency:

North Korea is apparently allowing foreign currency to be exchanged at unofficial, black market rates at a newly-renovated department store in Pyongyang, according to a diplomatic source who recently visited the country, Tuesday.

The source said people could exchange euros, dollars and yuan at kiosks at Kwangbok Area Supermarket, which recently opened after refurbishment and is said to resemble department stores in the South. The North has long kept the value of its local currency artificially high.

Euros were being exchanged at the rate of one euro for 4,420 North Korean won, while the official rate is around 130 won per euro, the source said.

“They are exchanging hard currency at a rate that seems to be an unofficial rate,” the source told The Korea Times. “People can also shop at the department store using foreign currency by taking their receipts to the booths.”

…

The source added that the exchange rates were written on a board inside the kiosks.

ORIGINAL POST (2012-1-6): See the original post below.

Pictured Above: (L) The original facade of the “Kwangbok Department Store (광복백화점)”. (R) The new facade of the “Kwangbok Area Supermarket (광복지구상업중심)”

Here is KCNA coverage of the opening of the facility (Posted to YouTube):

Astute observers will notice the American beer, Pabst Blue Ribbon, featured prominently in the beer section.

Here is coverage of the opening in KCNA (2012-1-5):

Pyongyang, January 5 (KCNA) — The Kwangbok Area Supermarket was opened with due ceremony on Thursday.

All business service at the supermarket built as a commercial service center has been put on IT and digital basis. Customers can buy varieties of goods according to their taste and requirements in the sales rooms on each floor stacked with household appliances, electronic products, foodstuff, fibre, sundries and others.

Present there were officials concerned, officials of the Korea Taesong General Trading Corporation, officials and employees of the Kwangbok Area Supermarket, members of the Feihaimengxin Trading (Beijing) Co. Ltd. staying in the DPRK and the Chinese embassy here.

O Ryong Il, general president of the Corporation, said in his speech that the work to build the supermarket was successfully completed under the energetic leadership of leader Kim Jong Iland the dear respected Kim Jong Un and the positive efforts of the peoples of the two countries.

He expressed belief that the supermarket would help towards improving the people’s living standard and promoting the well-being of the two peoples through better service and management.

Xue Rifei, executive managing director of the Feihaimengxin Trading (Beijing) Co. Ltd., said in his speech that Kim Jong Il and Kim Jong Un gave field guidance to the supermarket on December 15, 2011 and named it the Kwangbok Area Supermarket.

He expressed the expectation that an effort will be made to reenergize the supermarket to win high appreciation for its best management, service and credit.

The Korea Taesong General Trading Corporation is a sanctioned organization, and according to the US Treasury, it is a “key node” in the illicit activity of Office 39. According to NK Leadership Watch:

One of the participants at the opening ceremony was Jon Il Chun (Chon Il-chun), deputy director of the Korean Workers’ Party’s Finance and Accounting Department and section chief of Office #39.  Mr. Jon accompanied Kim Jong Il on a visit to the Kwangpok store in mid-December 2011, which was KJI’s last reported public appearance before his death.

On a more casual note, the supermarket marks a point of administrative departure from the way department stores are typically managed in socialist countries. The Kwangbok Department Store (the former name) was one of Pyongyang’s premier formal retail outlets. For decades it operated in the same way as other socialist department stores: customers ended up standing in three lines before they were able to collect their merchandise (one line to order, another line to pay, and another line to pick up). The new Kwangbok Supermarket has adopted a market-style check out line. Though unnoticed by foreigners, this is the first such check out line I have seen in a North Korean department store.

This point was also highlighted in AP coverage:

A separate story in KCNA notes that the shop will sell both foreign and domestic goods:

The supermarket is supplied with home and foreign-made products which are in demand in the country.

Although I have not acquired data specific to this store, I believe it is reasonable (even rational) to assume that if the supermarket sells imported goods it will charge had currency for them. This opinion is based on the following assumptions: 1. The Chinese investors will not accept North Korean won under any circumstances. 2. The goal of Office 39 is to acquire hard currency for the Kim family. 3. North Korean retail outlets frequently post prices in multiple currencies so I don’t see any reason why it would be different here. Today a plurality of North Koreans can easily acquire foreign exchange.

Here is my working assumption of the business model: Chinese partner acquires merchandise and imports it to the DPRK. Sales in hard currency go towards allowing the Chinese supplier to recover its costs. Chinese partner either earns a profit from a markup it charges Kwangbok or it divides the profit with Office 39 along some agreed percentage.

If Chinese profits are earned from a cost-plus markup that it charges Kwangbop, then the partnership is closer to an exclusive supplier deal rather than a true joint equity deal. The North Koreans could cheat on this deal by finding cheaper suppliers and decreasing its purchases from the Chinese partner. If after-sales profits are split between the Chinese and Office 39, then both partners will need auditors on hand to make sure the books are accurate. The Chinese partner will also need a good relationship with the Chinese embassy if it runs into problems with the DPRK managers should they unilaterally change the terms of the contract (the split).

A Chinese firm reportedly tried to invest in the Pyongyang Department Store No. 1 several years ago. Not much seemed to happen, but maybe there is some more info here.

Institute for Far Eastern Studies (IFES)
2012-2-16

The KCNA announced on February 9 that the “Foreign Investment Bank Law” was modified and supplemented. According to the report, the amended law included “those businesses in operation for over ten years are exempt from income tax on the profit collected in the first year and Bank of Chosun [Bank of North Korea] will be exempt from business taxes on the interest revenue collected from loans provided to companies on favorable terms.”

The previous law already had regulations about exemption of transaction taxes but nothing on business tax. The foreign investment company and foreigner tax law regulated that two to ten percent of profit to be paid by the foreign companies in service and construction sectors.

While the prior law stated, “tax exemption will be provided for the first year for income tax on those businesses over ten years old, and 50 percent exemption will be given in the next two years,” the “50 percent limit” was omitted in the amended legislation.

According to the KCNA, “The law has 5 chapters and 32 articles which included the contents of categorization and specification for areas to establish foreign investment banks, property rights, and autonomy on business management.”

On February 10, the KCNA announced that the Foreign Investment Company Registration Law, Foreign Investment Company and Foreigner Tax Law, and Foreign Investment Company Bankruptcy Law were amended.

In reference to the ordinance of the Supreme People’s Assembly Standing Committee signed on December 21, 2011, provided that this law consisted of 6 chapters and 34 articles with specifics on business establishment, address, tax, and tariff registrations. However, no other details were given.

On January 30, the KCNA also reported the “Labor Law of Foreign Investment Company” was amended and supplemented. This law consists of 8 chapters and 51 articles on hiring and labor contracts, rest, protection, social insurance, and security.

In addition, the “Financial Management Law of Foreign Investment Company” and “Fiscal Law of Foreign Investment Company,” was also modified. However, no other details were provided.

The KCNA has reported that North Korea modified foreign investment laws previously in 1992, 1999, and 2004. This year marks the fourth amendment.

The news elaborated, “The DPRK is encouraging foreign companies to investment in our country based on complete equality and reciprocity and will not nationalize or collect the invested asset,” reiterating the safety and security of foreign investment.

Some analyze the recent amendment as an effort to attract more foreign investment into the country. Similarly, North Korea has recently announced the Special Economic Zone Act for the development of Hwanggumpyong and Wiwha Islands.  In addition, the state-run Academy of Social Sciences published a newsletter emphasizing the rational tax investigation for foreign companies.

The Daily NK also reported on this development:

On February 10th, Choson Central News Agency (KCNA) reported fresh amendments to North Korea’s laws governing foreign investment.

KCNA revealed, “Chosun’s law on the registration of foreign-funded enterprises has changed. 34 articles in 6 chapters of the law, which was made according to a December 21st, 2011 decision of the Standing Committee of the Supreme People’s Assembly to cover the founding, residence, taxation and customs of businesses, have been amended.”

As is ordinarily the case, specific amendments were not included in the report.

On February 9th, North Korea also announced revisions to its Foreign Investment Bank Law issuing exemptions from consumption tax. Last month also saw revisions to banking as well as labor and financial management laws.

The amendments appear aimed at assuaging the fears of Chinese enterprises over issues such as the threat of expropriation. Indeed, China is said to have last month rejected initial laws governing the management of special economic zones at Hwanggeumpyeong and Wihwa Island nr. Shinuiju for a variety of reasons.

Read the full story here:
NK Investment Laws Get Another Makeover
Daily NK
Kim Tae Hong
2012-2-13

Chico Harlan writes in the Washington Post:

Recent North Korean defectors in South Korea sometimes joke that their transition to capitalist life begins with two key steps. First, they buy a smart phone. Then, they get a lesson about phone banking.

With those two things, defectors can then transfer money back to North Korea, where many still have family or friends. The money doesn’t go directly to the North; rather, it’s channeled through a series of brokers, routed through China, and trimmed by handling fees and commissions.

But as underground systems go, this one is quite functional. Some 50 percent of North Korean defectors have transferred money back home. Those who try once almost always do it again.

Just a decade ago, almost no money flowed back to the North in the form of remittances. But the number of defectors here has skyrocketed, and the amount of cash they send back home has surged as well.

Some 23,000 defectors now live in South Korea, with the number jumping more then 2,500 every year. (Just 12 years ago, a total of 1,400 North Koreans lived in the South.)

The defectors don’t make much money — about $1,000 per month on average — but that doesn’t stop them from sharing it generously, shipping it back to a country where $1,000 can feed a family for a year.

According to a January 2011 survey from the Database Center for North Korean Human Rights, some 56 percent of defectors who send money give more than $900 (1.01 million won) annually. Another 12.5 percent give more than $4,500 (5.01 million won) annually.

North Korea scholar Andrei Lankov, in this April 2011 essay, estimated that the total money given each years totals $10 million–an enormous influx of cash into the extremely impoverished North.

One recent defector, Ju Kyeong-bae, described during a recent interview at his apartment in Seoul how he transfers money to his friends in the North, who live in a village some 25 miles from the Chinese border.

First, one of his friends — let’s call him Mr. Jeong — calls Ju from North Korea, using a Chinese cell phone that gets a signal from towers just beyond the border.

Mr. Jeong provides a telephone number for a broker in China. Ju calls the broker.

The broker then gives Ju the name of a bank in South Korea, along with a particular account number.

Ju determines the amount of money he wants to send, punches a few buttons on his iPhone, and transfers the money, which then pinballs from the South Korean bank to a Chinese bank, using two brokers.

The Chinese bank account belongs to a businessman (let’s call him Mr. Kim) who does frequent work in North Korea — and who holds lots of private wealth stashed away in the North. When Ju’s money lands in Mr. Kim’s account, Kim just lets it sit there. He never withdraws it and takes it across the border. Rather, he distributes money he already has stashed in North Korea to Mr. Jeong, who in turn gets it to the person Ju’s payment is intended for.

Mr. Jeong then places another call to Ju — a confirmation.

“Some of the middle men, I never even know their names,” Ju said. “It’s all based on trust. If you don’t trust the system, you’re better off not even sending money.”

According to the 2011 survey of defectors, the commission on transfers is generally between 21 and 30 percent. It’s almost never higher than 50 percent. Some 90 percent of defectors say they receive a phone call from their friend or family member confirming that they received the payment.

One of every two defectors thinks his or her money transfers will spark admiration toward the South. About one in every 10 thinks the money will raise resistance against North Korean society.

South Korea technically bans the transfers, but an official at Seoul’s Ministry of Unification, which handles North Korea policy, says that the government has little incentive to stop the remittances.

“They fall into a gray area,” said the official, requesting anonymity because he was unauthorized to speak about the policy on record. “We always say no money should be sent to North Korea in case it is diverted for military purposes. But in this case, we’re not talking about huge amounts. And it’s for humanitarian purposes. So long as that’s the case, we won’t pursue it.”

Additional posts on remittances:

1. ROK moves to control inter-Korean remittances (2011-5-26)

2. ROK seeks to gain greater control of sanctioned cash flows to DPRK (2011-05-25)

3. Remittances from North Korean defectors (2011-4-21)

4. Defectors remit US$10m a year to DPRK (2011-2-23)

Read the full story here:
North Korean defectors learn quickly how to send money back home
Washington Post
Chico Harlan
2012-2-15

According to KCNA (2012-2-9):

Law on foreign-funded banks has been amended in the Democratic People’s Republic of Korea.

The law, which breaks into 32 articles in five chapters, deals with classification, residence, property right and independent management of foreign-funded banks.

The law stipulates that the banks with 10 or more years of banking activities shall be exempted from paying income tax for the first-year profits.

It also provides that business taxes shall not be levied on the interest receipts from loans that were credited to local banks and businesses in their favor.

According to the Daily NK:

There has been an upswing in prices and exchange rates in North Korea as East Asia moves towards the lunar New Year’s holiday, which falls on the 23rd.

A source from Hyesan in Yangkang Province told Daily NK this afternoon, “The number of people in the jangmadang is rising and trade is getting more active, and so the Yuan exchange rate and rice price are both on the up.” According to the source, the Yuan is trading for 680 North Korean Won, while rice is hovering at approximately 4,300.

A source from Musan in North Hamkyung Province previously reported similar circumstances to Daily NK on the 16th, with the Yuan at 780 Won and rice and corn at 4,500 Won and 800 Won respectively in the jangmadang there.

The current situation follows on from a price spike before Kim Jong Il’s death on December 17th [see here and here], the following mourning period (to the 29th) and criticism sessions (to January 8th). However, while at its height last month the price of the most expensive rice had hit 5,000 Won, by January 11th-14th it had declined to 3,000-3,500 Won in eastern regions. Now, however, with the holiday period ahead, prices are rising again.

“Although the self-criticism period ended, we still had to keep an eye on the security forces so the number of sellers in the jangmadang was what it used to be, but from a few days ago people started using the jangmadang as normal and the rice and Yuan prices started rising a bit,” the Hyesan source explained.

Interestingly, while the authorities have tried a number of measures to regulate the Sino-North Korean border and limit the use of foreign currency of late, sources report that the measures have only had a minor effect on prices and have not daunted the will of local people to trade at all.

Overseas currency is even being traded publicly somewhat more frequently now, sources report, showing the skepticism with which the people view official threats to stop the use of Yuan and U.S. Dollars in the market.

As the Musan source commented wryly, “People are saying that ‘If his dad couldn’t stop it, what is the young one going to do about it?’ and ‘As long as the Tumen River keeps flowing, they can’t stop the Yuan, the smuggling, or the defection.’”

Read the full story here:
New Year Seeing Active Trade
Daily NK
Lee Seok Young
2012-1-18

UPDATE 1 (2012-1-19): Writing in the Asia Times, Michael Rank offers an update on the Ponghwa group (Ponghwajo, 봉화조):

It is widely assumed that if anyone knows what the North Koreans are up to, it’s the Chinese, and Chinese-language Internet sites have provided news stories about drug smuggling and border-crossing refugees. But there seems to have been a clampdown in the last year or two and these sources have dried up.

However, the Beijing magazine Kan Tianxia published a noteworthy article after Jong-il’s death highlighting the so-called Ponghwa group consisting of the sons (and presumably the occasional daughter) of the Pyongyang elite.

This privileged clique, which was first formed around 2000, consists of people mainly in their 30s and, the magazine claims, included Jong-eun himself after he returned home from his studies in Switzerland.

It says the group’s purpose is to strengthen Jong-eun’s power base and to act as his backstage support.

The article quotes an informed source as saying the Ponghwa group are mainly graduates of Kim Il-sung University, Pyongyang Foreign Languages University and other elite institutions, and that they tend to work in the security and intelligence apparatus and in top government organs such as the supreme procuratorate (prosecutor’s office).

The word Ponghwa means “smoke of battle” and also has connotations of “advance guard”. It is the name of the area of Pyongyang on the Taedong River that was the home of Kim Il-sung’s mother Kang Pan-sok; it is also the name of Pyongyang’s most elite hospital and there is a Ponghwa underground station.

The group is said to be headed by the sons of two generals. One of these is O Se-hyon, the second son of General O Kuk-ryol, who, according to the North Korea Leadership Watch (NKLW) blog, participated in a crucial meeting hours after Jong-il’s death which “began the order of operations which publicized KJI’s [Kim Jong-il’s] demise and taking on KJI’s remaining administrative and command mechanisms”.

The other leader is Kim Chol, son of General Kim Won-hong, who, according to rumors, was involved in various scandals but was nevertheless promoted to full general in 2009. General Kim, like the fathers of several Ponghwa members named in the article, belongs to the super-elite as is clear from his listing as a member of Jong-il’s funeral committee.

Ponghwa members also include the son of former veteran ambassador to Switzerland Ri Chol (Ri Tcheul) who is said to have been close to the young Jong-eun when he attended the International School in Bern, as well as the son of vice premier Kang Sok-ju. Kang was until 2010 the senior vice minister of foreign affairs and is, according to NKLW, a cousin of Jong-il; he also has has ties to Jong-eun’s mentors and uncle and aunt, Jang Song-taek and Kim Kyong-hui.

Members of elite groups such as the Ponghwa set are visible to the foreign community in Pyongyang where they frequent hard currency shops and restaurants, and have a clear parallel in China where the sons and daughters of top officials are assiduous in exploiting family connections.

Although Jong-eun is said to be as omniscient and omnipotent as his father and grandfather, almost nothing is known for sure about him. There is little doubt that he went to school in Switzerland, and the Chinese magazine claims this has been confirmed in North Korean “propaganda documents” – probably internal briefing materials distributed to senior officials.

Pyongyang watchers experienced a mild frisson when his mother was mentioned in a television documentary earlier this month, as this was the first time there had been official recognition that he has a mother. She has never been officially named, apparently because she was a Japanese-born Korean, and also because her relationship with Jong-il was not a happy one. She is said to have died in Paris in 2004.

Nobody is sure if Jong-eun was born in 1983 or 1984. According to a book written by his father’s former live-in chef [Kenji Fujimoto], his birthday is on January 8, but there were no signs of celebration in Pyongyang on that day. Perhaps it was considered unfitting to celebrate so soon after his father’s demise.

The only utterance attributed to Kim Jong-eun is a paean of praise to the joys of working all night. “Even when I work night after night, once I have brought joy to the comrade supreme commander, the weariness vanishes and a new strength courses through my whole body. This is what revolutionaries should live for.”

His father and grandfather were also fond of lauding the joys of working through the night, and there’s nothing North Korean leaders fear more than original thinking.

ORIGINAL POST (2011-4-18): Today the media was abuzz with rumors of the DPRK’s most exclusive club: Ponghwajo (aka: Bonghwajo, 봉화조).  This club is composed of the children of ruling elites, and according to the rumors, they not only generate substantial sums of hard currency, but they also know how to spend it.  Below are some stories about the group:

Choson Ilbo:

When Kim Jong-chol, the second son of North Korean leader Kim Jong-il, spent 10 leisurely days in Singapore in February going on a luxury shopping spree and attending an Eric Clapton concert, he was apparently joined by a brat pack of children of powerful officials in North Korea.

An official source here said Sunday intelligence information reveals Kim Jong-chol (30) and members of the so-called Ponghwajo or torch group not only visited Singapore, but also went to Macao and Malaysia to gamble and shop.

The Ponghwajo consists of the regime’s princelings, not to be confused with the children of early high-ranking officials who fought as revolutionaries along with former North Korean leader Kim Il-sung. These sons of the revolutionaries are now in their 50s and 60s and have recently been tapped to serve in key positions under North Korea’s heir apparent Kim Jong-un.

But the Ponghwajo are in their 30s and 40s and are not viewed favorably by the regime’s leadership. Though they are often engaged in activities that generate dollar revenues through drug sales, counterfeiting and black market trade, they apparently do not wield much political power.

The group was formed in the early 2000s by O Se-won, the son of Gen. O Kuk-ryol, a senior leader in North Korea’s powerful National Defense Commission, and Kim Chol, the son of Kim Won-hong, head of the People’s Army Security Command. Its members include Ri Il-hyok, the first son of Ri Chol, former North Korean ambassador to Switzerland and the official in charge of handling Kim Jong-il’s secret bank accounts, as well as Kang Tae-seung, the eldest son of First Vice Foreign Minister Kang Sok-ju and Jo Song-ho, the eldest son of the late Jo Myong-rok, first vice chairman of the National Defense Commission who died last year.

Donga Ilbo:

Certain members of Bonghwajo, a club of the children of North Korea’s power elite, accompanied Kim Jong Chul, 30, the second son of North Korean leader Kim Jong Il, when the junior Kim attended Eric Clapton’s concert in Singapore in February.

Like “Crown Prince Party, or The Princelings,” a group of the children of prominent and influential senior communist officials in China, Bonghwajo is comprised of children of ranking officials of the North Korean Workers’ Party, military and senior members of its Cabinet.

Due to their parents’ influence, the children reportedly landed jobs at powerful organizations and are earning money through illegal activities such as counterfeiting and narcotics trafficking.

A source on North Korea said, “Kim Jong Chul is forming a closer relationship with Bonghwajo members after his younger brother Jong Un was named Kim Jong Il’s heir apparent.”

“When Jong Chul went to Singapore to watch Eric Clapton’s concert, certain Bonghwajo members accompanied him and paid all of the costs for his stay and shopping in Singapore.”

The source said, “Jong Chul and Bonghwajo members visited not only Singapore but also Macau and Malaysia in February,” adding, “Visiting the three countries, they gambled with up to 300,000 U.S. dollars and purchased expensive products at department stores.”

Formed in the early 2000s, Bonghwajo is reportedly led by O Se Hyon, second son of National Defense Commission Vice Chairman O Kuk Ryul, and Kim Chul, first son of the General Political Department Director Kim Won Hong at the People`s Army. Kim Jong Un joined the club when he turned 20, while Kim Chang Hyok, son of Kim Chung Il, deputy director of Kim Jong-Il`s personal secretariat, also became a member.

Bonghwajo was named after the village of Bonghwa in Pyongyang`s Kangdong County, where Kim Jong Il’s grandmother Kang Ban Sok lived. Bonghwa is construed as meaning “frontier” in North Korea.

Bonghwa Medical Center, the North’s top hospital, is where Kim Jong Il underwent treatment when he suffered a stroke in 2008.

Bonghwajo is also known to deal in illegal activities such as counterfeiting and drug trafficking. The Washington Times reported in May last year that Bonghwajo was involved in illegal activities, including circulation of “super notes,” or ultra-high precision counterfeit 100-dollar bills, and drug trafficking.

U.S. intelligence say O Se Hyon was entangled in the incident of the Bongsu-ho, North Korea’s drug trafficking boat that was caught by Australia in April 2003, and is related with counterfeit bills discovered in Las Vegas in 2004.

Bonghwajo members are said to be habitually taking drugs as well as trafficking them. Kim Chul, who works at the general surveillance bureau under the (North) Korean People’s Army Ministry, is earning money through drug trafficking in China and elsewhere and paying kickbacks to Kim Jong Un and Kim Jong Chul.

The group is even called a narcotics club because drug use is so rampant among members, with leader O Se Hyon undergoing treatment at a detention facility due to heroine inhalation.

Daily NK:

The existence of ‘Bonghwajo’, a grouping of the children of North Korea’s highest leadership including Kim Jong Eun, has made headlines in South Korea in recent days, raising questions about what role this group of powerful youngsters might be playing in the succession.

‘Bonghwajo’ members are said to be involved in foreign currency-earning businesses, many of them illegal, while also working in key areas of the National Security Agency, General Bureau of Reconnaissance, Ministry of the People’s Armed Forces, Central Prosecutors’ Office and other high organs. They reportedly curry favour by financially supporting both Kim Jong Eun and elder brother Kim Jong Cheol.

Therefore, one analysis has it that the Bonghwajo, which is analogous with China’s ‘Princelings’ is both a group for the strengthening of Kim Jong Eun’s power and a private bank through which to finance the successor’s activities.

Cho Young Ki, a professor with Korea University, told The Daily NK today, “Bonghwajo can be read as being Kim Jong Eun’s support group. The Three Revolutionary Teams took the initiative in the establishment of Kim Jong Il’s power, and I presume that Bonghwajo might be performing the same role.”

Professor Cho added, “Kim Jong Cheol, who lost his practical power after publicizing the succession structure, is likely to be providing this group with his support.”

Head of World North Korea Study Center An Chan Il agreed, suggesting, “It appears that Bonghwajo may be intervening in personnel management while offering funds for Kim Jong Eun obtained from foreign currency-earning businesses.”

An went on to describe a group led by Kim Jong Il’s half brother Kim Pyong Il and Oh Il Cheong (the son of former Minister of the People’s Armed Forces Oh Jin Wu) at the time of Kim Jong Il’s elevation.

An said, “Even though we didn’t know their name, there was a group that came before ‘Bonghwajo’, and the nature of ‘Bonghwajo’ could be the same as that of the group led by Kim Pyong Il.” He went on, “Kim Pyong Il worked as the group’s main leader, but then he was put in a ‘sub-branch’ and got sent overseas. But Oh Il Cheong switched line and is now a Lieutenant-General.”

The ‘Bonghwajo’ group may well consider that it is in the same boat as Kim Jong Eun. Therefore, its members are likely to work to expand their power in the Party, military and foreign currency earning organs so to ensure Kim Jong Eun’s succession and their own access to power and money for the years to come.

The core members of the Bonghwajo are said to be Oh Se Hyun, the second son of Vice Chairman of the National Defense Commission Oh Keuk Ryul, Kim Cheol, who is the eldest son of Kim Won Hong (the vice director in charge of political organization in the General Political Department of the People’s Army), Kang Tae Sung, the eldest son of Vice Premier of the Cabinet Kang Suk Ju, Kim Cheol Woong, the second son of Kim Choong Il (a former vice director in Kim Jong Il’s Secretary’s Office), and Cho Sung Ho, the eldest son of Cho Myeong Rok (former first vice chairman of the National Defense Commission).

However, professor Cho pointed out, “Even if Bonghwajo make an effort to establish Kim Jong Eun’s smooth power succession, it is doubtful whether they can reign properly. The extent of their activities and legitimacy may decide whether or not they are able to support Kim Jong Eun.”

Meanwhile, Yonhap News has claimed that drugs are so prevalent within the group that it is known as a drug club, and Oh Se Hyun has reportedly been treated for addiction.

According to the Daily NK:

A Hamkyung Province source has informed Daily NK this afternoon of a directive completely forbidding the use of foreign currency in markets, saying he was informed that “As part of the last instructions of Kim Jong Il, those who circulate foreign currency including Yuan and Dollars will be punished more severely than those who deal in drugs.”

“They said it is part of General Kim Jong Il’s last instructions and didn’t say what the reason is, so it is being strictly enforced,” the source added.

In North Korea’s markets, foreign currency is ordinarily preferred to the North Korean Won, and most transactions are conducted accordingly in Chinese Yuan. Therefore, if the new measure is actually enforced it has the potential to cause chaos.

However, it may be just a part of an ongoing competition to display loyalty to Kim Jong Eun, and given that the use of foreign currency is so ubiquitous in North Korea that it would be extremely hard to strictly enforce such a measure, may not last long.

Dong Yong Seung, a researcher with Samsung Economic Research Institute in Seoul commented after hearing the news from Daily NK, “They could be trying to increase the value of the North Korean Won by stopping use of other currencies.”

Read the full story here:
Authorities Move to Block Currency Usage
Daily NK
Choi Cheong Ho and Cho Jong Ik
2012-1-2