Arms shipment « North Korean Economy Watch

Archive for the ‘Arms shipment’ Category

Lifting US Sanctions Key to NK’s Economic Revival

Wednesday, August 15th, 2007

Korea Times
8/15/2007

To understand what is at stake, we need to look back at key events in the past that led to North Korea’s isolation in the global economy.

U.S. economic sanctions against North Korea began on June 28, 1950, only three days after North Korea invaded South Korea, when the United States invoked a total embargo on exports to North Korea. Over the years, many more U.S. sanctions have been imposed against North Korea, and North Korean companies. Three of these sanctions have had a significant impact.

The first was the suspension of the Most Favored Nation (MFN) trade status, imposed on September 1, 1951. This sanction, which is still in effect, made it impossible for North Korea to even consider exporting its products to the United States.

The second is the placement of North Korea on the list of countries that support international terrorism. This sanction, imposed on January 20, 1988, followed North Korea’s blowing up of Korea Air Lines 858 on November 29, 1987, off the waters of Thailand.

This sanction has entailed many restrictions, including denial of North Korea’s ability to borrow money from international financial institutions.

The third measure is not a single action, but has taken the form of a tightening grip around the financial network used to fund North Korea’s illicit financial activities.

Although the ultimate target is North Korea, the threat of actual sanctions has been targeted against banks, including Banco Delta Asia, which deal with North Korea’s accounts. These financial sanctions involving Banco Delta Asia have been the focus of recent overt and covert negotiations between North Korea and the United States.

On September 17, 1999, President Clinton agreed to the first significant easing of economic sanctions against North Korea since the Korean War ended in 1953.

The U.S. easing of sanctions against North Korea, announced on June 19, 2000, may have been too little to persuade the leaders of North Korea to give up their prized long-range missile technology. North Korea carried out a nuclear test on October 9, 2006, and the United Nations passed Resolution 1718, further tightening North Korean economy.

There is no doubt that all these sanctions are having an impact on the North Korean economy. For instance, the North Korea’s annual trade deficit has averaged between $800 million and $1 billion in recent years, depending on whether deficits against South Korea are included.

The huge trade deficit is not sustainable, and it will eventually lead to a decrease in North Korea’s trade and gross domestic product. Studies indicate that the entire trade deficit appears to have been financed by weapons sales, illicit activities, and funds flowing from South Korea through joint projects. With the two UN resolutions adopted during 2006 and the tightening of North Korea’s financial transactions that began in 2005, North Korea should find it increasingly more difficult to pay for its trade deficit.

The key issue is not whether North Korea deserves the lifting of all the sanctions imposed against the country on the basis of its behavior since 1950, but how to bring about a peaceful resolution of pending security and humanitarian issues without military confrontation. This brings us to the importance of the upcoming summit between President Roh and North Korean leader Kim.

My assessment is that the collapse of the Soviet Union in 1989 led to an important change in the approach of North Korean leaders toward a better calculation of costs and benefits.

Posted in Arms shipment, Illicit activities, International trade, Trade Statistics, USA | Comments Closed

The North Korean Economy: Between Crisis and Catastrophe

Thursday, May 3rd, 2007

American Enterprise Institute Book forum
4/17/2007

A couple of weeks ago, I had the opportunity to attend a book forum at the American Enterprise Institute on Nicholas Eberstadt’s new book, The North Korean Economy: Between Crisis and Catastrophe. It was very informative to hear three different perspectives on the direction of North Korea’s economic reform.

Panelists included:

Nicholas Eberstadt, AEI
Andrei Lankov, Kookmin University
Deok-Ryong Yoon, Korea Institute for International Economic Policy

In summary, Mr. Eberstadt and Mr. Lankov are pessimistic about the North Korean leadership’s desire to enact reforms–knowing that information leakages will undermine their political authority. As Mr. Lankov pointed out, the North Korean nomenklatura are all children and grandchildren of the founders of the country who are highly vested in the current system. They have no way out politically, and as such, cannot reform.

They argue that the economic reforms enacted in 2002 were primarily efforts to reassert control over the de facto institutions that had emerged in the collapse of the state-run Public Distribition System, not primarily intended to revive the economy. Lankov does admit, however, that North Korea is more open and market-oriented than it has ever been, and Mr. Yoon was by far the most optomistic on the prospects of North Korean reform.

Personally, I think it makes sense to think about North Korean politics as one would in any other country–as composed of political factions that each seek their own goals. Although the range of policy options is limited by current political realities, there are North Koreans who are interested in reform and opening up–even if only to earn more money. In this light, even if the new market institutions recognized in the 2002 reforms were acknowledged only grudgingly, they were still acknowledged, and their legal-social-economic positions in society are now de jure, not just de facto. The North Korean leadership might be opposed to wholesale reform, but that is economically and strategically different than a controlled opening up on an ad hoc basis–which is what I believe we are currently seeing. Anyway, dont take my word for it, check out the full commentary posted below the fold:

(more…)

Posted in Arms shipment, Black markets, China, Counterfeiting, Drug smuggling, Economic reform, Energy, Fiscal & monetary policy, Foreign direct investment, General markets (FMR: Farmers Market), Illicit activities, International Aid, Kaesong Industrial Complex (KIC), Mt. Kumgang Tourist Special Zone, Price liberalization, Rason Economic and Trade Zone (Rajin-Sonbong), Sinuiju Special Administrative Region, South Korea, Special Economic Zones (Established before 2013), UN Security Council, USA | Comments Closed

Flags that hide the dirty truth

Friday, April 20th, 2007

Asia Times
Robert Neff
4/20/2007

Many small countries in the world have resorted to unorthodox methods of obtaining much-needed currency. Although these methods may be legal, they often assist unscrupulous individuals and governments in conducting illegal activities. One popular method of obtaining cash is through flags of convenience (FOC). Countries, even land-locked ones, register other nations’ ships under their flag for a price.

It is a profitable industry that has no shortage of customers. Shipowners choose to register their ships under a foreign flag for a number of reasons, including tax advantages, cheap non-union crews, the ships’ conditions fail to meet the standards of the owner’s country, political reasons, or to facilitate illegal activities.

Because many of these ships often exchange flags and even their names, it is difficult to trace them, thus providing the anonymity they need to conduct their illegal operations. According to a statement by David Cockroft, general secretary of the International Transport Workers’ Federation (ITF): “Arms smuggling, the ability to conceal large sums of money, trafficking in goods and people and other illegal activities can also thrive in the unregulated havens which the flag of convenience system provides.”

Flying the Cambodian flag
One of the most notorious FOC countries was Cambodia. In 1994, Cambodia established its own ship registry – Cambodian Shipping Corporation (CSC), based in Singapore – and began immediately flagging ships of other nations.

Although its beginnings were modest (only 16 foreign ships registered with Cambodia during the first year) the CSC rapidly expanded. According to CSC, prior to its closing in 2002, the number of ships registered with the company was between 400 and 600, but according to US investigators and Cambodian officials the number was probably twice that.

CSC offered basically what many other FOC countries offered: registry for any ship, no questions asked, under its (Cambodia’s) flag for a low price. But, unlike other FOC countries, it offered to do the entire process online and within 24 hours. Despite Cambodia’s relative lag in Internet technology, its operation in Singapore enabled CSC to pioneer online registration.

As more and more foreign ships registered with CSC, it soon became apparent that a large number of the ships were involved in illegal activities. Cigarette smuggling operations were discovered near Crete and Albania; during the oil embargo of Iraq, oil was smuggled out of that country; human trafficking and prostitution operations were discovered near Japan and Crete, and, of course, drug trafficking.

All of these activities were cause for concern and drew condemnation, but there was one more criminal activity that concerned many nations even more: allegations that many of the ships were running arms. “Cambodia is one of the highest-risk flags. It is particularly murky and has got to be one of the first choices if you are running arms,” a spokesman for ITF said.

When asked about CSC’s alleged illegal operations, Ahamd Yahya of the Cambodian Ministry of Public Works and Transport was reported to have told Fairplay: “We don’t know or care who owns the ships or whether they’re doing ‘white’ or ‘black’ business … it is not our concern.” (Fairplay, October 12, 2000.)

Unsafe ships
In addition to illicit activities, the condition of the ships themselves was a concern. According to an article in the Guardian of London, by 2002 the company had about 450 registered ships, and out of this number 25 had suffered shipwrecks/strandings, 41 collisions, nine fires and 45 arrests. Nine ś% ¬’n-registered ships were deemed severely hazardous and banned from entering European ports.

By the summer of 2002, many of the leading shipping organizations were calling for action to be taken against CSC. A spokesman for ITF condemned CSC and Lloyds shipping intelligence service wrote in an opinion piece: “The world should join us in demanding that Cambodia shut down this sleazy and pestilent offshore registration. How many more people have to die in incidents involving Cambodian-flagged vessels, or its ships detained for illegal activities, before something is actually done about it?”

The North Korean connection
American and South Korean interests in CSC were aroused when it was observed that a large number of North Korean ships, at least a dozen according to Michael Richardson, journalist and author of A Time Bomb for Global Trade, were registered with CSC and flying the Cambodian flag.

It is no secret that the Cambodian royal family had, and still maintains, a close relationship with the North Korean regime. King Norodom Sihamoni has often spoken of the Kim regime in a favorable manner. Kim Il-sung provided him with asylum during the turbulent years of Cambodia’s past and even built him an extensive 60-room palace outside Pyongyang. When the royal family returned to Cambodia it was accompanied by North Korean diplomats and bodyguards.

North Korea’s involvement in Cambodia’s flag of convenience operation was suspected after an investigation revealed that one of the primary partners in CSC was Lim In-yong, a senior North Korean diplomat who had served in Cambodia for many years. His role with CSC was described as being that of “a private citizen, [and] not as a representative of the North Korean government”. Whether his role was purely that of an individual or of a more sinister nature is unclear. But the United States and several other countries became increasingly suspicious of North Korea and the company’s motives.

Among several charges of illegal operations by North Korean ships, one was drug smuggling. When it was suggested in the media that Cambodian-registered North Korean ships may have been involved in drug smuggling, CSC denied any knowledge.

Incidents of drug smuggling involving ships from other nations flagged by the company were apparent. In 2002, the Greek-owned, but Cambodian-registered Winner was seized by French forces and discovered to be smuggling a large amount of cocaine. Interestingly enough, Hun Sen, the prime minister of Cambodia, gave his permission to the French government to board the ship – an indication that he did not support CSC. A short time later he revoked CSC’s authority to grant registry to foreign ships.

Perhaps the most infamous North Korean drug smuggling operation took place in 2003. The North Korean freighter Pong-su began its journey from North Korea under its own flag, but on arriving in Singapore changed its registration and reflagged under Tuvulu. It then proceeded to Australia where it was discovered trying to smuggle in a large amount of heroin, and was eventually seized after it tried to resist Australian authorities. Although this incident did not involve a Cambodian-flagged ship, it does give some credence to speculation that North Korea had smuggled drugs using CSC-flagged ships.

Weapons smuggling
While North Korea’s attempts to gain badly needed hard currency by smuggling drugs and tobacco were of some concern to the United States, more important were allegations that North Korea was smuggling and selling advanced weapons technology to other nations.

“Of most concern to the US and indeed to South Korea was the clear evidence that North Korean freighters flying the Cambodian flag or on the Cambodian register were moving ballistic missiles to clients in the Middle East and Africa,” noted journalist Richardson.

Perhaps the best-known of these Cambodian-registered North Korean ships was the Song Sang. In November 2002, a freighter believed to be carrying weapons departed a North Korean port and was tracked by American satellites and American naval ships. In December, as it made its way through the Indian Ocean, it was stopped by American and Spanish naval forces and inspected.

The United States justified its actions by claiming that it was flying no flag and thus was considered a pirate ship. According to Richard Boucher, the State Department’s spokesman, “At first we couldn’t verify the nationality of the ship because the ship’s name and the indications on the hull and the funnel were obscured. It was flying no flag.”

On investigation it was found that the ship was the So San, which claimed to have Cambodian registry. The So San’s manifest stated it was transporting cement to Yemen, but an examination revealed 15 Scud missiles with 15 conventional warheads, 23 tanks of nitric acid rocket propellant and 85 drums of unidentified chemicals all hidden beneath the bags of cement.

It is believed that the North Koreans tried to disguise the ship (Song Sang) by painting over the last two letters in the first name and the final letter in the second name (So San) to help prevent identification. The ship was eventually allowed to continue on its course after it was determined that it had broken no laws.

World criticism
Following the World Trade Center and other terrorist attacks, world opinion began to force the Cambodian government to reconsider its policy of allowing CSC to flag ships at will. The Cambodian government felt compelled to take action before one of the ships under its flag was found guilty of terrorist activity.

“We are victims because the company recklessly allows ships to use the Cambodian flag without proper inspection or control,” said Hor Namhong, the foreign minister, adding: “The company will be audited by the government.”

In July 2002, bowing to international criticism over concern for “Cambodia’s maritime safety record”, the Cambodian government revoked CSC’s authority to grant registrations, giving that authority to the Ministry of Public Works and Transportation. Ironically, it was this ministry that had just two years earlier declared disinterest into the alleged illegal activities of ships registered under its flag.

The Ministry of Public Works and Transportation was only in control of the registry for about six months before the Cambodian government granted the authority to register and flag ships to a new company, International Ship Registry of Cambodia, and its representatives in Busan, South Korea. According to e-mail correspondence from the company’s managing director, Charles Bach, to New York Times reporter Keith Bradsher, there are no longer any North Korean ships registered under the Cambodian flag.

But Marcus Hand, the Asian editor for Lloyd’s List, explained how difficult it is to know for certain who owns what ship because so many of them are owned by different companies registered throughout the world and only the North Koreans themselves know how many ships they own and what flag they fly.

Not only does North Korea purchase flags of convenience, it also sells them for nearly three times the normal asking price. According to ITF in 2006, out of 408 North Korean-flagged ships, only 187 of them were actually owned by North Korea; the rest were owned by other nations including Cambodia, Tonga, Comoros and Sao Tome and Principe – nations that are infamous for their own flags of convenience.

Prior to the United Nations Security Council’s resolution following North Korea’s nuclear test in October 2006, some of the ships registered to North Korea may have done so to avoid inspection while they carried out illegal activities.

There is some question as to the number of ships that were owned by United States-based companies and registered and flagged under North Korea. According to the American Central Intelligence Agency’s Fact Book, there were three, but Bill Gertz, in an article published with The Washington Times (June 8, 2006), listed nine ships owned by foreign companies, such as Egypt and Syria, based in Delaware, United States. One of these ships was discovered in March 2006 engaged in smuggling migrants off the coast of Europe. Under sanctions that went into effect in May 2006, the companies were required to cancel their registrations with North Korea and seek new registrations with other countries.

The new threat
With the CSC no longer able to grant registrations and Cambodia and South Korea’s progressively warmer relationship, North Korea has been forced to look elsewhere to register its ships. According to The Straits Times, at least 40 nations in the world engage in flags of convenience; many of them willing to flag North Korean ships for a price. North Korea does business with several of them, but a surprising replacement for Cambodia has apparently been found – Mongolia, a land-locked nation.

However, following North Korea’s nuclear test in October of last year, Mongolia’s Ship Registry has urged ships under its flag to abide by the United Nations resolution against North Korea. It is unclear what effect this has had on North Korean ships registered with Mongolia.

In addition to the North Korean threat of nuclear weapons, it has been speculated that North Korea may have the ability to launch modified missiles from its submarines and cargo ships. North Korean-flagged ships would be more susceptible to being stopped and searched by United Nations forces, but ships under FOC might pass unnoticed through surveillance and pose a significant threat to the enemies of the Pyongyang government and to the reputations of the governments which flagged them.

Posted in Arms shipment, Cambodia, Counterfeiting, Drug smuggling, Illicit activities, Sea shipping, Singapore, Transportation | Comments Closed

Ethiopia Denies Shipment From Korea Violated Ban

Sunday, April 15th, 2007

New York Times
Michael R. Gordon
4/15/2007

The Ethiopian government has denied that it violated United Nations sanctions by carrying out a secret purchase earlier this year of military equipment from North Korea.

The Central Intelligence Agency reported in late January that an Ethiopian-flagged ship had left a North Korean port and that its cargo probably included tank parts and other military cargo, according to American officials.

The purchase of tank parts would violate restrictions on dealings with North Korea imposed by the United Nations Security Council in a resolution adopted in October. The Security Council acted less than a week after North Korea tested a nuclear device.

The Bush administration decided not to press Ethiopia to reject the shipment, and the vessel was not inspected after it took its cargo to a port in Djibouti for overland transport to Ethiopia. Some American officials said the shipment was most likely a Security Council violation.

In a statement issued Friday, the Ethiopian Foreign Ministry acknowledged that it had received a cargo shipment from North Korea on Jan. 22, but asserted that it did not include prohibited items like tank parts.

“This shipment contained spare parts for machinery and engineering equipment and raw material for the making of assorted ammunition for small arms,” the Ethiopian statement read. “The United States Embassy in Addis Ababa might have been aware of Ethiopia’s importation of the said cargo from North Korea. “However, the fact is that Ethiopia did not purchase arms or any other item covered by Resolution 1718 under the contractual agreements,” the statement read, referring to the Security Council measure. Ethiopia said the shipment was carried out under the terms of several contracts that were signed with North Korea in June and was paid for in advance.

The State Department has declined to comment on the details of this episode.

Ethiopia purchased $20 million worth of arms from North Korea in 2001, according to American estimates, and American officials say this pattern has continued. Ethiopia has an arsenal of Soviet T-55 tanks and other Soviet-style equipment. The United States has sought to persuade Ethiopia to wean itself from its longstanding reliance on North Korea for inexpensive Soviet-era military equipment.

The United States has had close ties with Ethiopia. American officials say that Ethiopia was provided with American intelligence about the location of Islamist forces before its recent offensive in neighboring Somalia. On Jan. 7, American AC-130 gunships launched two strikes on terrorist targets from an airstrip inside Ethiopia, according to American officials. Ethiopia has said such reports are a fabrication.

Previous Washington Post Story below…

(more…)

Posted in Arms shipment, Ethiopia, Illicit activities, International trade | Comments Closed

Banks balk at handling North’s ‘dirty’ money

Saturday, March 24th, 2007

Joong Ang Daily
Brian Lee
3/24/2007

The messy knot of North Korean funds frozen in a Macao bank is proving difficult to untangle despite Washington’s assurances that the money will be returned to Pyongyang.
As a result, the six-party nuclear talks, which recessed Thursday over the issue, remain on hold while a solution is sought. North Korea demands that it have the money in hand before sitting down again.

South Korean Foreign Minister Song Min-soon said yesterday that the problem of returning the $25 million in funds frozen in Macao’s Banco Delta Asia would be resolved next week and the talks would resume soon. Seoul’s top negotiator, Chun Young-woo, however, said on the same day that resolving the issue will be difficult.

“Next week we will resolve it and expect to move forward in implementation measures,” Mr Song said in a news conference.

Mr. Chun said that the Bank of China, despite pressure by the Chinese government, has refused to put the money into North Korean accounts but is working with Washington to find a way to relay the money to a bank in a third country.

A government official said yesterday that the Bank of China, which is listed on the Hong Kong Stock Exchange, has foreign shareholders and is not willing to risk alienating itself from the international financial community by associating itself with money branded illicit by Washington.

In September 2005, Washington declared Banco Delta Asia a prime money launderer on behalf of North Korea, a move which caused the funds to be frozen.

Furious, North Korea backed away from nuclear negotiations and demanded the money back as a precondition for substantive talks. Recently, Washington agreed to the release of the funds but it has ordered all ties between the rogue bank and the U.S. financial system cut.

Meanwhile, the U.S. State Department said that Treasury Department official Daniel Glaser will go to Beijing soon to consult with the Bank of China on the issue.

Sources said that providing written assurances to the bank from American regulators that it would not face scrutiny over relaying the money might be one way to resolve the issue.
Mr. Chun said that finding a bank willing to accept the money is the key. “North Korea has to designate a bank in a third country,” said the official. “North Korea does not want cash.”

A government official said yesterday that Pyongyang wants contact with an overseas bank and is also unwilling to have the money wired to a North Korean bank.

“Any bank will think that there could be problems with its credit rating when dealing with money stamped illicit by Washington,” the official said. “Finding a bank to receive the money will be a difficult task.”

Mr. Chun remained cautiously optimistic. While he admitted that little progress was made in the latest round of talks, he said that from a long term perspective Pyongyang has learned a lesson that would help it understand its current position of isolation in the international community. “Even if there is the political will to resolve the issue, North Korea has seen the cold reality of the international financial world,” he said.

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

U.S., N.K. resolve BDA dispute

Tuesday, March 20th, 2007

Korea Herald
3/20/2007

‘Pyongyang pledges to use funds for education, humanitarian purposes’

The United States and North Korea have resolved a dispute over $25 million in frozen North Korean funds, clearing the way for progress in dismantling the North’s nuclear programs, U.S. officials said Monday.

The U.S. nuclear envoy, Christopher Hill, said six-party talks – which resumed Monday – could now “move on to the next problem, of which there are many.”

U.S. Deputy Assistant Treasury Secretary Daniel Glaser said the funds would be transferred into a North Korean account at the Bank of China in Beijing to be used for education and humanitarian purposes. Glaser said Pyongyang had proposed the arrangement.

The funds, some of which U.S. authorities suspect may be linked to counterfeiting or money laundering by cash-starved North Korea, had held up progress in nuclear disarmament talks.

“North Korea has pledged … that these funds will be used solely for the betterment of the North Korean people,” Glaser said.

“We believe this resolves the issue of the DPRK-related frozen funds,” Glaser said using the acronym for North Korea’s formal name, the Democratic People’s Republic of Korea.

Under last month’s deal, North Korea – which conducted its first atomic test in October last year – would get badly needed energy aid and diplomatic concessions in return for shutting down its nuclear programs.

North Korea was given 60 days from the signing of the agreement to close its main nuclear reactor at Yongbyon and allow International Atomic Energy Agency (IAEA) inspectors back into the country to supervise.

In return, North Korea would initially receive 50,000 tons of heavy fuel for energy.

The impoverished state would eventually receive 1 million tons of heavy fuel or equivalent energy aid if it permanently disbanded its atomic weapons program.

Hill said he now expected the initial provisions of the February accord to be implemented on schedule.

“We look forward to that process continuing in the next 30 days, so that we will have the shutdown of the Yongbyon facility and the sealing of it and the monitoring of it by IAEA personnel,” he said.

Hill also insisted that the United States had achieved its goals in taking action against North Korea for money laundering and counterfeiting, despite allowing the $25 million to go back to Pyongyang.

“What this means is that the North Koreans understood our concerns (and were) prepared to cooperate with us to make sure the money is used appropriately,” he said.

South Korea, which has already said it will provide the initial batch of 50,000 tons of fuel oil, welcomed Monday’s development.

“Since the issue has been resolved, there will be no big obstacles… during the initial 60-day stage for disabling North Korea’s nuclear facilities,” chief South Korean envoy Chun Yung-woo told reporters.

Japan’s chief envoy, Kenichiro Sasae, expressed similar optimism but cautioned that the focus should remain on the much tougher task of permanently putting an end to North Korea’s nuclear program.

“What is important is that this is not the end… we must work by holding a broad view, a long-term view. We must not be caught up on day-to-day movement,” Sasae said.

Posted in Arms shipment, Banking, Counterfeiting, Drug smuggling, Energy, Finance, Illicit activities, Oil | Comments Closed

Treasury Reportedly Set to Act to Free North Korean Money

Wednesday, March 14th, 2007

NY Times
Steven R. Weisman
3/14/2007

The Treasury Department is expected to move formally this week to bar American banks from engaging in transactions with a bank in Macao linked to North Korea, clearing the way for North Korea to regain possession of money at the bank frozen since 2005, a Bush administration official said Tuesday.

American officials see such a step by the Treasury, which has been expected for weeks, as a crucial part of the recent deal to disarm North Korea’s nuclear program. The deal, announced last month, requires North Korea to disarm its nuclear facilities in return for economic and energy benefits.

The Chinese government effectively froze about $25 million connected to North Korea a year and a half ago, when the Treasury Department listed Banco Delta Asia, a small family-owned bank in Macao, as a “primary money laundering concern.” As much as half of the money is expected to be returned to North Korea.

American officials charged in 2005 that the bank was helping North Korea conduct counterfeiting, narcotics trafficking and transactions related to its nuclear weapons program, a charge that North Korea and the bank denied.

The initial Treasury announcement put American banks on notice that after further investigation, the department would decide whether to bar United States banks formally from facilitating transactions with the bank.

However, the practical effect was to make all United States banks voluntarily cease transactions with Banco Delta Asia.

Without the ability to acquire dollars, Banco Delta Asia collapsed. Macao froze all its funds related to North Korea, and most of its other customers withdrew their money in a run on the bank. The bank was then taken over by the authorities in Macao, a semiautonomous province of China.

Subsequently, American and Chinese authorities pored over more than 300,000 documents describing the transactions with North Korea. These included accounts of 20 North Korean banks, 11 North Korean trading companies, 9 North Korean citizens and 8 Macao-based companies that did business with North Korea, according to bank records filed with the Treasury Department.

The Treasury announcement expected this week would formalize what is already in place. It would probably mean that the bank could do only a modest amount of business, without the benefit of dollar transactions.

But it would mean that the Chinese government would be in a position to return some of the funds to North Korea that are not linked to counterfeiting, drugs, nuclear arms or other illicit activities.

For example, some of the funds belong to a North Korean unit of British American Tobacco, American officials say, and those funds are expected to be returned to the company, which is owned by British interests.

When the North Korea nuclear deal was announced last month, no mention was made of returning funds to North Korea from the bank, but American officials now say that the return of those funds was a major incentive for North Korea to reach an accord.

The disarmament agreement was negotiated with the United States, China, South Korea, Japan and Russia as part of what were called six-party talks.

Christopher R. Hill, the assistant secretary of state for East Asian and Pacific affairs and the central envoy in the talks, said this month that North Korea was “concerned about the fact that we were able to go after an important node of their financing” but that the United States would continue to monitor its illicit activities.

Posted in Arms shipment, Banking, British American Tobacco (BAT), Counterfeiting, Drug smuggling, Finance, Illicit activities | Comments Closed

US Concludes Probe Into NK-Linked Bank in Macau

Tuesday, February 27th, 2007

Korea Times
2/27/2007

U.S. officials said Monday they had wound up their probe into a Macau bank accused of laundering millions of dollars of illicit North Korean funds, Agence France-Presse reported.

The U.S. move raised expectations that sanctions placed on the lender may soon be lifted, AFP said in its dispatch from Hong Kong.

AFP quoted Daniel Glaser, an assistant to the U.S. Treasury Department’s deputy secretary, as saying that a team of U.S. officials had met Macau financial authorities during their one-day visit.

“We’ve completed our investigation,’’ Glaser was quoted as telling reporters at a hastily convened press briefing in nearby Hong Kong hours after the talks ended.

“Everything that we have seen throughout this investigation has confirmed and reinforced the concerns we initially expressed in September 2005,’’ he added.

The talks follow a deal announced two weeks ago between the U.S., the two Koreas, Japan and Russia on initial steps towards dismantling Pyongyang’s nuclear program.

As part of the agreement, the U.S. Treasury team probing Banco Delta Asia (BDA) and other banks believed to have links to North Korea said they would begin talks that would lead to the lifting of sanctions.

“All of this work has put us in a position where we can begin to take steps resolve the BDA matter,’’ Glaser was quoted as saying, adding that he had discussed the matter with North Korean and Macanese authorities.

However, he would not say when a decision would be made on lifting the sanctions, nor on what would happen to some $24 million worth of bank assets frozen by the Treasury.

“I don’t think it would be responsible for me to get into a specific timetable, but we do intend to take steps to resolve the matter and we do intend to do that in a timely fashion and to do it as soon as possible,’’ Glaser said.

BDA has been under administration in Macau since the Treasury announced its inclusion on the watch list in 2005.

The government stepped in after fearful depositors began withdrawing funds at a rate that threatened to destabilize the southern Chinese territory’s financial system.

AFP said that in December the bank admitted to buying gold bullion produced by North Korea.

According to the AFP report, the bank also admitted to continued dealings with Tanchon Commercial Bank for three months after the North Korean lender was blacklisted.

Promising never again to deal with North Korea, BDA has appointed an outside compliance officer and hired Hong Kong-based consultants to upgrade its computer system.

Macau’s authorities, meanwhile, with the backing of China’s central government in Beijing, have instituted tough new laws against money laundering and counterfeit currency.

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

Kim Jong-il’s Son Sells Weapons Abroad: Report

Tuesday, February 13th, 2007

Korea Times
1/13/2007

Kim Jong-nam, believed to be the eldest son of North Korean leader Kim Jong-il, has taken charge of the overseas sales of North Korean military weapons.

The junior Kim, 35, went back to Pyongyang via a Koryo Air flight from Beijing on Tuesday after getting a lot of media attention during his three-day stay in the Chinese capital.

According to the Segye Times, a vernacular daily, Jong-nam has made profits for his country by selling military weapons such as Scud medium-range missiles and SA-16 surface-to-air missiles overseas.

He invested money in real estate and overseas banks offering high interest rates in several countries including Britain, Switzerland, Hong Kong, Macau and Singapore, said the report based on comments from an expert on North Korean affairs in Japan.

On Sunday Kim was spotted by Japanese television crews at Beijing International Airport. His appearance in Beijing sparked interest among North Korea watchers, as the six-party talks over the North’s nuclear weapons programs were being held there.

Reports said Kim was on a three-day layover on his way back home to attend his father’s 65th birthday party, which falls on Friday.

Wearing a Reebok baseball cap and blue jeans as well as a gold necklace, Kim showed off his foreign language skills in brief interviews with the news media including Japan’s Fuji television.

Asked whether he speaks Japanese, he answered in Japanese that he didn’t understand the language. He also said he speaks a little bit of English and French as he studied in Europe for several years.

Kim said he meets with his father “sometimes” but did not elaborate on their relationship.

According to reports Kim stayed at his favorite hotel, the Kempinski Hotel located adjacent to the South Korean embassy in Beijing during his short visit.

The Toronto Globe and Mail reported earlier this month that the North Korean leader’s son has been spending most of his time for the past three years at casinos, saunas and luxury hotels in Macau, the former Portuguese enclave near Hong Kong.

Kim was photographed in the city by a newspaper as he left his favorite hotel, the Mandarin Oriental.

According to the South China Morning Post, he has frequently visited Macau’s casinos and often goes out drinking late at night.

There have been rumors that fell out of favor with his father in 2001 when he embarrassed the regime in a bizarre incident in Japan.

Kim was briefly detained at Tokyo’s airport where he tried to enter Japan on a fake Dominican Republic passport. He was on his way to visit Tokyo Disneyland, reports said.

Posted in Arms shipment, Banking, Finance, Fiscal & monetary policy, Illicit activities, International trade, Political economy | Comments Closed

Will Economic Sanctions Have Impact on N. Korea?

Tuesday, January 23rd, 2007

Korea Times
Chang Se-moon
1/23/2007

Obviously, it is important to know the correct answer to this question. Sanctions that have no impact on North Korea’s economy will not change the behavior of North Korean leaders. If sanctions do have a significant impact, the possibility that North Korean leaders may be tempted to resolve the pending security issues through negotiations exists.
In answering the question, however, we need to keep in mind what the British economist John Maynard Keynes (1883-1946) said: “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor draw correct conclusions.’’ In plain English, Keynes stressed an unbiased economic way of thinking that could help us draw correct conclusions. In other words, until we review all the facts with an open mind we should not make up our minds.

This is exactly what we will do by assessing the impacts of economic sanctions on North Korea.

The first question that comes to mind is which sanctions are we talking about. If we review U.S. sanctions on North Korea since the outbreak of the Korean War in 1950, there would be too many sanctions imposed on North Korea to be practical. There are three important sanctions that are still in effect, however. One is the U.S. denial of a Most Favored Nation (MFN) trade status on North Korea’s exports.

This sanction was imposed on North Korea’s exports to the United States on September 1, 1951, following the outbreak of the Korean War. MFN tariffs are the lowest tariffs that are levied on imports to the U.S. Over 99 percent of imports to the United States qualify for the MFN tariffs. Without MFN status, tariffs on North Korean exports to the United States are so high that North Korea simply cannot even imagine exporting anything to the United States.

The second of the three important sanctions stemmed from the bombing of Korean Air 858 by North Korean agents on November 29, 1987. The explosion killed 115 innocent passengers and crew members. On January 20, 1988, North Korea was placed on the list of countries that supported international terrorism according to the U.S. Export Administration Act of 1979.

The importance of this sanction is that placement on the list has made it impossible for North Korea to borrow money from international financial institutions including the World Bank and the International Monetary Fund. Like the denial of MFN status, the placement of North Korea on the list of countries supporting international terrorism continues to this date.

The third of these three key sanctions relates to tightening of North Korea’s illegal financial transactions, which culminated in Banco Delta Asia’s termination of business dealings with North Korea as of February 16, 2006. You may know that Banco Delta Asia had long been suspected of handling North Korea’s illicit activities overseas such as laundering of counterfeit U.S. dollars and sales of illegal drugs

Banco Delta Asia is located in Macao, which is a Special Administrative District of China. Tightening of North Korean financial transactions was extended to North Korean trade during 2006. This added pressure on North Korea originated from U.N. Resolution 1540 following North Korea’s test-launching of long-range missiles on July 5, 2006, as well as from U.N. Resolution 1718 which followed North Korea’s nuclear test on October 9, 2006.

Are these sanctions having an impact on North Korea’s economy? Perhaps, a more accurate question is whether these sanctions are placing enough pressure on North Korean leaders to reconsider the possibility of returning to the negotiation table?

One aspect is the status of North Korea’s trade deficit. As you probably know, North Korea buys from other countries much more than it sells to other countries. When the amount of imports exceeds the amount of exports it’s called a trade deficit. North Korea’s annual trade deficit averaged about $800 million from 2003 to 2005. This figure does not include North Korea’s trade deficit against South Korea, since South Korea appears to consider any financial support to the North as a long-term investment rather than a trade deficit.

How has North Korea been paying for the trade deficit? The ways have been unique. Almost the entire deficit appears to have been financed by weapons sales, illicit activities, and funds flowing from South Korea through joint projects.

In fact, a study by the Korean Institute for Defense Analysis indicates that full implementation of U.N. Resolution 1718 would cause North Korea to lose just about the same amount ($700 million to $1 billion) by stopping exports of weapons and illegal drugs and counterfeit money.

The Economist Intelligence Unit is quoted to have estimated in 2003 that “North Korea earned as much as $100 million a year from counterfeit money, while in 2005, a U.S. task force estimated that “$45 million to $60 million in Pyongyang’s counterfeit currency (primarily in U.S. $100 bills) is in circulation,’’ reportedly, including some in Seoul’s Namdaemun Market.

Assuming that recently added sanctions will cause North Korea to lose about $800 million that it has been earning overseas each year, the next interesting question is how North Korea will pay for the annual trade deficit of $800 million in the future? If North Korea does not pay for its imports, other countries will refuse to sell products to North Korea and the North Korean economy will suffer.

North Korea cannot borrow from world financial institutions because of the 1988 U.S. sanctions that branded North Korea as one of countries supporting international terrorism. They cannot use the money from foreign direct investment because China and Korea are the only two countries that have been willing to invest in North Korea, but the combined amount is not even close to paying for the annual trade deficit.

Think of it this way. If you borrow money every year, and lenders believe that your ability to pay off the debt is rapidly declining, will lenders continue to lend you money? Not likely. With sanctions adversely affecting North Korea’s ability to pay for imports, North Korea will find it increasingly difficult to buy what it needs. The breaking point may not be imminent, but the future is predictable.

This is what I think will happen. North Korea will ask China to increase its foreign direct investment in North Korea by giving China more incentives for such investment. These incentives may include low taxes and free land. North Korea will ask South Korea to send more money.

For instance, as of July 1, 2004, Hyundai Asan and North Korea set the entrance fee to Mt. Kumkang at $10 for a day trip, $25 for a two-day trip and $50 for a three-day trip. On May 1, 2005, these fees were raised to $15, $35, and $70. On July 1, 2006, these fees were raised again to $30, $48, and $80. This is just one way.

North Korea may also ask South Korea to lend it a large sum of money with an empty promise of paying it back. This explains in part why it is so important for North Korea to have leaders of the South Korean government who are friendly to North Korea.

These desperate acts are likely to be very short of paying for the majority of the annual trade deficit. If sanctions continue to be effective, the likelihood of North Korea returning to the negotiation table increases. Economics is rarely boring, especially when it deals with real problems.

Posted in Arms shipment, Banking, China, Counterfeiting, Drug smuggling, Economic reform, Finance, Fiscal & monetary policy, Foreign direct investment, Illicit activities, Insurance, International Aid, International Organizaitons, International trade, South Korea, USA | Comments Closed

North Korean Economy Watch