Archive for the ‘Insurance’ Category

Foreign shareholding in Daedong Credit Bank sold

Sunday, August 28th, 2011

Pictured Above (Google Earth): The Taedong Credit Bank offices at the Potonggang Hotel.  See in Google Maps here.

London UK/Pyongyang DPRK, 26 August 2011
The Board of Daedong Credit Bank is pleased to announce that the foreign shareholding in Daedong Credit Bank has been sold to a Chinese based corporate entity, the “Nice Group”.

The foreign-appointed directors on the Board of Daedong Credit Bank have resigned with immediate effect, and have no further interests (financial or fiduciary) in the company.

Outgoing CEO of Daedong Credit Bank, Nigel Cowie noted:

“I am now heavily involved with a second joint venture company in the DPRK, Hana Electronics JVC. Established in 2003, this company has enjoyed solid commercial success and has recently opened its new headquarters building, together with the expansion of its business lines.

The success of both ventures has been such as to necessitate a decision to focus on one or the other, and a commercial decision had to be made.

The bank is continuing to enjoy the commercial success it has seen for the past 16 years, but ironically the decision has been made easier by the general sanctions-laden environment in which financial business here is framed these days.

As to the possibility of ever re-entering the bank, any decision we make will be based purely on commercial considerations.”

Both Hana Electronics and Phoenix Commercial Ventures bank with DCB, and will continue to do so.

About Daedong Credit Bank

Daedong Credit Bank is a joint venture retail bank based in Pyongyang. It was established in 1995 as “Peregrine Daesong Development Bank”. The Bank underwent a change of name and foreign ownership in 2000.

The wealth of experience garnered over Daedong Credit Bank’s 16 years of successful operation is unrivalled.

Daedong Credit Bank was the first, by fifteen years, foreign majority held bank in the DPRK. DCB is proud to be regarded as a flagship successful joint venture in the DPRK, and a key part of the infrastructure needed to assist the foreign-invested joint ventures, which contribute to the country’s economic development.

The bank’s principal function is to offer normal “high street” banking facilities in hard currency to foreign companies, joint ventures, international relief agencies and individuals doing legitimate business in the DPRK.

Daedong Credit Bank was the first bank in the DPRK to introduce, and vigorously implement, a comprehensive set of anti-money laundering procedures. DCB’s anti-money laundering procedure manual was introduced eight years ago, and subsequently updated based on anti-money laundering guidelines provided by the Asian Development Bank. The manual has been sent to, and accepted by, DCB’s international correspondent banks.

Daedong Credit Bank also maintains strict procedures for the detection and rejection of counterfeit bank notes; it uses regularly updated note checking machines, and has personnel with over 15 years of experience of handling notes.

Daedong Credit Bank is strongly positioned in relation to the future economic development of the DPRK, and, being the oldest established foreign invested commercial bank in the DPRK, it is the intention of the bank to capitalise on these advantages.

Daedong Credit Bank office address in Pyongyang is:
Daedong Credit Bank
Suite 401, Potonggang Hotel
Pyongchon District
Democratic People’s Republic of Korea


On the DPRK’s informal credit markets…

Monday, May 16th, 2011

According to the Daily NK:

Loan-sharking of both money and food is back to being widespread in North Korea these days, and sources say this is causing problems.

The activity is said to have waned for a time in the face of strict crackdowns during the currency redenomination in 2009; however, according to sources, a lot of those people who were expropriated by the currency redenomination have now started borrowing money from loan sharks in order to begin trading or get access to food, meaning it has spread widely once again.

A source from Hyesan, Yangkang Province explained on the 13th, “Those without funding for trade tend to borrow money at high interest. If they borrow money from an acquaintance, the interest rate is five percent, or they make an agreement with a loan-shark, who they don’t know well, to give ten percent.”

“Some loan-sharks get from 15 to 20 percent interest from smugglers for loans over a single night! Even though it is risky, depending on the regulations, they lend money to smugglers because they can earn large sums of money in just a few days.”

Loan sharks have been the target of crackdowns for years. In August 1997, the Ministry of Public Security (formerly the People’s Safety Ministry) released a decree stating that authorities could go so far as to execute those caught loaning food at high interest rates. Additionally, right before the currency redenomination in September of 2009, the National Security Agency cracked down on loan-sharking, releasing a decree calling on officials to “Map out measures to uproot usury.”

However, given that even agents of the People Safety Ministry use loan-sharking for the trading activities of their families, the crackdowns are doomed to fail.

According to sources from several provinces, the activity is also more common in rural areas than in cities, because in cities people have more survival mechanisms, but rural people do not have many alternative ways to get hold of money or food.

Loans are used in these agricultural areas in order to borrow grain from March to May, and are paid back double in the harvest season. In Yangkang Province, meanwhile, when people borrow one kilogram of rice or flour, they must pay it back in the form of 2.5 or 3 kg of potato starch, since the major product of the province is potatoes.

It is the kind of interest rate that was applied during the March of Tribulation, but people still apply it now.

This is a vicious circle of poverty, another defector pointed out. “Those who suffer loan-sharking each year face another worrying fall because their harvest must be paid to the loan sharks.”

The author of this Daily NK story unfortunately chooses to describe the DPRK’s “informal lenders” as “loan sharks,” making them morally equivalent to thieves and bullies, rather than describing them as lenders in a high-risk market.  This sort of pejorative name-calling is common among those who don’t understand how credit markets work, particularly in a high-risk business environment such as the DPRK.

The reality is that informal and black market lenders in the DPRK are making de jure illegal loans from their own savings.  This means that if the loan is officially discovered, the lender (and probably the borrower) will face criminal charges.  Even if the lender is not arrested, he must pay regular protection money to keep it that way.  Additionally, there is little property in the DPRK which can be credibly used as collateral in a loan, which means that even if the loan is not discovered by the authorities, if the borrower defaults or absconds with the funds there is little the lender can take possession of to recover his capital.  This level of risk requires borrowers to pay much higher interest rates to coax scarce lenders into the market.

In addition to the high interest rates that black market lenders usually charge, they also earn a bad reputation for their resort to “informal” mechanisms to insure and recover these loans.  Some insurance mechanisms, such as lending to family members and close acquaintances, might work well.  Other mechanisms, such as making threats of harm (and following through), are not as widely respected. But these are “technological” adaptations and responses to the DPRK business environment, not purely sadistic behavior.  In other words, these market practices are completely predictable given the institutional environment and not unique to the DPRK.  If the DPRK court system impartially enforced contracts, and collateral could be legally secured, these sorts of technologies would be unnecessary.

I am not claiming that black market lenders are angels, or even pleasant people (in fact some of them may be powerful individuals in the party and security infrastructure), but they are financing the development of the DPRK’s unofficial economy out of nothing more than financial self-interest.  Without their efforts a whole class of informal and black market entrepreneurs would be unable to access capital markets to start new businesses or finance operations.  The unpleasant side of black market lending should not be placed on the market participants themselves, but on the DPRK’s policymakers who have pursued economic policies that have made this sort of behavior necessary.

Read the full Daily NK story here:
Loans Creating Circle of Poverty
Daily NK
Kang Mi Jin


DPRK hosts insurance seminar

Sunday, August 8th, 2010

According to Naenara:

The Pyongyang International Insurance Seminar on “Marine Insurance & Reinsurance: the Challenges of the Time” ran between June 7 and 8, 2010.

Present at the seminar were Yang Hyong Sop, vice-president of the Presidium of the DPRK Supreme People’s Assembly, Pak Su Gil, vice-premier and minister of Finance, So Tong Myong, president of the Korea National Insurance Corporation (KNIC) and chairman of the organizing committee of the seminar, officials from the KNIC, insurance workers from the provinces and officials concerned.

Among those present were Ezzat Abdel-Bary, secretary general of the Federation of Afro-Asian Insurers and Reinsurers, and his party, Roberto Quinto Martinez, permanent secretariat of the Association of Insurance and Reinsurance in Developing Countries, delegates from companies of China, Morocco, Sudan, Switzerland, the United Arab Emirates, Britain, India and Egypt, officials of foreign embassies and missions of international organizations in the DPRK.

A delegation from the Kumgang Insurance Company of the General Association of Korean Residents in Japan was also present at the seminar.

The seminar heard papers on marine cargo insurance, marine cargo claims and adjustment—an overview, the art of adjusting catastrophe claims, new trend in the reinsurance market and other papers. Then speeches were made.

The seminar provided the participants with an opportunity to find a way out of instability in the field of insurance affected by the global financial crisis and let each country make an effective use of its own financial resources in the field of insurance and strengthen the international cooperation and exchange.

Unfortunately, when I hear the words “DPRK” and “insurance,” I think of this.


The DPRK’s illicit international activities

Sunday, April 18th, 2010

The Strategic Studies Institute has published a paper on the DPRK’s illicit activities.  You can download the paper here (PDF). It has been added to my DPRK Economic Statistics page.  Here is the forward:

The authors of this monograph have exposed a key piece of the puzzle which helps to provide a better understanding of North Korea’s surreptitious international behavior. For years, North Korea’s military provocations have been obvious to the world, however, much of its decisionmaking is shrouded in secrecy, particularly that of a wide-range of clandestine activities. This monograph is unique in the way that it sheds light on the illicit activities of the regime, and how those illegal activities are used to support its military programs and the government itself.

From drug trafficking to counterfeiting, from money laundering to cigarette smuggling, North Korea’s Central Committee Bureau 39 is an active participant in the criminal economy of the region with tentacles extending well beyond Asia. The authors discuss how these activities have negative strategic consequences for a number of stakeholders and nations throughout the region while describing how such activities provide critical funding streams for military programs and regime supporters.

As a result, North Korea is not just a “rogue state,” but practices what is essentially criminal sovereignty whereby it organizes its illegitimate activities behind the shield of non-intervention while using the tools of the state to perpetrate these schemes abroad. The authors argue that this arrangement has important links to succession issues within the regime. They also argue that policy makers who are concerned with the development of future policies and strategies aimed toward North Korea must view those new policies from a different perspective than that used in the past.

This paper draws heavily on information from Kim Kwang-jin who is working at the Committee for Human Rights in North Korea. Without Mr. Kim’s contributions, much of this activity would remain unknown to us.  You can make a donation to support Mr. Kim’s work here in the US at this web page.


DPRK defector discussed financial flows

Friday, July 3rd, 2009

Last week we mentioned the curious case of Kim Kwang Jin, a high-ranking defector who helped raise money for the North Korean government who is spending a year here in DC at the Committee for Human Rights in North Korea.  This week he spoke to Fox News and painted a broad picture of the DPRK’s financial strategy:

Trim and sharply dressed, his bushy head of hair dyed jet black, the 42-year-old Kim, once an English professor at a computer college in Pyongyang, speaks polite and fluent English, albeit in a halting style and with a heavy accent.

An interview with FOX News in late June marked Kim’s first with an American TV news channel. Kim recounted his extraordinary experiences working for the Northeast Asia Bank and Korea National Insurance Corporation, where he handled accounts worth hundreds of million of dollars.

He described two economies in North Korea: one administered by the North Korean Cabinet and nominally oriented toward serving the needs of the people; and a “Royal Court economy,” financed by illicit enterprises worldwide and providing the stream of hard currency that keeps Kim Jong Il, and his cronies, ensconsed in power and luxury.

“Kim [Jong Il] himself enjoys a lavish lifestyle,” said Kim Kwang Jin. “He is giving gifts to his associates: the Mercedes-Benz[es] and whiskeys, first-class room and [air]fare from Japan. Everything’s provided to his aides….Kim Jong Il himself is now ruling the country with [the] dollar, hard currency….Without hard currency they cannot rule the country.” 

Kim Kwang Jin described a society in which bankers demand bribes from clients, doctors from patients, professors and teachers from students. 

“Everybody tries to make use of their position, their authority…to survive,” Kim said.

The former banker said the regime’s largest source of hard currency comes from the clandestine manufacture and sale of weapons of mass destruction. After that comes the regime’s multibillion-dollar insurance fraud business, in which the authorities stage arson and bogus accidents to collect multimillion-dollar payouts from international banks and insurers. 

“The state — Kim Jong Il himself — controls all these funds,” said Kim Kwang Jin. “It is funneled to him. And then he’s using all these revenues according to his regime’s priorities, which are now the missile program and nuclear weapons development.”

Kim Kwang Jin believes the North Korean government has never negotiated in good faith with the United States and its allies at the Six-Party nuclear disarmament talks. 

“The North Koreans are coming to the table not for negotiation; they are there for winning, for implementing their strategy,” he said. To grant meaningful concessions at such negotiations, or to enact meaningful internal reforms toward democratization, would, Kim says, be tantamount to “suicide to the regime.”

Yet Kim also believes financial sanctions can compel better behavior from Pyongyang, and cites as an example the Treasury Department’s targeting from 2005 to 2008 of Banco Delta Asia: a bank in Macau, also known as “BDA,” through which the North Korean regime once transferred large sums. It was during this period, when Banco Delta Asia faced international restrictions, that the North made its most far-reaching concessions in the Six-Party Talks, only to renege on them once the sanctions were lifted.

“The BDA case was a frightening thing to the regime,” Kim said. “It was a blow to [Kim Jong Il’s] personal funding, to the economic sector which is now supporting the regime. And even the national economy, the people’s economy run by [the] Cabinet, is influenced by this BDA case. 

Here is his interview on Fox News via YouTube

Read the full story here:
North Korean Defector Describes Inner Workings of Isolated Regime
Fox News
James Rosen


DPRK reinsurance update

Sunday, June 21st, 2009

In December 2008 this blog discussed how the DPRK’s Korea National Insurance Corporation (KNIC) received USD$58 million from several European reinsurance companies in a legal settlement.

Well, the Washington Post offers an update on how the money is being moved and even highlights the story of a defector who claims to be involved in the DPRK’s insurance racket:

For Kim Jong Il’s birthday, North Korean insurance managers prepared a special gift.

In Singapore, they stuffed $20 million in cash into two heavy-duty bags and sent them, via Beijing, to their leader in Pyongyang, said Kim Kwang Jin, who worked as a manager for Korea National Insurance Corp., a state-owned monopoly.

Kim said he helped arrange the shipment and watched in February 2003 as the cash was packed. After the money arrived, Kim Jong Il sent a letter of thanks to the managers and arranged for some of them to receive gifts that included oranges, apples, DVD players and blankets, Kim said.

“It was a great celebration,” he said.

The $20 million birthday present and the gratitude of its recipient, who is known as the Dear Leader, were annual highlights of a sophisticated global insurance fraud that North Korea has concocted to provide its communist leadership with hard currency, said Kim, who spent five years as an executive of the state insurance company in Pyongyang and worked for a year at its banking subsidiary in Singapore before defecting to South Korea.

The British court ruled the way it did [NKeconWatch: this might be an error as the court did not rule on the case–it was settled] because the reinsurance companies contractually agreed to be bound by the North Korean court system (which to nobody’s surprise systematically rules in favor of domestic agencies and firms).  Since the western reinsurance firms could not prove that the DPRK was committing fraud, they had to pay up.

And how does this program work?

While working for North Korea’s insurance monopoly, Kim Kwang Jin said, he and other managers had a tightly focused mission: to find reinsurance companies and brokers in different parts of the world who would accept high premiums to reinsure KNIC’s policies.

Those policies, he said, usually covered losses from common North Korean disasters such as mining accidents, industrial fires, transportation crashes and crop losses due to floods.

“The major point of the reinsurance operation is that they are banking on disaster,” he said. “Whenever there is a disaster, it becomes a source of hard currency.”

According to Kim, KNIC would target a different potential disaster and a different reinsurance company each year. “We pass it around,” he said. “One year, it might be Lloyd’s; the next year, it might be Swiss Re; and the next, Munich Re.”

In London, the expert on the insurance industry familiar with the helicopter case echoed Kim’s assessment of how KNIC operated. He spoke on the condition of anonymity because he was not authorized by reinsurers to talk about the case.

“They pay good premiums, and they are very sophisticated, very clever,” he said. “They would divvy business up into very small bites and use different brokers in different places. The division of losses was such that it would never be apparent to a prospective reinsurer just how bad the business was.”

The North Koreans were known in the reinsurance industry for their capacity to prepare meticulously documented claims, speed them through puppet courts in Pyongyang and demand quick payment from international reinsurers. The North sometimes restricts the ability of reinsurers to dispatch investigators to verify claims.

The North Korean insurance monopoly sometimes took advantage of the geographical and political ignorance of brokers and reinsurers, according to the London-based insurance expert. Some brokers and companies, he said, thought they were dealing with a company from South Korea, while others were unaware that North Korea is a secretive totalitarian state with one of the world’s worst human rights records.

When he worked at KNIC, Kim said, annual revenue from North Korea’s reinsurance claims was about $50 million to $60 million. Most of that money, he said, was used to scout out potential disasters inside North Korea, to buy more reinsurance on the global market and to pay premiums.

“The remaining hard currency should have been used to help people recover from disasters and accidents, but it was not used that way,” Kim said. “It is just going into the pocket of Kim Jong Il.”

He said cash shipments of $20 million arrived yearly in Pyongyang, usually in the week before Feb. 16, which is Kim Jong Il’s birthday and a national holiday. In his six years at KNIC, Kim said, bags of cash arrived in Pyongyang from Singapore, Switzerland, France and Austria.

The money, he added, was delivered to an entity called Bureau 39 of the Korean Workers’ Party Central Committee. It was created by Kim Jong Il in the 1970s to collect hard currency and give him an independent power base, according to defectors, Seoul-based analysts and published reports. These sources agree that Bureau 39 spends foreign currency on luxury goods for the North Korean elite, components for missiles and other weapons programs.

With Bureau 39 skimming off hard-currency earnings returned to North Korea by KNIC’s global operation, Kim said, claims to disaster victims had to be paid in won, North Korea’s currency.

“That money is nearly worthless at present, because the economy has collapsed,” he said. “This means that little is done to help people recover from fires or whatever.”

But Kim Jong Il has been pleased with the state insurance company, Kim said.

“It brings him large amounts of hard currency,” Kim said. “Working in insurance is one of the best professions in North Korea. Many people want to do it.”

Mr. Kim is working in the Washington DC area this year with the Committee for Human Rights in North Korea.

Read the full artocle here:
Global Insurance Fraud By North Korea Outlined
Washington Post 
Blane Harden


North Korea’s transformation: A legal perspective

Thursday, February 12th, 2009

The Institute for Far Eastern Studies (IFES) published an interesting paper (with the above title) on legal reform in the DPRK.  Below are some highlights.  Links to the entire paper at the bottom.

As citizens have been left without state provisions for subsistence since the state did not have the material resources to supply the people through its central rationing system, the vast majority of individuals and organizations had to support themselves. Legitimizing commercial and market activity and expanding the scope of private ownership were a part of this effort. One of the most important laws reflecting this transformation is the Damage Compensation Law (sonhae bosang-beop), which is the North Korean version of a general torts law. This law holds an individual or any legal entity liable for its tort when damage is inflicted. Monetary compensation is the rule, while restoration is allowed when possible.

Under the socialist system, where the state is responsible for the provision of a citizen’s livelihood, tort law was of little use. Even in the case of death, one’s family would not suffer economically since the state provided sustenance rations. However, with the collapse of the public distribution system, the North Korean authorities could no longer maintain their socialist system. Since an individual now has to rely on his or her own devices, the loss of the employment, for example, directly inflicts a financial burden on the individual or family. Therefore, damage to property or person should be compensated for by the responsible party. Therefore, the new damage compensation law acts as a new mechanism for the protection of private property, and strengthens individual responsibility for negligent acts that inflict damage on others.


Relaxation of law and order, along with the laxity of organizational control due to economic difficulties, changed individual attitudes toward government authorities and organizations in which these individuals were members. Individuals became more independent from the state and its organizations, since both the state and more directly engaged organizations lost important means of control over individuals in society due to the lack of resources and the inability to provide basic necessities to the people.

Under these circumstances, individual victims had no appropriate method to seek compensation for damage through an official dispute resolution process. This has led to an environment in which self-remedy has become the rule, rather than the exception. Although new criminal law punishes those who have used force in asserting their rights, there is no effective means of dispute resolution outside of taking advantage of officials willing to look the other way in exchange for favors, or hiring thugs to more directly resolve disagreements. Citizens can buy justice through bribes, and law enforcement officials are especially helpful in these endeavors when their palms are greased. This is much more economical as well as effective than bringing a case to the relevant official agency, which is generally incapable of resolving problems and instead further exploits the situation.

On courts and lawyers…

For example, the most prominent role of the court in North Korea, where other types of lawsuit are very unusual, was to handle divorce settlements, since divorce through simple agreement of the two parties was not allowed. Ordinary citizens went so far as to perceive settlement of divorce to be the most important role of the court. Criminal cases were also unusual. Political crime is handled through a non-judicial process, while many deviances are resolved through unofficial processes within more local organizations. The role of the court in resolving disputes was negligible, aside from divorce. Since the role of law enforcement agencies is to protect the state and secure the socialist system, the most important qualification for them is not legal expertise, but rather, loyalty and devotion to the North Korean ideology and system.

On the other hand, the Lawyer’s Act of 1993 prescribes the required qualifications of a lawyer. Those who are eligible to work as lawyers are those who are certified legal professionals, those who have working experience of no less than 5 years in legal affairs, or those who have a professional license in a certain area and have passed the bar examination after a short-term course in legal education. This qualification for working as a lawyer signifies that the state wants to equip the judicial system with legal professionals. Although there is no explicit professional qualification for a judge or prosecutor, we may assume that legal professionals have been elected or recruited in practice. This trend is likely to be reinforced as these social changes continue to unfold.

New provisions were also introduced to reinforce the judicial system. For example, interference with a law enforcement official’s performance of duties is now a punishable offence ; Threatening a witness or exacting revenge has been criminalized ; Non-execution of judgment will now be punished. Although the introduction of these provisions was an expression of the government’s effort to bring in a more effective judicial system, it would not be an easy task under the vague status of transformation. The state is very cautious and reluctant to undertake bold or fundamental changes due to concerns about political instability. Therefore, it takes time for various coherent mechanisms to fully support a market system.

You can download the entire paper in PDF format here.

You can read it on the IFES web page here.


Lessons in insurance

Friday, December 19th, 2008

In September 2006 the first questions about North Korean reinsurance contracts hit the media (Joong Ang Daily, Sept. 20).  North Korea’s Minjok Insurance General Company filed claims in London and Moscow for two railway crashes, a ferry sinking, and a helicopter crash.  The Joong Ang Daily reported that that the accident sites were examined by industry representatives—though the checks had not been cut.  At the time the filings were interpreted in the west as a sign of tough financial times in the DPRK. Others suggested Pyongyang was learning how to manipulate global financial systems.

By December 2006, many underwriters began to (publicly) suspect fraud in these cases.  

North Korea Suspected of Collecting Millions in Reinsurance Fraud
Monday , December 04, 2006
By George Russell

[Excerpt] The central focus of concern is the absolute control of ownership and information in North Korea by Kim Jong-Il and his regime. All North Korean insurance is controlled by one state-owned firm, the Korea National Insurance Corporation (KNIC), formerly known as the Korea Foreign Insurance Company, which in turn purchases reinsurance coverage abroad for risks that it has assumed in its domestic market.

The alleged fraud involves a wide variety of North Korean industrial and personal calamities where insurers have been presented with perfect government-controlled documentation of accidents, including deaths, along with carefully gathered photographic evidence, all compiled in a startlingly brief time.

That paperwork is coupled with a resistance to letting foreign insurance adjusters examine some of the most crucial physical evidence, except after long delays and under a watchful eye, if at all.

The growing concern in the reinsurance industry is that the property damage being claimed is vastly overstated, and the circumstances of some alleged accidents may have been altered, or that deaths for which insurance payment is claimed may have had nothing to do with the accidents.

The number of apparently ordinary people in the dictatorship who have suddenly been found to have foreign-backed life insurance is raising insurers’ eyebrows.  The chief concern is that only the Kim Jong-Il regime controls the information required to trigger the payments.

So what specifically looked suspicious?

Suspicions in London began to gel in July 2005, when North Korea reported that a medical rescue helicopter had crashed into a government-owned warehouse that authorities said was crammed with disaster relief supplies.

The entire contents of the warehouse, which ran to hundreds of thousands of items, were destroyed, KNIC said, submitting within 10 days a list compiled by the relief center of every single commodity that it said had been lost.

Along with the lengthy list came a reinsurance claim for more than 40 million euros, or almost $50 million at then-current rates, for 95 percent of the damages. The reinsurance was placed through London, but the risk was spread among reinsurers worldwide.

“They provided details including tens of thousands of children’s gloves, handkerchiefs, leather gloves, toilet soap and washing soap, within 10 days,” Payton said. “In the chaos which follows an accident of this kind, that is unheard of.

“A similar loss report in Britain might take months to compile.”

The North Koreans also supplied photos of the devastation, which insurers turned over to leading experts at photographic estimates of fire damage. The experts concluded that the volume of debris remaining within the warehouse, as assessed from the photographs, did not support the high volumes of relief supplies that were claimed to be there before the fire.

“The North Korean claims are supported by meticulous paperwork, something at which the North Koreans excel,” Payton (senior partner in the London-based international law firm of Clyde & Co.) said.

“For example, where death certificates and hospital reports are required, the regime’s attitude is ‘tell us what you want, we’ll give it to you.’”

In the case of a ferry accident that allegedly took place last April, near the coastal city of Wonsan, North Korean authorities declared that 129 people had died aboard the vessel after it struck a rock about 1,000 yards off the Korean coast, and only about 100 yards from an island. All of them, the Koreans claim, had been automatically covered with life insurance when they bought their ferry ticket, and that insurance risk had been passed on to the London market through a common reinsurance product known as “excess loss personal accident reinsurance.” Here the claims from reinsurers totaled about 5 million euros, or roughly $6 million.

The North Koreans claimed that most of the victims had died of hypothermia in the freezing water. Industry sources say that when insurance investigators discovered that weather conditions were warmer than claimed at that time, the North Koreans responded that severe winds were blowing from Siberia in the spring, making the water unusually frigid.

When insurers asked for permission to send an independent diver to inspect the ferry wreck, they were refused.

Britain’s Foreign Office says the lack of firm proof of fraud is why it hasn’t taken action on the reinsurance issue, although British diplomats say they are aware of it.

Apparently, these circumstances led the insurers to refuse payment, and the North Koreans took them to court in London. Quoting from the Times of London (January 2007): 

The state-owned Korea National Insurance Corporation (KNIC) is demanding €44 million in a London court from a group of reinsurers, including Lloyd’s syndicates, for damage caused in a catastrophic helicopter crash in 2005.

The North Koreans have supplied exhaustive documentation and their claims have been authenticated by independent loss adjusters and upheld in a North Korean court. But the reinsurers argue that the nature of the regime makes it impossible to trust and that the claim is a fraudulent one intended to bring in desperately needed foreign exchange.

The accident took place in April 2005 when, it is claimed, a helicopter owned by Air Koryo, the North Korean state airline, was dispatched from Pyongyang, the capital, to collect a woman who was in labour with triplets from a remote island. On the return flight it crashed into a warehouse on the outskirts of the city, causing a fire that destroyed a large amount of humanitarian relief goods.

The KNIC settled an insurance claim by the airline, which had compensated the owner of the warehouse, and claimed this back from its London reinsurers. According to the contract, disputes were to be settled under North Korean law and last month a court in Pyongyang ordered the reinsurers to pay the North Korean company the €44 million. They refuse to do so.

Lawyers for the KNIC say that, having pocketed premiums for the previous nine years without any claims, the reinsurers are simply reluctant to pay out such a large sum.

“There is no evidence at all to suggest that the helicopter claim is fraudulent,” says Tim Akeroyd, of the law firm Elborne Mitchell, which is acting for the KNIC. “All the evidence available, including the reports of loss adjusters appointed by Mr Payton’s clients, clearly established that this was a bona fide claim.”

The contract also states that claims in North Korean won will be converted at a rate of 160 won to the euro, close to the Government’s exchange rate. But the black market rate, which is used for all practical purposes in North Korea, is closer to 2,000 won to the euro. If this were applied it would reduce the reinsurers’ bill from €44 million to €3.5 million.

This month the European reinsurers settled the case–delivering the DPRK’s KNIC nearly totoal victory in the suit pertaining to the helicopter crash. Quoting from the Financial Times:

Court proceedings in London have ended after a group of re­insurers, including Allianz of Germany, Generali of Italy, [Misr Insurance of Egypt], and three Lloyd’s of London syndicates, agreed to pay 95 per cent of the reinsurance claim, or €39.2m ($58.2m).

[One member of the reinsurance consortium, Aviabel of Belgium, has refused to accept the settlement and legal proceedings are continuing.]

The reinsurers also agreed to retract and withdraw all allegations of fraud and impropriety made against the Korea National Insurance Company.

It is not unusual for reinsurers robustly to contest claims. But it is thought this is the first victory of its kind in an overseas court for [North Korea’s monopoly insurance provider].

Apparently the other cases (particularly the ferry sinking) are still pending. Quoting from Reuters:

The lawsuit is one of several which North Korea is pursuing, with claims exceeding $150 million dollar according to some estimates, involving several calamities.

Why did the European insurers settle the case?

[L]awyers representing the North Koreans argued that the insurance claim was a legitimate commercial debt owed to KNIC by reinsurers who were fully aware of the nature of the contract when they signed it, and had even agreed to let a North Korean tribunal adjudicate the claim.

English judges evidently agreed. The reinsurer’s position was first rejected in England’s High Court of Justice in August, 2007, and again on appeal two months later. Another trial began on November 12, 2008 before the Commercial Court in London before the two sides came to their agreement.

The settlement amounts to roughly 95 percent of what KNIC had originally demanded. It includes a specific confirmation that the reinsurers “have retracted and withdrawn all allegations of fraud and impropriety against KNIC.”

Settlement here (via Fox News): dprk_settlement_agreement.pdf

UPDATE: Aidan Foster-Carter issued a personal comment on the case.  You can read a PDF of it here.

Read articles here:
North finds reinsurance a source of hard cash
Joong Ang Daily
Lee Young-jong, Shin Eun-jin, Sohn Hae-yong

North Korea Suspected of Collecting Millions in Reinsurance Fraud
Fox News
By George Russell

North Korea ‘trying £30m insurance scam’
Times of London
Richard Lloyd Parry

N Korea state insurance group wins case
Financial Times
Sundeep Tucker

Reinsurers pay North Korea claim, drop fraud case
Nadine Jakobs


Singapore-North Korea trade deal

Tuesday, December 2nd, 2008

The Singaporean government is insuring investment in the DPRK…

Quoting from the article:

Singapore firms keen to expand into the largely untapped market of North Korea now have a foot in the door, thanks to two new agreements inked on Tuesday.

The Ministry of Trade and Industry (MTI) said that Singapore signed an Investment Guarantee Agreement (IGA) with the country on Tuesday.

Trade and Industry Minister Lim Hng Kiang and his North Korean counterpart, Mr Ri Ryong Nam, signed the IGA during the North Korean Foreign Trade Minister’s official visit to Singapore.

MTI said the IGA will help promote bilateral investment flows by protecting investors and their investments.

Under the agreement, investors will be accorded non-discriminatory treatment, compensation in the event of expropriation or nationalisation of their investments, and free transfer of capital and returns from investment – perennial ‘banana peels’ for businesses entering a less-developed and unexplored market.

Separately, the Singapore Business Federation (SBF) also signed a Memorandum of Understanding with the North Korean Chamber of Commerce.

According to the SBF, North Korea remains an unexplored market for many Singapore firms but there exists many opportunities for local businesses to tap into such as its high-quality yet affordable workforce and the abundance of natural resources.

Read the full article below:
S’pore, N.Korea ink trade deals
The Straights Times
Francis Chan


Lankov and Kim on North Korean market vendors

Wednesday, July 23rd, 2008

“North Korean Market Vendors: The Rise of Grassroots Capitalists in a Post-Stalinist Society”
Andrei Lankov and Kim Seok-hyang
Pacific Affairs, Vol. 81 Iss.1 
(subscription required)

The article deals with the social changes that have taken place in North Korea [from 1994-2002], when the collapse of the centrally planned economy led to the growth of private commercial activity.  This activity remains technically illegal, but the relevant bans and restrictions have rarely been enforced due to endemic corruption and disorganization of the state bureaucracy.  The article is largely based on in-depth interviews with North Korean black market operators [who have defected to South Korea].  It traces their origins, the type and scale of their business, and changes in their mode of operation.

The article demonstrates that the “second economy” came to dominate North Korean economic life by the late 1990s, since authorities’ attempts to limit its scale were largely ineffective.  The growth of the “second economy” produced new grassroots capitalists who sometimes came from underpriveledged social groups, but more typically represented people with good official connections.  It is also remarkable that foreign connections (usually with China) played a major role: to a large extent, merchandise sold at the North Korean markets either came from overseas or was exported overseas eventually, and in many cases the merchants’ initial capital was also provided by relatives residing overseas.

Some highlights:
1. Changsa is the North Korean word for “dealings in the marketplace.” Tonju is the word for money changers/lenders meaning “master of money”. 
2. Public Distribution System (PDS) rations were cut for the first time in 1973.
3. The DPRK system restricted market activity primarily through three mechanisms: limited size of family farming plots, inminban surveillance system, and travel permits.
4. Before the arduous march, North Koreans were not inclined to resort to market trade.  These transactions were seen as ethically suspect.  Once the famine hit, people took up market trading remarkably quickly.
5. Before the arduous march, bribery was rare, even though patronage and indirect forms of corruption were rampant.  Mid-level bureaucrats had to vie for preferred access to poor-quality consumer goods, better schools, and study trips abroad.
6. At the height of the arduous march (1997), production was at 46% of capacity.
7.  North Korean traders seldom if ever have to deal with the protection racket.  When asked directly, respondents did not mention threats from mobsters as one of their security concerns (I wonder if this is still the case).
8. Pyongsong market is reputed to be the largest in the country.  It is just outside Pyongyang, making it accessible to citizens inside the capital as well as those who cannot get permits to enter the city (Pictured below with Google Earth coordinates).


Click on image for larger view

9. Financial services such as money-changers and private loan sharks offer loans at 5%-30%/month.
10. Most North Korean merchants know South Korea is a rich country.  They also avoid surveillance since these activities are done at state-owned enterprises and study sessions.