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Illegal Prostitution Occurring in Massage Parlors and Bathhouses

Tuesday, August 7th, 2007

Daily NK
Han Young Jin
8/7/2007

Defector Choi Young Lim [pseudonym] who entered South Korea this past January was a “broker” in North Korea who would receive money from defectors and deliver it to family members in North Korea. He was exposed while mediating money and arrested but was released after giving bribes.

Choi said, “Previously, even with just evidence that there was a connection to a South Korean, you were dragged to a political prison camp and your family members were exiled. However nowadays, even if it is exposed that a defector who entered South Korea sent money, the family members aren’t severely punished.”

“These days, even if there is evidence that you received wired money, unless there is hard evidence of ties to the National Intelligence Service in South Korea the national security agents just impose a fine and release you,” he said.

According to Choi the fine is around the range of USD $2000.

Most of the foreign currency that enters North Korea these days is done through wired transfers from defectors in South Korea to family members. The money that Korean defectors send to family in the North undergoes a 20-30% processing fee and is finally delivered to the individual. The process is from the defector in South Korea through Chinese exchange broker to North Korean broker.

If USD $100 is sent from South Korea, the brokers share $30 and the remaining $70 is delivered to the family.

Until the mid-1990s, regardless of reason, North Korean authorities would take any monetary matter related to South Korea and punish them as “spies”. However, as the number of defectors concentrated in the North and South of Hamkyung increased after the food crisis, a uniform punishment became difficult to impose.

Choi said, “Even the National Security Agency doesn’t consider receiving money from family in South Korea as a spy activity. If they punish everyone, there is a side effect that even their own personal connections will be made adversaries. Thus, they can’t touch this issue.”

The emergence of taxis targeting large city wealthy classes

Trader Hwang Sang Do [pseudonym] who had traveled Chongjin, Hamheung and Shinuiju to collect trade items to export to China entered the South Korea this March.

Hwang introduced a variety of daily activity that he experienced in North Korea. “Even in Hamheung and Chongjin, taxis are operated. The base fare is around 3,000 won. Some cars have the mark that says, ‘taxi’ but some operate as passenger cars without such marks,” he said.

In the North Korean black market 1kg of gasoline (North Korea ordinarily uses kg) costs around 2,000 won. Hwang says, “There are drivers who solicit customers in front of the Chongjin Station or Hamheung Square Station. There aren’t many customers so when veering outside of central city, they receive the round trip fare.” The customers are mainly trade workers, overseas Chinese emigrants or the wealthy class.

It is known that taxi drivers refurbish used taxis or passengers cars that come in from China, then register it as an institution or business entity and start business activity. As there was an order earlier this year to remove all Japanese cars within 3 years, most of the cars that are on the street are manufactured in China.

Massage Parlors, Skincare Salons – Prostitution Secretly Going On

In large cities of North Korea, motels, massage parlors and skincare salons have been established and prostitution has been going on secretly.

Trade worker Hwang says, “There has been an increase of places in Hamheung motels that also function as saunas or skincare salons. A Chinese style massage at a massage parlor is 10,000 won (around US$3.4) per 60 minutes and there is instantaneous prostitution with female masseuse.” It is told that prostitution goes on for about 20,000 – 30,000 won.

With North Korean bathhouses, a service culture to put women at the forefront has taken place. The owners here use jargons such as “selling a bed” or “selling flowers” to feel out a customer’s intention for prostitution. There are cases where women find private homes to prostitute themselves. Hwang says that because it is easy to make money through prostitution, there has been an increase of female prostitutes.

Previously, if prostitution was exposed, you would be sentenced to forced labor. Even now, the authorities ban prostitution. However, the reality is that related entities have secretly been increasing.

On the other hand, there have been several luxury restaurants that opened in Wonsan and Hamheung. These places have implemented the Chinese service system, so the interior facilities are luxurious and female employees greet customers with a “Welcome” at the door.

Previously, only overseas Chinese emigrants or Chinese businessmen invested in such restaurants but recently, there are many cases where North Korean residents open large restaurants as well. Hwang says that as the Chinese restaurant culture that competes with taste and service infiltrated North Korea, North Korea has been undergoing a huge transformation to gain customers through service.

A service concept to “treat the customer as a king” has been emerging different from 1990s.

Posted in Automobiles, Banking, Black markets, Civil society, Cosmetics, Finance, Fiscal & monetary policy, Gasoline, Price liberalization, Transportation | Comments Closed

Kim Jong Il’s Yacht, UNESCO, Golf, and the Taean Glass Factory

Tuesday, July 31st, 2007

Now available on Google Earth!
(click above to download to your own Google Earth)

North Korea Uncovered v.3

Google Earth added a high-resolution overlay of the area between Pyongyang and Nampo. In it, most of the Koguryo tombs listed with UNESCO are now distinguishable. In addition, viewers can see the latest Kim Jong Il palace (including a yacht), the DPRK’s premier golf course, and the Chinese-built Taean Glass factory. I have also made some progress in mapping out the DPRK electricity grid.

This is the most authoritative map of North Korea that exists publicly today. Agriculture, aviation, cultural institutions, manufacturing, railroad, energy, politics, sports, military, religion, leisure, national parks…they are all here, and will captivate anyone interested in North Korea for hours.

Naturally, I cannot vouch for the authenticity of many locations since I have not seen or been to them, but great efforts have been made to check for authenticity. In many cases, I have posted sources, though not for all. This is a thorough compilation of lots of material, but I will leave it up to the reader to make up their own minds on the more “controversial” locations. In time, I hope to expand this further by adding canal and road networks.

I hope this post will launch a new interest in North Korea. There is still plenty more to learn, and I look forward to hearing about improvements that can be made.

Posted in Architecture, Automobiles, Aviation, Banking, Coal, Communications, Computing/IT, Dams/hydro, Education, Electricity, Energy, Football (soccer), Forestry, Gambling, Gasoline, General markets (FMR: Farmers Market), Golf, Google Earth, Health care, Hoteling, Hwanggumphyong and Wihwado Economic Zones (Sinuiju), Kaesong Industrial Complex (KIC), Leisure, Library, Light Industry, Manufacturing, Mass games, Military, Mining/Minerals, Mt. Kumgang Tourist Special Zone, Railways, Rason Economic and Trade Zone (Rajin-Sonbong), Real estate, Religion, Restaurants, Sea shipping, Sports, Tourism, Transportation | 1 Comment »

North Korea’s living exports

Wednesday, July 25th, 2007

Asia Times
Bertil Lintner
7/25/2007

It has been known since the early 1990s that North Korea exports manpower to eastern Russian logging sites. But two remarkable incidents over the past years reveal that the foreign-currency-strapped nation also sends laborers to other, somewhat less expected places in the world.

When North Korea won a soccer game over Japan at the Asian Games in the Qatari capital Doha last December, its cheerleaders became so excited that they rushed on to the field and carried the players on their shoulders around the grounds. They could do that, because the North Korean cheerleaders were not, as cheerleaders usually are, young, petite women. They were all male – sturdy, middle-aged construction workers who belonged to the contingents of laborers that the North Korean government is sending to work in the Middle East.

Then, in January, the managing director of an unnamed construction firm was found slashed to death, and one of his workers hanged, in a building in the East Malaysian riverside town of Sibu, on the fringes of the jungles of Sarawak. The businessman was identified as Ri Won-gil, 52, and the worker as Kim Kwong-ryun, 47 – both North Koreans. Their company had “been doing contract work here for years”, the Malaysian Star newspaper reported, although it was not clear what kind of work that was.

As many as 70,000 North Koreans are currently working in various countries, Kim Tae-san, a defector who testified last year on North Korean migrant labor to the European Parliament, told US-financed Radio Free Asia (RFA) this year. Other estimates are considerably lower, but it is evident that labor export is becoming an important source of income for the government in Pyongyang.

Today, North Korean workers are found not only in Russia, Malaysia and Qatar but in Dubai, Mongolia, the Czech Republic, Poland, Bulgaria, Libya, Saudi Arabia and possibly also some African countries. Many are dispatched through labor agencies based in China, and most of their salaries end up in the coffers in Pyongyang. As North Korea does not publish any economic statistics, it is not known exactly how much it earns from exporting labor to other countries, but is it believed by North Korea-watchers to be bringing in millions of US dollars annually.

In addition, tens of thousands of North Koreans are working illegally in China, and sending money home to their relatives. This may not directly benefit the Pyongyang regime, but it helps alleviate poverty in the country, and therefore stifle possible social unrest on the level that actually hit the North Korea during the great famine in the early and mid-1990s. On a more organized level, trusted citizens are sent by Pyongyang to work in North Korean-run restaurants not only in China – Beijing and Shanghai – but also in Russia, Cambodia, Thailand and Laos. Profits from those enterprises are, naturally, sent to Pyongyang, or to support the activities of North Korean diplomatic missions in those respective countries.

Russia, or the erstwhile Soviet Union, is the oldest destination for North Korean labor, and it probably began when in 1967 Soviet secretary general Leonid Brezhnev and North Korea’s Kim Il-sung reached an agreement to bring manpower to sparsely populated eastern Russia. In September 1996, Amnesty International stated in its “Democratic People’s Republic of Korea/Russian Federation: Pursuit, Intimidation and Abuse of North Korean Refugees and Workers”, one of the earliest reports on the subject: “North Korea brought in the manpower and ran the logging sites, while the Soviet Union provided the natural resources. The profit, reportedly many million dollars over the years, was split between the two countries.” Some of the income was also reportedly used to pay off North Korea’s debt to Russia.

Today, according to Moscow’s Ministry of Economics, 90% of North Korea’s “exports” to Russia consist of workers. An estimated 2,500 North Koreans are to be found in Primorye, or the maritime region adjacent to the Sea of Japan, and almost all of them work at construction sites in Vladivostok and Nakhodka. According to local sources, they sleep in dormitories and eat together under portraits of the late Kim Il-sung and his son, current ruler Kim Jong-il.

Political classes are held every week under strict supervision of members of the ruling Korean Workers’ Party. The supervisors, who belong to North Korea’s security police, also collect their salaries from the Russian construction companies that have hired them, and give the workers only food and some pocket money. The bulk of their incomes are sent back to Pyongyang, or used to buy computers and other electronic equipment for North Korea’s small but burgeoning information-technology industry.

Many more North Koreans – the exact figure is not known but is believed to be at least 10,000 – work under similar conditions in logging camps in Khabarovsky krai (region) and Amursky oblast (province). The main camps in Khabarovsky krai are around Chegmodyn and Alonka in the Verkhnebureinsky region, in the wilderness some 680 kilometers north of Khabarovsk. In Amursky oblast, logging camps with North Korean workers are found in the north along the Yuktali, Yukcha and Gilyui rivers, and along the Arkhara River in the southeast. Fenced off with barbed wire, these camps are in extremely remote areas from which it is almost impossible to escape.

Some Russian logging firms – now all privately owned since the collapse of the Soviet Union and its communist system in 1991 – pay in cash, while others reportedly let the North Koreans keep 40% of the timber they fell as payment. Those logs are sent to North Korea by train, and resold to China, or used in North Korea itself, which has almost no forests left and therefore no timber.

According to Lyudmila Erokhina of the Vladivostok State University of Economics and Services, North Korean workers are preferred in the Russian Far East because they work hard and never complain: “They were brought up as law-abiding citizens in a strictly controlled society.” On the other hand, Chinese and Vietnamese guest workers in the Russian Far East are known to have raised demands for better working conditions, and are alleged by many Russians to be engaged in sometimes dubious local businesses, often in black or gray areas.

The good behavior of North Korean workers and their willingness to put up with harsh conditions may have been selling points when in more recent years Pyongyang began sending laborers to the Middle East, where they, according to RFA, mostly perform “low-skilled labor, such as plastering and bricklaying. The North Korean workers receive meager wages, even lower than the Nepalese workers, who have been known to receive the lowest pay of all foreign laborers” in, for instance, Qatar.

“The entire wage received by North Korean workers goes to the North Korean authorities. In order to make some money they can keep, they have to moonlight,” RFA quoted a South Korean resident in Qatar as saying. Thousands of North Korean construction workers are reported to be living under similar conditions in the United Arab Emirates and Saudi Arabia.

In the Czech Republic, hundreds of North Koreans, mostly women, work in factories producing auto parts, or as seamstresses in the garment industry. According to the US State Department’s 2006 Trafficking in Persons Report, the North Korean regime “provides contract labor for private industry in the Czech Republic. There are allegations that this labor is exploitative, specifically that the DPRK [Democratic People’s Republic of Korea] government keeps most of the wages paid to the North Korean workers and that workers’ movement is controlled by DPRK government ‘minders’.”

Since the formerly communist Czech Republic joined the European Union in 2004, it has been compelled to investigate the conditions of North Korean workers in country. But according to the US report, the Czech government “to date … has not confirmed that they enjoy freedom of movement away from DPRK government ‘minders’ and are not subject to other coercive practices, such as the collection of a majority of the workers’ salaries by DPRK officials”.

Soon, however, the North Koreans in the Czech Republic may be going home because of international pressure. No new work permits will be issued to them, and those who have permits will not have them renewed, which means that by the end of this year there will be no more North Korean workers in that country. The main problem from the Czech government’s point of view is that, since it joined the EU, tens of thousands of its own workers have left to seek higher wages in western Europe, so foreign labor is badly needed. And who could be better than hard-working, compliant North Koreans?

But if they are no longer wanted in the Czech Republic, there are many other countries willing to hire North Koreans – and, as long as Pyongyang needs foreign currency, the export of labor is also likely to continue.

Posted in Banking, Finance, Fiscal & monetary policy, Forestry, International trade, Labor conditions/wages, Russia | 3 Comments »

DPRK Emphasizes Training International Financial Experts

Monday, July 23rd, 2007

Institute for Far Eastern Studies (IFES)
NK Brief No. 07-7-23-1
7/23/2007

North Korea is calling for training for financial specialists in order to protect against the pitfalls of credit transactions and currency exchanges. In a recently acquired copy of the latest issue of the North’s economic journal, “Economy Research”(2007, no.2), ‘bank risk’, the term applied to the hazard of potential losses, was explained in detail, stating, “In order to strengthen the improvements made in foreign currency trading, an important issue is that banks, such as the Trade Bank, dealing with overseas debts identify and thoroughly resolve potential threats.”

It is especially exceptional that the North Korean journal fully introduced the bank risk involved in financial transactions within a market-based economic system. This issue also reported on the events of May 20, when movement toward a resolution to the issue of frozen DPRK accounts in the Delta Banco Asia took place.

The journal divided ‘bank risk’ into three categories, ‘finance risk’, ‘credit risk’, and ‘management risk’. Finance risk was defined as, “the risk that a variety of changes within capitalist financial markets could carry with them adverse effects”. Further on, finance risk was divided into ‘foreign exchange risk’ caused by fluctuations in exchange rates, and ‘interest risk’ driven by changing interest rates.

In addition, “Economy Research” also carried pieces on rational management of the banking management system, subjective evaluation of bank risk, and establishing a strategy for preventing bank risk. “The outcome of [strategy for] prevention of bank risk rests entirely on the quality, skill, and roles of workers responsible for bank administration.”

The journal also stressed that even though quality information resources and materials on financial data are available, “if the quality and skill of workers in the banking sector cannot be raised,” then bank risk cannot be understood, analyzed, or evaluated, and an appropriate strategy cannot be implemented. “When workers constantly improve their quality and turn their attention to preventing bank risk…then an appropriate strategy can be set up.”

In one article, training in international financial transactions was called for, with the journal printing, “Even though today’s workers know how to use modern information resources and include financial experts with foreign language skills, they need to be well versed in the changing modern banking sector and international financial transactions.” From the 2002 “Foreign Investor Banking Law’ to last year’s ‘Commercial Banking Law’, established to stimulate private-sector financial transactions, North Korea continues to tweak its financial system.

Posted in Banking, Domestic publication, Education, Finance, Foreign Trade Bank, Insurance | Comments Closed

Chongryon’s trouble

Tuesday, June 19th, 2007

Korea Herald
6/20/2007

The General Association of (pro-Pyongyang) Korean Residents in Japan or Chongryon (Jochongnyeon) is in the most serious trouble since its founding half a century ago. The Tokyo District Court on Monday ordered it to repay 62.7 billion yen (about $780 million) to a Japanese official debt-collection agency and allowed the agency to seize the premises housing Chongryon headquarters in Tokyo. If and when the Resolution and Collection Corp. starts procedures to impound the property, Chongryon will face eviction.

RCC took over non-performing loans from a Chongryon-affiliated credit union upon its bankruptcy, and filed a suit to have Chongryon repay them on the grounds that the loans had in effect been channeled to the Korean residents’ association. Chongryon asserted that the suit was politically motivated to deprive it of its headquarters building and force its dissolution. The judge rejected the claim and ruled in favor of RCC.

The Japanese media has extensively covered the suit as well as an unsuccessful attempt by Chongryon to turn over the ownership of the premises to a Japanese investment advisory firm headed by a former government intelligence chief in order to avoid seizure of the property. Ownership was transferred in the official registry, but no actual payment was made in the fake sale, and the transfer was canceled before the court ruling.

Chongryon, which has served as North Korea’s virtual embassy in Japan in the absence of diplomatic relations between Tokyo and Pyongyang, has funneled funds to the North collected from Korean firms and individuals affiliated with it. Japanese government’s and civil society’s antagonism toward it grew over the past few years as a result of the disclosure of North Korea’s abduction of Japanese nationals, its nuclear arms development and occasional test-firing of missiles toward and over Japan.

Japan’s “right turn” in recent days has curtailed Chongryon’s activities on political and social levels. Since Tokyo Governor Shintaro Ishihara lifted tax exemption on Chongryon facilities, other autonomous bodies have followed suit, causing deeper financial woes to the organization. Prime Minister Shinzo Abe vowed to cut ties between Pyongyang and Chongryon as he believed the residents’ association was instrumental in North Korea’s illicit operations in Japan.

Under these circumstances, Mindan or the pro-Seoul Korean Residents’ Association in Japan sought amity with Chongryon and the two organizations issued a “joint statement” on May 17 last year agreeing on steps toward reconciliation and concord, including joint observation of the Aug. 15 liberation anniversary. That accord, however, has not produced practical results.

The impending seizure of the Chongryon headquarters in Tokyo in lieu of debt payment will hasten the decline of the organization. The Tokyo court ruling will be followed by similar court actions against provincial Chongryon chapters that are more or less in similar situations. Japanese media reported that nine of 29 major Chongryon facilities across the country have already been seized by the Resolution and Collection Corp.

Young affiliates of Chongryon are leaving the organization or naturalizing in Japan in increasing numbers. Older Chongryon Koreans who had lived with the fantasy of a “socialist paradise” in the northern part of the Korean Peninsula up until the 1980s have long lost their pride. They are now seeing their once beloved fatherland still demanding contributions from their expatriates in Japan when their organization is facing eviction and eventual dissolution. It is a bitter irony that some Japanese liberals are protesting to their government for what they call the political persecution of Chongryon.

Posted in Banking, Chongryun, Finance, Japan | Comments Closed

Japanese court orders seizure of pro-N. Korean group

Monday, June 18th, 2007

Yonhap
6/18/2007

A Japanese court Monday allowed the seizure of the headquarters of a pro-North Korean organization based in Japan because of its failure to repay its debts, a news report said.

In its ruling, the Tokyo District Court ordered the General Association of Korean Residents in Japan, better known here as “Chongryon,” to repay 62.7 billion yen to a government debt-collection body, the Kyodo News Agency reported.

Resolution and Collection Corp. (RCC) is expected to start procedures to confiscate the organization’s building, as it claims that the debt was part of loans extended by now-defunct credit unions associated with the group.

The RCC, which took over the non-performing loans from the credit unions, claimed that Chongryon is bound to pay the 62.7 billion yen (US$508 million) as the money was effectively purported to be handed over to Chongryon under the arrangements of the credit associations.

In connection with the suit, an investment advisory firm headed by the former chief of the Public Security Intelligence Agency, Shigetake Ogata, tried in vain to purchase the Chongryon head office for 3.5 billion yen (US$28.4 million) in an effort to prevent the premises from being seized.

Chongryon acknowledged the existence of the loans, but failed to reach an out-of-court settlement with the RCC.

Chongryon argued that the RCC, a public organization, had no right to demand that Chongryon pay the loans at face value, since the RCC had acquired the debts at very low prices.

“There is a purpose in depriving Chongryon of the headquarters’ premises and leading it to dissolution,” Chongryon said. “It offends public order and morality.”

Posted in Banking, Chongryun, Finance, Japan | Comments Closed

North Korea Gets $25 Million Frozen by U.S. Probe

Friday, June 15th, 2007

Washington Post, A17
Glenn Kessler
6/15/2007

North Korea took possession yesterday of about $25 million in funds previously frozen by a Treasury Department investigation, potentially clearing the way for Pyongyang to fulfill its commitment to shut down an aging nuclear reactor.

An impasse over transferring the money had stalled an agreement announced in February that the Bush administration had hailed as a first step toward ending North Korea’s nuclear activities.

Under that agreement, which angered President Bush’s conservative supporters, the United States was supposed to end the Treasury investigation within a month and North Korea was to shutter its reactor at Yongbyon by April 14. But North Korea refused to take that step until it received money caught up in the investigation.

The reactor had been frozen under a 1994 deal with the Clinton administration, but in 2002 Pyongyang restarted it after a dispute with the Bush administration. Experts estimate that North Korea — which conducted its first nuclear test in October 2006 — has obtained enough plutonium from the reactor for as many as 12 nuclear weapons.

Late this year or in early 2008, North Korea would need to produce fresh fuel to keep the reactor going, says a recent report by the Institute for Science and International Security.

The Treasury Department had targeted Banco Delta Asia, in the Chinese special administrative region Macau, alleging it was involved in money-laundering for North Korea. But the Treasury’s action had wider repercussions, essentially convincing banks around the world not to do business with North Korean firms.

Though the Treasury Department agreed to allow the return of money tainted by illicit activities, no bank was willing to transfer the money without explicit assurances that the Treasury would take no regulatory action. North Korea could have withdrawn the money in cash, but many experts suspected Pyongyang demanded a wire transfer to signal to financial institutions that it was once again part of the financial system.

U.S. officials trying to save the deal desperately searched for a willing bank, but each time an arrangement seemed possible, complications arose. Finally, after Russia indicated that one of its banks could help, the Treasury arranged for the Federal Reserve Bank of New York to transfer the money to a dormant North Korea account at a Russian bank that operates in the Far East, near the border with North Korea.

“Basically all of it has been transferred,” the Macau government said in a statement yesterday. “For Macao, this incident has come to a conclusion.”

When the Treasury ended the Banco Delta Asia investigation in March, it formally ordered a broad range of U.S. financial institutions to stop doing business with BDA. But that order did not include the banks’ regulator — the Federal Reserve system — which allowed the New York Fed to handle yesterday’s transaction without requiring an exemption from the Treasury.

Still, a group of Republican lawmakers this week asked the Government Accountability Office to examine whether the transaction complies with money-laundering and counterfeiting laws.

N Korea fund transfer ‘under way’
BBC
6/14/2007

The transfer of North Korea’s funds from a bank in Macau – a key issue in nuclear disarmament talks – appears to be under way.

A Macau finance minister reportedly said $20m of Pyongyang’s $25m (£12.7m) had left a blacklisted bank in Macau.

The money was earlier reported to be going to a North Korean bank account in Russia, via the US Federal Reserve.

North Korea insists it must access its funds before abiding by a deal to begin shutting its nuclear facilities.

Q&A: North Korean money in Macau
BBC
6/12/2007

In February North Korea agreed to a timeline for giving up its main nuclear site by April – in return for badly-needed fuel and the return of $25m from a bank in Macau.

But the money has yet to be transferred, and the site remains open.

Now, though, the Russians are offering to step in and get the money to Pyongyang, which could remove a key sticking point in neutralising North Korea’s nuclear capability.

How has such a small amount of money become such a sticking point?

The money is, in a sense, only the visible part of a broader problem.

Dozens of North Korean government departments do their international business through a bank in Macau called Banco Delta Asia.

But in September 2005, the US Treasury accused BDA of being a conduit for laundering money for Pyongyang, triggering severe limits on the bank’s dealings with US financial institutions – and a freeze on $25m of North Korean money in the bank’s accounts.

According to the Treasury, BDA was a “willing pawn” of North Korea, helping process as much as $500m a year in dirty money without asking awkward questions.

The move sent relations between Washington, DC and Pyongyang – frosty at the best of times – into the deep freeze.

Between then and now, the $25m became a tool for the US to achieve a deal on North Korea’s ambitions for nuclear weapons – and an excuse for North Korea to stall.

So has a deal been reached now?

Yes, in February this year. North Korea pledged to give up its nuclear reprocessing activities in exchange for thousands of tonnes of fuel.

At the same time, the $25m would be unfrozen, and could – in theory – head back to North Korea.

But the money has yet to leave Macau, because at the same time the US Treasury cut BDA off altogether from the US banking system.

This ultimate sanction, in banking terms, was made under section 311 of the USA Patriot Act – passed shortly after the 11 September 2001 attacks on New York. Effectively, it bars any financial institution from having anything to do with BDA, if they want to do business with or in America.

Understandably, therefore, attempts to find a way of wiring the money back to North Korea have failed.

Banks in China and Vietnam have been approached and have refused to get involved.

One US bank – Wachovia – has been asked by the US State Department to consider helping out, but it points out that it will need assurances that it is not in breach of section 311 before it can do anything.

What is Russia offering to do?

Russia is one of the partners in the six-way talks over denuclearisation of North Korea, and – given that it shares a border with North Korea – has a powerful interest in moving discussions along.

Early in June, Russian officials suggested that a Russian bank might step in to get the frozen $25m from Macau to Pyongyang – directly or via intermediaries.

The US Treasury has now acknowledged the possibility of Russian assistance.

But Russia is likely to require cast-iron assurances that US sanctions against banks which carry out transactions with North Korea will not apply.

One possibility would be for the money to go first via the New York branch of the US central bank, the Federal Reserve, and then on to Russia’s own central bank before being paid into Moscow’s Far East Commercial Bank, where North Korea has a long-unused account.

But what does a country like North Korea need money-laundering services for?

North Korea, in practical terms, is flat broke.

Its trade is minimal, its agriculture is suffering, and its contact with the outside world is severely limited.

But according to the US Treasury, not to mention many experts elsewhere in intelligence and financial crime, Pyongyang has for the past two decades made up for its lack of legitimate trade by taking an unhealthy interest in faking US banknotes, smuggling counterfeit tobacco products and even the narcotics trade.

Much of the proceeds, the US claims, have been laundered through BDA, which has also facilitated huge bulk cash shipments back to Pyongyang – as well as large trades in precious metals.

BDA, it should be said, has always strongly denied the allegations, insisting its business with North Korea is above board.

Why does the US not just send the money back itself?

In theory, the US could have provided a bank with the reassurance it needs to get involved, although that has yet to happen – and could, in any case, be legally tricky. “Difficult, yes; impossible, no,” was how the State Department’s spokesman described it.

Similarly, reports have suggested that since 2001 there has been a conduit for fund transfers between the State Department’s credit union and the Foreign Trade Bank in Pyongyang.

But as far as the Treasury is concerned, the ball is now in Macau’s court. It is up to the regulators there to work out how to get the money back to North Korea – and in the meantime the section 311 rule stays in force.

In any case, after years of playing hardball with North Korea, the last thing the current US administration wants is look as if it is doing things Pyongyang’s way.

Can’t North Korea get it back any other way?

It could – for instance, through a direct withdrawal from BDA back to Pyongyang.

Alternatively, if the US is right that bulk cash shipments have been going on for years illicitly, perhaps the technique could be used for above-board purposes.

But as far as North Korea is concerned, that kind of deal is unacceptable.

It seems that the authorities in Pyongyang want the transfer to pass through the international financial system, so as to send a signal that handling North Korean money does not mean instant ostracism.

Not only that; keeping the matter rumbling on means more time to extract concessions – and, some experts fear, to keep reprocessing nuclear material.

Posted in Banking, China, Finance, Russia | Comments Closed

How To Beat an Audit

Monday, June 4th, 2007

Wall Street Journal
6/4/2007

North Korea will not extend “cooperation” to any U.N. review.

The case of U.N. hard currency for Kim Jong Il took its latest turn Friday with the release of the much-awaited audit on United Nations operations in North Korea. The investigation confirms and elaborates on irregularities in United Nations Development Program’s activities in North Korea, first reported on these pages in January. It fails, however, to examine the central question of this scandal: Whether U.S. cash in North Korea was diverted from its intended recipients and instead used to prop up Kim’s totalitarian regime?

Let us stipulate that any investigation having to do with North Korea is bound to have its share of, shall we say, frustrations. Just ask the U.S. State Department, which, nearly two months after the first nuclear-disarmament deadline, still can’t get Pyongyang to live up to the initial round of its commitments no matter how many times it sweetens the deal.

The first thing to know about the U.N. probe is that it was an internal affair–conducted by the organization’s own Board of Auditors, a monitoring group that in U.N. doublespeak is said to conduct “external” inquiries. The second salient point is that it was conducted entirely in New York City. The longest journey the auditors undertook was to cross First Avenue from the U.N. Secretariat to the offices of the UNDP. To their credit, they tried to go to North Korea but were rebuffed.

In refusing to let the auditors into North Korea, Kim Jong Il displayed his disrespect for Secretary-General Ban Ki Moon. The Board of Auditors had asked Mr. Ban’s office to intercede on its behalf with help on travel arrangements. “In an email dated 11 April 2007,” the audit report reads, “the Board was informed that on 20 March 2007, the Deputy Permanent Representative of DPRK [North Korea] advised [Mr. Ban’s chief of staff] that his government was not going to extend any cooperation to UNDP’s audit.”

Even given the limited scope of their investigations, however, the auditors were able to confirm the massive irregularities in the UNDP’s operations in North Korea. The auditors also found violations at three other agencies–Unicef, the U.N. Population Fund and the U.N. Office for Project Services. The infractions covered three areas:

Staffing: In violation of U.N. rules, local staffers were hand-picked by the North Korean government and allowed to work in “general service” jobs that, for example, allowed them access to the UNDP checkbook and other sensitive documents. Salaries were paid in euros directly to the government, and the auditors could not confirm whether the staffers actually received their pay.

Foreign-currency transactions: Also in violation of regulations, U.N. agencies in North Korea made large-scale disbursements in foreign currency, including payments for salaries, allowances and rent. The auditors could not verify controls over the disbursements. UNDP, Unicef and the U.N. Population Fund spent a total of $72.5 million on programs between 2002 and 2006, though the auditors caution that “the information supplied was not verified and no source documents were examined.”

Program oversight: Visits to U.N. projects, while permitted, were controlled by the North Korean government. Authorization took a week, and government officials accompanied the U.N. inspectors. Most revealing of all, it’s unclear whether the inspectors were international officials or the North Korean government officials on loan to the U.N. organizations whose first loyalty, it’s safe to say, would have been to Pyongyang.

UNDP says it provided evidence to the auditors of 38 field visits during 2002-2006. According to the auditors’ report, UNDP had a total of 172 projects over that five-year period. Do the arithmetic and it seems that only one in five UNDP projects was visited annually. Some “oversight”–especially if the inspectors were government factotums.

The auditors say that this is a “preliminary review.” That’s an understatement. Most glaringly, they failed to investigate the broader role UNDP is said to have had as a kind of money manager for other U.N. programs and, possibly, for countries sending aid to the North. UNDP is trumpeting the auditors’ finding that it spent only an average of $2.6 million a year during 2002-2006. But if it was making disbursements on behalf of other entities, the actual sums under its control–which presumably were subject to the same shoddy financial controls criticized by the auditors–could be far higher.

The UNDP suspended operations in North Korea in March when Pyongyang refused to abide by conditions laid down by the UNDP executive board after the irregularities came to light (but years after the UNDP itself knew but ignored them). To the extent that it sheds light on the corruption, the just-released audit is a useful exercise. But there’s a long way to go before we get to the bottom of the Cash for Kim scandal.

Posted in Banking, Finance, UN Office for Project Services, UN Population Fund, UNDP, UNICEF | Comments Closed

Swiss authorities question U.S. counterfeiting charges against North Korea

Tuesday, May 22nd, 2007

McClatchy Newspapers
Kevin Hall
5/22/2007

Swiss police who closely monitor the circulation of counterfeit currency have challenged the Bush administration’s assertions that North Korea is manufacturing fake American $100 bills.

President Bush has accused North Korea of making and circulating the false bills, so perfect they’re called supernotes, and in late 2005 the U.S. Treasury took measures to block that country’s access to international banking. North Korea subsequently halted negotiations over dismantling its nuclear weapons program, a process that remains in limbo because of the dispute.

The Swiss federal criminal police, in a report released Monday, expresses serious doubt that North Korea is capable of manufacturing the fake bills, which it said were superior to real ones.

The Swiss report includes color enlargements that show the differences between genuine bills and counterfeit supernotes. The supernotes are identical to U.S. banknotes except for added distinguishing marks, which can be detected only with a magnifying glass. In addition, under ultraviolet or infrared light, stripes appear or the serial numbers disappear on the supernotes.

The Bundeskriminalpolizei didn’t hazard a guess as to who’s been manufacturing the supernotes, but said experts agreed that the counterfeits weren’t the work of an individual but of a government or governmental organization.

The U.S. Secret Service, the lead federal agency in combating counterfeiters, declined to provide details or respond to the Swiss report. But spokesman Eric Zahren said the agency stood by its allegations against Pyongyang.

“Our investigation has identified definitive connections between these highly deceptive counterfeit notes and the North Koreans,” Zahren said. “Our investigation has revealed that the supernotes continue to be produced and distributed by sources operating out of North Korea.”

The Swiss report says the Secret Service has refused to provide any information about its investigations. It notes that if the United States produced concrete evidence to back up its allegations, “it would have a basis for going to war.” Under international law, counterfeiting another country’s currency is considered a cause for war.

But if the U.S. has a reason to go to war, against whom?

The Swiss police noted that before charging North Korea with counterfeiting, U.S. officials had mentioned Iran, Syria and East Germany as possible manufacturers. North Korea’s capacity for printing banknotes is extremely limited, because its banknote printing press dates from the 1970s. Its own currency is of “such poor quality that one automatically wonders whether this country would even be in a position to manufacture the high-quality `supernotes,’ ” the report says.

For years, analysts have wondered why the supernotes – which are detectable only with sophisticated, expensive technology – appear to have been produced in quantities less than it would cost to acquire the sophisticated machinery needed to make them. The paper and ink used to make U.S. currency are made through exclusive contract and aren’t available on the open marketplace. The machinery involved is highly regulated.

In theory, if North Korea were producing the notes, it could print $50 million worth of them within a few hours – as much as has been seized in nearly two decades, the report said.

“What defies logic is the limited, or even controlled, amount of `exclusive’ fakes that have appeared over the years. The organization could easily circulate tenfold that amount without raising suspicions,” says the Swiss police report, which also says Switzerland has seized 5 percent of all known supernotes.

Moreover, it noted that the manufacturer of the supernotes had issued 19 different versions, an “enormous effort” that only a criminal organization or state could undertake. The updates closely tracked the changes in U.S. currency issued by the Federal Reserve Bank.

The fact that the Swiss are questioning the veracity of the U.S. allegations against North Korea carries special weight in the insular world of banknote printing.

“The producers of the most sophisticated products used in banknote printing are Swiss or at least of Swiss origin. That goes for the (specialty) inks and that goes for the machines,” said Klaus Bender, a German foreign correspondent and the author of “Moneymakers: The Secret World of Banknote Printing.”

“Can the North Koreans do it, are they doing it? The answer is couched in diplomatic language, (but) the answer is clearly no,” Bender said.

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EXCERPT FROM THE REPORT:

“According to the US Secret Service, $50 million worth of `super-fakes’ were confiscated worldwide over the past 16 years, only a small portion of them within the United States. Measured against the US annual counterfeit damage of $200 million, the damage from $50 million worth of `super-fakes’ is not that significant. The Federal Reserve Bank produces genuine $100 dollar bills mainly for the foreign market. On their return to the U.S., the issuing bank after examination can easily distinguish the `supernotes’ from originals using banknote testing equipment, due to altered infrared characteristics. For this reason, the United States over the years has hardly suffered economic damage due to the `super dollar.’

“A (banknote) printing press like the one in North Korea can produce $50 million worth of bills in a few hours. Using its printing presses dating back to the 1970’s, North Korea is today printing its own currency in such poor quality that one automatically wonders whether this country would even be in a position to manufacture the high-quality `supernotes.’ The enormous effort put into the making of the 19 different `super-fakes’ that we know of is unusual. Only a (criminal) governmental organization can afford such an effort. What defies logic is the limited or even controlled amount of `exclusive’ fakes that have appeared over the years. The organization could easily circulate tenfold that amount without raising suspicions.”

Posted in Banking, Counterfeiting, Finance, Fiscal & monetary policy, Illicit activities, Switzerland | Comments Closed

Transfer of N. Korea Money Sought

Thursday, May 17th, 2007

Washington Post
Glenn Kessler
5/17/2007

Wachovia Bank Considering State Department Request

Wachovia Corp. said yesterday that it is considering a request from the State Department to transfer tainted money tied to North Korea from an overseas bank blacklisted earlier this year by the Treasury Department.

The State Department has scrambled to persuade banks around the world — including U.S. banks — to transfer the money, but financial institutions have been unwilling to shoulder the risk, because they do not want to run afoul of the Treasury Department. The failure to find a willing bank has left in limbo a deal inked in February that the Bush administration had called a breakthrough in the impasse over North Korea’s nuclear ambitions.

Pyongyang was supposed to shut down its reactor at Yongbyon by April 14, but has refused to do so until $25 million it holds in the blacklisted bank, Banco Delta Asia, is released. The bank is located in the Chinese special administrative region of Macao.

In response to an inquiry, spokeswoman Christy Phillips-Brown of Wachovia said that the Charlotte-based bank had “been asked, on a nonprofit basis, by the U.S. State Department to help them process an interbank transfer of funds held at other banks, which are the subject of negotiations with North Korea,” adding: “We have agreed to consider this request, and our discussions with various government officials are continuing.”

Phillips-Brown said that Wachovia, which had been a U.S. correspondent bank for the Macao bank, is “fully compliant” with sanctions involving North Korea but that “we take any request for assistance from our government seriously and endeavor to cooperate whenever possible.” She added that the bank “would not agree to any request without appropriate approvals from our regulators.”

The United States agreed in February to end a banking investigation that had frozen about $25 million in North Korean money, but in March the Treasury Department cut off the Macao bank from the U.S. financial system. Treasury officials said that nearly half of the money was obtained through illicit activities, such as money laundering and counterfeiting. But in an effort to win North Korea’s cooperation, U.S. officials agreed to return all of the money to Pyongyang. Yet the transfer has proved impossible to arrange.

U.S. government officials first disclosed the request made to Wachovia. Treasury officials declined to comment, but sources said that many officials are dismayed that the administration is now asking a major U.S. bank to work around an order issued two months ago. Some White House officials have also objected to using a U.S. bank, but Secretary of State Condoleezza Rice supports the possible deal with Wachovia.

“I can assure you . . . we are not going to allow $25 million or even $26 million to get between us and a deal that will finally do something about nuclear weapons on the Korean peninsula,” Assistant Secretary of State Christopher R. Hill told the Korea Society on Tuesday. “We are going after this problem until we solve this problem.”

The Treasury Department has not been involved in the effort to find a financial institution to handle the money, leaving the search to the State Department. But Treasury would need to grant significant waivers, such as special permission for a U.S. bank to deal with Banco Delta Asia. One senior U.S. official said that it is not clear “what universe of waivers” would be needed to ease the bank’s concerns that it would not be putting its reputation at risk.

Deputy Russian Foreign Minister Alexander Losyukov told the RIA Novosti news agency yesterday that Russian banks had refused to handle the transfer. “Until the U.S. Treasury lifts restrictions on operations with Banco Delta Asia, no sensible banks will deal with transfers of North Korean funds,” he said.

Posted in Banking, Finance, USA | Comments Closed

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