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China/North Korea financial integration

Saturday, April 12th, 2008

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

Posted in Banking, China, Finance | Comments Closed

North Korea launching massive anti-corruption drive

Monday, February 11th, 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

Posted in Banking, Black markets, Daesung General Bureau, Economic reform, Finance, Fiscal & monetary policy, Foreign direct investment, Joint Ventures, Kaesong Industrial Complex (KIC), National Economic Cooperation Federation (DPRK), Political economy, United Front Department | 3 Comments »

Law on Foreign-invested Bank

Monday, February 11th, 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.

Posted in Banking, Economic reform, Finance, Foreign direct investment, Law of the DPRK on Foreign-invested Bank | Comments Closed

2008 Index of Economic Freedom

Thursday, January 31st, 2008

The 2008 Index of Economic Freedom published by the Heritage Foundation and the Wall Street Journal covers 162 countries across 10 specific freedoms such as trade freedom, business freedom, investment freedom, and property rights. Unlike the Freedom House rankings, this is an index, meaning there is a first place winner (who should be rewarded with lots of investment and business creation) and a last place “winner” (who should be shamed into moving up the list for the same prizes)

The bottom ten countries:
148. Venezuela
149. Bangladesh
150. Belarus
151. Iran
152. Turkmenistan
153. Burma (Myanmar)
154. Libya
155. Zimbabwe
156. Cuba
157. North Korea (unchanged)

Posted in Banking, Economic reform, Finance, Fiscal & monetary policy, Foreign direct investment, Insurance, Joint Ventures, Political economy | Comments Closed

DPRK Holds Annual Lottery for Government Bond Repayments

Thursday, January 3rd, 2008

Institute for Far Eastern Studies (IFES)
Nk Brief No. 08-1-3-2
1/3/2008

North Korea has announced the winners of its sixth drawing for payouts of ‘People’s Life Bonds’, through which it provides ticket buyers with not only payment of principal, but also additional lottery winnings. From July to November of 2003, North Korea sold 10-year bonds worth 500, 1000, and 5000 won, and since then has held drawings once or twice per year repaying the bonds and lottery winnings as a way to pull in idle cash from the people.

(North) Korean Central TV reported that the 6th People’s Life Bond drawing had taken place and provided some numbers regarding the payments. In the latest drawing, thirteen 5000 won, eight 1000 won, and ten 500 won tickets were drawn. The television announcement explained that winners could report to the appropriate bank during the first quarter of 2008 to collect their winnings. It was also reported that during the latest fourth-quarter drawing, one first-prize, ten second-prizes, and fifteen third-prizes had been chosen, but provided no concrete details regarding the amount of the prize winnings. North Korean bonds do not pay interest to the investors, but rather, provide prize winnings greater than the amount of interest that would have been paid to winners each quarter.

The fifth round of drawings took place in January 2006 in Sariwon, North Hwanghae Province, when thirty tickets were drawn. North Korea’s savings and bond lottery system appears to be an attempt at improving financial difficulties faced due to the government’s collection of idle hard currency from each family.

Posted in Banking, Civil society, Finance, Fiscal & monetary policy | 1 Comment »

Widespread embezzlement among party officials

Monday, December 3rd, 2007

Daily NK
Jung Kwon Ho
12/3/2007

The North Korean authorities are intensifying efforts to crack down corruption and embezzlement prevalent among party cadres.

Lim Sang Il (pseudonym, 43), a native of Pyongyang, said, “The state excommunicated and dismissed both the chief secretary of the Party in the Daedonggang district and the head of the foreign currency-making activity organization. They were found to have embezzled money earned from cocoon business for the past ten years.” Mr. Lim, currently staying in Dangdong, China visiting relatives, said, “Words are circulating around that they extorted over 10 million dollars.”

Mr. Lim said, “The factory manager of the Sangwon Cement Complex located near Pyongyang took his life when he heard the news that he was suspected of corruption and the state inspection group against anti-socialist trends was about to come down to see him for inspection.”

“This manager was notorious for corruption. For years, he had extorted money from the factory and used it for his own use,” Mr. Lim said. “It was widely gossiped that this man killed himself because he knew that his would receive capital punishment considering the severity of his corruption.”

A source from Sinuiju in North Pyongan said in a phone conversation with DailyNK on the 28th of November, “The chief secretary of the local Party in Woonjeon, North Pyongan Province, was expulsed from the party and fired from his job after he was found to have extorted money allocated for public construction works.”

“There are constructions going on in Woonjeon, tearing down old houses and building new ones,” the source said, “However, no one has ever asked people’s permission for constructions in the first place and provided temporary housing for people until the completion of construction works, and that, of course, angered many people.”

“All of a sudden, those without money ended up being homeless whereas those with money became able to purchase two to three houses at affordable price,” said the source.

“Expressing their anger aggregated over time, the local people led by the old directly sent a written protest to the central Party and filed a complaint,” the source said. “After all, the inspection group had to come down to Woonjeun and dismissed the chief secretary of the local Party and head prosecutor.”

“The inspection group discovered that these men were hiding a significant amount of money in their houses,” the source said. “It was so much that the inspectors couldn’t count the money and had to weigh stacks of bills in the scales.”

“Conspiring with the construction manager, the chief secretary accumulated money by overpricing construction materials and selling newly constructed houses,” said the source. “The head prosecutor accepted huge bribe on condition that he should turn down pouring complaints and contesting reports from the locals.”

In regard to the recent incident where some machinery from the Suncheon Vinylon Complex was smuggled to China, the state has dismissed many high-ranking officials implicated in the smuggling such as the chief secretary of South Pyongan Province, the chief secretary of the local Party in Suncheon, the city’s public prosecutor, and director of safety agency and foreign-currency making organization of the city.

Posted in Banking, Black markets, Finance, Price liberalization | Comments Closed

N.K. officials visit Wall Street over access to global financial system: sources

Monday, November 19th, 2007

Yonhap
11/18/2007

A North Korean delegation is visiting Wall Street to meet financiers and attend a seminar that could help the isolated communist country gain access to the international financial system, sources here said on Sunday.

The six-member delegation led by Ki Kwang-ho, a director at the North Korean Finance Ministry, arrived here on Thursday for the two-day-long session, which starts Monday. The U.S. side is to be represented by Deputy Assistant Treasury Secretary Daniel Glaser and other officials involved in ending Pyongyang’s suspected illicit activities.

The visit by the North’s delegation, the first of its kind, comes about one year after the release of some US$25 million in North Korean funds that were frozen at a Macau bank over their alleged connection to money laundering and other illegal activities.

Although the assets were released in a one-time transaction through the international financial system, the North has said it wants full access to the system without financial sanctions from the U.S., which has considerable influence over the global market.

The delegation’s visit also coincides with recent progress in the multilateral negotiations for North Korea’s nuclear disarmament, in which Washington is negotiating with Pyongyang on the removal of the North from its list of state sponsors of terrorism and the termination of the application of its Trading with the Enemy Act.

Washington, one of major shareholders in the International Monetary Fund and other lending institutions, is obliged by law to oppose any loans to countries on the list.

The North Korean financial officials met with financiers at the heart of global finance here Saturday to discuss international financing for the isolated communist state, informed sources said.

Donald Gregg, chairman of the New York-based Korea Society, quoted the North Koreans as saying Friday that they came to learn about ways to get access to the international financial system.

While attending a seminar sponsored by the National Committee on American Foreign Policy, the North Koreans asked about know how to join the IMF and other international financial institutions, the former U.S. ambassador to South Korea said.

Another North Korea expert, however, predicted a long and bumpy road ahead for the North, saying the isolated, impoverished communist state needs a lot of manpower, experience and technologies before joining the international financial system.

Posted in Banking, Finance, Insurance, USA | Comments Closed

U.S. Treasury’s Levey Says Bankers Worldwide Are Shunning Iran

Thursday, November 15th, 2007

Bradley Martin
Bloomberg
11/15/2007

U.S. Treasury Department measures targeting Iran, similar to those used against North Korea, are having a significant effect in financially isolating the country, Stuart Levey, undersecretary for terrorism and financial intelligence, said in Tokyo.

Financial institutions around the world have cut ties with Iran, leading to “a dramatic pullback in business,” Levey said on a trip through East Asia to build support for the measures.

This followed the Treasury department’s identification of state-owned banks and other entities it said were financing weapons proliferation and terrorism. The department asked U.S. banks not to deal with those institutions.

Foreign banks are cutting financial ties with Iran generally, not just with the individually targeted entities, Levy said, going “beyond legal requirements” that govern banks involved in the U.S. financial system.

“Major financial institutions around the world have decided as a matter of risk assessment that they don’t want to do business with this regime,” he said.

The United Nations and the U.S. want Iran to halt uranium enrichment that the West suspects is aimed at developing nuclear weapons.

Iran is “turning itself into a financial pariah” through deceptive financial practices that obscure the line between legitimate and illicit transactions, Levey said.

North Korean Example

Financial pariah status befell North Korea’s banking and financial system after the Treasury in 2005 accused Macau’s Banco Delta Asia S.A.R.L. of aiding North Korean money laundering and weapons proliferation.

Macau authorities froze some $24 million in North Korea- related deposits in the blacklisted bank, bankers worldwide refused to handle North Korean transactions and Kim Jong Il withdrew from negotiations on the future of his country’s nuclear weapons program.

This year the U.S. agreed to the release of the BDA funds. While that compromise brought Kim’s negotiators back to the table, it didn’t cure the country’s financial isolation, according to Felix Abt, president of Pyongyang’s European Business Association.

“It is still difficult because some international banks are reluctant to handle payments to and from any banks in the DPRK, either state or foreign-owned, fearing that they could become targets of restrictive measures in the same way that Banco Delta Asia was,” Abt said, using the initials of North Korea’s formal name, Democratic People’s Republic of Korea.

Investment Prospects

Such fears affect the prospects for investment in the country, according to consultant Tony Michell of EABC Ltd. in Seoul. “There remains a reluctance by mainstream financial players to get involved,” he said, “in case of further action by the U.S. Treasury.”

A North Korean delegation is traveling to New York next week to hear more on how the country can extricate itself from that situation. U.S. and North Korean officials will hold financial talks Nov. 19 and 20 in New York, at North Korea’s request, State Department spokesman Sean McCormack told reporters in Washington Nov. 14. The U.S. delegation will be led by Daniel Glaser, the Treasury Department’s deputy assistant secretary for terrorist financing.

Levey, when asked in Tokyo today what would be discussed at the talks, said U.S. officials would “lay out for the government of North Korea the types of conduct that are inconsistent with international standards.”

Asked three times whether North Korea was still involved in the sort of illicit conduct that his department had alleged in 2005, Levey avoided a direct answer, saying only: “The North Koreans have engaged in a variety of conduct that has made it difficult for them to integrate in the international financial system.”

Posted in Banking, Finance | Comments Closed

US-NK Financial Talks Scheduled in New York Next Week

Wednesday, November 14th, 2007

Korea Times
11/14/2007

U.S. and North Korean officials will meet in New York early next week to reopen talks on addressing Pyongyang’s alleged illicit financial activities, sources here said Tuesday.

Daniel Glaser, assistant treasury secretary in charge of terrorism financing, will lead the U.S. delegation to the talks scheduled Monday to Tuesday, according to the sources. It was not yet clear who will represent North Korea at the meeting. Previous sessions were led by O Kwang-chol, president of the Foreign Trade Bank of Korea.

The meeting is the first since the two countries resolved a banking issue that for over a year delayed North Korean denuclearization negotiations. The U.S. Treasury in September 2005 sanctioned Banco Delta Asia (BDA), a Macanese bank, for abetting North Korea’s laundering of money acquired through smuggling, counterfeiting and arms proliferation. The bank froze all North Korea-related accounts, and Pyongyang boycotted the denuclearization talks in protest.

The issue was settled with the release of some $25 million in North Korean money at the BDA early this year.

Sources said next week’s meeting will address North Korea’s suspected illicit activities that led to the Treasury’s sanctions, including Pyongyang’s counterfeiting of American currency.

North Korea has been accused of producing and circulating fake$100 bills, known as “supernotes” because of their near-authenticity, and smuggling contraband goods.

Posted in Banking, Finance, Fiscal & monetary policy, Foreign Trade Bank, USA | Comments Closed

North Korea, China Will Start $10 Billion Fund, Yonhap Reports

Tuesday, November 13th, 2007

Bloomberg
Bomi Lim
11/13/2007

North Korea’s Daepung Investment Group will set up a $10 billion fund with China Development Bank to help Chinese firms operating in North Korea, Yonhap News reported, citing the company’s vice president.

The fund will be used to help Chinese companies build roads, railways and ports in North Korea, Daepung Vice President Bae Kyeong Hwan was quoted as saying. Bae didn’t say how much each country will contribute the fund.

Daepung also plans to set up a bank to attract investment from overseas, the report said.

China is North Korea’s biggest trading partner and an important provider of food and fuel. North Korea is isolated from most of the rest of the world and has received virtually no foreign investment.

Posted in Automobiles, Banking, China, Economic reform, Finance, Foreign direct investment, International trade, Korea Taepung International Investment Group (Daepung Investment Group), Railways, Sea shipping, Transportation | Comments Closed

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