North Korean Economy Watch

The Guardian
Julia Kollewe
6/8/2007

British American Tobacco is pulling out of North Korea, but insisted the move had nothing to do with political pressure.

The world’s second largest cigarette group, whose brands include Lucky Strike, Kent and Dunhill, said it had agreed to sell its 60% share in Taesong BAT, its joint venture in Pyongyang with the Korea Sogyong Chonyonmul Trading Operation, a state-owned company.

BAT is selling the stake to SUTL, a Singapore-based trading group that invests in business ventures in South East Asia. The price has not been agreed yet but will be small in relation to the group. The sale is expected to be completed later this year.

Daily NK
Kim Min Se
4/18/2007

Cigarette prices escalate as Japan toughens economic sanctions

Following Japan’s economic sanctions, North Koreans are finding it to difficult to splash out on luxury goods, an inside source informed on the 17th.

Though only a minority of the rich are experiencing this hardship as the import of Japanese cigarettes and foods slowly come to a halt, it will be interesting to note what further repercussions will follow as a result of Japan’s sanctions.

The North Korean rich often lavish on “Seven” cigarettes, made in Japan which is known to be different to “Mild Seven” sold in South Korea. It is a much stronger cigarette containing 14mg of tar and 1.4mg of nicotine,

Seven was first introduced to North Korea in the mid-1980’s and has captivated tobacco preference of North Koreans ever since. As living standards deteriorate in North Korea Seven cigarettes have become a rare commodity for an average person to have today, though earlier in the 90’s, Seven was a luxury cigarette smoked by the majority of North Koreans. In particular, merchants who accumulated wealth through North Korea-China trade still prefer this brand to others.

Unlike other popular luxuries, smoking is a habit which becomes easily addictive. Hence, a handful of North Korean elites who in the past commonly smoked Seven’s and acquired its taste are experiencing withdrawal symptoms today, due to Japan’s economic sanctions and consequent ban of Seven.

Seven is a strong cigarette and though it sells well throughout the Japanese, it is not a preferred brand in South Korea. While Japan places export bans towards the North, conversely North Korean authorities are also regulating Japanese goods. For this reason, North Korean citizens are smoking these cigarettes in secret.

As supply does not meet demand, the cost of Seven cigarettes has skyrocketed in the cities of Pyongyang and Nampo.

Nowadays, a packet of Seven’s in Pyongyang sells at around 40 Yuan (11,000 North Korean won, US$3.6). This is 7~8 times more expensive than the common North Korean brand of cigarettes “Cat.” Considering that a kilogram of rice costs 800 North Korean won (US$0.26) and the average monthly salary of a worker 3,000~4,000won (US$0.98~1.3), the price of Seven’s is phenomenal.

However, as supply continues to be depleted, rich merchants and powerful ministers face a difficult test.

Furthermore, the rich and former Korean residents of Japan are unable to taste the flavors of popular Japanese foods that they have become accustomed to such as soy sauce, bean paste and instant noodles for a long time. 

International Herald Tribune
Donald Greenlees
3/8/2007

Last August, Colin McAskill, a British businessman, agreed to buy a small bank in North Korea. On the face of it, Daedong Credit Bank was not a brilliant investment.

The agreement that McAskill signed with the management of Daedong Credit at a hotel in Seoul came as the bank was caught in the grip of financial sanctions that had virtually cut off North Korea from the global financial system.

Financial institutions around the world were shunning any links to North Korean banks, making it almost impossible to transact business.

Daedong Credit was using couriers to carry cash in and out of the country in amounts as high as $2.6 million because it could not make electronic transfers to other banks.

Since September 2005, Daedong Credit had also been fighting to recover $7 million that had been frozen in a Macao bank as part of efforts by the United States to put a financial squeeze on North Korea over alleged illicit financial transactions. This was a big sum for Daedong Credit. When McAskill had examined the bank’s books, its total assets were just $10 million.

None of this has deterred him. He said during an interview in Hong Kong that he planned to execute the sale agreement within the next two weeks and take full control of the only foreign-managed bank in North Korea. The Hong Kong- based Koryo Asia, chaired by McAskill, will take control of the banking license and a 70 percent stake owned by British investors through a Virgin Islands company. The remaining 30 percent is held by the state-owned Daesong Bank. “I think it’s a magnificent deal,” McAskill said, although he would not disclose the purchase price. “The bank has been running for 12 years. It is trusted and it has been profitable since day one.”

Despite McAskill’s optimism, the future of Daedong Credit has been under a cloud since the imposition of the U.S.- orchestrated banking embargo on North Korea 18 months ago and the viability of the business remains precarious.

Even amid signs of a thaw in relations between Pyongyang and Washington, the start of a bilateral dialogue that began in New York on Monday and an agreement in six-nation talks in Beijing on Feb. 13 to start to denuclearize the Korean Peninsula, analysts say banks in North Korea will struggle to restore contacts with the global financial system.

The trigger for the financial embargo of North Korea was a declaration by the U.S. Treasury Department under section 311 of the Patriot Act that the Banco Delta Asia, based in Macao, was a “primary money laundering concern” because of its links to a number of North Korean banks, individuals and companies alleged to have engaged in product and currency counterfeiting, drug trafficking and weapons proliferation.

The U.S. and Macanese authorities began separate investigations into Banco Delta Asia and the bank was placed under Macao government supervision.

Along with about 50 North Korean banks, trading companies and individuals, Daedong Credit had its account frozen. The total amount put into “suspense accounts,” according to Banco Delta Asia, was about $25 million, with Daedong Credit accounting for the largest share. Since then, almost all foreign banks that had correspondent relations with Daedong Credit have severed contact for fear of being excluded from the U.S. financial system.

Jack Pritchard, president of the Korea Economic Institute in Washington, said it was unlikely that the United States would send an explicit signal to the financial community to resume trading with North Korea, regardless of whether Pyongyang starts to address concerns about its foreign financial transactions.

He said that although a portion of the frozen money was likely to be released soon, there would not be a “100 percent reversal” of the American stance on financial transactions with North Korea.

Daedong Credit is likely to be one of the first North Korean account holders in Banco Delta Asia to get its money back from the Macao Monetary Authority where it has been earning no interest.

In recent months, McAskill has circled the globe from his home in London acting under a mandate from Daedong Credit to persuade officials in Washington and Macao to release the account. At 66, McAskill has spent 28 years doing business with North Korea, including as a consultant to North Korean banks on debt negotiations and helping to operate North Korean foreign gold sales. He said that at no stage in his meetings with officials from either the U.S. or Macao governments had he seen any specific reason for freezing the Daedong Credit money or been told of any specific allegation about its origins.

McAskill has produced what he calls a “dossier of proof” to establish the identity of all the customers whose money is frozen and the sources of the money. Since it was founded by the failed Hong Kong finance group Peregrine in 1995, Daedong Credit has filled a valuable niche serving the foreign community in Pyongyang. It has about 200 customers among foreign-invested joint ventures, foreign relief organizations and foreign individuals, according to McAskill. The biggest single amount frozen in Macao is $2.6 million belonging to British American Tobacco, which owns a cigarette plant in North Korea.

“We irrefutably established that the money was legal,” McAskill said. “The U.S. Treasury have been going around the world saying to banks ‘close this account, close that account’ but not offering any proof of wrongdoing.” He said his due diligence of Daedong Credit had convinced him that it was a “fully legal, legitimate operation” that did not manage state accounts or had ever been connected to illicit practices.

One of the Treasury’s main allegations against Banco Delta Asia is that it facilitated the spread of counterfeit $100 bills. But McAskill said Daedong Credit had put $49 million into Banco Delta Asia in 2005 and all that money had been forwarded to HSBC for verification.

Only three of the $100 notes belonging to Daedong Credit were confiscated because they were “suspect,” he said.

McAskill has charged the Treasury with harassment after two correspondent banks — one in Vietnam and the other in Mongolia — informed Daedong Credit late last year that they would immediately close accounts because of pressure from the United States.

But it is likely to prove difficult to persuade banks, nervous about the effect on Banco Delta Asia of the long- running Treasury investigation, to take the risk of dealing with a North Korean counterpart, regardless of the pedigree of its shareholders and board.

Last week, at a meeting in Macao, McAskill was finally told by the head of a government-appointed committee supervising Banco Delta Asia, Herculano de Sousa, that it was likely that the money in Daedong Credit would be returned by the end of March.

In the meeting, McAskill told de Sousa that once the funds were freed, Daedong Credit intended to leave the money in Banco Delta Asia and resume operating its old account.

But Banco Delta Asia has informed the U.S. Treasury that as part of its cleanup both the administrative committee and the shareholders were adamant that they no longer would do business with any North Korea entities. In doing so, the bank hopes to avoid the United States making good on a threat to ban Banco Delta Asia from having any correspondent relationships with U.S. banks.

Still, McAskill insisted that Daedong Credit has not broken any law in Macao or elsewhere and that there were no grounds for it to be forced to close its account.

“I am not going to take my money back and cut and run,” he said.

Daily NK
Yang Jung A
12/20/2006

Difficult to Recover British Funds Caught in BDA North Korea Accounts

In amongst the North Korean accounts that were frozen from Macao’s Banco Delta Bank (BDA) was joint funds from a British tobacco company which has been deemed difficult to recover.

The U.K. Financial Times reported on the 18th that the $7mn of the $24mn in North Korea funds frozen in BDA accounts is from Korean trusts and banks of which half the funds is estimated to from a joint account by British American Tobacco (BAT) and a tobacco company trading by North Korea.

BAT’s spokesperson Catherine Armstrong revealed in an interview with Radio Free Asia (RFA) on the 18th “The money has been certified as legal so we’re very keen to get the money out of the frozen account.”

Regarding the amount of frozen funds, Armstrong said “As there are no substantial data, an actual figure cannot be revealed but I am aware it is nearing tens and hundreds of thousands of dollars.”

Raphael Perl, a specialist at the U.S. Congressional Research Service (CRS) said “We don’t necessarily know on its face that the North Korean tobacco company is not also involved in criminal activity” and revealed “As North Korea sells fake cigarettes on a large scale, every tobacco company in North Korea is being suspected of conspiring illegal acts.”

Perl said “Even in the case a company is internationally based, a company is not completely owned internationally but if a joint ownership, it is even more difficult to discern whether or not the transaction was legitimate.”

In another sense, as reports suggest that “The U.S. Administration told North Korea $12mn of the $24mn frozen funds appears to be unrelated to North Korea’s illegal actions,” others are cautiously anticipating progress from the six party talks as North Korea’s legitimate funds are released.

From the Choson Ilbo:
9/26/2006

N.Korean Ship With Contraband Cigarettes Nabbed
 
Officials in Greece nabbed a North Korean freight vessel that was carrying 1.5 million cartons of contraband cigarettes and arrested the seven seamen aboard, it was announced Monday. The ship’s load would have brought 3.5 million euros in taxes.

The Greek Merchant Marine Ministry said the vessel was discovered about 11 km southwest of the Katakolo port on the Peloponnesus Peninsula in southern Greece, and all of the cargo looked bound for that country. The Evva is currently anchored at the Katakolo port. Greece has uncovered 4 million cartons of contraband cigarettes at sea so far this year, of which 3 million were aboard North Korean vessels.

From the Choson Ilbo
8/28/2006

A Californian man indicted on charges of smuggling counterfeit dollars into the U.S. testified at his trial that the high-quality counterfeit US$100 bills or “supernotes” were manufactured in North Korea, the National Intelligence Service said Monday. The NIS reported to the National Assembly’s Intelligence Committee that the man admitted conspiracy to smuggle the supernotes and admitted where the phony bills were made.

The man is a Chinese-American named Chao Tung Wu, the NIS said. There have been reports in the U.S. media quoting anonymous government officials as saying the supernotes were made in North Korea, but this is the first time the claim was confirmed in legal testimony by a chief suspect.

A joint taskforce of the FBI, the CIA, the Justice Department and the Treasury conducted secret investigations and rounded up 59 suspects around the U.S. on charges of smuggling counterfeit dollars and cigarettes in August last year. The taskforce worked under the code name “Smoking Dragon” and “Royal Charm” between 1999 and 2005. It alleges suspects attempted to smuggle millions worth of forged dollars and some $40 million worth of counterfeit cigarettes.

The case drew much publicity not only because of its sheer scale but also because of North Korea’s suspected involvement. The Treasury Department led the investigation that ended up designating Macao’s Banco Delta Asia as Pyongyang‘s “primary money laundering concern” on Sept. 15 last year, a month after the suspects were arrested.

“We should note that talk of political solutions between the U.S. and North Korea over the counterfeit dollars disappeared in South Korea and China since the end of last year,” a diplomatic source in Seoul said. Some until then claimed the U.S. was pressuring the North without clear evidence, but they lost their ground as Washington acquired evidence to support North Korea’s involvement.

The trial is likely to take one or two years, a diplomatic source said. If it ends with a guilty verdict for the main suspect for smuggling made-in-North Korea supernotes, it would get Pyongyang into serious trouble on the global stage. The North denies the charges and says the resulting sanctions amount to “theft.” The communist country in a statement last Saturday said the U.S. has produced no clear evidence so far. But the suspect’s guilty plea undermines the credibility of that claim.

Well the notion that the DPRK has been counterfitting cigarettes to raise hard currency has had a big day in the press.  I saw stories alone.

From Yonahp:

Fake cigarettes are major source of income for N. Korea: report

North Korea is believed to earn between US$500 million and $700 million a year by making and selling fake U.S. and Japanese cigarettes, a U.S. radio station reported Wednesday, quoting a former U.S. official.

“Counterfeit tobaccos are one of the largest, probably the largest single source of income for the North Korean regime,” David Asher said in an interview with the Washington-based Radio Free Asia.

Asher, who until July 2005 had served under former Assistant Secretary of State for East Asia and Pacific Affairs James Kelly, said the North’s communist regime operates as many as 10 plants to make fake U.S. and Japanese cigarettes.

Those plants are scattered throughout North Korea, including its capital, Pyongyang, and its eastern industrial zone, Rajin, he said.

The counterfeit cigarettes, Asher said, are usually packed and sent in containers to China and then to other Asian countries for sale.

“They need to start inspecting containers more aggressively,” he told the radio station, referring to a recent decision by Japan to block the North’s massive scheme to make counterfeit cigarettes.

Tokyo has recently ordered investigation into North Korean-made fake Japanese cigarettes reportedly circulated in China, according to Japanese media reports.

The amount of North Korean-made fake U.S. and Japanese cigarettes is estimated at about 2 billion packs a year, they said.

Asher claimed in an earlier report that as much as 40 percent of North Korea’s total earnings is believed to come from illegal activities such as counterfeiting, drug trafficking and weapons smuggling.

From the Daily NK (for the Japanese perspective):

‘Fake Cigarettes’ Japan Investigation on North Korean Authorities
North Korea reels in an annual income of $80mn~$160mn through counterfeit cigarettes 
By Yang Jung A, Reporter

At the Prime Minister’s residence last August 14th, Japan’s Deputy Chief Cabinet Secretary Suzuki Seiji who heads the ‘Special Investigation Team on Japanese abductees to North Korea’ initiated an official investigation on North Korean Authorities to combat the issue of counterfeit cigarettes.

A Japanese Newspaper ‘Mainichi’ (Daily News) reported that North Korea had been shipping large scale counterfeits of Japan’s leading cigarette brand ‘Mild Seven’ throughout China and South-East Asia in order to produce greater foreign currency.

The investigation by the ‘Special Investigation Team’ will focus on cracking whether or not North Korean authorities partook in the trafficking. On release of results, explicit countermeasures will be taken by the police, financial affairs, agriculture and fisheries and other ministries.

Last July 31st, Vice Minister Suzuki said at a ‘Special Investigation Team’ meeting that “There is a high possibility that North Korea is distributing ‘counterfeit cigarettes’ to foreign countries” and that severe measures will be taken.

The Japanese government argues that the flow of illegal foreign currency made through sales from fake cigarettes needs to be stopped if not at least for the persecution occurring in North Korea, and for the past few months has been pressurizing governments to take action.

A Japanese tobacco industry announced that masses of fake Mild Seven cigarettes were known to be circulating throughout China, North Korea and districts around the boarder. However, there is not yet confirmation that fake cigarettes are circulating in Japan.

Last May, the Japanese Maritime Bureau confirmed that a foreign vessel was found to be transporting fake Japanese cigarettes made in North Korea to South Korea and Taiwan. According to an U.S. press report the amount of fake cigarettes manufactured in North Korea and smuggled out of the country reaches $80-160 mn every year.

BBC
6/1/2006

Good exam grades will no longer be the main requirement for students hoping to get a university degree in North Korea.

The government has announced plans to ban students who smoke from higher education, unless they give up.

The communist country has been on an anti-smoking drive for years, led by leader Kim Jong-il, a reformed smoker.

Mr Kim once described smokers as one of the “three main fools of the 21st Century” along with people who were ignorant of music and computers.

“North Korea is briskly proceeding anti-smoking activities, including a measure to strip smokers of their rights to go to university,” the country’s official media, North Korean Central Agency (KCNA), reported.

Smoking rate fallen

Experts in South Korea say that although there are no accurate statistics, they estimate more than 40% of North Korea’s 22 million people are smokers.

According to KCNA, the smoking rate has decreased by about 15% over the last six years.

Quoting Vice Public Health Minister Choe Chang Sik, it says the government’s goal is to reduce that to below 30% by 2010.

The United States has accused North Korea of being involved in the production and trafficking of counterfeit cigarettes, a claim which North Korea denies.

From the Daily NK:

On the 15th, Tokyo Shinbun reported that “At the inspection on board by Japanses Maritime Safety Department, it has been confirmed that fake Japanese cigarettes produced in North Korea have been delivered to South Korea and Taiwan”.

Although the US has recently announced that the most profit-making illegal activity that North Korea is involved in is production of fake cigarettes, it is the first time that physical evidence is obtained.

Japanese Maritime Safety Department analyzed the testimony of the crew and information obtained by reconnaissance satellite, and concluded that ships dock at Wonsan, Chongjin and Najin to leave with fake cigarettes. It is suspected that the goods are transferred to ships that belong to Taiwanses or South Korean mafia on the sea of Taiwan or Busan.

There are tens of different kinds of fake cigarettes, including Japanese such as Mild Seven, Seven Star and American, such as Marlboro.

Production of Fake Cigarettes started with Growing Opium

When and how did production of fake cigarettes start?

It is almost the time of order to “grow poppy” by Kim Jong Il in November 1992 that production of fake cigarettes started.

At the time, much effort was put into creating a cigarette-production base in North Hamkyung Province. Grain Factory at Hoeryong changed its name to ‘Hoeryong Food United Company’ and the cigarette factory under it was expanded. After 1994, soldiers discharged from their duty were put into ‘4.25 farm’ where they produced the raw material for cagarettes. 4.25 farm was built where #22 political prison camp used to be, in Changpyong, Hoiryeong City.

The area centered around 4.25 farm is known for the good quality of cigarettes in North Hamkyung Province. Especially, “Poisonous” cigarette (contains high nicottine) in Ryonggye, Saebyul, near 4.25 farm is known to be the best of the best.

The average cigarette in South Korea “THIS” has 0.65mg of Nicottine, while the ‘poisonous cigarette’ has about 1.5mg. Even a habitual smoker needs to mix in tobacco. Well-known tobacco is produced in Yunsa, North Hamkyung Province.

The poisonous cigarette from 4.25 farm and tobacco from Yunsa have potential to be the raw material for high quality cigarette such as Mild Seven and Seven Star. However, it seems that it has been hard to produce high quality fake. It has been heard that raw material is imported from foreign countries.

“North Korea Is Fit For Production of Fake Cigarettes”

North Korea is fit for production of fake cigarettes in terms of domestic and international environment. In other countries including China, production of fake goods is strictly controlled and is illegal. However, it is not so in North Korea. A brandname for North Korean cigarette ‘Sweetbrier’ produced in Pyongyang factory is also made in Soonchun cigarette factory in South Pyongan Province and other thousands of domestic factories.

Domestic factory means a co-op where goods are produced using the leftovers from factories. Kim Jong Il started the movement on 3 August 1984, which is why the movement is called ‘August the 3rd Movement for Production of Goods By The People”.

In North Korea, the order from Kim Jong Il turned itself into a commercial activity where fake goods are produced and sold to the people. Accordingly, production and transaction of fake goods are not illegal in North Korea.

Main customer for the fake cigarettes is foreign small and middle scale businesses. Especially in China, as the regulation has gotten stricter, the fake cigarette producing factories turned to North Korea. North Korea smuggled machines and raw materials from China to cigarette factoriesin places such as Pyongyang and Hoeryong to produce fake cigarettes.

Production of Fake Cigarettes Was Run By the Government From The Beginning

North Korea supplies labor and factory, while Chinese companies took charge of supply of raw material and circulation. It is hard for fake cigarettes to be circulated through legal procedure. Therefore, the deal needs to be made with international mafia.

The analysis coincides with the testimony of a North Korean defector (51) who has delivered raw material for cigarette from foreign countries to Pyongyang cigarette factory. He did not want to reveal his identity, but he said he clearly saw a cigarette paper and packs with foreign language on them in 1996.

Japanese Maritime Safety Department said North Korea started producing fake cigarette when it became difficult for them to produce and smuggle stimulants such as opium, which is not a correct analysis.

Production of cigarette in North Korea started when Kim Jong Il order to grow poppy in November 1992. Production of cigarette was not started in order to replace the production of opium, but was managed by the government from the beginning.

From the Joong Ang Daily:

During the last two years, Japanese maritime police officers have frequently caught foreign ships leaving North Korean ports trying to smuggle fake cigarettes, the Japanese newspaper Tokyo Shimbun reported.

Citing intelligence data from satellites, the newspaper said that the fake cigarettes were at times transferred onto other ships waiting in the South Korean port of Busan or near Taiwanese waters. The foreign ships were from Cambodia, Mongolia and Taiwan.

The top cigarette brand forged by North Korea was the American Marlboro. Japanese brands, such as Mild Seven and Seven Star, as well as British tobacco brands were also included in the list.

The Japanese newspaper said in its report over the weekend that North Korean manufactured cigarettes use high-quality wrapping paper, while the tobacco leaves used in the forged cigarettes are inferior to the genuine products.

Japanese authorities did not confiscate the goods because they were not intended to be smuggled into Japan. Nevertheless, authorities have notified foreign intelligence organizations. The Japanese Maritime Police is conducting security checks on all ships that pass through Japan’s exclusive economic zone.

Experts say a crackdown on forged cigarettes in China has led to an influx of machinery used for making those cigarettes into the North, which has started to manufacture them on a mass scale. Increased production of fake cigarettes by the North is said to make up for decreased profits from drug trafficking due to a crackdown by governments. Washington recently reported that the North earns more money selling fake cigarettes than it does on any of its illicit activities.

From the Donga:

North Korean imitations of Japanese cigarettes being transported to South Korea and Taiwan were verified by a foreign vessel inspection by the Japanese maritime security force.

The Japanese maritime security force did not confiscate the North Korean imitation cigarettes, however, since they were not being smuggled into Japan. Instead, they traded information with foreign authorities.

Two kinds of cigarettes from Japan, Mild Seven and Seven Star, and several more American and English cigarettes such as Marlboro were found aboard a ship sailing from North Korea. These cigarettes have different packaging, but consist of the same ingredients.

America has recently pointed out imitation cigarettes as North Korea’s biggest source of illegal profits. Japan’s maritime security force’s view is that as smuggling drugs or stimulants became difficult, North Korea chose imitation cigarettes as a new source to obtain foreign currency.

The maritime security force gave chase to a North Korean vessel in 2001, when it neglected orders to stop and fled in front of Kagoshima Island. After this incident, it has executed maritime inspections against foreign vessels sailing within its exclusive economic zone (EEZ).

According to the maritime security force, imitation cigarettes have been found on Cambodian, Taiwanese, and Mongolian ships sailing from North Korea since two years ago.

Information from reconnaissance satellites and sailors’ statements leads us to believe that imitation cigarette carriers load their goods at North Korea’s Wonsan, Cheongjin, or Najin harbors and transfer them to Taiwanese or Korean mafia vessels in the Taiwanese or Busan sea.

Hundreds of thousand of packs of cigarettes are loaded onto every ship, and these are sold at 60% of the price of authentic ones. The profit from these cigarettes, minus the cost of materials reaches up to tens of millions of yen.

A Japanese newspaper commented that due to the Japanese goods circulation system that uses vending machines at a fixed price, imitation cigarettes are not brought into Japan.

The Mild Seven series is a popular brand that was the most sought-after cigarette in Taiwan last year, and is among the five most popular cigarettes in Korea. Marlboro, which had the most loadage in imitation cigarettes, was exposed thirteen hundred times between 2002 and 2005.

Mass production of cigarettes supposedly began when China’s cigarette producing machines flew into North Korea as crackdowns on cigarettes in China became harsher.