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Can North Korea be safe for business?

Thursday, May 20th, 2010

Geoffrey Cain writes in Time:

Few investors can boast the one-of-a-kind global pedigree of Felix Abt. Since 2002, the Swiss businessman has found his calling as a point man for Western investments in — of all places — North Korea, where he helped found the Pyongyang Business School in 2004. He also presided over the European Business Association in Pyongyang, a group in the capital that acts as a de facto chamber of commerce. A few years ago, that position led him to help set up the first “European Booth” featuring around 20 European companies each year at the Pyongyang Spring International Trade Fair, an annual gathering of 270 foreign and North Korean companies currently underway in the hermit kingdom until Thursday.

Yet Abt, 55, who lives in Vietnam and therefore won’t be attending the trade fair this year, laments the giant cloud hanging over the country: in recent years, political turmoil on the peninsula has raised the stakes even further for doing business in North Korea — even for the country’s main patron, China. Though investors have always faced the prospect of sanctions, he says, the situation has worsened after the United States ratcheted up sanctions on the government in 2006 on allegations that it was counterfeiting U.S. dollars. And in 2006 and 2009 the Kim Jong-il regime tested two small nuclear bombs, prompting heavier sanctions from the United Nations in 2006. Recently, tensions with Seoul have spiked over the March sinking of a South Korean corvette in waters near the North.(See pictures of the rise of Kim Jong-il.)

Those measures hit home for Abt. While he was running a pharmaceutical company in Pyongyang called Pyongsu in the mid-2000s, he learned that the U.N. Security Council had imposed sanctions on certain chemicals — a move that could have forced him to completely stop manufacturing medicine. Thankfully, he adds, he had already secured a large stock of the substance beforehand. “Whatever business you are involved in,” he says, “some day you may find out that some product or even a tiny but unavoidable component is banned by a U.S. or U.N. sanctions because it can, for example, also be used for military purposes.”

Those dilemmas haven’t stopped Abt. In 2007, he co-founded an information technology firm in Pyongyang called Nosotek, whose 50 or so employees design software applications for the iPhone and Facebook. The venture has already seen its share of success: one of its iPhone games ranked first in popularity for a short while on Apple’s Top 10 list for Germany — though he can’t name the software out of concern for protecting his contractors from bad publicity.(See pictures of North Koreans at the polls.)

For some companies, the stigma of a “Made in North Korea” label matters less than the competitive edge gained from having low overhead costs and a diligent workforce whose wages remain less than outsourcing powerhouses like China, Vietnam and India. In the past, North Korea has attracted the interest of multinational corporations looking for cheap labor in fields as diverse as electrical machinery and cartoon animation. Yet few multinationals show their faces at this month’s fair, a decline from the early 2000s when Abt says they were appearing regularly to look for opportunities in electricity, infrastructure, transportation and mining.

Not all foreign ventures in the North are driven by profit margins alone. The 2005 animated Korean movie Empress Cheung, a popular fantasy film drawn jointly by South and North Korean animators, brought attention to the animation industry in North Korea. Nelson Shin, head of the Seoul-based animation studio that started the project, claims he worked with North Korea for a greater cause than cheap labor. “It wasn’t so much because of cost efficiency as because of cultural exchange between the two Koreas,” he says.

For a country so poor, North Korea has churned out a remarkable number of talented engineers and scientists who fuel some of these small sectors (along with its controversial nuclear weapons program). In the 1960s and 1970s, the government pushed the country to become self-sufficient through development projects, a part of its ideology of “Juche” that promotes absolute autonomy from foreign powers. The communist regime of Kim Il-sung prided itself on its universities and public housing system, in particular. “It was an advance from pre-World War II days,” says Helen-Louise Hunter, a former CIA analyst now in Washington, D.C., who researched North Korea during those decades. “Kim Il-sung was genuinely interested in improving his people’s standard of living, and was off to a good start in a couple of areas compared to South Korea in those early days.”

Yet North Korea fell behind after the South’s own military dictators put their country into industrial overdrive throughout the 1970s and 1980s. Then the Soviet Union collapsed in 1989, depriving North Korea of valuable aid. Then came a famine in the mid-1990s that delivered the final blow, leaving up to 3 million people dead and crippling the capacities of the already isolated state.

Today, the pariah regime of Kim Jong-il is allegedly known to raise money through illicit activities like trafficking narcotics and money laundering. But it’s not known how much those activities figure into the country’s GDP of $28.2 billion in 2009 and its $2 billion worth of exports in 2008, the most recent year data is available. “Not that much income comes from illegitimate operations if you mean drugs and counterfeited dollars,” says Andrei Lankov, a North Korea expert at Kookmin University in Seoul. “More come from arms sales, though, but I would not describe this as an illegitimate trade.”

Abt shakes off the image of Pyongyang being the center of a mafia state. He sees himself and other foreign investors as the potential movers and changers of Kim’s hermit regime. “Cornering a country is ethically more questionable than engagement,” he says. “Foreigners engaging with North Koreans are change agents. The North Koreans are confronted with new ideas which they will observe and test, reject or adopt.”

Read the full story here:
Can North Korea Be Safe for Business?
Time
Geoffrey Cain
5/20/2010

Posted in Animation, Arms shipment, Counterfeiting, Drug smuggling, Economic reform, Foreign direct investment, GDP statistics, Health care, Illicit activities, International trade, Military, Pharmaceuticals, Trade Statistics | Comments Closed

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.

Posted in Arms shipment, Banking, Counterfeiting, Drug smuggling, Finance, Fiscal & monetary policy, Illicit activities, Insurance, International trade, Statistics, Trade Statistics | Comments Closed

Hermit economics hobbles Pyongyang

Wednesday, March 31st, 2010

Aidan Foster-Carter writes in the Financial Times about some poor decision-making coming out of Pyongyang:

Great Leader? Pyongyang’s fawning hagiography not only grates, but is singularly unearned. Even by its own dim lights, North Korea’s decision-making is going from bad to worse.

Last year saw two spectacular own goals. Missile and nuclear tests were a weird way to greet a new US president ready to reach out to old foes. The predictable outcome was condemnation by the United Nations Security Council, plus sanctions on arms exports that are biting.

Domestic policy is just as disastrous. December’s currency “reform” beggars belief. Did Kim Jong-il really fail to grasp that redenomination would not cure inflation, but worsen it? Or that brazenly stealing people’s savings – beyond a paltry minimum, citizens only got 10 per cent of their money back – would finally goad his long-suffering subjects into rioting? Forced to retreat, officials even apologised. One scapegoat was sacked – and possibly shot.

By his own admission, Mr Kim does not do economics. In a speech in 1996, when famine was starting to bite, the Dear Leader whined defensively that his late father, Kim Il-sung, had told him “not to get involved in economic work, but just concentrate on the military and the party”.

That awful advice explains much. Incredibly, North Korea was once richer than the South. In today’s world, this is the contest that counts. “It’s the economy, stupid” is no mere slogan, but a law of social science.

Having taken an early lead, Kim senior threw it all away. He built the world’s fourth largest army, crippling an economy that he refused to reform, viewing liberalisation as betrayal. His own personality cult was and is a literally monumental weight of unproductive spending.

Used to milking Moscow and Beijing, in the 1970s North Korea borrowed from western banks – and promptly defaulted. That was not smart; it has had to pay cash up front ever since.

Pyongyang also resorts to less orthodox financing. In 1976 the Nordic nations expelled a dozen North Korean diplomats for trafficking cigarettes and booze. In December a Swedish court jailed two for smuggling cigarettes. More than 100 busts worldwide over 30 years, of everything from ivory and heroin to “supernotes” (fake $100 bills), leave scant doubt that this is policy.

Yet morality aside, it is stupid policy. Pariahs stay poor. North Korea could earn far more by going straight. The Kaesong Industrial Complex (KIC), where South Korean businesses employ Northern workers to make a range of goods, shows that co-operation can work. Yet Pyongyang keeps harassing it, imposing arbitrary border restrictions and demanding absurd wage hikes.

Now it threatens to seize $370m (€275m, £247m) of South Korean assets at Mount Kumgang, a tourist zone idle since a southern tourist was shot dead in 2008 and the north refused a proper investigation. Even before that, Pyongyang’s greed in extorting inflated fees from Hyundai ensured that no other chaebol has ventured north. Contrast how China has gained from Taiwanese investment.

In this catalogue of crassness, the nadir came in 1991 when the dying Soviet Union abruptly pulled the plug on its clients. All suffered, but most adapted. Cuba went for tourism; Vietnam tried cautious reform; Mongolia sold minerals. Only North Korea, bizarrely, did nothing – except watch its old system crumble. Gross domestic product plunged by half, and hunger killed up to a million. Now famine again stalks the land. The state cannot provide, yet still it seeks to suppress markets.

All this is as puzzling as it is terrible. China and Vietnam show how Asian communist states can morph towards capitalism and thrive. Kim Jong-il may fear the fate of the Soviet Union if he follows suit. True, his regime has survived – even if many of its people have not. Yet the path he is on is patently a dead end. Mr Kim’s own ill-health, and a belated bid to install his unknown third son as dauphin, only heighten uncertainty. Militant mendicancy over the nuclear issue – demanding to be paid for every tiny step towards a distant disarmament, then backsliding and trying the same trick again – will no longer wash. North Korea has run out of road; the game is finally up.

What now? A soft landing, with Mr Kim embracing peace abroad and reform at home, remains the best outcome. But if he obdurately resists change, we need a plan B. The US and South Korea have contingency plans for the north’s collapse. So does China, separately. Tacit co-ordination is urgent, lest future chaos be compounded by a clash of rival powers – as in the 1890s. Koreans have a rueful proverb: when whales fight, the shrimp’s back is broken.

But Beijing will not let it come to that. China is quietly moving into North Korea, buying up mines and ports. Some in Seoul cry colonialism, but it was they who created this vacuum by short-sightedly ditching the past decade’s “sunshine” policy of patient outreach. President Lee Myung-bak may have gained the Group of 20 chairmanship, but he has lost North Korea.

Nor will Mr Kim nuzzle docile under China’s wing, though his son might. As ever, North Korea will take others’ money and do its own thing. In early 2010 new fake “super-yuan” of high quality, very hard to detect, started appearing in China. They wouldn’t, would they?

Read the full article here:
Hermit economics hobbles Pyongyang
Financial Times
Aidan Foster-Carter
3/30/2010

Posted in Arms shipment, Banking, China, Counterfeiting, Drug smuggling, Finance, Fiscal & monetary policy, Foreign direct investment, Illicit activities, International Governments, International trade, Kaesong Industrial Complex (KIC), Mt. Kumgang Tourist Special Zone, Private property | 6 Comments »

US State Department: 2010 International Narcotics Control Strategy Report

Thursday, March 4th, 2010

The International Narcotics Control Strategy Report (INCSR) is an annual report by the Department of State to Congress prepared in accordance with the Foreign Assistance Act. It describes the efforts of key countries to attack all aspects of the international drug trade in Calendar Year 2009. Volume I (PDF) covers drug and chemical control activities, and beginning on page 488, there is a profile on the DPRK:

North Korea

I. Summary
There is insufficient evidence to say with certainty that state-sponsored trafficking by the Democratic People’s Republic of Korea (DPRK or North Korea) has stopped entirely in 2009. Nonetheless, the paucity of public reports of drug trafficking with a direct DPRK connection suggests strongly that such high-profile drug trafficking has either ceased, or has been reduced very sharply. Trafficking of methamphetamine along the DPRK-China border continues. There are indications that international drug traffickers can purchase methamphetamine in kilogram quantities in some of the major towns on the Chinese side of the DPRK-China border. Other criminality involving DPRK territory, such as counterfeit cigarette smuggling and counterfeiting/passing of U.S. currency (supernotes), continues.

II. Status of Country
No confirmed instances of large-scale drug trafficking involving the DPRK state or its nationals were reported in 2009. This is the seventh consecutive year that there were no known instances of large-scale methamphetamine or heroin trafficking to either Japan or Taiwan with direct DPRK state institution involvement. From the mid- 1990s through to 2002/2003, numerous instances of narcotics trafficking involving DPRK persons and important state assets, such as sea-going vessels and military patrol boats, were recorded in Taiwan and Japan.

Press reporting suggests that methamphetamine trafficking along the DPRK-China border continues. These reports detail the activities of organized criminal groups arranging methamphetamine shipments to destinations in Asia from the major towns near the DPRK-China border (e.g., Dandong, Yanji).

III. Country Actions Against Drugs in 2009
Law Enforcement Efforts. The source of relatively small quantities of methamphetamine seized elsewhere in Asia can occasionally be traced back to the China-DPRK border area. Local press reports in Asia describe apprehensions of traffickers smuggling methamphetamine and indicate that arrangements to purchase that methamphetamine were made in towns near the China-DPRK border. These reports suggest that trafficking of methamphetamine continues along the China-DPRK border and they raise the question of whether or not local DPRK officials might be aware or even complicit in the drug trade. There is no clear evidence of a central role for DPRK state institutions in selling methamphetamine or organizing the trafficking of methamphetamine. Evidence of direct DPRK state involvement in drug trafficking to
Taiwan and Japan emerged regularly in the past.

Reports of non-narcotics related acts of criminality in the DPRK suggest that DPRK tolerance of criminal behavior may exist on a larger, organized scale, even if no large-scale narcotics trafficking incidents involving the state itself have come to light. Press, industry, and law enforcement reports of DPRK links to large-scale counterfeit cigarette trafficking in the North Korean Export Processing Zone at Rajiin (or Najin) continue. It is unclear the extent to which DPRK authorities are complicit in this illegal activity, although it is likely that they are aware of it, given the relatively high-profile media reports. In addition, counterfeit $100 U.S. notes called “supernotes” (because they are so difficult to detect), continue to turn up in various countries, including in the United States. There are reports, for example, of supernote seizures in San Francisco and a very large supernote seizure in Pusan, South Korea during 2008 and 2009. Supernotes are uniquely associated with the DPRK, but it is not clear if recent seizures are notes which have been circulating for some time, or if they are recently-counterfeited new notes.

Agreements and Treaties. The DPRK is a party to the 1988 United Nations (UN) Drug Convention, the 1961 UN Single Convention as amended by the 1972 Protocol, and the 1971 UN Convention on Psychotropic Substances.

Cultivation/Production. For many years, it has been alleged that poppies are cultivated in the DPRK, with the opium converted into heroin and then trafficked by state organs for profit. However, it has not been possible to confirm such illicit cultivation, and there has not been a heroin trafficking incident with a DPRK connection for many years. There are also several known factories in the DPRK that could produce very pure heroin and methamphetamine drugs, and there have been cases of large-scale smuggling of pure methamphetamine drugs from the DPRK to Japan and Taiwan as recently as 2002.

IV. U.S. Initiatives and Programs
The Department of State has no evidence to support a clear finding that DPRK state narco-trafficking has either stopped or is continuing. The absence of any seizures linked directly to DPRK state institutions, especially after a period in which seizures of very large quantities of drugs regularly occurred, does suggest considerably less state trafficking, and perhaps a complete end to it.

On the other hand, press reports of continuing seizures of methamphetamine in Asia, which can be traced back to an apparent DPRK source, suggest continuing manufacture and sale of DPRK methamphetamine to criminal traffickers. Large-scale trafficking of counterfeit cigarettes from the DPRK territory also continues and suggests that enforcement against notorious organized criminality in the DPRK is lax.

It is likely that the North Korean government has sponsored narcotics trafficking and other criminal activities in the past. The Department of State has insufficient information to confirm that the DPRK-state is no longer involved in manufacture and trafficking of illicit drugs, but if such activity persists, it is certainly on a much smaller scale.

Posted in Arms shipment, Counterfeiting, Drug smuggling, Illicit activities, Tobacco | Comments Closed

DPRK diplos arrested for smuggling (again)

Sunday, November 22nd, 2009

UPDATE: According to the Boston Herald, the diplomats were sentenced to eight months in prison.

ORIGINAL POST: It is no secret that North Korean diplomats and embassies are self-financing. In fact, they are profit earning and they must remit funds back to Pyongyang. While this means that DPRK diplomatic relations are not a drain on the treasury, as is typically the case with other countries, it does mean that the DPRK’s official representatives are more likely to make headlines for their business dealings rather than political statements.

And so here is the latest installment in this saga from Reuters:

Swedish police have arrested two North Korean diplomats on suspicion of smuggling 230,000 cigarettes into the Nordic country, the Swedish Customs Office said Friday.

The pair, a man and a woman who have diplomatic status in Russia, were stopped by Swedish customs officers Wednesday morning as they drove off a ferry from Helsinki, the Finnish capital.

Customs officials discovered Russian cigarettes in the car driven by the couple, Swedish Customs spokeswoman Monica Magnusson told Reuters.

The two North Koreans claimed diplomatic immunity.

“They were accredited as diplomats in Russia, but had no accreditation in Sweden,” she said. “They were arrested on suspicion of smuggling.”

Magnusson added that the pair were still being held by Swedish police and that she was not aware of them having any contact with North Korean officials since their arrest.

Sweden’s Foreign Ministry said it had been informed of the arrests but would not comment directly on the matter, saying it was a criminal case and was being handled by the police.

Foreign Ministry spokeswoman Cecilia Julin said foreign diplomats are only immune from criminal prosecution in countries where they have been accredited with the authorities.

“If you come to Sweden and commit a crime, you’re just like any other foreign national,” she said.

Sweden is one of only seven countries to have an embassy in North Korea, treated by much of the world as a rogue state due to human rights abuses and its possession of nuclear weapons despite opposition by the international community.

The Foreign Ministry said the arrests were primarily a police matter, but that the North Korean embassy in Sweden was in contact with the ministry over the matter.

An official at the North Korean embassy in Stockholm said earlier he had no knowledge of the arrests.

North Korean diplomatic staff were expelled from Sweden and two other countries in 1976 after a “massive” smuggling scheme was uncovered. According to Time Magazine (in 1976):

Not in years have so many diplomatic persona suddenly been declared non grata. In Oslo, members of North Korea’s diplomatic mission—three bureaucrats and a chauffeur—were given six days to pack up and get out. Foreign Ministry officials frostily informed North Korea’s Ambassador to Stockholm, Kil Jae Gyong, who is also accredited to Oslo, that he was no longer welcome in Norway. Similar scenes took place in Helsinki and Copenhagen, and as of last week, twelve North Korean embassy staffers had been unceremoniously ordered home to Pyongyang.

International politics had nothing to do with the abrupt action by the Scandinavian governments. What had happened was that North Koreans in all three countries* had been caught red-handed in a massive smuggling racket involving liquor, cigarettes and dope —apparently instigated by the financially hard-pressed government of President Kim II Sung. Officials in Norway estimated that their branch of the Kim gang had smuggled into the country at least 4,000 bottles of booze (mostly Polish vodka) and 140,000 cigarettes, which were then given surreptitiously to Norwegian wholesalers for distribution on the black market. In Denmark, the illegal goodies impounded so far included 400 bottles of liquor, 4.5 million cigarettes and 147 kilos of hashish, which police confiscated two weeks ago from two Danes who had just bought the drug from North Korean embassy staffers.

Personal Use. How long the North Koreans have been into smuggling as a sideline remains unclear, but Scandinavian officials have been closely watching their business dealings for about five months. In Norway, neighbors of the neat brick North Korean embassy in Oslo’s West End had long been puzzled by the constant movement of cars in and out of the compound and by the sight of mission staffers struggling in the backyard with huge mysterious boxes. In Denmark, customs officials got suspicious last month when the North Koreans imported 2.5 million duty-free cigarettes, allegedly for the “personal use” of one staffer.

The discovery of illegal activity by the North Koreans in Scandinavia may be only the iceberg’s tip. Five months ago in Cairo, Egyptian officials caught two North Korean diplomats with 400 kilos of hashish in their luggage. A North Korean official assigned to Malaysia has also been recalled after dealing in smuggled goods.

The North Koreans have protested their innocence, and mission staffers in Finland insisted that they would not leave the country. Nonetheless, Scandinavian officials have little doubt that the smuggling was ordered by Pyongyang as a desperate measure to help resolve the government’s horrendous financial crisis. Western experts estimate that North Korea, with a G.N.P. of only $4.5 billion, has a foreign debt of more than $2 billion, at least $500 million of which is owed to the capitalist world. North Korea not only maintains some 60 expensive missions abroad but also buys millions of dollars’ worth of advertising space in newspapers round the world every year to publicize the latest speeches of Kim II Sung. Faced with a severe shortage of hard Western currency, officials speculate, North Korean diplomats turned to smuggling to support their missions and pay for the ads, sending any excess profits home to Pyongyang.

The DPRK embassy has also been accused of smuggling in Pakistan.

Sometimes the DPRK embassy staff make “good” business decisions.

Good article here with further info (h/t OneFreeKorea).

2007 CRS report: Drug Trafficking and North Korea: Issues for U.S. Policy

You could probably write a series of books on the DPRK embassies in Russia and China.

And just for the record: Sweden–the North Koreans are not the only ones doing this–everyone is. When I lived in Europe over 15 years ago I talked with fellow teenagers about doing this! If you want to increase people’s incomes, increase tax receipts, and lower the incomes of mobsters and bootleggers–lower your cigarette taxes!

Read the full stories here:
Diplomats arrested for cigarette smuggling
Reuters
Jens Hansegard
11/20/2009

SCANDINAVIA: Smuggling Diplomats
Time Magazine
11/1/1976

Posted in Alcohol, Counterfeiting, Drug smuggling, Illicit activities, International trade, Sweden, Tobacco | 3 Comments »

Bureau 39 update

Wednesday, August 12th, 2009

Vanity Fair has published a lengthy article about the DPRK’s mysterious Bureau 39 which is allegedly behind a number of illicit activities such as counterfeiting US currency and cigarettes, smuggling drugs and bilking western insurance companies with fraudulent claims. The full article is worth reading here. (h/t DPRK Studies)

Of immediate interest, here is the supposed location of Bureau 39 just south of the Grand People’s Study House:

Click image to enlarge

Here is a short excerpt:

Hamer’s three-year investigation—code-named Operation Smoking Dragon—began not with supernotes but with counterfeit cigarettes, which were being shipped by freight container from China into California ports by the millions. These, too, says Asher, originated in North Korea, and were the subject of a report by the Coalition of Tobacco Companies, one of whose investigators made an undercover visit, posing as a buyer, to North Korean factories in Pyongyang and the northeastern city of Rajin. These turn out fake Western brands, such as Marlboros, in such quantities that they generate as much as $720 million in gross revenue each year. Hamer set up a number of front operations to get inside the cigarette-smuggling business, and soon had many contacts who dealt with him as if he were a smuggler, too. In the spring of 2004, Hamer and his colleagues were asked by F.B.I. headquarters to see if they could acquire North Korean supernotes. One of Hamer’s best customers, Chao Tung “John” Wu, who eventually pleaded guilty to smuggling counterfeit currency, cigarettes, and narcotics, as well as conspiring to broker a deal for Chinese-made, shoulder-fired missiles, but died before he was sentenced, promised he could supply them with the help of a man who was a frequent visitor to North Korea—Wilson Liu. The notes were so good, Wu said at a secretly recorded meeting, “you can even go to Las Vegas and slide them into the machines—they take them right away.”

Posted in Arms shipment, Bureau 39, Counterfeiting, Drug smuggling, Illicit activities, Secretariat, Worker's Party | 1 Comment »

CRS report on DPRK counterfeiting

Monday, July 27th, 2009

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.

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

Tunnels, Guns and Kimchi: North Korea’s Quest for Dollars – Part II

Thursday, June 11th, 2009

Yale Global
Bertil Linter
6/11/2009

BANGKOK: The global economic meltdown has claimed an unexpected victim: North Korea’s chain of restaurants in Southeast Asia. Over the past few months, most of them have been closed down “due to the current economic situation,” as an Asian diplomat in the Thai capital Bangkok put it. This could mean that Bureau 39, the international money-making arm of the ruling North Korean Workers’ Party – which runs the restaurants and a host of other, more clandestine front companies in the region – is acutely short of funds. Even if those enterprises were set up to launder money, operational costs and a healthy cash-flow are still vital for their survival. And, as for the restaurants, their main customers were South Korean tourists looking for a somewhat rare, comfort food from the isolated North of the country. The waitresses, all of them carefully selected young, North Korean women dressed in traditional Korean clothing, also entertained the guests with music and dance.

But thanks to the global economic crisis, not only has the tourist traffic from South Korea slowed, the fall in the value of won has also reduced their buying power. The South Korean won plummeted to 1,506 to the US dollar in February, down from 942 in January 2008. No detailed statistics are available, but South Korean arrivals in Thailand – which is also the gateway to neighboring Cambodia and Laos – are down by at least 25 percent.

Though staunchly socialist at home, the North Korean government has been quite successful in running capitalist enterprises abroad, ensuring a steady flow of foreign currency to the coffers in Pyongyang. North Korea runs trading companies in Thailand, Hong Kong, Macau and Cambodia, which export North Korean goods – mostly clothing, plastics and minerals such as copper – to the region. At the same time, they import various kinds of foodstuffs, light machinery, electronic goods, and, in the past, dual-purpose chemicals, which have civilian as well as military applications. Those companies were – and still are – run by the powerful Daesong group of companies, the overt arm of the more secretive Bureau 39.

North Korea embarked on its capitalist ventures when, in the late 1980s and early 1990s, the country was hit by a severe crisis caused by the disruption in trading ties with former communist allies. More devastatingly, both the former Soviet Union in 1990 and China in 1993 began to demand that North Korea pay standard international prices for goods, and that too in hard currency rather than with barter goods. According to a Bangkok-based Western diplomat who follows development in North Korea, the country’s embassies abroad were mobilized to raise badly needed foreign exchange. “How they raised money is immaterial,” the diplomat says. “It can be done by legal or illegal means. And it’s often done by abusing diplomatic privilege.”

North Korea’s two main front companies in Thailand, Star Bravo and Kosun Import-Export, are still in operation. In the early 2000s, Thailand actually emerged as North Korea’s third largest foreign trading partner after China and South Korea.

Bangkok developed as a center for such commercial activities and Western intelligence officers based there became aware of the import and sale of luxury cars, liquor and cigarettes, which were brought into the country duty-free by North Korean diplomats. In a more novel enterprise, the North Koreans in Bangkok were reported to be buying second-hand mobile phones – and sending them in diplomatic pouches to Bangladesh, where they were resold to customers who could not afford new ones. In early 2001, high-quality fake US$100 notes also turned up in Bangkok and the police said at the time that the North Korean embassy was responsible as some of its diplomats were caught trying to deposit the forgeries in local banks. The North Korean diplomats were warned not to try it again.

The restaurants were used to earn additional money for the government in Pyongyang – at the same time, they were suspected of laundering proceeds from North Korea’s more unsavory commercial activities. Restaurants and other cash-intensive enterprises are commonly used as conduits for wads of bills, which banks otherwise would not accept as deposits.

For years, there have been various North Korean-themed restaurants in Beijing, Shanghai and other Chinese cities. But the first in Southeast Asia opened only in 2002 in the Cambodian town of Siem Reap. It became an instant success – especially with the thousands of South Korean tourists who flocked to see the ancient ruins of Angkor Wat. It was so successful that Pyongyang decided to open a second venue in the capital Phnom Penh in December 2003. A fairly large restaurant in the capital’s Boulevard Monivong, which offered indifferent Korean staple kimchi and other dishes and live entertainment by North Korean waitresses, closed earlier this year for lack of business.

In 2006, yet another Pyongyang Restaurant – as the eateries were called – opened for business in Bangkok. It was housed in an impressive, purpose-built structure down a side alley in the city’s gritty Pattanakarn suburb, far away from areas usually frequented by Western visitors but close to the North Korean embassy and the offices of its front companies in the Thai capital. This was followed by an even grander restaurant in Thailand’s most popular beach resort, Pattaya, which was also housed in a separate building with a big parking lot outside for tour buses. A much smaller Pyongyang restaurant opened in Laos’s sleepy capital Vientiane, but that one became popular not with South Korean tourists, but with Chinese guest workers and technicians. The Vientiane restaurant may be the only North Korean eatery that is still in operation.

After years of watching North Korea’s counterfeiting and smuggling operations, the United States began tightening the screws on Pyongyang’s finances in September 2005. This occurred after Banco Delta Asia, a local bank in Macau, was designated as a “financial institution of primary money-laundering concern.” The bank almost collapsed, and North Korea’s assets were frozen. The money was eventually released as part of an incentive for North Korea’s concession in the Six-Party talks and returned to North Korea via a bank in the Russian Far East. But, coupled with UN sanctions, the damage to North Korea’s overseas financial network was done – including the ability of Pyongyang’s many overseas front companies to operate freely. For example, the two-way trade between Thailand and North Korea peaked at US$343 million in 2006 – but then began to decline. It was down to US$100 million in 2007, and US$70.8 million in 2008.

Now with North Korea conducting a second nuclear test and firing off missiles, Washington has raised the possibility of the re-listing of North Korea as a state that supports terrorism. If that were to happen, many private companies would become hesitant to deal with Pyongyang and its enterprises for fear of being blacklisted by the US Treasury.

With its various money-making enterprises coming unstuck, Pyongyang is increasingly under pressure. The worldwide financial crisis has already put North Korea in a tight corner. There was never anything to suggest that the money earned by North Korea’s economic ventures abroad were to be used for social development at home, or to be spent on basic necessities such as putting food on the tables of the country’s undernourished people. Now, there won’t even be food for sale to South Korean tourists in the region.

Posted in Bureau 39, Cell phones, Counterfeiting, Drug smuggling, International trade, Kosun Import-Export, Restaurants, Star Bravo, Thailand | Comments Closed

DPRK general named in counterfeit scheme

Tuesday, June 2nd, 2009

According to Fox News:

A top North Korean general and close advisor to the country’s leader, Kim Jong-Il, has been named by U.S. and foreign intelligence agencies as a key figure in the production of high-quality counterfeit $100 bills, called supernotes, according to documents and interviews cited by The Washington Times.

North Korean Gen. O Kuk-ryol, who was recently promoted to the country’s powerful National Defense Commission, is said to be in charge of creating the false $100 bills, which are produced to look nearly indistinguishable from authentic U.S. banknotes. Several members of the general’s family are also believed to be involved, the Washington Times reported.

A government report obtained by the Washington Times from a diplomatic source names Gen. O as one of the regime’s most powerful military figures, and the key person in charge of facilitating the succession of Kim Jong-Il by his third son, Kim Jong-un. The North Korean leader suffered a stroke in August, and his appearance in recent months suggests he is in ill-health.

The information about the general in the report was confirmed by a senior U.S. Intelligence official as well as by additional officials with knowledge of North Korean activities, the Washington Times reported.

North Korea has been linked to counterfeiting for many years, but the recent report is unusually detailed in its account of how North Korea is using illegal activities to raise funds for the regime and its reclusive leader. The new details were released as the United Nations considers new economic sanctions against North Korea for an underground test of a nuclear weapon last week.

The North Koreans deny the allegations.

You can read previous posts about counterfeiting here.

An organization chart of the DPRK leadership can be seen here in PDF format. Michael Madden constructed a biography of Gen. O which you can view here.

The Washington Times was founded by the Rev. Sun Myung Moon, who met Kim il Sung, and was responsible for the construction of the Potonggang Hotel in Pyongyang and Pyonghwa Motors in Nampo.

You can find the full Washignton Times story here:
N. Korea general tied to forged $100 bills
Washington Times
Bill Gertz
6/2/2009

Posted in Counterfeiting | Comments Closed

DPRK not about to collapse

Sunday, May 31st, 2009

Newsweek has an interesting article which makes the case that the DPRK economy is not as bad as the public tends to think. According to the article:

…North Korea isn’t broke—and its economy has been moving away from collapse in recent years-. The Hermit Kingdom may not be getting rich—the CIA estimates its GDP at roughly $40 billion, ranking 96th in the world. But it’s not failing either, and for the past decade, its economy has grown at an average rate of about 1.5 percent a year, according to South Korean statistics. While Seoul estimates that the North’s GDP shrank by 2.3 percent last year, some analysts say it actually expanded, arguing that South Korea’s recent figures on the North are deflated for political purposes.

To understand how the Dear Leader has managed this, you must first drop a few of the myths surrounding his country. First, the North Koreans haven’t been living in caves for the past two decades, nor is their economy de-industrializing, as is sometimes reported. Instead, with help from Beijing, Pyongyang has revamped its outdated infrastructure in recent years and repaired the mining facilities that were battered by massive floods during the mid-’90s. It now aims to shift from recovery to growth, with a focus on steel production, mining and light-industrial manufacturing.

Second, the North doesn’t have to rely on the black market to support itself. True, Pyongyang has sold missiles to Iran, Syria and Pakistan, and annual revenue from such exports is roughly $100 million, but analysts say that other illicit activities like drug trafficking and counterfeiting add very little to that sum. According to a former U.S. diplomat in East Asia who asked not to be named discussing sensitive intelligence, during the Bush years Washington investigated the oft-heard counterfeiting accusations, and found that the notes in question had actually been produced privately by former Chinese military officials, in China. “The Treasury Department couldn’t find a single shred of hard evidence pointing to North Korean production of counterfeit money,” the American says.

The biggest myth is that North Korea remains isolated. Despite supposedly comprehensive sanctions, Pyongyang today has diplomatic and commercial relations with more than 150 countries, including most European Union members. North Korea trades its abundant gold reserves—estimated at 1,000 to 2,000 tons—in cities like London, Zurich and Hong Kong, and buys and sells shares on the New York Stock Exchange via a legitimate London-based brokerage firm it essentially owns. While there are no figures on the volume of such transactions, the former U.S. diplomat says that such activities are “a substantial source of hard currency for North Korea.” In recent years, European firms have also begun eyeing investment opportunities there; In 2004, the London-based energy firm Aminex signed a 20-year deal with Pyongyang for exclusive rights to explore on- and offshore oil-and-gas deposits. Other companies are looking for ways to exploit the North’s cheap labor supply, and while most of these deals have yet to take off for technical and political reasons, ties to the outside world are expanding. In 2008, the country’s overall trade rose 30 percent from the previous year, reaching a record $3.8 billion, including imports of $2.7 billion, according to Seoul’s Korea Trade-Investment Promotion Agency.

North Korea has proved adept at avoiding restrictions: when Tokyo slapped it with sanctions five years ago, Pyongyang simply reshuffled its deals, turning to the BRIC economies as well as South Korea and Singapore. Meanwhile, China now accounts for nearly three quarters of North Korea’s total trade, sending it crude oil, petroleum and manufactured goods in exchange for coal, steel and rare metals like tungsten and magnesite. The North’s natural resources have become a major growth engine: the Musan mine in the country’s northwest is now said to be one of the largest iron-ore fields in Asia, and could eventually yield 10 million tons of ore a year.

Finally, there’s the southern connection. Despite deteriorating relations between Seoul and Pyongyang, factories at the joint Kaesong Industrial Complex are still operating at full gear, earning the North about $35 million annually—enough for eight or nine No-dong missiles. And that figure was projected (before the current crisis hit) to jump to $100 million by next year, says Lim Eul Chul of Seoul’s Kyungnam University.

I should point out that the CIA estimate of the DPRK’s GDP is among the highest. Most other estimates are below $30 billion for 2008.

Read the full article here:
How Kim Affords His Nukes: The myth of a failing economy.
Newsweek
5/30/2009

Posted in 2002 Economic reforms, Aminex, Arms shipment, Counterfeiting, Drug smuggling, Economic reform, GDP statistics, Illicit activities, International trade, Statistics, Trade Statistics | 2 Comments »

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