Archive for the ‘Counterfeiting’ Category

Banco Delta Asia Says It Bought `Large Share’ of N. Korea Gold

Monday, December 11th, 2006

Bloomberg (Hat Tip DPRK Studies)
Stuart Biggs

Banco Delta Asia S.A.R.L., the Macau, China-based bank accused by the U.S. of money laundering for North Korea, said it bought gold from the communist state in a filing to the U.S. Treasury.

North Korea has made the unfreezing of about $24 million in assets held at Banco Delta Asia a pre-condition to returning to six-nation talks over its nuclear weapons program that broke off in September 2005. The U.S. alleged that the bank helped North Korean officials accept “surreptitious” multi-million dollar transactions, some linked to drug trafficking.

Banco Delta Asia, in an Oct. 18 letter to the U.S. Treasury Department by law firm Heller Ehrman LLP, said the bank “purchased a large share of the gold bullion produced by North Korea” prior to the allegations and no longer does so.

“Money could have been laundered, but there is no specific evidence that the bank was aware that it was being used for this purpose, nor that it facilitated any criminal activities,” the letter said. The bank “paid insufficient attention to maintaining its own books.”

Banco Delta Asia also said North Korea’s Tanchon Commercial Bank, described by the U.S. as the Pyongyang government’s main financial agent for sales of arms and ballistic missiles, remained a customer for three months after Tanchon was blacklisted by the U.S. in June 2005 “due to shortcomings in the information technology systems.”

The bank said it put in place new managers after the U.S. action and closed North Korean-related accounts, hired an outside firm to set up procedures against money laundering and asked the Treasury to reconsider its ruling.

“The Bank has not done any business with North Korean or North Korean-related entities for over a year and pledged not to do any in the future,” the letter said.

The six-party negotiations may resume on Dec. 18 or 19, Yonhap News Agency reported, citing unidentified South Korean government sources.


US Agencies releases stats on Supernotes

Friday, October 27th, 2006

From the US Treasury, Federal Reserve and Secret Service:

From the report:  p. 66

Since 1989, the U.S. Secret Service has led a counterfeit investigation involving the trafficking and production of highly deceptive counterfeit notes known as supernotes. The supernote investigation has been an ongoing strategic case with national security implications for the U.S. Secret Service since the note’s first detection in 1989. The U.S. Secret Service has determined through investigative and forensic analysis that these highly deceptive counterfeit notes are linked to the Democratic People’s Republic of Korea (DPRK) and are produced and distributed with the full consent and control of the North Korean government.

In March 2005 and again in June 2006, Interpol issued an “Orange Alert” regarding the DPRK and its continued quest to obtain or purchase printing supplies that would facilitate the counterfeiting of U.S. currency. The U.S. Secret Service is working very closely with the intelligence community in analyzing supernote distribution activity and monitoring the broader illicit affairs of the DPRK. Over the course of this sixteen-year investigation, approximately $22 million in supernotes has been passed to the public (table 6.5), and approximately $50 million in supernotes has been seized by the U.S. Secret Service.


Bank of Korea sees hardship in sanctions

Tuesday, October 24th, 2006

From the Joong Ang Daily:
Bank sees North pain if sanctions take hold
Choi Hyung-kyu, Ser Myo-ja

The Bank of Korea said yesterday, in a report prepared for a legislator, that international financial sanctions on North Korea could deal a heavy blow to the North’s shaky economy.

In an assessment for Representative Yim Tae-hee of the Grand National Party, the central bank said a 30-percent reduction in foreign currency inflows to North Korea would lower economic activity by three-quarters of a percentage point. A halving of North Korea’s external trade, the paper said, would reduce economic growth by nearly 5.5 percentage points; a 70-percent falloff in trade would drop economic output by 8.25 points.

Estimates of economic activity in centrally planned economies are difficult at best, however, and North Korea’s secrecy makes such estimates even more tenuous.

“When international financial institutions join in the sanctions and cut the influx of the annual $800 million in foreign currency to the North, Pyongyang will face serious trouble,” Mr. Yim said.

He added, without citing sources, that the North earns about $300 million through legitimate activities, such as inter-Korean economic cooperation deals and remittances from North Koreans abroad, adding that counterfeiting and drug trafficking bring in about $500 million more annually.

Christopher Hill, the U.S. assistant secretary of state for Asia, arrived in Hong Kong on Saturday to meet, among others, William Ryback, the deputy chief executive of the Hong Kong Monetary Authority.

“The U.S. team asked the Hong Kong authorities to cooperate in its effort to freeze North Korean assets in Hong Kong and Macao,” a Hong Kong source said yesterday. “Hong Kong gave a positive answer.”

Another Hong Kong government source said Mr. Hill also asked the government there to help inspect suspect North Korean ships.

“A North Korean ship under a U.S. intelligence watch is on its way to Hong Kong,” the official said. “Mr. Hill asked the authorities to inspect the boat thoroughly when it enters port here.”


Suspects Admits Smuggling N.Korean ‘Supernotes’

Monday, August 28th, 2006

From the Choson Ilbo

A Californian man indicted on charges of smuggling counterfeit dollars into the U.S. testified at his trial that the high-quality counterfeit US$100 bills or “supernotes” were manufactured in North Korea, the National Intelligence Service said Monday. The NIS reported to the National Assembly’s Intelligence Committee that the man admitted conspiracy to smuggle the supernotes and admitted where the phony bills were made.

The man is a Chinese-American named Chao Tung Wu, the NIS said. There have been reports in the U.S. media quoting anonymous government officials as saying the supernotes were made in North Korea, but this is the first time the claim was confirmed in legal testimony by a chief suspect.

A joint taskforce of the FBI, the CIA, the Justice Department and the Treasury conducted secret investigations and rounded up 59 suspects around the U.S. on charges of smuggling counterfeit dollars and cigarettes in August last year. The taskforce worked under the code name “Smoking Dragon” and “Royal Charm” between 1999 and 2005. It alleges suspects attempted to smuggle millions worth of forged dollars and some $40 million worth of counterfeit cigarettes.

The case drew much publicity not only because of its sheer scale but also because of North Korea’s suspected involvement. The Treasury Department led the investigation that ended up designating Macao’s Banco Delta Asia as Pyongyang‘s “primary money laundering concern” on Sept. 15 last year, a month after the suspects were arrested.

“We should note that talk of political solutions between the U.S. and North Korea over the counterfeit dollars disappeared in South Korea and China since the end of last year,” a diplomatic source in Seoul said. Some until then claimed the U.S. was pressuring the North without clear evidence, but they lost their ground as Washington acquired evidence to support North Korea’s involvement.

The trial is likely to take one or two years, a diplomatic source said. If it ends with a guilty verdict for the main suspect for smuggling made-in-North Korea supernotes, it would get Pyongyang into serious trouble on the global stage. The North denies the charges and says the resulting sanctions amount to “theft.” The communist country in a statement last Saturday said the U.S. has produced no clear evidence so far. But the suspect’s guilty plea undermines the credibility of that claim.


North Korean cigarettes-big news day

Thursday, August 17th, 2006

Well the notion that the DPRK has been counterfitting cigarettes to raise hard currency has had a big day in the press.  I saw stories alone.

From Yonahp:

Fake cigarettes are major source of income for N. Korea: report

North Korea is believed to earn between US$500 million and $700 million a year by making and selling fake U.S. and Japanese cigarettes, a U.S. radio station reported Wednesday, quoting a former U.S. official.

“Counterfeit tobaccos are one of the largest, probably the largest single source of income for the North Korean regime,” David Asher said in an interview with the Washington-based Radio Free Asia.

Asher, who until July 2005 had served under former Assistant Secretary of State for East Asia and Pacific Affairs James Kelly, said the North’s communist regime operates as many as 10 plants to make fake U.S. and Japanese cigarettes.

Those plants are scattered throughout North Korea, including its capital, Pyongyang, and its eastern industrial zone, Rajin, he said.

The counterfeit cigarettes, Asher said, are usually packed and sent in containers to China and then to other Asian countries for sale.

“They need to start inspecting containers more aggressively,” he told the radio station, referring to a recent decision by Japan to block the North’s massive scheme to make counterfeit cigarettes.

Tokyo has recently ordered investigation into North Korean-made fake Japanese cigarettes reportedly circulated in China, according to Japanese media reports.

The amount of North Korean-made fake U.S. and Japanese cigarettes is estimated at about 2 billion packs a year, they said.

Asher claimed in an earlier report that as much as 40 percent of North Korea’s total earnings is believed to come from illegal activities such as counterfeiting, drug trafficking and weapons smuggling.

From the Daily NK (for the Japanese perspective):

‘Fake Cigarettes’ Japan Investigation on North Korean Authorities
North Korea reels in an annual income of $80mn~$160mn through counterfeit cigarettes 
By Yang Jung A, Reporter

At the Prime Minister’s residence last August 14th, Japan’s Deputy Chief Cabinet Secretary Suzuki Seiji who heads the ‘Special Investigation Team on Japanese abductees to North Korea’ initiated an official investigation on North Korean Authorities to combat the issue of counterfeit cigarettes.

A Japanese Newspaper ‘Mainichi’ (Daily News) reported that North Korea had been shipping large scale counterfeits of Japan’s leading cigarette brand ‘Mild Seven’ throughout China and South-East Asia in order to produce greater foreign currency.

The investigation by the ‘Special Investigation Team’ will focus on cracking whether or not North Korean authorities partook in the trafficking. On release of results, explicit countermeasures will be taken by the police, financial affairs, agriculture and fisheries and other ministries.

Last July 31st, Vice Minister Suzuki said at a ‘Special Investigation Team’ meeting that “There is a high possibility that North Korea is distributing ‘counterfeit cigarettes’ to foreign countries” and that severe measures will be taken.

The Japanese government argues that the flow of illegal foreign currency made through sales from fake cigarettes needs to be stopped if not at least for the persecution occurring in North Korea, and for the past few months has been pressurizing governments to take action.

A Japanese tobacco industry announced that masses of fake Mild Seven cigarettes were known to be circulating throughout China, North Korea and districts around the boarder. However, there is not yet confirmation that fake cigarettes are circulating in Japan.

Last May, the Japanese Maritime Bureau confirmed that a foreign vessel was found to be transporting fake Japanese cigarettes made in North Korea to South Korea and Taiwan. According to an U.S. press report the amount of fake cigarettes manufactured in North Korea and smuggled out of the country reaches $80-160 mn every year.



Is Singapore the new Macao?

Saturday, August 5th, 2006

from the donga:

Singapore: N. Korea’s New Money Haven

It is reported that after the U.S. froze North Korea’s accounts in Macao’s bank, North Korea changed its account to a bank in Singapore.

The U.S. Department of Treasury listed this bank as being related to North Korea’s illegal funds and is currently conducting an investigation. There are also speculations that North Korean Foreign Minister Baek Nam Soon’s two visits to Singapore around the time of the ASEAN Regional Forum (ARF) that was held in Kuala Lumpur, Malaysia, had a connection to the funds.

Recently, a source in Washington D.C. said, “With the American administration raising its pressure on North Korea’s funds in Macao, North Korea attempted to change its bank to Singapore, and the new haven is known as a small bank referred to as O Bank.”

On August 3, a U.S. government official also said in an interview with Dong-A Ilbo, “O Bank is a problem bank. This bank is on the list of banks related to North Korea, which the U.S. government keeps a close eye on.” With the U.S. tracing its funds, North Korea tried to disperse them, and by the official’s statement it was officially confirmed that Singapore, an international finance city, has become one of the safe havens.”

With the relation between O Bank and North Korea surfacing, Foreign Minister Baek’s two visits to Singapore around July 28, while ARF was held, are also drawing attention. Minister Baek left Pyongyang on July 25, stopped in Beijing, spent two days in Singapore and finally arrived at Kuala Lumpur in the afternoon of July 27. At the time, the South Korean government explained, “Minister Baek stopped by Singapore for kidney dialysis. It wasn’t for any particular reason.” Nevertheless, on his journey back home, Minister Back spent three days, from August 1 to 3, in Singapore, meeting with Singapore government officials.

When asked by Dong-A Ilbo if Minister Baek’s stay in Singapore was related to O Bank, the U.S. government official answered, “Don’t you think that it would be logical to think so?”

It was also reported that the U.S. government has grasped considerable information regarding the creation and distribution of North Korean counterfeit dollar bills, based on the testimonies of one or two North Koreans apprehended last year.

In the first half of last year, the Department of Justice arrested 87 Taiwanese triad gang members in Long Beach, California, and Atlantic City, New Jersey. They were charged with smuggling counterfeit dollar bills and tobacco. A U.S. government official stated, “It is true that some North Korean were among the arrested 87. However, they will not be punished because they cooperated with the investigation.”


DPRK inflation on the increase

Tuesday, August 1st, 2006

from the Daily NK:

Recently, concerns mounted that a counterfeit $100 “supernote” was being used as “official currency” between North Korean traders.

For a while, the supernote was used in areas of China in common trade and drug smuggling. The counterfeit money began circulating in Jangmadang and then North Korean markets, as “unofficial forms of trade”.

As of early this year, the supernote circulated amongst North Korean common traders was valued at $70, and by June, had spread throughout the whole nation. It appears that the counterfeit money is being accepted as “income currency”.

This information was obtained by North Korean and Chinese tradesmen residing both in and outside of North Korea.

On July 26th, Park Chul Woong (pseudonym, 34), a Korean-Chinese merchant in Dandong, China said “It has been a while since counterfeit money has been used as a form of transaction in North Korea. Now, tradesmen use the supernote amongst themselves to do business”.

Park said “Even if you make a small deal of $1,000, this still equates to 600 sheets of North Korean 5,000 won notes. (The largest North Korean bill) As people do not want to carry this amount of money with them, merchants use the counterfeit money instead”.

Also, Park said “Merchants do not deal with North Korean currency as they do not trust it. When inflation rises rapidly as in 2002, merchants sit around and discuss how the money has no value. However, there is nothing you cannot do with the dollar. As the dollar is scarce, merchants have resorted to using fakes.”

The traders complain that the North Korean currency has lost its value so much, that if they were to use the money for trade at markets they would have to carry numerous bags of it. They also said “Every day the market price fluctuates dramatically. The more you trade with North Korean money, the greater the loss.”

No control of counterfeit money
Last May, Kim Young Man (pseudonym, 38), a Korean-Chinese who went to Shinuiju for an Investment Conference, said “North Korea is unhestitantly using the counterfeit $100 note as real $70. It is of concern as to how far they will take this.”

He said “Even business employees of the National Security Office or the Department of the People’s Armed Forces General Logistics Bureau use counterfeit when paying Chinese tradesman for products such as seafood and hand-made goods. If North Korean authorities discover that counterfeit money is circulating in North Korea on such a large scale, chaos could ensue.”

Also, he said “Merchants generally carry dollars. Rich merchants store their real currency in safekeeping and use counterfeit money for “exchange”. He continued, “Although the whole world has eradicated counterfeit money, North Korea is still far behind”.

At Dandong’s economic development zone, a Chinese tradesman said “The U.S. alleges that it will eradicate the counterfeit money, but there has been little change. The value of the counterfeit money at $70 is not depreciating”.

On the one hand, tradesmen say “Apart from the supernotes manufactured by North Korean authorities, computer-made supernotes have been discovered and rejected as a means of business.”

At present, it is difficult to estimate how much counterfeit money is circulating around North Korea. However, if the counterfeit money is accepted amongst common traders at Jangmadang, this means that the counterfeit currency has reached a large scale and is spreading further.

This substantiates the failure of the North Korean authority’s implementation of foreign transaction of the Euro in December, 2002.

Last July, at the Interpol Conference on counterfeit money in Riom, France, North Korea was marked as “a hotbed of counterfeit money”. It is expected that the U.S. will take drastic measures to control the counterfeit dollars circulating throughout North Korea as official currency.


U.S. hails Bank of China’s freeze

Friday, July 28th, 2006

Joong Ang Daily
July 28, 2006

North’s accounts were in Macau branch, Korean legislator says 

The United States is encouraged by Beijing’s “affirmative steps” in freezing North Korean accounts at a Chinese bank, White House Spokesman Tony Snow said on Wednesday.

His remarks were the first official confirmation of a South Korean lawmaker’s earlier claim that the Bank of China had frozen North Korean assets. Beijing remained silent on the issue after Grand National Party lawmaker Park Jin revealed the news, citing an unidentified former White House official as his source, after a trip to Washington.

Mr. Park said yesterday that the frozen accounts he was referring to were only in the Bank of China’s Macau branch, but that he is looking into whether the Beijing branch will make a similar move.

Mr. Snow was asked if Washington had knowledge of China’s actions in regard to freezing accounts. He answered yes, and said the move was related to counterfeiting issues.

In a related development, Stuart Levey, the undersecretary for terrorism and financial intelligence of the U.S. Treasury department warned yesterday in an interview with Yonhap News Agency that North Korea could use funds legally gained through trade for military purposes. A diplomatic source in Washington said yesterday the remarks by Mr. Levey could mean Washington might pressure Seoul about the Kaesong Industrial Complex and the Mount Kumgang tours, through which Pyongyang receives cash from the South.

A government official in Seoul said yesterday that if Washington tries to alter the current course of inter-Korean projects it would meet “heavy resistance” from Seoul.

Unification Minister Lee Jong-seok has repeatedly said the inter-Korean projects would not be influenced by North Korea’s recent missile salvo.

In October last year, the U.S. Treasury department designated eight North Korean entities as being involved in the proliferation of weapons of mass destruction. Under U.S. law, all transactions between the designated entities and any person in the United States are prohibited while all assets of these entities are frozen in territories under U.S. jurisdiction. 


China freezes DPRK bank accounts I

Monday, July 24th, 2006

This is big news.  The Bank of China has frozen DPRK-owned bank accoounts for one of two reasons:

1.  The Bank of China plans to list on the New York Stock Exchange (NYSE), as a result, it has to comply with western regulations and concerns…making its role as the new faciltator of DPRK monetary transactions more difficult to accept.  

2.  The Chinese now suspect the DPRK of counterfeiting the Chinese Yuan.

I am not sure of the real reason just yet.  Anyway, here is the coverage in the South Korean press: 

From the Joong Ang Daily:

Bank of China freezes North’s money accounts
Lawmaker, citing U.S. official, blames counterfeiting concerns
by Brian Lee 

The state-run Bank of China has frozen its North Korean bank accounts due to concerns over counterfeit money, a Grand National Party lawmaker claimed yesterday.

Lawmaker Park Jin said his information came from a former senior U.S. government official of the Bush administration, who served at the White House.

Nevertheless, an official with the Foreign Ministry said yesterday that there was no information in regard to Mr. Park’s claim while the Chinese Embassy to Seoul said it was not in a position to comment.

Mr. Park visited in Washington recently with ruling and opposition lawmakers.

The lawmaker said that after Washington initiated an operation called “Smoking Dragon” in September of last year, which was designed to target North Korean counterfeit activities, a Macao-based bank was put under financial sanctions and North Korea moved its bank accounts to China in response.

Mr. Park said the former official told him that continuing probes by Washington led to the measure taken by the Chinese bank.

Mr. Park said yesterday that the Chinese bank was opting to list its stock at the New York Stock Exchange and was told it had little choice but to freeze the accounts.

The lawmaker said he didn’t know the exact timing of when the Chinese bank had frozen the North Korean accounts but speculated that a recent rift between Beijing and Pyongyang was due in part to that incident.

China agreed to a UN resolution passed earlier this month that was drafted in response to North Korea’s missile launch, which occurred despite Beijing’s efforts to stop it.

Mr. Park asserted that Pyongyang is also forging Chinese yuan currency. However, Unification Minister Lee Jong-seok who was asked about it yesterday at a briefing to the National Assembly’s Unification, Foreign Affairs and Trade Committee, said Seoul had no information one way or the other about the forging.

From the Korea Times:

China freezes N.K. accounts: lawmaker
By Lee Joo-hee

A South Korean lawmaker yesterday claimed that the Bank of China froze its North Korean accounts in relation to the alleged counterfeiting activities of the communist regime.

Citing former and incumbent Washington officials, Grand National Party lawmaker Park Jin said the latest move by China was connected with the United States’ financial measures against North Korea’s counterfeiting and laundering of money.

“This is a virtual ban against dealing with North Korea by China, leaving North Korea all the more devastated,” Park said. Park was in Washington to attend a seminar that started on July 15.

Last September, the U.S. Treasury Department cautioned American banks from dealing with Banco-Delta Asia, a Macau-based bank, which allegedly helped circulate North Korea’s counterfeit U.S. dollars.

The measure eventually forced the Macau bank to freeze the North Korean accounts, which amounted to $24 million.

North Korea immediately protested the move and has since boycotted the six-party talks.

“According to U.S. officials, although the $24 million may not appear to be a large sum, North Korea is sensitive to this issue because most of the funds are used for bribery and purchases of weapon components,” Park said.

Park said that following the freeze of BDA, the U.S. Treasury Department trained their radars onto other banks in Macau. North Korea has moved its accounts into banks in China since, he said.

Washington is currently evaluating the data from BDA for proof that North Korea counterfeited U.S. dollars.

North Korea is apparently concerned that the BDA measure could also affect some $200 million to $300 million accounts that are scattered in Singapore, Austria, Switzerland and Russia.

In yesterday’s parliamentary session, Park questioned Unification Minister Lee Jong-seok over North Korea’s counterfeit currency.

Park contended that North Korea was also counterfeiting Chinese yuan, but Lee responded that he did not have any specific information about it.

Reports in Tokyo yesterday said Japan was contemplating revising foreign exchange and trade laws, as part of its additional sanctions on North Korea over its missile launches.

The revisions are likely to require about 300 Japanese-based companies with business ties with North Korea to suspend exports of about 40 materials to destinations that are believed to be linked to the North’s missile program, the Yomiuiri newspaper reported.

It will require the companies to report to the Trade Ministry the details of their exports of targeted materials, including large trucks, titanium alloys and carbon fiber, the Yomiuri said.

Japan is also considering banning cash remittances and freezing North Korean assets in the country.

From Yonhap:

Chinese bank said to freeze N.K. accounts for currency counterfeiting

North Korea is suspected of having printed fake Chinese currency, which prompted the Bank of China (BOC) to freeze all of its North Korean accounts in an apparent retaliation, a South Korean legislator asserted on Monday.

Quoting a number of unidentified U.S. officials, Rep. Park Jin of the main opposition Grand National Party (GNP) said the freezing of North Korean accounts at the BOC is tantamount to virtual imposition of sanctions by Beijing on the North.

“I understand the North is even more frustrated because this means China is in fact imposing sanctions on North Korea,” the opposition lawmaker told Yonhap News Agency in a telephone interview.

Park has just returned to the country after a three-day trip to Washington along with 12 other ruling and opposition party legislators.

The GNP lawmaker claimed Washington may have been aware of the Chinese bank’s move as early as late last year when its Treasury Department imposed sanctions on a Macau bank suspected of circulating counterfeit U.S. dollars printed in the North.

“I suspect (the United States) did not announce the part related to China considering the sensitivity of the issue,” Park said.

He later claimed Beijing may be working with Washington to crack down on Pyongyang’s alleged counterfeiting of Chinese yuan.

“Following U.S. dollars, North Korea is also counterfeiting China’s currency, the yuan,” Park said during a meeting of the National Assembly Unification, Foreign Affairs and Trade Committee.

The claim, if found true, is expected to further complicate the stalled negotiations over North Korea’s nuclear weapons program as the United States has been looking to China to convince the North to return to the multilateral talks.

Pyongyang has been staying away from the talks since November, shortly after Washington imposed sanctions on the Macau bank, Banco Delta Asia.


DPRK super notes are of super quality

Saturday, July 22nd, 2006

From the New York Times (via NK Zone):

The counterfeits were nearly flawless. They featured the same high-tech color-shifting ink as genuine American bills and were printed on paper with the same precise composition of fibers. The engraved images were, if anything, finer than those produced by the United States Bureau of Engraving and Printing. Only when subjected to sophisticated forensic analysis could the bills be confirmed as imitations.

Counterfeits of this superior sort — known as supernotes — had been detected by law-enforcement officials before, elsewhere in the world, but the Newark shipment marked their first known appearance in the United States, at least in such large quantities. Federal agents soon seized more shipments. Three million dollars’ worth arrived on another ship in Newark two months later; and supernotes began showing up on the West Coast too, starting with a shipment of $700,000 that arrived by boat in Long Beach, Calif., in May 2005, sealed in plastic packages and wrapped mummy-style in bolts of cloth.

In the weeks and months that followed, federal investigators rounded up a handful of counterfeiting suspects in a series of operations code-named Royal Charm and Smoking Dragon. This past August, in the wake of the arrests, Justice Department officials unsealed indictments in New Jersey and California that revealed that the counterfeits were purchased and then seized as part of an operation that ensnared several individuals accused of being smugglers and arms traffickers, some of whom were suspected of having connections to international crime rings based in Southeast Asia.

The arrests also prompted a more momentous accusation. After the indictments were released, U.S. government and law-enforcement officials began to say in public something that they had long said in private: the counterfeits were being manufactured not by small-time crooks or even sophisticated criminal cartels but by the government of North Korea. “The North Koreans have denied that they are engaged in the distribution and manufacture of counterfeits, but the evidence is overwhelming that they are,” Daniel Glaser, deputy assistant secretary for terrorist financing and financial crimes in the Treasury Department, told me recently. “There’s no question of North Korea’s involvement.”

Last September, the Treasury Department took action to signal its displeasure. The department announced that it was designating Banco Delta Asia, a bank in Macao with close ties to North Korea, a “primary money-laundering concern,” a declaration that ultimately led to the shutting down of the bank and the freezing of several key overseas accounts belonging to members of North Korea’s ruling elite. In a public statement, Treasury officials accused Banco Delta Asia of facilitating North Korea’s illicit activities by, among other things, accepting “large deposits of cash” from North Korea, “including counterfeit U.S. currency, and agreeing to place that currency into circulation.”

The counterfeiting of American currency by North Korea might seem, to some, to be a minor provocation by that country’s standards. North Korea, after all, has exported missile technology in blatant disregard of international norms; engaged in a decades-long campaign of kidnapping citizens of other countries; abandoned pledges not to pursue nuclear weapons; and most recently, on July 4, launched ballistic missiles in defiance of warnings from several countries, including the United States.

But several current and former Bush administration officials whom I spoke with several months ago maintain that the counterfeiting is in important ways a comparable outrage. Michael Green, a former point man for Asia on the National Security Council, told me that in the past, counterfeiting has been seen as an “act of war.” A current senior administration official, who was granted anonymity because of the sensitivity of relations between the United States and North Korea, agreed that the counterfeiting could be construed by some as a hostile act against another nation under international law and added that the counterfeits, by creating mistrust in the American currency, posed a “threat to the American people.”

Whether counterfeiting constitutes an economic threat, the issue of North Korean counterfeiting is aggravating diplomatic relations between the two countries. According to some analysts, the freezing of North Korea’s bank accounts helps explain the regime’s decision to launch its missiles on July 4. Bill Richardson, the governor of New Mexico and a former U.S. ambassador to the United Nations, visited North Korea last fall, not long after the Treasury Department’s crackdown. When I spoke with him in mid-July, he said that the missile launch was in part a protest of the department’s actions. “When I was in Pyongyang in October,” he said, “my interlocutor raised the counterfeiting issue and the freezing of the assets as a major irritant for the government.” He continued, “The counterfeiting issue, and the crackdown on Banco Delta Asia, is a major factor which is contributing to Kim Jong Il’s posturing.”

How much of a concern should the counterfeiting be? Is it worth adding the issue to an already volatile diplomatic situation? The current South Korean government, which has made détente with North Korea a centerpiece of its foreign policy, has shied away from an open confrontation with the regime over the issue. Even many American law-enforcement officials who are upset that North Korea is counterfeiting nonetheless question the view that the counterfeiting poses an urgent threat. In Congressional testimony delivered in April, Michael Merritt, deputy assistant director of investigations for the Secret Service, which is responsible for protecting the nation’s currency from counterfeiters, said that the supernote was “unlikely to adversely impact the U.S. economy based on the comparatively low volume of notes passed.”

The Bush administration, though, is taking a hard line. In response to a question after a speech in Philadelphia in December, President Bush himself suggested that counterfeiting is among the regime’s gravest affronts. “North Korea’s a country that has declared boldly they’ve got nuclear weapons,” he said. “They counterfeit our money. And they’re starving their people to death.”

Funny Money

In December 1989, while counting a stack of $100 bills, an experienced money handler in the Central Bank of the Philippines became suspicious about one bill in particular. It passed the usual tests for authenticity but still felt a bit odd. The bill eventually found its way to the offices of the United States Secret Service. All counterfeits sent to the Secret Service headquarters, in Washington, are examined under a microscope, scrutinized in ultraviolet light and otherwise dissected to reveal their flaws and shortcomings, as well as the printing techniques used in their manufacture. This information is then cross-checked with a database of all known counterfeits.

As the mystery note underwent the usual scrutiny, it became apparent that this was no ordinary counterfeit. For starters, it was printed on paper made with the appropriate mix of three-quarters cotton and one-quarter linen of real U.S. currency. Making secure paper with this mix requires a special paper-making machine rarely seen outside the United States.

In addition, the note was manufactured using an intaglio press, the most advanced form of currency-printing technology available. These intaglio presses are far more expensive than ordinary offset, typographic or lithograhic presses, which yield inferior counterfeits. An intaglio press coats the printing plates with ink, and then wipes the surface clean, leaving behind ink in the recesses of the engraving. The press then brings paper and plate together under pressure, so that the ink is forced out of the recessed lines and deposited on the paper in relief. While counterfeits made using the intaglio process had been seen on rare occasions before, this note surpassed all of them in the quality of the engraving.

As with other new species of counterfeits arriving in the offices of the Secret Service, the bill was given its own flat-file drawer and christened with a sequential number: C-14342. In time, its remarkable quality earned it its more informal honorific: the supernote. But as soon became clear, the supernote was merely one member of a family of counterfeit notes. Technicians at the Secret Service soon linked it to another intaglio note detected around the same time, C-14403. This counterfeit had a few defects that the note from the Philippines did not, suggesting it was manufactured before C-14342. Nonetheless, C-14342 was soon known by the name Parent Note 14342, or PN-14342.

The Secret Service has drawn up what looks like a genealogical chart of these and related bills, which agents showed me during a visit to their Washington offices this spring. The chart displays the many members of the supernote clan: C-21555, for example, the first “big head” $100 (so-called because of the design of the most recent U.S. bills), which was initially identified in London; and C-22500, a more recent arrival that appeared in Macao. The family, which now has 19 members and remains unparalleled even in the world of high-quality counterfeits, also includes two $50 notes: C-20000, a small-head supernote that appeared in Athens, in June 1995; and C-22160, a big-head version, first sighted in Sofia, Bulgaria.

Thanks to sophisticated tools, including mass spectroscopy and near-infra-red analysis, along with old-fashioned visual inspection, the labs of the Secret Service have established genetic links between the family members. These links are not a matter of resemblance so much as they are an indication of a common ancestry: the notes in the PN-14342 family have been created by an individual or an organization using the same equipment and the same materials, and most likely operating from a single location.

As the number of supernotes multiplied, the question arose: who created them? In theory, only governments can buy intaglio printing presses used for making money, and only a handful of companies sell them. Those facts alone pointed toward government involvement, but for some time there was no consensus as to which nation was behind the counterfeiting. Many of the supernotes surfaced in the Middle East, notably in the Bekaa Valley of Lebanon and in Tehran. In 1992, Bill McCollum, a Florida congressman and chairman of the House Task Force on Terrorism and Unconventional Warfare, issued a report accusing Iran of printing the supernotes. The report estimated that the value of supernotes in circulation might eventually approach “billions.”

The Secret Service, however, distanced itself from this accusation. In a letter written in 1995 in response to a Government Accounting Office report on counterfeiting overseas, the Secret Service called the task force’s allegations “unsubstantiated” and characterized its conclusions as being based on “rumor and innuendo.” In reality, evidence was pointing elsewhere.

A Picture Emerges

With a country as closed and secretive as North Korea, information about government activities is hard to come by. But in the late 1990’s, a new source of information arrived in the form of defectors. Starvation, corruption and desperation had prompted thousands of North Koreans, many of them government officials, to flee the country. In 1997, two high-ranking bureaucrats — Hwang Jang Yop, a former secretary of the North Korean Workers’ Party, and Kim Duk Hong, head of a government trading company — sought political asylum at the South Korean Embassy in Beijing. They were the most prominent officials to defect, but they were hardly alone: thousands of North Koreans have fled to South Korea. Many thousands more have escaped to China.

In the international intelligence community, vetting accounts from defectors about activities in North Korea soon became a specialty — as well as a necessity, for the accounts were not always reliable. Raphael Perl, an analyst at the Congressional Research Service who has written extensively on North Korea’s counterfeiting operations, told me that “a lot of defectors or refugees give us information, but they tell us anything we want to know. You have to question the reliability of what they say.”

Nonetheless, the most trustworthy of these accounts, when combined with more traditional intelligence sources, permitted a best guess of what might be happening in North Korea. And as far as counterfeiting was concerned, the picture that emerged suggested that moneymaking had long been a passion for the country’s dictatorial ruler, Kim Jong Il, dating back to the 1970’s, years before he took over the reins of power from his father, the country’s founder and first president, Kim Il Sung.

Today, on Changgwang Street in Pyongyang, the capital of North Korea, there is a barricaded compound of government buildings. Judging from satellite photos, these are unremarkable, rectangular structures that suggest no special purpose. Yet according to a North Korean specialist based in Seoul whom I spoke with recently, and who has interviewed many high-ranking North Korean defectors, including Hwang Jang Yop and Kim Duk Hong, these buildings are the home of Office 39, a government bureau devoted to raising hard currency for Kim Jong Il. (The specialist was granted anonymity because of the sensitivity of relations between North and South Korea.)

While the operatives of Office 39 may well direct legitimate enterprises, including the export of exotic mushrooms, ginseng and seaweed, a substantial portion of the office’s revenue comes from its involvement in illicit activities: drug manufacturing and trafficking, sales of missile technology, counterfeit cigarettes and counterfeit $50 and $100 bills. According to Ken Gause, director of the Foreign Leadership Studies Program at the CNA Corporation, a policy group in Virginia that consults on national-security issues, the activities of Office 39 overlap with those of two other offices that occupy buildings in the same complex. The first, Office 38, manages the money acquired by Office 39, he said, while the second, Office 35, handles kidnappings, assassinations and other such activities.

All three divisions employ the same narrow coterie of elites, and all answer directly to Kim Jong Il, who lives in a villa less than a mile away. The history of the operations of Offices 39, 38 and 35, Gause told me, closely follows Kim Jong Il’s own rise to power through the party apparatus. In the early 70’s, after helping his father purge the ranks of the Korean Workers’ Party of competing factions, Kim Jong Il assumed control of North Korea’s covert operations, mostly involving South Korean targets.

In the mid-70’s, according to defector accounts related to me by the North Korean specialist, Kim Jong Il issued a directive to members of the Central Committee of the Korean Workers’ Party instructing that expenses for covert operations against South Korea be paid for by producing and using counterfeit dollars. Officials in charge of the operation supposedly brought back $1 bills from abroad, bleached the ink and then used the blank paper to print fairly sophisticated counterfeit $100 bills — though nothing close in quality to a supernote. Many of these notes were later used by North Korean agents implicated in attacks on South Korean targets, like the operatives arrested for the bombings of a South Korean government delegation in Rangoon in 1983 and a Korean Airlines jet in 1987.

According to the same defector accounts, Kim Jong Il endorsed counterfeiting not only as a way of paying for covert operations but also as a means of waging economic warfare against the United States, “a way to fight America, and screw up the American economic system,” as the North Korean specialist paraphrased it to me.

In a similar vein, according to Sheena Chestnut, a specialist on North Korea’s illicit activities who has also interviewed several key defectors, counterfeiting was seen as an expression of the guiding idea of the regime: the concept of juche. Often loosely translated as “self-reliance” or “sovereignty,” the idea of juche entails an aggressive repudiation of other nations’ sovereignty — a reaction to the many centuries in which Korea capitulated to its larger, more powerful neighbors. “It appears that counterfeiting actually contributed to the domestic legitimacy of the North Korean regime,” Chestnut told me. “It could be justified under the juche ideology and allowed the regime to advertise its anticapitalist, anti-American credentials.”

By 1984, as North Korea’s planned economy began to fall apart, Kim Jong Il, who by that time was effectively running much of the government, issued another directive, according to the North Korean specialist, who told me he has obtained a copy of the document. It explained that “producing and using counterfeit U.S. dollars” was a means, in part, for “overcoming economic crisis.” The economic crisis was twofold: not only the worsening conditions among the general population but also a growing financial discontent among the regime’s elite, who had come to expect certain perquisites of power. Counterfeiting offered the promise of raising hard currency to buy the elite the luxury items that they had come to expect: foreign-made cars, trips for their children, fine wine and cognac.

Laundering, Wholesaling and Redesigning

Earlier this year, I visited David Asher, a former senior adviser for East Asian and Pacific affairs in the State Department and an outspoken critic of the North Korean regime. In late 2001, he explained to me, Assistant Secretary of State James Kelly asked him to study why the North Korean regime had not collapsed, given that the country’s economy had declined even further over the previous decade, with industrial output alone falling by as much as three-quarters. Former Communist countries had ended their subsidies, Kim Il Sung had died, the country was stricken by floods and famine and the food-distribution system had collapsed. (Party slogans betrayed more than a hint of desperation: “Let’s Eat Two Meals a Day” was one of the era’s more uplifting exhortations.) Yet Kim Jong Il, defying all expectations, managed to cling to power.

“How this was happening was perplexing, given the huge trade gap, even with adjustments for aid flowing into the country,” Asher recalled. “Something just didn’t add up. It didn’t account for why Kim was driving around in brand new Mercedes-Benzes or handing out Rolexes at parties and purchasing truly large quantities of cognac.”

As Asher and his colleagues began amassing intelligence, evidence of an array of illicit activities began surfacing — everything from ivory smuggling to the production of high-grade methamphetamine. And counterfeiting was at the core. “The more we found out about this counterfeiting of dollars, the more we thought it was outrageous,” Asher told me. These activities provided what Asher calls “an alternative framework for existence” and “the palace economy of Kim Jong Il.”

In the spring of 2003, the State Department established the Illicit Activities Initiative, an interagency effort designed to investigate and counter North Korea’s criminal activities, and appointed Asher coordinator. The department began to systematically collect a variety of forensic and other evidence gathered by its own investigators, the Secret Service and elements of the intelligence community linking North Korea to the supernotes. (Asher declined to comment on the nature of the evidence, most of which remains classified.)

In addition, the department put together circumstantial evidence of North Korean counterfeiting that had been accumulating for more than a decade. In 1994, for example, authorities in Hong Kong and Macao apprehended five North Korean diplomats and trade-mission members carrying about $430,000 in bills that turned out to be counterfeits of the supernote variety. Additional North Korean diplomats, including an aide close to Kim Jong Il who was attached to Office 39, were caught trying to launder millions of dollars worth of supernotes over several years, prompting an increased scrutiny of North Korea’s diplomatic and trading missions.

Thwarted, the regime seems to have changed tactics, harnessing new distribution networks and wholesaling the counterfeits to third parties who would funnel them to criminal gangs. In the late 1990’s, for instance, British detectives began tracking Sean Garland, the leader of the Official Irish Republican Army, a Marxist splinter group of the I.R.A. According to an unsealed federal indictment in Washington, Garland began working with North Korean agents earlier in the decade, purchasing supernotes at wholesale prices before distributing them through an elaborate criminal network with outposts in Belarus and Russia, as well as Ireland. (Garland denies the charges and is currently fighting extradiction to the United States from Ireland.)

Details of the actual manufacture of counterfeit notes also began filtering into the State Department, much of the information derived from defector accounts. According to similar accounts compiled by Sheena Chestnut and the North Korean specialist in Seoul whom I spoke with, the regime obtained Swiss-made intaglio printing presses and installed them in a building called Printing House 62, part of the national-mint complex in Pyongsong, a city outside Pyongyang, where a separate team of workers manufactures the supernotes.

In 1996, frustrated by the high-quality imitations of its currency in worldwide circulation, the United States government redesigned the money for the first time since 1928. Out went the old-fashioned symmetrical designs, replaced by the big-head notes. Almost everything about the new design was aimed at frustrating potential counterfeiters, including a security thread embedded in the paper, a watermark featuring a shadow portrait of the figure on the bill and new “microprinting,” tiny lettering that is hard to imitate. The most significant addition was the use of optically variable ink, better known as O.V.I. Look at the bills in circulation today: all 10’s, 20’s, 50’s and 100’s now feature this counterfeiting deterrent in the denomination number on the lower-right-hand corner. Turn the bill one way, and it looks bronze-green; turn it the other way, and it looks black. O.V.I. is very expensive, costing many times more than conventional bank-note ink.

A Swiss company named SICPA is the major manufacturer of O.V.I., and the United States purchased the exclusive rights to green-to-black color-shifting ink in 1996. Other countries followed, purchasing color-shifting inks of different colors for their own currency. One of the first countries to do so, interestingly enough, was North Korea, whose currency, the won, counterfeiters ignore. North Korea purchased O.V.I. from SICPA that shifts from green to magenta. For the purposes of counterfeiting American currency, it would be a smart choice: magenta is the closest color on the spectrum to black. “The green-to-magenta ink can be manipulated to look very close to green-to-black ink,” Daniel Glaser of the Treasury Department told me. “They took this stuff the same year we went to O.V.I.” According to Glaser, the North Koreans managed to fiddle with the new ink, obtaining an approximation of the O.V.I. on the bills.

Though there is some dispute on the timing, the first counterfeit big-head supernotes might have arrived on the market as early as 1998. Like the earlier generation of supernotes, the big-head imitations show an ever-growing attention to detail. “They would certainly fool me,” said Glaser, who points out that the “defects” of the supernote are arguably improvements. He recalled looking at the back of a $100 supernote under a magnifying glass and noticing that the hands on the clock tower of Independence Hall were sharper on the counterfeit than on the genuine.

From all accounts, superb quality is a feature of much North Korean contraband: methamphetamine of extraordinarily high purity; counterfeit Viagra rumored to exceed the bona fide product in its potency; supernotes. It’s an impressive product line for a regime that can barely feed its people. When I discussed this with Asher, he let out a sigh. “I always say that if North Korea only produced conventional goods for export to the degree of quality and precision that they produce counterfeit United States currency, they would be a powerhouse like South Korea, not an industrial basket case.”

The Threat

How many supernotes are in circulation, and what sort of provocation do they represent?

Most government officials interviewed for this story declined to give an estimate, but several, including Michael Merritt of the Secret Service, noted that his agency has removed $50 million worth of supernotes from circulation. That is a far cry from the “billions” predicted by Representative Bill McCollum’s task force in the early 1990’s, and while it may still sound like a lot, it is insignificant relative to the $12 trillion dollar American G.D.P.

When supernotes are discovered in a smaller foreign economy that makes use of American currency, they can cause a local crisis of confidence in the dollar (this has happened in Taiwan and Ireland, for instance). But in the United States, the economic threat is minimal. For this reason, many analysts, particularly those outside the administration, like Raphael Perl of Congressional Research Service, express concern about making the issue into a diplomatic crisis. Perl, who agrees that the North Koreans are behind the counterfeiting, told me that because American government officials often view the violation of the currency as “a matter of national honor,” there is “an emotional factor that could get blown out of proportion.” In the process, he argued, counterfeiting can become conflated with other, more pressing problems posed by the North Korean regime, like its nuclear threat.

This conflation may also be deliberate. According to Kenneth Quinones, who was the North Korea country director in the State Department in the 1990’s, hawks in the current administration may be trying to use the counterfeiting issue to impede negotiations with the regime over its nuclear program. Critics of this approach note that the freezing of the North Korean bank accounts took place in the same month that participants in the six-party talks, the multination negotiations over North Korea’s nuclear program, hammered out an agreement that the regime would abandon its nuclear-weapons program. North Korea soon reneged on its promise to abandon its nuclear program and has since refused to rejoin the talks until the United States lifts the designation on Banco Delta Asia. The hawks, Quinones told me, “are attempting to use these sanctions” to help “bring down the regime.”

The senior administration official interviewed for this article dismissed that claim. “The notion that there was a grand conspiracy by hard-liners is just wrong,” he told me. “It’s not accurate. This was done as a law-enforcement action by appropriate U.S. government agencies based on the facts of the case.”

Even if the counterfeiting is not worthy of being a diplomatic issue unto itself, the fact that North Korea is counterfeiting may still serve as a grim reminder of the difficulty of good-faith negotiations with North Korea. Just consider that the supernotes that were seized by law-enforcement officials in New Jersey and California arrived in the United States while the six-party talks were going on. Asher, for one, was stunned by the audacity of the regime. “If they’re going to counterfeit our currency the entire time they’re engaged in diplomatic negotiations, what does that say about their sincerity?” he asked me. “How can they want normalization with a country whose currency they’re counterfeiting? How can they expect it?”

However the diplomatic standoff is resolved, Asher said that he believes North Korea won’t continue to counterfeit much longer. Next year, the Bureau of Engraving and Printing is issuing an updated version of the $100 bills. The notes will be expensive to manufacture, requiring the purchase of a new set of presses at a cost that Asher estimated in the “hundreds of millions” of dollars. The Treasury Department characterizes the next generation of notes as part of a routine redesign that it will undertake on a regular schedule every decade. But Asher has no illusions as to the timing. “It might be a routine update,” he said, “but it’s a routine update that’s being instigated by one country: North Korea.”

Stephen Mihm teaches history at the University of Georgia. He is at work on two books about the history of counterfeiting in the United States, one to be published by Harvard University Press and the other by HarperCollins.