North Korean Economy Watch

PSA Cracks Down on Loan Sharks
Daily NK
Jung Kwon Ho
9/20/2009

North Korea’s police, the People’s Safety Agency (PSA), have launched a special investigation into the behavior of loan sharks, or “usurers,” in light of the high numbers of people taking out high interest loans but being unable to keep up repayments and ending up as “kotjebi.”

A source from Shinuiju told Daily NK on Friday, “A decree declaring all-out war against predatory usurers has been handed down to the provincial People’s Safety Agency. They are investigating Korean-Chinese traders and North Koreans repatriated from Japan.”

Loan sharks in North Korea are generally Korean-Chinese with relatives in China or those who have returned from Japan but whose relatives remain there.

The story was confirmed by a source from Hoiryeong in North Hamkyung Province. The source explained to Daily NK on Thursday, “The People’s Safety Agency issued a decree exposing the usury, and conveyed it to every office of the provincial and municipal National Security Agency (NSA) and the PSA. Thereafter, NSA officials attended People’s Unit meetings and gave lectures about harshly sanctioning the practice of earning money through high interest loans.”

According to the Hoiryeong source, the decree, “Map out measures to uproot usury,” was delivered to all NSA officials on September 2.

The decree apparently says, “Although national measures have been adopted to root out usury, this social phenomenon has not been eradicated.”

The Shinuiju source said that the authorities’ new hard-line has come about because the numbers of people who are being turned into “kotjebi” by these predatory loans is increasing.

He noted, “Since 2000, new kotjebi have been people who have gone to ruin and lost their homes to loan sharks. These days their numbers are drastically increasing, so the authorities cannot stand by indifferently.”

According to one source, a Korean-Chinese loan shark called Cho Jung Cheol was recently caught by the PSA on suspicion of taking a total of seven houses from defaulters.

North Korean people usually offer their house as security on a loan. Cho lent money at 30% interest for two weeks to a month, and used gangsters to take houses from those who couldn’t pay.

Those who lose their houses in this way roam the streets with their family members, the family splits up, or sometimes they escape from North Korea. After 2005, this became a common social phenomenon.

The loan sharks have other unethical ways to turn a profit, “Some of these loan sharks hoard up food during the harvest season and earn undue profits from selling it in the difficult spring season,” the source explained.

Sources all agreed that the people unanimously welcome the authorities’ measures.

Institute for Far Eastern Studies (IFES)
NK Brief No. 09-9-4-1
9/4/2009

The latest issue of the Kim Il Sung University newspaper (2009, no. 2, April) acknowledged the international society’s sanctions against North Korea, and in a bid to encourage a self-determinant resolution to the country’s economic problems, the paper called for “the utmost circulation of dormant cash,” emphasizing the role of the bank.

The paper stressed that strengthening the role of the bank was a crucial part of ensuring the country’s socialist system continued to operate. It also stated that elevating the position of the bank and circulating currency were essential elements of ensuring that North Koreans were not reliant on foreign assistance, and that they were able to solve their problems independently.

In the article encouraging currency circulation, it was stated that “the oppressive isolation policy of the imperialists grows worse every day,” but that by maximizing capital circulation, domestic economic problems could be resolved and the North could complete its bid to create an economically strong nation even more quickly.

The article reflects the DPRK government’s attempt to encourage spending of Won, Dollars, and Euros by institutions, enterprises and even individuals in an attempt to ease economic woes even in the face of international sanctions. Jung Yeon-ho, a researcher with the Korea Development Institute (KDI), reported in 2003 that North Koreans were sitting on as much as 600,000-1,000,000 USD. Since 2003, North Korean authorities have been trading US dollars for Euros due to sanctions from Washington, so now many in the North also have considerable amounts of Euros stashed away, as well.

Kim Il Sung University, through its paper, insisted that banks needed to strengthen their role in currency circulation and lending, and to ensure that their services were in line with the demands of the times. It noted that banks were taking note of the needs of individuals and enterprises, and catering to their demands in order to more appropriately respond to their issues and not only meet their needs, but to encourage their continued use.

Some North Koreans have had bad experiences with banks, not being able to withdraw previously deposited funds or not earning expected interest. This has led some to avoid banks in order to guarantee their savings.

After the North’s July 1st (2002) Economic Management Reform Measure, an attempt to make policy reflect reality in the North, the government began selling 10-year ‘People’s Lifestyle Bonds’. In early 2006, North Korea’s banks began offering savings accounts, loans, and other services to individuals and enterprises in order to encourage spending.

According to the Dow Jones Newswire:

The U.S. Treasury Department Tuesday announced sanctions on the Korea Kwangson Banking Corp., a bank the department says is tied to North Korea’s nuclear and weapons trade.

Treasury alleges that North Korea used the Korea Kwangson Banking Corp., or KKBC, to hide nuclear proliferation activities.

The department accuses the bank of providing financial support to Tanchon Commercial Bank and a unit of the Korea Ryonbong General Corp., both of which have already been identified by the U.S. government as weapons of mass destruction proliferators.

“North Korea’s use of a little-known bank, KKBC, to mask the international financial business of sanctioned proliferators demonstrates the lengths to which the regime will go to continue its proliferation activities and the high risk that any business with North Korea may well be illicit,” Treasury Under Secretary for Terrorism and Financial Intelligence Stuart Levey said in a statement.

According to the Associated Press:

The sanctions mean bank accounts or other financial assets found in the United States that belong to the firm are blocked. Americans also are prohibited from doing business with the bank. It is based in North Korea and has operated at least one overseas branch in Dandong, China.

Further information:
1. Here is an earlier post that contains information on other sanctions imposed this year.

2. Aside from the US and UN, China has also “sanctioned” the DPRK this year.  See here and here.  No doubt they will react to the Dandong branch of KKBC as well. 

3. Stephan Haggard Marcus Noland call these kinds of actions “Whac-a-Mole.” Read their analysis here. 

4. Joshua notes that this company was one of the North Korean banks listed in Treasury/OFAC’s June 18th advisory about North Korean financial institutions engaging in money laundering activities.

The US Congressional Research Service has updated their report on the DPRK’s alleged counterfeiting operations. You may download the report here.

Here is the summary:

The United States has accused the Democratic People’s Republic of Korea (DPRK or North Korea) of counterfeiting U.S. $100 Federal Reserve notes (Supernotes) and passing them off in various countries, although there is some doubt by observers and other governments that the DPRK is capable of creating Supernotes of the quality found. What has been confirmed is that the DPRK has passed off such bills in various countries and that the counterfeit bills circulate both within North Korea and around its border with China. Defectors from North Korea also have provided information on Pyongyang’s counterfeiting operation, although those statements have not been corroborated. Whether the DPRK is responsible for the actual production or not, trafficking in counterfeit has been one of several illicit activities by North Korea apparently done to generate foreign exchange that is used to purchase imports or finance government activities abroad.

Although Pyongyang denies complicity in any counterfeiting operation, at least $45 million in such Supernotes thought to be of North Korean origin have been detected in circulation, and estimates are that the country has earned from $15 to $25 million per year over several years from counterfeiting. The illegal nature of any counterfeiting activity makes open-source information on the scope and scale of DPRK counterfeiting and distribution operations incomplete. South Korean intelligence has corroborated information on North Korean production of forged currency prior to 1998, and certain individuals have been indicted in U.S. courts for distributing such forged currency. Media reports in January 2006 state that Chinese investigators had independently confirmed allegations of DPRK counterfeiting. In June 2009, press reports claimed that the DPRK produced counterfeit U.S. bills even after 2007.

For the United States, the alleged North Korean counterfeiting represents a direct attack on a protected U.S. national asset and may provide a rationale to impose financial sanctions on the DPRK. The earnings from counterfeiting and related activities also could be important to Pyongyang’s finances. Profits from any counterfeiting also may be laundered through banks or other financial institutions.

U.S. policy toward the alleged counterfeiting is split between law enforcement efforts and political and diplomatic pressures. On the law enforcement side, individuals have been  indicted and the Banco Delta Asia (BDA) bank in Macao (a territory of China) was named as a primary money laundering concern under the Patriot Act. In June 2007, the BDA issue was resolved and the Six-Party Talks resumed. At the time, Pyongyang promised that it would punish the counterfeiters and destroy their equipment. The law enforcement effort has become entwined with diplomatic efforts and pressures to resolve the North Korean nuclear and missile issues. Following North Korea’s second nuclear test and several missile launches in May 2009, the United States reportedly has been considering further financial sanctions on the DPRK based partly on its alleged counterfeiting.

This report as well as many other CRS reports on the DPRK can be found here.

According to Yonhap:

A South Korean automaker operating in North Korea said Wednesday it has posted its first net profit and remitted part of it home, the first southbound money transfer by an inter-Korean venture.

Pyeonghwa Motors Corp. made a net profit of US$700,000 for the fiscal year ending in February and sent $500,000 to its headquarters in Seoul via a bank account in Hong Kong, its spokesman Roh Byoung-chun said.

The automaker began production in 2002 as a joint venture between North Korea and the Unification Church of South Korean Rev. Moon Sun-myung, who was born in the North. Its plant in Pyongyang produces sedans and small buses with some 340 employees, and its customers are mostly local businesses.

Roh said it took a while for North Korea to approve the remittance, which was made through a South Korean lender, Woori Bank, in Hong Kong in late May.

“For North Korea, $500,000 is a large sum of money. It is not used to the capitalist idea of making investments and retrieving profits. We believe they pondered deeply before giving approval,” he said.

Pyeonghwa sold 652 units last year, while North Korea took $200,000 for its 30 percent share in the venture, he said. The company says profits are picking up, with this year’s sales already surpassing 740.

North Korea’s own automaker, Sungri Motor, was established in 1958 and mostly produces cargo trucks.

Pyeonghwa’s production is not influenced by political tensions or South Korea’s ban on cross-border shipments, he said, as raw materials and parts are imported from Europe and China. The ban was enforced after North’s rocket launch in April, with the exception of goods going to a joint industrial complex in the North’s border town of Kaesong, where 109 South Korean small firms operate.

“The remittance is symbolic. They are having a hard time in Kaesong, and many went bankrupt in Mount Kumgang (the North Korean tourist resort),” Roh said. “We hope this can bring hope to people doing business in North Korea that anyone can go there and can bring back profits.”

Officials from the South Korean Unification Ministry said inbound money transfers from North Korea are not restricted, although outbound remittances are strictly monitored and prohibited in some cases. It is the first time a South Korean company has sent profits from sales in North Korea, they said. Other businesses investing in North Korea, including those operating in the Kaesong park, sell their goods in South Korea and elsewhere.

South Korea has put three North Korean firms, including a bank, on its blacklist under a U.N. resolution that bans financial transactions with North Korean entities suspected of aiding the country’s nuclear and missile development.

Read the full artilce below:
S. Korean automaker in Pyongyang sends first business profit home
Yonhap
Kim Hyun
7/15/2009

According to the Wall Street Journal:

The Pyeonghwa spokesman didn’t disclose revenue figures but said last year’s vehicle sales were just over twice the 2007 level. The company has already sold more cars this year, 742, and expects to sell more than 1,500 for the full year, the spokesman said.

The performance is the culmination of an 18-year effort that began when church founder Rev. Moon Sun-myung met North Korea’s then-ruler Kim Il Sung in Pyongyang to propose several business ventures. In 1999, the church spent $55 million to build the auto factory in the port city of Nampo, on North Korea’s west coast. The Unification Church, based in South Korea, has a number of investments in tourism, construction and trade.

Since completing the factory in 2002, Pyeonghwa has imported partially built cars, in a form called knockdown kits, from manufacturers such as Italy’s Fiat SpA and China’s Brilliance Automotive Holdings Ltd.

Pyeonghwa completes the cars and puts its own nameplate and brand names on them. In 2003, its first full year of operation, the company sold 316 cars.

North Korea’s government is a partner in the company and took about 30% of the profit.

When it first started production, the company touted North Korean dictator Kim Jong Il’s role in naming several cars. One sport-utility vehicle, built from the design of Fiat’s Doblo model, was named by Mr. Kim as the Ppeokkugi, or Cuckoo.

Pyeonghwa, like other companies that do business in North Korea, faced enormous difficulty moving its money out of the country. Many Chinese businesses resort to buying commodities in North Korea with their profits, then exporting them to China to be sold for Chinese currency.

The motor company worked from February to May to move its money from North Korea, seeking permission from the North’s central bank, the spokesman said.

Read the full article below:
Pyeonghwa Sells in North Korea
Wall Street Journal
Sungha Park
7/16/2009

Read other Pyonghwa stories here.

Here is the location of Pyonghwa’s factory near Nampo.

Below are excerpts from an article by Stephan Haggard and Marcus Noland on the complexities of North Korea sanctions.  The full article is worth reading.

According to Haggard and Noland in the Oriental Economist:

On June 12, 2009, in response to North Korea’s second nuclear test, the United Nations Security Council (UNSC) imposed additional economic sanctions via UNSC Resolution 1874. This measure is politically significant, particularly in signaling the changing attitude of Beijing. However, it is highly unlikely that the sanctions by themselves will have any immediate effect on North Korea’s nuclear program or on the increasing threat of proliferation. Sanctions need to be coupled with a nuanced policy that includes a strongly stated preference for a negotiated solution as well as defensive measures, of which the sanctions are only one part. Proliferation can be impeded. However, elimination of the North Korean nuclear weapons capability is likely to require a regime change in Pyongyang.

…

The most interesting features of the resolution have to do with means of enforcement. In 2003 President Bush launched the Proliferation Security Initiative (PSI), a loose effort to secure international cooperation in monitoring and interdicting ships that might be trafficking in WMDs or WMD-related materials. The new Security Council Resolution comes close to making the PSI a formal multilateral effort. The resolution calls upon member states to inspect vessels on the high seas or escort them to port if they have reasonable grounds to believe that they are carrying prohibited cargo. South Korea, which sat on the fence under the previous government of Roh Moo-hyun, has now formally joined the PSI effort.

An important loophole is that such interdiction must have the assent of the country under which the vessel is flagged. This provision could provide incentives for North Korea to do more shipping under its own flag. But there are clear constraints on doing so because of the country’s pariah status, and the major flags of convenience, such as Panama and Liberia, would come under strong pressure to comply. This obligation will almost certainly generate a confrontation at some point, given that North Korea has stated unambiguously that it would view such action as an act of war.

In addition to interdiction, the UNSC resolution explicitly provides for the use of financial means for stopping the flow of WMD-related trade. These measures are potentially more sweeping than those related to trade sanctions per se, since the resolution permits the blocking of transfers and even the freezing of any assets that “could contribute” to North Korea’s weapons programs or activities. Such a provision is similarly open to quite broad interpretation.

Finally, the new resolution establishes a new enforcement process by creating a panel of experts that will monitor efforts and provide recommendations to the Security Council.

Will Sanctions Work?

Despite these steps forward, the sanctions effort is not likely to yield immediate results and could even appear to backfire in the short run.

First, the North Koreans have typically responded to pressure not by complying but by escalating. The most recent cycle of escalation, culminating in the nuclear test, was in fact triggered by the sequence of UN actions described above.

Second, those favoring engagement had hoped that expanded trade, investment, and aid would encourage North Korea toward a more reformist path by demonstrating the gains from economic integration and by tilting the internal debate in favor of liberalizers. Economic inducements were probably never as powerful carrots as some believed. However, in 2005, the risk-averse North Korean leadership began reversing its limited economic reforms anyway. Kim Jong Il’s stroke in August 2008 has only exacerbated such tendencies; In the succession process, no one wants to be vulnerable to charges of apostasy. The influence of the military, a conservative, antireform institution is on the rise. In today’s environment, sanctions may be welcomed by reactionary elements as a justification for circling the wagons.

Finally, those countries most inclined to sanction North Korea no longer have much economic interaction with it anyway. Japan, once an important mainstay of the North Korean economy through transfers, has imposed an embargo (though circumvention via third countries is reputedly easy). Aid from South Korea has dropped to a trickle, and commercial relations through the collaborative Kaesong industrial park in North Korea have also been held hostage by new North Korean demands to renegotiate contracts. US economic exchanges with North Korea are miniscule. Indeed, the North Koreans even rejected the last important economic link to the United States by declining to continue a generous food aid program negotiated last year.

Thus an unintended consequence of the crisis has been to dramatically raise the share of North Korea’s trade with China, and with Iran Syria, and Egypt, countries with which it shares nuclear and/or missile interests. These latter partners show little interest in political quid-pro-quos, let alone sanctions. This geographical shift in trade makes traditional sanctions even less potent.

Consequently China has become even more central to any effective sanctions effort. China is North Korea’s largest trading partner, accounting for about one-third of its trade, and is the country’s most generous aid donor. A cut-off of critical Chinese oil shipments, much less a complete trade embargo, would bring the country to its knees.

But China has ambivalent, conflicting interests in North Korea. It values having a fraternally allied buffer state on its border and regards the country as a useful pawn in its rivalries with the United States and India, acting as its proxy in dealings with Iran and Pakistan. Yet North Korean provocations push South Korea, Japan, and the United States closer together, and ultimately could trigger a major arms race in Northeast Asia, which would not be to China’s benefit. Finally, China has concerns that excessive pressure on the regime could provoke its collapse, in the worst case sending millions of North Korean refugees into China and ending with US troops on the Yalu River. For China, a stable, nuclear-armed North Korea is preferable to an unstable one, nuclear or not, and this consideration ultimately limits the degree of pressure that Beijing is willing to bring to bear.

Financial Levers

This does not mean that the United States and its allies are without economic options, however. Even in the absence of complete multilateral coordination, the United States can still exercise leverage if it can identify how and where North Korea finances its international trade and goes aggressively after financial intermediaries. This particular form of sanction does not require multilateral coordination, since foreign banking institutions that conduct significant business in the United States have a strong interest in avoiding institutions that the US Treasury has identified as engaged in illicit finance.

In 2005 the US Treasury signaled that a small Macau bank, Banco Delta Asia, was possibly engaged in money laundering activities on North Korea’s behalf. Without any further action, the bank immediately suffered a run on its deposits and was forced into receivership, freezing $25 million of North Korean funds. The issue became a major sticking point in the Six Party talks but also appeared to motivate the North Koreans to return to them, setting the stage for the agreements reached in 2007. Undoubtedly the North Koreans have attempted to diversify their financial linkages since then.

In sum, the world appears capable of hurting North Korea economically, but given the extreme priority that the regime places on its military capacity, it is unlikely that the pain that the world can bring to bear will be sufficient to induce North Korea to abandon core political goals. However, holding out the possibility of removing these measures could constitute one incentive for a successor government to reassess the country’s diplomatic situation and to terminate its nuclear weapons program.

Read the full articles here:
Sanctions harden the lives of ordinary North Koreans
Oriental Economist
Haggard, Noland
7/3/2009

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
7/2/2009

According to the Washington Post:

The White House is ramping up its efforts to enforce sanctions against North Korea by forming a new interagency team to coordinate U.S. actions with other nations, senior administration officials said today.

The new team will be led by former ambassador to Bolivia Philip S. Goldberg, who is slated to leave for China in the near future as the U.S seeks concerted action to stop the North Korean regime from developing nuclear weapons.

“There is a broad consensus about the need to have a focused and engaged effort to see that these sanctions are implemented … and that we’re sharing information with each other,” one official said, speaking on background.

U.S. officials described the new group as a way to focus the administration more squarely on implementation of the latest sanctions, which were approved by the United Nations in the wake of North Korea’s nuclear test last month.

The officials said they are hoping the group — with representatives from the State Department, the White House, the National Security Agency, Treasury and others — will help “shine a spotlight” on the actions of the regime.

“We wanted somebody who woke up every morning and thought about nothing but sanctions implementation,” one official said. “It’s a huge difference when you have somebody who isn’t worried about any of the other aspects of this.”

The White House also announced a renewed effort to use the authority of the U.N. resolution to take financial actions against the North Korean regime in an effort to choke off the money flowing from small arms trade and other activity.

Treasury officials have issued a public memorandum to private financial institutions reminding them of the global condemnation and other risks of doing business with the North Korean regime.

The letter warns that North Korean banks and institutions often use deceptive techniques to engage in financial transactions that could place legitimate financial firms at risk.

“Financial institutions should apply enhanced scrutiny to any such correspondent accounts they maintain, including with respect to transaction monitoring,” the letter states.

One senior official said the U.S. is confident that the financial sanctions will over time help to further isolate North Korea and pressure its leaders to abandon its nuclear program.

“It’s going to take time to have a bite,” he conceded. “But we’re trying to get out of the box quickly.”

The Bush administration also had a sustained effort to implement United Nations sanctions after North Korea first tested a nuclear weapon in 2006.

The Counterproliferation Directorate of the White House National Security Council coordinated the effort, while the State Department and Treasury also co-chaired an interagency effort to examine specific cases that eventually worked their way up the chain for approval.

A team of senior officials, led by the undersecretary of State for arms control, traveled to Asia to work closely with allies. But the effort was dropped after Bush shifted course and decided to pursue diplomacy with North Korea.

Their first stops: China then Malaysia.

Citations:
New North Korea Sanctions Team Formed
Washington Post
Michael D. Shear and Glenn Kessler
6/26/2009

U.S. North Korea sanctions team to visit Malaysia
Reuters UK
7/2/2009

North Korea Uncovered version 18 is available.  This Google Earth overlay maps North Korea’s agriculture, aviation, cultural locations, markets, manufacturing facilities, railroad, energy infrastructure, politics, sports venues, military establishments, religious facilities, leisure destinations, and national parks.

This project has now been downloaded over 140,000 times since launching in April 2007 and received much media attention last month following a Wall Street Journal article highlighting the work.

Note: Kimchaek City is now in high resolution for the first time.  Information on this city is pretty scarce.  Contributions welcome.

Additions to this version include: New image overlays in Nampo (infrastructure update), Haeju (infrastructure update, apricot trees), Kanggye (infrastructure update, wood processing factory), Kimchaek (infrastructure update). Also, river dredges (h/t Christopher Del Riesgo), the Handure Plain, Musudan update, Nuclear Test Site revamp (h/t Ogle Earth), The International School of Berne (Kim Jong un school), Ongjin Shallow Sea Farms, Monument to  “Horizon of the Handure Plain”, Unhung Youth Power Station, Hwangnyong Fortress Wall, Kim Ung so House, Tomb of Kim Ung so, Chungnyol Shrine, Onchon Public Library, Onchon Public bathhouse, Anbyon Youth Power Stations.

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
6/18/2009