North Korean Economy Watch

From the Joong Ang Daily:

Experts say money squeeze on North is working

For 10 months, Washington has enforced a systematic plan to clamp down on cash going into North Korea. The measures are working, experts say.

Nam Sung-wook, a North Korea expert at Korea University, estimated yesterday that the recent measures have led to a 40 percent decline in North Korean leader Kim Jong-il’s income.

Since the 1980s, Kim Jong-il has regularly collected money from four sources: forged bank notes, arms sales, drug trafficking and money coming from ethnic Koreans living in Japan who acquire money by operating legal gambling casinos there.

Mr. Kim used the money to cement his hold on the North Korean elite, such as the military. Those in the right position received from the “Dear Leader” gifts ranging from German luxury cars to Japanese electronics.

However, since 2002, when the Bush administration started to tackle the issue with its North Korea Working Group, the situation changed and has squeezed the North. The U.S. group is composed of 14 government organizations, including the U.S. treasury department. Washington’s efforts against counterfeit money have yielded results: At the end of last year Irish national Sean Garland and six others were indicted for distributing North Korean-manufactured “supernotes.”

The North is believed to have produced annually $15 million to $25 million of forged money.

As a result of international pressure, one government official said it would be harder for the North to print new forged bank notes and circulate them.

The arms trade is also an important money maker for the North. However, since it sold 15 Scud-type missiles in December 2002 to Yemen, Pyongyang has not inked another arms deal. Sources said yesterday Pyongyang tried last year to sell missiles to African nations, but in light of Washington’s international call to prevent the transfer and sales of weapons of mass destruction, cautious African nations have distanced themselves from Pyongyang.

In the international arms market, Chinese-manufactured AK-47 assault rifles and other cheaper alternatives are being preferred over North Korean-made ones. The North’s drug trafficking is reportedly giving Pyongyang an annual income of $100 million. From 1998 to 2002 Japanese authorities seized 1,500 kilograms (3,300 pounds) of North Korea-manufactured philpone, a methamphetamine.

Nevertheless, a continued crackdown has narrowed the avenues of sales to organized crime groups such as the Japanese yakuza.

Money sent from the North Korea- backed Chongryon, the General Association of Korean Residents in Japan, amounted to 2 billion yen ($1.7 million) to 3 billion yen annually until 2002 with the money being shipped by a North Korean ferry.

However, since 2003, Tokyo has imposed regulations on the ferry, dropping the money flow to 1 billion yen per year. With the recent missile launch, Tokyo is now considering cutting off the money flow even more by strengthening the monitoring of insured postal parcels above a certain amount.

From the Korea Times:

Missile Tests Won’t Have Major Impact on Korean Ratings: S&P
By Yoon Ja-young

Standard & Poor’s (S&P) said that North Korea’s test launches of missiles earlier in the day will not drastically affect South Korea’s economic prospects.

“At this stage, it (North Korea’s missile launch) will not directly and significantly affect the macroeconomic outlook and fiscal position of South Korea,” Takahira Ogawa, a sovereign credit analyst and director at S&P said.

“Politically, the launches are likely to make negotiations in the six-party talks more difficult, and could possibly lead to further economic sanctions by the U.S. and Japan beyond a six-month freeze on the ferry service between North Korea and Japan announced this morning,” Ogawa added.

The U.S. ratings agency noted that its baseline scenario on the North Korea issue remains that “a peaceful solution will be found, although it could be protracted and may not be comprehensive.”

It also hinted that the North Korean nuclear issue has been taken into account in the credit assessment of Asia’s fourth-largest economy, noting that it “has long assumed that relations with North Korea would remain difficult.”

“Geopolitical risks have figured as the most critical risk factor weighing on South Korea’s credit standing,” S&P said.

From the Daily NK:

North Korean prices are continuing to rise.

At Sunam Jangmadang of Chongjin City, the price of rice is 1,200W/1kg, corn 300W, bottle of oil 2,000W, pork 2,500W and pants made from China 20,000W.

As it is spring, not only is it a time where the overall price of Jangmadang rice rises, but because the country is not distributing rations, the majority of people depend on the rice at Jangmadang. Also, rice sellers are watching this opening and are raising prices.

Lee who entered South Korea in 2003 says she has already sent money to her family by various means. The money sent through earnings from part-time jobs and resettlement money from the South Korean government, is becoming a lifeline for her family. Her families in North Korea depend on her to send money to live and get great relief from their daughters who live in South Korea.

Chinese 100yuan is 34,000won at Jangmadangi

Lee’s family who support their living by selling goods made from China, ceased trade because of soaring prices and control of Jangmadang by authorities.

Lee added, as it became harvest season and authorities restrained Jangmadang operations, there was even an incident last May at Chongjin where a lot of children were hospitalized after eating sweets and medicines made from China, and instruction was made in regards to strengthening the regulation of Chinese goods.

However, Chinese goods are in the majority and controlling Chinese commodities in North Korea is ‘shading the sun with the palm of your hand.’ Lee conveyed that to regulate the problem, police officers confiscate Chinese goods such as alcohol and cigarettes, and that oppression is worsening.

According to Lee, at present in Chongjin, Chinese 100yuan is 34,000 won for North Korean money. If this is converted to dollars, $1 calculates approximately 2,750won.

In March, the exchange rate at Musan Jangmadang was 100yuan to 37,125 won North Korean currency, in dollars $1 for 2,970won. The exchange rate for Yuan has decreased since March from roughly 100yuan to about 3,000won.

Local factory workers, majority mobilized to the village

The local industrial factory Lee’s brother works for in Chongjin, has recently closed factory doors and sends workers to the village. Compared to reports of North Korean publicity and media of central businesses in production at Pyongyang, standards of local industries are extremely inferior.

The reason, local industries could not extricate the aftereffects of acute shortages in equipment and materials following the economic breakdown in the mid-90’s.

According to defector of Chongjin, person ‘A’ laments “Recovery in factories is difficult as electric machines and electric lines are stolen and sold. Factories themselves want restoration but money is required, and isn’t it that there is no where money can appear.”

The most urgent is the problem of electricity. Most recently, as it is the farming season, all the electricity is mobilized for the water meter operations, with electricity servicing the villages approximately 10hours daily. However, as electricity is supplied to the villages, meanwhile the city is locked in darkness.

This was the key-note address By Nigel Cowie from an information meeting hosted by the European Business Association, Pyongyang, May 4th, 2006.

Introduction
My name is Nigel Cowie, I’m GM of DCB, and I’d like to take this opportunity to address with you the recent financial allegations and actions against the DPRK by the US Treasury. Where they have acted against specific companies, I can’t make any comment, except perhaps that we have not seen any evidence of any wrongdoing by them, because I don’t know anything about those cases, but I can tell you what they mean in the case of our bank and the budding legitimate foreign business community in the DPRK which we serve.

May I quickly first say a few words of introduction about me and about Daedong Credit Bank, our customers and their activities, before moving on to the US financial allegations and measures; and then address the use of cash in the DPRK, as this is important with regard to the financial allegations, then address the allegations themselves.

Daedong Credit Bank
Daedong Credit Bank is a majority foreign-owned, and foreign-managed joint venture commercial bank, providing standard, high street banking services in foreign currency to foreign-owned or invested commercial business customers—current accounts, remittances, foreign exchange and lending. Most of our customers are importing goods. These may be the consumer goods on sale in the hard currency shops, or larger scale commodities, mainly food related; also raw materials, in the case of the joint venture companies. A very few are exporting, mainly perishable goods like seafood and agricultural products, where they need to receive payment before goods arrive. However, we are not allowed to operate accounts for state-owned companies, and since these are the ones handling high value exports like minerals, most of our remittance business consists of outward remittances to pay for imports.

Financial Measures
On 15 September last year, the US Treasury announced the designation of Banco Delta Asia, Macau, as a “primary money laundering concern” in connection with transactions for DPRK customers, and proposed steps to deny the bank access to the US financial system. BDA immediately suspended all transactions with its DPRK customers and shortly thereafter voluntarily handed over management to the Macau Monetary Authority. The balances of these customers were transferred into special suspense accounts pending the outcome of various audit and other investigations. These investigations have now been completed, although the results have not been made public, and it is still not clear if and when the balances will be released.

Subsequently, other overseas banks closed the accounts of their DPRK bank customers, after receiving warnings from the US Treasury.

When we asked them, one of our correspondent banks explained that “This was an across-the-board policy decision due to external developments/factors, as you may be aware of, where present or future requirements may preclude us from our ability to service the accounts in an efficient manner.”

However, US Treasury Department Under Secretary Stuart Levey is quoted in Newsweek last week as saying that as more business people and governments learn about the risks of dealing with the DPRK, the campaign will have a “snowballing-avalanche effect.”

In this regard, he would appear to be true. We have heard from foreign customers conducting legitimate business here, who have been told by their bankers overseas to stop receiving remittances from the DPRK, otherwise their accounts will be closed.

Cash—a Key Point
Now, the way most of these customers get paid by local buyers is in cash. They bring the cash to the bank, we check the cash for counterfeits and credit it to their accounts with us. Then at the end of the month or whenever, we remit the funds out to their suppliers overseas. But because they are mainly importing, we tend to accumulate cash here in Pyongyang, and sometimes have to physically deliver it to banks overseas. There is nothing in any way tainted with this cash, and it is not counterfeit, it represents funds from legitimate business activities by legitimate customers, and the only reason it comes in cash is because of the peculiar circumstances in the DPRK.

An expert compares counterfeit and genuine bills
Irrespective of whether or not any illegal activities went on, other banks in the DPRK will have the same problem, whereby they have to make cash deposits overseas.

We have the most updated equipment, as well as highly experienced cashiers, for detecting counterfeit notes. While we do come cross them, they are not that common. And, contrary to many perceptions, it is possible to detect the so-called “supernotes.”

All the banks in the DPRK, so far as I am aware, view counterfeit notes as a nuisance, as, just like anywhere else, people have to have confidence in the cash they are handling. When the “supernotes‚ first appeared, our staff worked closely with those of Daesong bank and the Foreign Trade Bank to find ways of detecting them.

Banco Delta Asia
DPRK banks have, as the Treasury announcement correctly observed, been using Banco Delta Asia for decades. One of the reasons for that is because they were prepared to provide banking services to DPRK customers, but also because they accepted cash transactions.

Mongolia story
One further incident occurred specifically to us, which I would like to relate, and you can draw your own conclusions.

At the end of last year, we opened new accounts with Golomt Bank of Mongolia, in Ulaanbaatar. We discussed in detail with them procedures for handling cash transactions in a legally correct manner, as well as providing them with a copy of our anti-money laundering procedure manual, a manual that, incidentally had been accepted by our other correspondent banks.

On 21 February, our designated couriers transported a cash deposit to Mongolia, consisting of USD1 million and JPY20 million; the couriers were met, as previously agreed, by Golomt Bank officials together with local police at Ulaanbaatar International Airport. However, the couriers were then detained by Mongolian intelligence agents who took them, and the cash, to the Bank of Mongolia (central bank); the couriers were accused of importing counterfeit currency.

DCB’s couriers were detained outside the Bank of Mongolia for most of the night, whilst the intelligence agents claimed to be checking the authenticity of the cash. The next day they alleged that USD61,700 was suspected to be counterfeit; the alleged fakes were sent, together with two additional notes randomly taken from each remaining USD10,000 bundle of cash, for further examination at an unspecified location.

On 22 February the Mongolian press carried false reports, based on a leak, to the effect that “North Korean diplomats had been intercepted smuggling USD1 million and JPY200 million (not JPY20 million) into Mongolia”. These reports were subsequently carried by international news agencies.

Our Treasurer was dispatched to Mongolia, where he was subsequently joined by me, to protest this action and demand the return of the funds.

On 7 March, after holding the cash for 14 days claiming they were still checking it, the intelligence officials in a meeting with us finally conceded that all the notes were genuine; the cash was released. The money was deposited with the Golomt Bank of Mongolia on 9 March, as had originally been intended.

By the way, I would like to add that this is not a complaint against the Mongolian authorities. All the meetings I attended were most cordial, and I had the impression that all the officials I met were just trying to do their job. At the final meeting with Mongolian intelligence, they appeared rather embarrassed that they had been given incorrect information.

Effects of these Moves on DCB
Once again, I can only speak for DCB, and don’t know what Banco Delta Asia was doing with other customers. For our part, we are only conducting legitimate business, but have nonetheless been seriously affected by these measures. A large amount of our, and our customers‚ money—not just in USD, but in all currencies—has effectively been seized, with no indication of when they’ll give it back to us.

This makes it more difficult to manage the bank’s working capital, as well as that of those customers whose money was frozen. It has subsequently resulted in a sharp fall in turnover—more than 50%, I estimate—as customers’ own working capital is tied up, and they are reluctant to continue using the banking system in case something like this happens again.

It has also obliged us to expend great efforts to find new bank accounts, and make our side of the story heard to protect our and our customers‚ business. It has also greatly increased the cost of operations as the banking transactions have become more complicated.

So, there is a clear effect on legitimate business. I can’t speak about the illegitimate business, because we don’t have any, but I would imagine that anyone conducting illegal business could find a way around this, because they don’t have to comply with internally instituted procedures like we do. For example, I was approached by someone overseas offering to take cash deposits of any size we like, and have it re-sent on to wherever we want in consignments of less than $10,000 so that they are not spotted by overseas banks’ money laundering detection procedures. I declined this offer because we are not about that sort of banking.

Which brings me to the point that there is a danger of legitimate businesses being squeezed into routes that are more normally used by real criminals, and the result of these actions against banks doing business with the DPRK being that criminal activities go underground and harder to trace, and legitimate businesses either give up, or end up appearing suspicious by being forced to use clandestine methods.

Suggestion
We and other EBA members are trying to make an infrastructure for normalizing economic relations with outside world, this not helping.

During a March 7 interview with Arms Control Today, Michael Green, until recently President George W. Bush’s National Security Council senior director for Asian affairs, stated that The United States will continue to take action against illegal North Korean activities regardless of the six- party talks’ status. But he added that Washington thinks such measures complement the talks by forcing Pyongyang to turn to legitimate economic activities for revenue.

Our point is that that may be impossible.

The US Treasury department’s full report on Banco Delta Asia, as reproduced in the Federal Register (20 September 2005) states that “It is difficult to determine the extent to which Banco Delta Asia is used for legitimate purposes. Although Banco Delta Asia likely engages in some legitimate activity, the [Treasury] Secretary believes that any legitimate use of Banco Delta Asia is significantly outweighed by its use to promote or facilitate money laundering and other financial crimes.

I would far rather get everything out in the open, reporting full details of all our transactions to any monitoring authorities that need to know, that way there is nothing to hide, all parties are satisfied, and everything is legal, open, transparent and respectable.

I am quite sure that the other DPRK banks would be willing to do the same. Indeed, at a meeting on 7 March between US Treasury officials and the DPRK’s deputy Director-General for North America, Mr Li Gun, Mr Li proposed that the DPRK be allowed to open a USD bank account with a US bank—something we also would support.

This is a slightly abbreviated text of the original talk, posted at Japan Focus on May 6, 2006

Daily NK
Kwon Jeong Hyun
5/26/2006

In North Korea, domestic rice prices are showing a sharp rise.  In mid May, the price of rice in North Pyongan province was 1,300W ($0.43)/1kg. Compared to the price in May 2005, it rose 500W ($0.17). In Jangmadang, there is a rumor that rice will rise to 2,000 won ($0.67), so it seems that it’s just a matter of time before rice becomes more expensive.

The reason for the rising cost of rice is simple: a lack of rice. The rice stored in Autumn has begun to run out and there are not enough edible plants to go around. North Korea calls this period the Spring Austerity Season. This period is the hardest season for North Koreans.

The average wage of North Koreans is 3,000W($1). To be more exact, it means that 4 family members have to live off of 1.5kg of rice a month. Everybody struggles to survive by doing business, digging up edible plants, getting help from relatives living in China, and selling scrap iron.

The following is March prices from North Pyongan province. This shows the great difference from this year’s price. Except for food and groceries, the price does not vary much:

Will this have repercussions in the south’s credit rating?

From the Daily NK:

On May 22, an official of Moody’s Investor Service, a Credit Rating Agency, announced that despite Kim Jong Il’s visit to China early this year, North Korea did not show indications for internal economic reformation.

On May 22, Vice-president Thomas Byrne of Moody’s Investor Service rated the possibility of North Korea towards economic reformation negative in the North Korean Economic Outlook Symposium held by Institute for Corean-American Studies(ICAS) in the Rusell Senate Building.

Vice-president Byrne estimated that North Korea failed to adjust its currency and exchange rate, and its trade environment was not improved, so that rather its economic situation was worse. Plus, he emphasized that North Korea did not show any signs of internal economic reformation.

He said about Gaesung Industrial Complex that, “If 5 more complexes like Gaesung Industrial Complex develop, we can see North Korea be in the economic reformation’s process, yet the Complex is no more than a symbol”. He emphasized that if North Korea has a strong resolute for economic reformation, “it should follow the economic model of South Korea because the way to Seoul is easier than the train to Shanghai for it”.

Vice-president Byrne warned that if South Korea would continue to support North Korea economically, it would face economic crisis soon.

While saying that, “The difference between the approaches of South Korea and the U.S is not great enough to make an impact on the credit rating of South Korea”, he stated, “Due to North Korea, South Korea always gets a lower credit rating than its original rating”.

Meanwhile, a special correspondent informed that North Korean-Chinese trader Lee Dae Kil(pseudonym, 49) who recently came back from North Korea showed a negative opinion about North Korean economy.

Mr. Lee said that, “There has been little profit in spite of trades with North Koreans for a few years”, and “North Koreans buy and sell only for living, not for investment for profits. He said that, “The North Korean government does not show even such efforts”,.

Mr. Lee said that, “After it was known that the U.S blocked banks banking with North Korea, dollar transactions sharply decreased”, and “There were people who even asked me about what happened outside”.

Well, I discovered this series of events that really peaked my curiosity.  The Friederick Naumann Foundtaion has hosted two conferences on DPRK economic reform in Pyongyang. 

From the Foundtaion’s web site:

Since 2004, the Friedrich Naumann Foundation has been organizing seminars and workshops in North Korea in order to transfer knowledge on market economy. The first EU-DPRK workshop, which was held in August 2004 focused on economic transition processes and the changes in the DPRK since 2002. This second meeting had a more specific focus on practical issues that were raised last year such as the role of the state in economic management, strategies to attract foreign direct investment and the restructuring of state-owned enterprises and agriculture.

I have reconstructed this short agenda with links to relevant papers:

Opening: Kung Sok Ung, Vice Minister of Foreign Affairs of the DPRK (in attendance: almost 100 DPRK officials from economic ministries, institutions, and universities as well as reps from the EU)

Session 1: The Role of the State in Economic Management
Dr. Ari Kokko, professor at the Stockholm School of Economics
Paper: Economic Systems and the Role of the State

Dr. Dusan Triska, former deputy Minister of Finance, Czechoslovakia
Paper: Redefining the role of the state: public planning and management tools

Mr. Max van der Sleen, Chairman of ECORYS Netherlands
Paper: Macro-economic tools of the State to manage the economy

Session 2: Conditions and Strategies to attract investment: experiences of the new member states of the EU
Dr. Andrea Szalavetz, Senior Research Fellow, Hungarian Institute for World Economics
Paper: Mobilizing foreign capital to promote catching-up and modernization: The Hungarian experience

Dr. Jacek Mironski, researcher at the Warsaw School of Economics
Paper: Human Resource Management and Investment in Human Capital

Mr. Han Dok Son, DPRK’s University of National Economy
Paper: Actions for Modernization of National economy in DPRK

Session 3: Restructuring state-owned enterprises and agricultural sector: Methods and implementation.
Mr. Ju Yong Seol, Economic Research Institute of the Cabinet
Paper: New economic measures taken by the DPR Korea and the experience gained from their implementation

Dr. Bruno Dallago, University of Trento
Paper: Creation and development of small and medium-sized enterprises (SME)

Dr. Brigitta Kauers, Head of Division at Germany’s Federal Ministry of Finance
Paper: Experiences with the Treuhand agency in Germany

Dr. Michael Cuddy, National University of Ireland
Paper: Some thoughts on agriculture and rural development in the DPRK

Report on the Conference

Economic Reform and SEZ as Survival Strategy of DPRK
PDF: Deok Ryong Yoon.pdf
Deok Ryong Yoon

Introduction to & implications of Gaesong Industrial Complex Project
PDF: kaesong.faqs.pdf
Ministry of Unification

Gaeseong Industrial complex: Past, Present and Future
PDF: Dong-geun Kim.pdf
Speech by Dong-geun Kim, Chairman of Gaeseong Industrial District Management Committee

Gaeseong Industrial Complex : Frequently Asked Questions (FAQs)
PDF: kaesong.faqs1.pdf
Ministry of Unification, ROK

Asia Times
Lora Saalman
2/8/2006

On January 10, North Korean leader Kim Jong-il traveled in a luxury train to China’s Guangdong province to sample socialist-flavored capitalism. Just a few months earlier, the North Korean Workers Party introduced reform measures granting foreign investors tax cuts and allowing them to sell goods produced in North Korea without tariffs.

For an economy that ostensibly issued halting economic reforms in 1984, these new measures constitute a revolution, albeit one with Chinese characteristics. In accordance with its giant neighbor’s model, North Korean economic reform is predicated as an alternative to the instability of political liberalization. Unforeseen social and political shifts are to be cushioned by financial solvency to keep the regime intact. With China’s assistance and unofficial aid, sustainable growth may one day be achieved in North Korea. Yet a darker side to North Korea’s economic awakening remains.

Kim Jong-il’s visit comes on the heels of accounts of North Korean money-laundering in Macau and the US decision last June and again in October to freeze the assets of various North Korean companies and financial institutions. While many of these firms are beyond the reach of US sanctions, implied misconduct has already led to runs on the North Korean-affiliated financial institution Banco Delta Asia in Macau.

As allegations swirl of money-laundering through counterfeit cigarettes and currency, a less-known story has emerged on British American Tobacco’s previously undisclosed four-year-old joint venture in North Korea. It presents the dilemma of doing business in a country in desperate need of revenue but with a poor track record of allocating resources to its people. This cautionary tale begs the question as to where exactly Pyongyang’s joint-venture profits are going.

For North Korea, which lacks many of the basic laws for financial transparency and good governance, capital investments are more than economically precarious. Shared contact information and dubious management practices among North Korean companies are ubiquitous.

Daesong-BAT is one of a handful of Western joint ventures in North Korea. The far-reaching tentacles of its North Korean partner illustrate the complexity of verifying the background and connections of any North Korean entity. Like many of its compatriots, North Korea’s Sogyong General Trading Corp (Sogyong) boasts circuitous and often indirect ties to entities engaged in proliferation, international trade, shipping, and money-laundering. These indicators point to larger concerns as to whether joint ventures, particularly Western ones, can be manipulated by North Korea for illicit financing of the regime or even to sustain its alleged WMD (weapons of mass destruction) programs.

Joint ventures and front companies
In establishing Daesong-BAT, British American Tobacco teamed up with Sogyong General Trading Corp, a Pyongyang-based state trader best known for its carpet exports. Sogyong, however, also exports such products as handicrafts, furniture and agricultural produce, while importing machinery, electronics, fishing tackle, chemicals and fertilizer. It is not uncommon for North Korean state-run enterprises to deal in everything from machinery to fishing tackle. Yet eclectic product lists make trade in illicit drugs and weapons all the more difficult to track. Cigarettes are just one more product in the Sogyong export-import pantheon.

North Korean company product lists also rarely convey their full range of trade. Seemingly innocuous industries are often manipulated as front companies. Last year, for example, Japan’s Ministry of Economy, Trade and Industry (METI) listed what appeared to be an innocuous North Korean food manufacturer, Sosong Food Factory, for its participation in nuclear, missile, chemical and biological-weapons proliferation. Cigarettes, like food, have been used at times to mask the real objects being transferred. In one case, Japan in 2002 seized a Chinese vessel and found that the declared store of cigarettes on board actually contained drugs thought to have come from North Korea.

While not as licentious as drug or human trafficking, even the black-market trade of cigarettes could have a tangible impact on North Korea’s financing, as seen in Eastern European illegal cigarette rings. These factors highlight the danger of taking a North Korean food or even carpet manufacturer at face value.

North Korea’s network
Among the elements of obfuscation, the company name Daesong-BAT merits attention. Rather than combining or modifying the titles of the two partner companies to form Sogyong-BAT, Daesong-BAT combines British American Tobacco’s acronym with a name that could either point to North Korea’s Daesong district or Daesong General Trading Corp (Daesong). If it turns out to be the latter, Japan and other governments have prominently featured Daesong for its ties to missile and nuclear proliferation.

Incidentally, Daesong maintains one of the most extensive and convoluted North Korean networks, with more than 10 subsidiaries. It also is suspected of falling under Bureau 39, which earns foreign currency for North Korea. A direct connection between Daesong-BAT and the sinewy Daesong franchise has yet to be established but, as illustrated below, nothing is clear cut in North Korean business relations.

Because of the lack of transparency and convoluted nature of North Korean companies, contact information often serves as the first stencil for tracing overlap between industries. In the case of Daesong, the US Central Intelligence Agency’s Open Source Center follows the use of the same fax number to establish potential business and branch linkages. If the same logic is applied to Sogyong, another pattern emerges. Sogyong shares common fax numbers with at least two companies, Korea Foodstuffs Trading Corp (Foodstuffs) and Korea Kwail Trading Corp (Kwail). These companies in turn share fax numbers with nearly 100 companies in North Korea.

Among North Korean firms sharing contact information with Sogyong-linked entities, Japan’s METI and official European export monitors have listed at least six as end-users associated with North Korean WMD programs. In October, the US government targeted one in particular, Korea Ryonha Machinery Joint Venture Corp (Ryonha), freezing its assets under US jurisdiction and placing it on the US Specially Designated Nationals and Blocked Persons list. Ryonha is a prime example of the complex web of North Korean subsidiaries. Last June, the US Treasury Department also targeted the assets of its parent company Korea Ryonbong General Corp, formerly known as Lyongaksan, which heads five other US-designated entities.

Ryonha is not an aberration among companies converging with Sogyong. Among other Foodstuffs and Kwail-connected entities, Korean company databases list Korea Pyongyang Trading Corp as a distributor of methane gas derived from animal excrement. Apparently, effluent is not its only fetid source of income. The Japanese government has listed the very same company, along with subsidiaries of two other firms tracing back to Sogyong, namely Korea Ryonhap Trading Corp and Korea Jangsu Trading Corp, for nuclear, missile, chemical and biological weapons proliferation.

Proliferation networks may not be the only mechanisms at Sogyong’s fingertips. Contact information also links the two Sogyong-connected associates with at least four North Korean financial institutions. Among these, Koryo Bank and Korea Joint Bank have alleged ties to the now-infamous Banco Delta Asia in Macau. Banco Delta Asia’s own purported involvement in counterfeit-currency distribution and counterfeit-cigarette smuggling does not bode well for Daesong-BAT, no matter how convoluted their connections. Banco Delta Asia may have three degrees of separation between it and Sogyong, but in North Korea’s fishbowl of finance this does not preclude cooperation.

Banco Delta Asia is also reported to maintain a close business relationship with Macau-based Zokwang Trading, which its own vice general managing director claims is a part of North Korea’s Daesong General Trading Corp. Daesong, as mentioned earlier, has a pervasive proliferation record. It also has reported links to Changgwang Sinyong Corp (Changgwang), which has been repeatedly sanctioned by the United States for its missile-proliferation activities and sales to Iran and Pakistan. Zokwang in turn deals in missiles and nuclear-power-plant components, all the while maintaining a partnership with the notorious Changgwang. Combined with Sogyong’s branch in the joint \-venture hub Shenyang, China, even indirect ties to Macau suggest that Sogyong has the ability to tap into proliferation, industrial and financial networks in China and beyond.

Proliferation, industry and finance mean little without the means to transport goods and technology. Sogyong-associated entities Foodstuffs and Kwail share fax numbers with North Korea’s national airline Air Koryo, which has also been cited by official European monitors for proliferation. A 2003 Far Eastern Economic Review article even named Air Koryo as the transportation mechanism for Daesong’s suspected military assistance to Myanmar. Sogyong’s own shipping vessels Sogyong 1 and 2, which were detained in Japan on safety violations in December 2004 and January 2005, complete the final leg of the contact-linked proliferation, financing and shipment triangle. This network belies a much more intricate set of alliances than the domestic-consumption-based joint venture touted by British American Tobacco and Sogyong General Trading Corp.

Standards of business conduct
British American Tobacco’s website advocates transparency in international business and laudably eschews bribery, corruption, illicit trade, and money-laundering. In October, BAT executives further contended in The Guardian that the company’s North Korean cigarette joint venture fuels only domestic consumption, not exports to China or elsewhere. In spite of these reassurances, BAT is no stranger to the dangers of black-market cigarette production and transshipment. A February 2000 article in The Guardian even accuses BAT of complicity, by knowingly allowing illicit smuggling of its cigarettes to occur.

In the case of Daesong-BAT, British American Tobacco officials have admitted to knowing little of the company’s North Korean joint-venture operations. Ominously, BAT has stated that an unnamed Singapore division controls its North Korean joint venture. Lack of oversight combined with a dubious North Korean offshore mechanism for managing an ostensibly domestic industry raises significant warning signs. The incestuous relationship between state-run North Korean entities that share fax numbers of companies and banks listed for WMD procurement and money-laundering through counterfeit tobacco should also elicit concern. These are not simply dilemmas for British American Tobacco, but pose challenges to any companies forming joint ventures in North Korea.

Economic integration, as in China’s case, may bring North Korea more into step with international norms and standards. Ironically, engagement that is likely to lead to greater future transparency may also be manipulated for North Korea’s short-term illicit gains.

In 2003, the British government pressured BAT to close down its cigarette factory operations in the military dictatorship of Myanmar because of concerns over that country’s lack of human rights. Given the legion of obstacles impeding transparency in North Korea, BAT and other Western firms could be contributing to the worsening of more than human rights. They could be aiding and abetting illicit North Korean financing that is alleged to fuel Kim Jong-il’s slush fund and WMD programs.

Acording to the BBC:

North Korea is no longer forging US dollars, contrary to US claims, South Korea’s intelligence agency has said.

The agency had no evidence Pyongyang has made forged, so-called “supernotes” since 1998, a lawmaker briefed by the National Intelligence Service said.

US sanctions imposed in connection with the alleged forgery have stalled talks on the North’s nuclear ambitions.