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North Korean Counterfeiting of U.S. Currency

Authors:
  • george c Marshall center

Abstract

The United States has accused the Democratic People's Republic of Korea (DPRK or North Korea) of counterfeiting U.S. $100 Federal Reserve notes (supernotes) and passing them off in various countries. This is one of several illicit activities by North Korea apparently done to generate foreign exchange that is used to purchase imports or finance government activities abroad. Although Pyongyang denies complicity in any counterfeiting operation, at least $45 million in such supernotes of North Korean origin have been detected in circulation, and estimates are that the country has earned from $15 to $25 million per year from counterfeiting. The illegal nature of any counterfeiting activity makes open-source information on the scope and scale of DPRK counterfeiting and distribution operations incomplete. South Korean intelligence has corroborated information on North Korean production of forged currency prior to 1998, and certain individuals have been indicted in U.S. courts for distributing such forged currency. Media reports in January 2006 state that Chinese investigators have independently confirmed allegations of DPRK counterfeiting. U.S. policy toward the alleged counterfeiting is split between law enforcement efforts and political and diplomatic pressures. On the law enforcement side, individuals have been indicted and the Banco Delta Asia bank in Macao (a territory of China) has been named as a primary money laundering concern under the Patriot Act. This started a financial chain reaction under which banks, not only from the United States but from other nations, have declined to deal with even some legitimate North Korea traders. North Koreans appear to be moving their international bank accounts to Chinese and other banks. In December 2006, North Korea agreed to return to the Six-Party Talks on its nuclear weapons program, but during the talks Pyongyang refused to discuss denuclearization officially until the Banco Delta financial sanctions were lifted.
Order Code RL33324
North Korean Counterfeiting of U.S. Currency
Updated January 17, 2007
Raphael F. Perl
Specialist in International Affairs
Foreign Affairs, Defense, and Trade Division
Dick K. Nanto
Specialist in Industry and Trade
Foreign Affairs, Defense, and Trade Division
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North Korean Counterfeiting of U.S. Currency
Summary
The United States has accused the Democratic People’s Republic of Korea
(DPRK or North Korea) of counterfeiting U.S. $100 Federal Reserve notes
(supernotes) and passing them off in various countries. This is one of several illicit
activities by North Korea apparently done to generate foreign exchange that is used
to purchase imports or finance government activities abroad.
Although Pyongyang denies complicity in any counterfeiting operation, at least
$45 million in such supernotes of North Korean origin have been detected in
circulation, and estimates are that the country has earned from $15 to $25 million per
year from counterfeiting. The illegal nature of any counterfeiting activity makes
open-source information on the scope and scale of DPRK counterfeiting and
distribution operations incomplete. South Korean intelligence has corroborated
information on North Korean production of forged currency prior to 1998, and
certain individuals have been indicted in U.S. courts for distributing such forged
currency. Media reports in January 2006 state that Chinese investigators have
independently confirmed allegations of DPRK counterfeiting.
For the United States, North Korean counterfeiting represents a direct attack on
a protected national asset; might undermine confidence in the U.S. dollar and depress
its value; and, if done extensively enough, potentially damage the U.S. economy.
The earnings from counterfeiting also could be significant to Pyongyang and may be
used to purchase weapons technology, fund travel abroad, meet “slush fund”
purchases of luxury foreign goods, or even help fund the DPRK’s nuclear program.
U.S. policy toward the alleged counterfeiting is split between law enforcement
efforts and political and diplomatic pressures. On the law enforcement side,
individuals have been indicted and the Banco Delta Asia bank in Macao (a territory
of China) has been named as a primary money laundering concern under the Patriot
Act. This started a financial chain reaction under which banks, not only from the
United States but from other nations, have declined to deal with even some legitimate
North Korea traders. North Koreans appear to be moving their international bank
accounts to Chinese and other banks. In December 2006, North Korea agreed to
return to the six-party talks on its nuclear weapons program, but during the talks
Pyongyang refused to discuss denuclearization officially until the Banco Delta
financial sanctions were lifted. It is not known whether North Korea currently is
engaged in supernote production, but such notes suspected to be from earlier
production runs reportedly are readily available in a Chinese town just north of the
DPRK border.
The political/security track attempts to stop the alleged counterfeiting activity
though diplomatic pressures, the Illicit Activities Initiative, and direct talks with
North Korea through a working group on U.S. financial sanctions that in December
2006 first met alongside the six-party talks. In these talks, the U.S. side stated that
U.S. sanctions on Banco Delta could be resolved if North Korea punishes the
counterfeiters and destroys their equipment. This report will be updated as
circumstances warrant.
Contents
U.S. Interests and Actions ...........................................1
Limits on Information ..............................................2
The Need to Counterfeit Currency .....................................3
Alleged Areas of DPRK Criminal Activities .............................3
Amount of Bogus U.S. Currency ......................................8
Denial of Counterfeiting by North Korea ...............................9
State-Sponsored Counterfeiting? .....................................10
A Summary of Main Points .........................................10
Policy Implications ...............................................11
1 See section “Amount of Bogus U.S. Currency,” below.
North Korean Counterfeiting of U.S.
Currency
The United States has accused the Democratic People’s Republic of Korea
(DPRK or North Korea) of counterfeiting U.S. $100 Federal Reserve notes
(supernotes) and passing them off in various countries. This is one of several illicit
activities by North Korea apparently done to generate foreign exchange that is used
to purchase imports or finance government activities abroad.
The purpose of this report is to provide a summary of what is known from open
sources on the DPRK’s alleged counterfeiting of U.S. currency, examine North
Korean motives and methods, and discuss U.S. interests and policy options.
Although Pyongyang denies complicity in any counterfeiting operation,
estimates are that at least $45 million in such supernotes of North Korean origin are
in circulation and that the country has earned from $15 to $25 million per year from
counterfeiting.1 South Korean intelligence has corroborated information on past
production of forged currency — at least until 1998 — and several U.S. court
indictments indicate that certain individuals have been accused of distributing such
forged currency more recently.
U.S. Interests and Actions
For the United States large-scale counterfeiting of U.S. currency, whether done
by North Korea or not, has a direct bearing on U.S. interests. The counterfeiting,
itself, could undermine confidence in the U.S. dollar and, if done extensively enough,
potentially damage the U.S. economy. It also is a direct attack on a protected asset
of the United States and a violation of U.S. and other laws. If being done by the
DPRK government, it violates accepted international norms. It also could affect the
willingness of financial institutions in certain areas to accept legitimate U.S.
currency, or it might induce them to impose surcharges when exchanging certain U.S.
banknotes for their currency.
In a broader sense, the counterfeiting, to the extent that North Korea is the
nation involved, arguably affects U.S. national security. North Korea is a Stalinist
regime with self-announced aspirations to become a nuclear power. It is led by a
communist dictator with a taste for luxury imports and need to subsidize his inner
circle of supporters and broader ranks of party cadres. Yet the North Korean
economy scarcely produces enough to feed its population and incurs a billion-dollar
CRS-2
2 Kyodo World Service. 6-way Talks’ Delegates Leave Beijing After 5-Day Discussions.
December 23, 2006. Note: The United States does not consider the actions to be sanctions,
but North Korea has characterized them as such.
3 Department of the Treasury. The U.S. Treasury, Federal Reserve and U.S. Secret Service
Announce the Redesign of the $5 Note. News Release, Washington, June 29, 2006.
trade deficit each year. Proceeds from counterfeiting could be used to maintain the
regime’s power or contribute to instability in East Asia.
The United States is ratcheting up a two-pronged approach to stem the alleged
North Korean counterfeiting of U.S. currency. The first is through law enforcement
initiatives. The second is through political and diplomatic efforts. The immediate
goal is to bring a verifiable halt to both the production and distribution of bogus U.S.
currency by North Korea. In the broader perspective, curbing North Korea’s illicit
activities is one piece of an overall U.S. strategy to halt Pyongyang’s nuclear
weapons program, to defuse tensions in Northeast Asia, and to induce the DPRK to
adopt policies less inimical to its own people, the region, and the world.
U.S. law enforcement actions to curb the alleged counterfeiting led to financial
measures taken by the United States in September 2005 to prevent the country from
laundering proceeds from its alleged illicit activities through Macao’s Banco Delta
Asia. As discussed below, this action froze some $24 million in North Korean
accounts in that bank and caused banks in other countries also to close their North
Korean accounts, even those for legitimate business. For the year following the
financial restrictions, they have been Pyongyang’s main complaint and the reason it
had given for boycotting the six-party talks on North Korea’s nuclear programs.
Even after returning to the talks in December 2006, Pyongyang refused to discuss
denuclearization officially until the Banco Delta financial sanctions were lifted.2 Th e
actions related to North Korea’s counterfeiting activities, therefore, seem to be also
halting progress on the larger issue of North Korea’s development of nuclear
weapons. (For discussion of U.S. policy, see section on “Policy Implications.”)
A redesign of the U.S. $100 bill is currently in progress to include enhanced
technologies to deter counterfeiters. The Department of the Treasury expects to
introduce the redesigned note to the public after early 2008.3 However, bills
previously produced, are expected to remain in circulation for the foreseeable future
making it possible for the DPRK to continue to circulate earlier production runs of
its counterfeit supernotes.
Limits on Information
Because counterfeiting is a form of clandestine criminal activity, a goal of those
engaged in it is that it remain clandestine and undetected to the maximum extent
possible. Thus, to the extent that the United States and other countries have
information on the scope and scale of DPRK counterfeiting and distribution
operations, such information is likely to be incomplete. As the DPRK is a relatively
closed society, information on any production of counterfeit U.S. currency there —
other than that received from defectors — is likely to be the product of intelligence
CRS-3
4 Pichirallo, Joe. “Indictments Depict Noriega As Drug-Trafficking Kingpin; U.S. Had
Long Backed Panamanian Leader.” The Washington Post, February 6, 1988. pg. a.01.
5 Note that such estimates of scale of the DPRK’s foreign exchange deficit may be
exaggerated as the amount may be offset by undetermined amounts of aid from the Peoples
Republic of China.
sources and methods. Hence, it is unlikely that such information would be made
public for fear of compromising ongoing intelligence gathering operations.
On the other hand, involvement of DPRK citizens and officials in the
distribution of so called “supernotes” is more readily demonstrated once criminal
investigations have been completed, arrests have been made, indictments issued, and
convictions/and or confessions obtained. Indeed, a number of such indictments have
been issued, and presumably a number of ongoing investigations remain in the
pipeline. U.S. officials appear to be increasingly sensitive to a need to support public
allegations with the weight of de facto legal evidence — fueling speculation that
“Noreiga-type” criminal indictments4 against the North Korean leadership may be a
policy option under active consideration.
Also at issue is the credibility of information provided U.S. authorities by the
South Korean government and its National Intelligence Services in matters involving
Pyongyang’s criminal activities. Whereas in past years Seoul’s reporting on such
matters was considered highly reliable, some now suggest downplaying the scope of
any such activity better dovetails with the goals and objectives of Seoul’s more recent
conciliatory unification policy vis-a-vis the North.
The Need to Counterfeit Currency
North Korea needs to raise approximately $1 billion per year to fund its
merchandise trade deficit.5 The DPRK imports more than it exports and must
generate enough foreign exchange to cover the difference through some means —
either legal or illegal. Legal means include borrowing, foreign investments, foreign
aid, remittances from overseas Koreans, selling military equipment not reflected in
trade data, and by selling services abroad. Illegal methods include the counterfeiting
of hard currency, illegal sales of military equipment or technology, sales of illegal
drugs or counterfeit cigarettes and pharmaceuticals, or by shipping illegal cargo
between third countries. The country also can dip into its meager foreign exchange
reserves. North Korea considers the United States to be a hostile nation and often
takes actions commensurate with that policy.
Alleged Areas of DPRK Criminal Activities
Allegations of North Korean drug production, trafficking, and crime- for- profit
activity have become the focus of rising attention in Congress, the Administration,
CRS-4
6 See generally CRS Report RL32167, Drug Trafficking and North Korea: Issues for U.S.
Policy, by Raphael Perl.
7 In July 2004, for example, the U.S. Secret Service reportedly uncovered a network selling
counterfeit North Korean made cigarettes, pharmaceuticals, and $100 bills. See Frederik
Balfour et. al., “Fakes,” Business Week, February 7, 2005. Criminal indictments
subsequently ensued. See generally: BBC News, “What is a superdollar?”, June 20, 2004.
8 Press conference of the President, January 26, 2006, p.9. [http://www.whitehouse.gov/
news/releases/2006/01/20060126.html]
9 See testimony of John Negroponte before the Senate Intelligence Committee on the issue
of Worldwide Threats to the United States, February 2, 2005. Note that Negroponte’s
remarks came at a time when the six-party talks on North Korea’s nuclear ambitions
remained stalled over North Korea’s insistence that the United States remove proposed
Treasury Department sanctions against Banco Delta Asia for its alleged role in laundering
proceeds of DRPK criminal activity and distributing of DPRK produced counterfeit U.S.
currency. See “North Korean Counterfeiting Complicates Nuclear Crisis,” by Martin
Fackler, New York Times, January 29, 2006, p. 3.
and the press, as well as in the diplomatic community.6 Areas of DPRK criminal
activity commonly cited include production and trafficking in: (1) heroin and
methamphetamines; (2) counterfeit cigarettes; (3) counterfeit pharmaceuticals (for
example “USA” manufactured Viagra); and (4) counterfeit currency (e.g., U.S. $100
bill “supernotes”).7
DPRK production and trafficking of “supernotes” have been addressed in 2006
by both National Intelligence Director John Negroponte and President George W.
Bush. In a January 26, 2006, White House Press Conference, President Bush — in
commenting on the issue of income generated by North Korean criminal activity
remarked:
When somebody is counterfeiting our money, we want to stop them from doing
that. And so we are aggressively saying to the North Koreans, just — don’t
counterfeit our money. And we are working with others to prevent their illicit
activities.8
Shortly thereafter, National Intelligence Director John Negroponte, in testimony
before Congress, stated that North Korea “produces and smuggles abroad counterfeit
U.S. currency as well as narcotics and other contraband.”9
In a Senate Committee on Government Affairs hearing in 2003, William Bach,
the Director of the Office of African, Asian and European Affairs in the Bureau for
International Narcotics and Law Enforcement Affairs of the U.S. Department of
State, stated:
The U.S. Secret Service Counterfeit Division is aware of numerous cases of
counterfeiting with North Korean connections. Typical of such cases was one
reported in Macao in 1994, when North Korean trading company executives,
who carried diplomatic passports, were arrested for depositing $250,000 in
counterfeit notes in a Macao bank. There are numerous other counterfeiting
CRS-5
10 Bach, William. Hearing Testimony. Drugs, Counterfeiting, and Weapons Proliferation:
The North Korean Connection. Hearing Before the Financial Management, the Budget, and
International Security Subcommittee of the Committee on Governmental Affairs, United
States Senate 108th Congress, First Session, S.Hrg. 108-157, May 20, 2003. p. 6.
11 U.S. Department of State, Bureau for International Narcotics and Law Enforcement
Affairs. International Narcotics Control Strategy Report — 2006. March 2006. Part II.
12 See “The ‘Soprano State?’ North Korean Involvement in Criminal Activity and
Implications for International Security,” by Sheena E. Chestnut (hereinafter cited as
Chestnut), Stanford University Honors Thesis, May 20, 2005, p.81 citing Cumings, Bruce,
Korea’s Place in the Sun: A Modern History (Norton, New York) 1997, and Michishita,
Narushigwe, “Calculated Adventurism: North Korea’s Military-Diplomatic Campaigns,”
Korean Journal of Defense Analysis, Vol. XVI, No.2, Fall 2004. Note that the term
“Soprano State”was originally coined by U.S. News and World Report investigative
journalist David Kaplan in 2003; see “The Far East Sopranos,” by David E. Kaplan, U.S.
News and World Report, January 27, 2003.
13 See “Seoul’s U-Turn on N. Korean Counterfeiting Could be Fatal,” Chosun Ilbo (English
Edition), December 25, 2005. The title of the 1988 report is cited as “A New Threat in the
21st Century: Realities and Responses to International Crimes.”
14 See “Korea Exchange Bank cuts ties with Macau bank accused of laundering money for
North Korea,” Associated Press Report (Seoul) Feb. 3, 2006. See also “No sign of North
Korea making fake bills since 1998: spy agency,” Yonhap, Feb. 3, 2006. Note that media
(continued...)
incidents with links to Macao banks, North Korea, and North Korean
diplomats.10
The State Department’s 2006 International Narcotics Control Strategy Report
released by the Bureau for International Narcotics and Law Enforcement Affairs
states that, for decades, citizens of the DPRK “have been apprehended trafficking in
narcotics and engaged in other forms of criminal behavior, including passing
counterfeit U.S. currency.” These have been carried out in league with criminal
organizations around the world.11
Counterfeiting of foreign currency is apparently a phenomenon that is not new
to the government of North Korea. Seoul’s War Memorial Museum reportedly
contains DPRK-manufactured South Korean currency from the 1950’s, the
production of which reportedly continued into the 1960’s.12 South Korean media
reports cite a 1998 South Korean National Intelligence Service (NIS) Report to the
effect that North Korea forges and circulates U.S. $100 banknotes worth $15 million
a year. Subsequent reports to the South Korean National Assembly in the same year
and in 1999 are cited in the media as stating that North Korea operates three banknote
forging agencies and that more than $4.6 million in bogus dollar bills had been
uncovered on thirteen occasions since 1994.13
Subsequent press reports (of February 2, 2006) cite a Uri Party Member of
Parliament’s account of a closed briefing by South Korea’s National Intelligence
Service to members of Korea’s National Assembly to the effect that North Koreans
were arrested abroad for counterfeiting offenses in the 1990’s but that the Service had
no evidence of the North making bogus currency after 1998.14 Informed South
CRS-6
14 (...continued)
reports contain at least a handful of reports by defectors that lend credence to the notion that
the DPRK produced counterfeit greenbacks under government direction prior to 1996. For
a consolidated overview of such reports see Sheena Chestnut, Soprano State, pp. 86-89.
15 See “Seeking international cooperation to stop manufacturing of North Korea’s money,”
Chosun Ilbo (Internet Version), December 27, 2005. Media report suggestions that the
DPRK may have ceased production of counterfeit greenbacks prior to the end of 1998,
however, may be contradicted by at least one defector who fled the North in 2000.
According to one press report, the defector, a chemist connected to the Sean Garland case,
was reportedly part of a team of North Korean experts ordered to produce fake U.S. $100
bills. However, what is publically known about him, his activities, and their connection to
the DPRK regime appears at this point to be anecdotal and sketchy at best. See
“Counterfeiting cases point to North Korea,” by Josh Meyer and Barbara Demick, L. A.
Times, Dec. 12, 2005. Note that often statements by individuals termed “North Korean
defectors,” have been considered unreliable when it comes to intimate knowledge of highly
secretive, closed, DPRK programs.
16 See “U.S. says S. Korea fake notes made in North,” by Jon Herskovitz and Jack Kim,
Reuters, Feb. 27, 2006. Accounts in subsidiaries of the Bank of China, Hong Kong have
been frozen as a result of reported links to the DPRK’s trade in supernotes, and other
criminal activities. See “HK link to Pyongyang ‘supernotes’ N Koreans have cut counterfeit
deals in the city, with payments made via Bank of China subsidiary,” by Greg Torode, South
China Morning Post, February 26, 2006.
17 See “Seeking international cooperation to stop manufacturing of North Korea’s money,”
Chosun Ilbo (Internet Version), December 27, 2005.
18 See “North Korean Counterfeiting Complicates Nuclear Crisis,” by Martin Fackler, New
York Times, January 29, 2006, p. 3.
Korean sources have confirmed the above stated content of the briefing, but insist
that the NIS lack of hard evidence of DPRK supernote production after 1998 should
not necessarily be construed to mean that such activity has ceased. Post -1998 South
Korean media reports note that South Korean authorities have continued to seize
bogus U.S. currency — including 1,400 counterfeit U.S. $100 bills in April 2005, but
that they have not traced the source.15 Subsequent press reports state that the United
States has provided South Korea with examples of DPRK source counterfeit 2001
& 2003 series $100 notes. Moreover, the U.S. has reportedly determined that at least
$140,000 worth of counterfeit notes seized by South Korean police in April 2005 was
manufactured in the DPRK as part of a batch produced in 2001, and distributed by
Pyongyang.16
On June 13, 2003, South Korea, the United States and Japan held a North Korea
policy coordination group meeting and announced an agreement that reportedly
stated, “The three countries’ delegations express concern about the illegal activities
of organizations in North Korea, including drug smuggling and money
counterfeiting.”17 Moreover, media reports as recent as January 20, 2006 stated that
Chinese investigators have independently confirmed allegations of DPRK
counterfeiting.18
Arrests and indictments point to DPRK trafficking in bogus U.S. currency as
recently as 2005. In August 2005, federal law enforcement authorities completed two
CRS-7
19 See generally, remarks of Acting Assistant Attorney General, John C. Richter of Aug.22,
2005. [http://www.usdoj.gov/criminal/press_room/speeches/2005_4193_
rmrksOprSmokngDrgnNroylChrm082405O.pdf]
20 See “Arrest ties Pyongyang to counterfeit $100 bills,” by Bill Gertz, Washington Times,
Sept. 20, 2005, p. A1.
21 See “North Korean Counterfeiting Complicates Nuclear Crisis” by Martin Fackler, New
York Times, January 29, 2006, p. 3. See “Garland stands accused by US over counterfeit
made in North Korea,” Irish Times, October 17, 2005. Garland was arrested October 7,
2005, as a result of pending U.S. proceedings against him. See also Department of Justice
Press Release of October 8, 2005, on Arrest of Leader of Irish Workers Party.
22 See Chestnut, pp. 144-145. The South Korean media reports that authorities there had
discovered 1,400 supernotes (presumed to be of DPRK origin) in April 2005, but little more
is known about such reports. See “DPRK’s manufacturing of counterfeit money was
common sense within the National Intelligence Service,” Chosun Ilbo (Internet Version)
December 27, 2005.
23 Torode, Greg. “Fake US Supernotes Find Their Way to HK. Pyongyang’s Counterfeit
Bills Are Seized from American in Transit.” South China Morning Post, March 5, 2006,
(continued...)
undercover operations in New Jersey and in California which focused on the
activities of members of China’s Triad criminal syndicates. The operations, named
Royal Charm and Smoking Dragon, reportedly netted some $4 million in supernotes
believed to be of North Korean origin. Illicit narcotics, and counterfeit brand
cigarettes and pharmaceuticals were seized as well. U.S. government authorities
indicate there is the potential that ensuing trials and/or the plea bargaining process
will reveal direct links between some of the smugglers and North Korean officials or
government entities.19
One of the indictments issued in the above cited cases identifies Chao Tung Wu,
a Taiwanese in custody for dealing in counterfeit bills, and alleges that he told
undercover agents that the government of a nation — identified in the indictment as
“country 2” — was producing counterfeit notes.20 Country two has been widely cited
in the media as being North Korea. Another law enforcement operation led to the
arrest in Northern Ireland of Sean Garland, a leading member of an Irish Republican
Army faction on charges of circulating more than $1 million of supernotes (believed
to be DPRK government produced) in Britain and Eastern Europe.21 A request for
his extradition to the United States ensued in mid-October 2005.
A Stanford University Honors Thesis Researcher, Sheena Chestnut, lists
thirteen reported incidents since 1994 of North Korean involvement in
smuggling/distributing counterfeit U.S. currency. All of these incidents allegedly
occurred in either Asia or Europe. In them, the use of DPRK diplomatic passports
and the involvement of DPRK diplomats, embassy personnel, and DPRK government
trading company officials connect most of these incidents to the government of North
Korea in varying degrees. Taken collectively, the link is seen as being even stronger.
Of these 13 incidents, 6 have occurred since 1999, the time after which the NIS
reportedly is unable to conclude that the DPRK continued producing counterfeit
notes.22 As recently as March 2006, counterfeit supernotes were reportedly seized by
police in Hong Kong from a Chinese-American man in transit from Macau.23
CRS-8
23 (...continued)
p. 3. Supernotes have reportedly shown up on 2005-2006 in Peru, Paraguay, Mongolia,
Hong Kong, and Ethiopia.
24 Kwak Tae-chung. Getting North Korean-made Counterfeit Notes is a “Piece of Cake” —
Supernotes Identical to Real Ones Circulated Through the North Korea-China Border —
The Powerful Economic Sanctions by the United States Has Reduced the Quantity. Seoul
Weekly Dong-A, April 25, 2006, pp. 30-31. Original article in Korean, translated by the
Open Source Center as ROK Weekly on Decreases in Circulation of DPRK-made Illegal
Products in China.
25 See Interview with Kansai University’s Professor (Young Hwa?) Lee carried by Japan’s
TBS-TV, in an interview during a program on “Narcotics Economy in the Making of North
Korea,” January 16, 2007, 17:30-18:30 local time.
26 “Smuggler’s Tale: The Chinese Connection.” Dong’A Ilbo (Internet version) January 27,
2006. Reported by Open Source Center.
27 See Sanger, David E., “U.S. Is Shaping Plan to Pressure North Korea,” New York Times,
February 14, 2005, p. A-1. Note that this amount is more likely to be $48 million, although
apparently not publically cited.
In April 2006, a Korean reporter claimed in an article in a South Korean
newspaper that obtaining fake $100 bills that likely were manufactured in North
Korea was a “piece of cake” in the Chinese town of Dandong just across the DPRK’s
northern border. According to the reporter, counterfeit bills similar to real currency
fetch about 40% of their face value. Carefully manufactured $100 supernotes go for
$60 to $70 each. North Koreans refer to the counterfeit dollars as “kattalio” and the
business of dealing in them as “the kattalio game.” After the Banco Delta financial
sanctions, the article states that Pyongyang proclaimed that anyone involved in illegal
drugs or fake notes would be severely punished. In March 2006, two men convicted
of such activities were publicly executed. Since the Banco Delta sanctions, the
number of counterfeit notes circulated through North Korea reportedly has dropped.24
However, it may be that the number of counterfeit notes circulating within North
Korea has increased since imposition of the Banco Delta sanctions.25 Another
newspaper articled reported that in the North Korean counterfeit currency market, a
printed counterfeit $100 bill trades at 30% of its face value while electronically
copied currency made with color copy machines trades at 10% of its face value.26
Amount of Bogus U.S. Currency
The amount of alleged DPRK-produced counterfeit currency in circulation is
unknown. U.S. officials have been quoted citing a figure of $45 million since 1989.27
Presumably this is the amount detected by the Federal Reserve. Officials familiar
with the bogus currency in question, however, note its exceptional quality — so good
that many cashier-level bank employees would likely not be able to detect the
forgeries. This raises speculation that North Korea — if it is indeed producing the
fakes — might need somehow to mark the currency to be able to identify its own
bogus notes after production.
CRS-9
28 See discussion in CRS Report RL32167, Drug Trafficking and North Korea: Issues for
U.S. Policy, by Raphael Perl. See also CRS Report RL32493, The North Korean Economy:
Background and Policy Analysis, by Dick Nanto and Emma Chanlett-Avery. For the $15
million figure on counterfeiting, see Korea Herald, Nov.16, 1998. See also, “Is Your
Money Real?”, Newsweek, June 10, 1996, p. 10. According to some sources, income from
counterfeiting is considerably higher, i.e. $100 million. (See May 20, 2003 congressional
testimony of Larry Wortzel of the Heritage Foundation.) It is said that the U.S. detects
somewhere around $3-4 million per year in DPRK origin supernotes. Rough calculations of
the total amount of DPRK bogus supernotes in circulation in recent years are achieved by
multiplying this figure by a factor of 3 or 4 for an estimate of $9-16 million being placed in
circulation per year. However, the exact amount remains elusive given the fact that much
of the currency is passed in remote places and arguably banks have no financial incentive
to report such forgeries if they can pass them on. Data on amounts of U.S. dollars
counterfeited are not widely publicized so as not to undermine confidence in the U.S. dollar.
North Korean counterfeit U.S. $100 notes have been detected in at least 14 countries
including the United States since the 1970’s according to media reports. On June 20, 2004,
the BBC aired a “Superdollar” special which traced counterfeit $100 bills from North Korea
to an official IRA source in the U.K. Reportedly millions of fake $100 bills were laundered
through a bureaux de change in Britain. In July, 1996, a former member of the Japanese Red
Army, traveling on a DPRK diplomatic passport was arrested in Thailand while trying to
pass counterfeit U.S. $100 bills. See “Japanese Fake Bill Suspect Had N. Korean Passport,”
Kyodo News, July 5, 1996. For data on other forms of DPRK criminal/smuggling activity,
see Avoiding the Apocalypse: The Future of the Two Koreas, by Marcus Noland, Institute
for International Economics, Washington, D.C., June 2000, p.119. U.S. military sources
reportedly estimated DPRK income from counterfeiting of U.S. currency at $15-20 million
for the year 2001. See “N.K. Exported $580 Million Worth of Missiles to Middle East,”
Seoul Yonhap (English), May 13, 2003, citing Japanese Yomiuri Shimbum report of May 12,
2003.
29 This is but one of a string of DPRK denials. David L. Asher, former Coordinator of the
State Department’s North Korea Working Group, in his February 1, 2006 remarks to the
American Enterprise Institute cited another DPRK denial: “We had neither counterfeited
currency nor gotten involved in any illegal trafficking.”
The amount of money that the bogus supernotes allegedly bring to the coffers
of the North Korean government is unknown as well. Hence, estimates of the profit
such transactions bring to the Pyongyang regime — to the extent they are based on
open source material — are speculative at best. Amounts commonly cited, which
take into account many factors, range from $15 million to $25 million in profit per
year.28
Denial of Counterfeiting by North Korea
The DPRK has consistently denied allegations of state involvement in criminal
activity, specifically in any counterfeiting activity, and it has vowed to resist U.S.
pressure over the matter. A January 24, 2006 commentary carried by the state-run
Korean Central News Agency reported that Pyongyang “does not allow such things
as bad treatment of the people, counterfeiting, and drug trafficking.”29 In what may
be an indication of DPRK willingness to curb any illicit counterfeiting activity, the
DPRK Foreign Ministry announced on February 9, 2006, that “there is no evidence
proving (North Korea’s) issue of counterfeit notes or money laundering” but that the
CRS-10
30 See KCNA (official North Korean News Agency) broadcast of 1006 GMT, February 9,
2006. Reported in “North Korea vows to join international anti-money laundering drive,”
MSN News, Feb. 9, 2006, and untitled AP report from Seoul of February 9, 2006.
Statements by a DPRK Foreign Ministry spokesperson are typically reserved for high level
communications with the outside world. Reuters and Agence France Presse (AFP) reported
on the broadcast as well.
31 See CRS Report RL32493, The North Korean Economy: Background and Policy Analysis,
by Dick Nanto and Emma Chanlett-Avery, January 2005. For a discussion of U.S. response
options reportedly reviewed see “U.S. is Shaping Plan to Pressure North Korea,” by David
E. Sanger, New York Times, Feb. 14, 2005, A-1.
country “will as ever actively join the international actions against money
laundering.... It is the consistent policy of the (North Korean) government to oppose
all sorts of illegal acts in the financial field.” The Foreign Ministry spokesman went
on to say that the DPRK has “perfect legal and institutional mechanisms to combat
such illegal acts as counterfeiting notes and money laundering, and any illegal acts
are liable to severe punishment.”30
State-Sponsored Counterfeiting?
Assuming that production of bogus U.S. currency is actually taking place in
North Korea, some suggest that this does not necessarily mean that such activity is
being done under government sponsorship, direction, or supervision. They argue that
counterfeiting is a criminal phenomenon that is widespread throughout the world, and
it is rarely, if ever, state-sponsored. Others say that there may be merit to such
arguments, but North Korea could be an exception to any such norms.
It can be said that it is widely acknowledged that the Pyongyang regime engages
— or has engaged — in a broad range of other crime for profit activity. Hence,
inhibitions against counterfeiting may not be strong. The sophisticated type of
equipment reportedly required for the production of supernotes is generally tightly
controlled and generally restricted for sale to governments. Finally, North Korea is
a closed authoritarian regime, and, as such, it is unlikely that any counterfeiting
activity — which requires centralized production — would not be government
sponsored, or at some point, come under government control.
A Summary of Main Points
Information publically available suggests an expansion in both the scale and
scope of North Korean cash-generating, criminal activity. This possibly indicates a
situation in which criminal activity is playing an increasingly pivotal role in
supporting North Korea’s fragile economy. 31
It is widely acknowledged that undetermined millions of dollars of so-called
U.S. $100 supernotes are currently in circulation. Given the sophistication of the
bills, many have concluded that they are government produced. The government of
North Korea has a demonstrated history of engaging in criminal activity to raise cash.
CRS-11
32 Note for example, that one operation against what is believed to be North Korean linked
contraband smugglers reportedly netted not only some $4 million in supernotes, but also
$700 in counterfeit U.S. postage stamps. See “Crime does pay for North Korea,” by Peter
Brooks, Boston Herald (op-ed), January 17, 2006.
33 Note that press reports indicate that the U.S. Secret Service estimates $43.4 million in
counterfeit currency was circulated in the United States in 2004 alone. It is estimated that
$700 billion in genuine U.S. currency exists worldwide. Generally, disclosure that large
amounts of U.S. currency in use worldwide might be bogus would likely be seen not to serve
the best interests of the nation. As a result, some suggest the United States may be
downplaying the scale of alleged DPRK counterfeiting activity — but nevertheless
according it the high policy priority the actual level of such activity warrants.
34 See footnote number 198.
It arguably has the disposition, opportunity, and technical means to produce forged
supernotes.
Past production by North Korea of forged U.S. currency — at least until 1998
— has been reported by South Korea’s National Intelligence Service. Indications of
Pyongyang’s more recent production of forged U.S. currency have seemingly been
posited by defectors, and by Chinese investigators as well.
Many observers are convinced that the DPRK has been counterfeiting U.S.
currency as matter of state policy. However, it is not fully clear from public sources
whether North Korean state enterprises have continued to produce bogus dollars after
1998. At issue here is whether bills now being circulated are new or solely from
stashes of earlier production runs. There appears to be a reasonable case that North
Korea has continued to counterfeit U.S. currency since 1998. Also, not clear or
publically announced, is the extent to which Pyongyang may have counterfeited —
or may be counterfeiting — currencies other than the dollar.32
As North Korea is a secretive and closed society, activity taking place within the
country, such as production of bogus foreign currencies — to the extent that such
activities exist — may be difficult to demonstrate publically without compromising
fragile intelligence sources and methods. In contrast, distribution of counterfeit U.S.
currency is likely to take place in countries where the money can purchase items of
value, i.e., more open and economically successful societies.33 Numerous arrests
outside the United States and recent indictments clearly involve individuals with
links to the government of North Korea or its state-run enterprises.34 This being the
case, it is difficult to conclude that the government of North Korea has not been
involved — at least until very recently — in distributing bogus U.S. currency.
Policy Implications
For the United States the North Korean counterfeiting of U.S. currency
combined with secondary effects has a direct bearing on U.S. interests.
Counterfeiting of one nation’s currency by another generally is considered to be an
CRS-12
35 Asher, David L. “The North Korean Criminal State, its Ties to Organized Crime, and the
Possibility of WMD Proliferation.” The Nautilus Institute. Policy Forum Online 05-92A:
November 15th, 2005.
36 The Federal Reserve Board. Currency and Coin Services. On Internet at
[http://www.federalreserve.gov/paymentsystems/coin/default.htm]
37 The Federal Reserve Board. Currency in Circulation: Value. On Internet at
[http://www.federalreserve.gov/paymentsystems/coin/currcircvalue.htm].
act of economic warfare — a direct attack on the U.S. financial system.35 There is
a large difference between criminal counterfeiting by private parties and that done or
sanctioned by a nation. The counterfeiting, itself, might undermine confidence in
the U.S. dollar and, if done extensively enough, potentially damage the U.S.
economy. If the extent of counterfeiting were in the range of $15 million to $25
million per year, however, this would represent a relatively small amount compared
with the total U.S. supply of currency or the amount circulating abroad. As of
February 2006, currency in circulation — that is, U.S. coins and paper currency in the
hands of the public — totaled about $780 billion. Since 1994, the value of currency
in circulation has risen at the rate of 6.5% per year, mostly stemming from foreign
demand. The U.S. Federal Reserve estimates that between one-half and two-thirds
of the value of currency in circulation is held outside the United States.36 In the
United States, most domestic transactions (by value) are done either electronically
or by checks, not cash. As of December 2004, 72% of the value of currency in
circulation consisted of $100 notes, the denomination allegedly counterfeited by the
DPRK.37
Counterfeiting also can reduce the confidence by foreigners in the dollar. The
dollar has become the predominant medium of exchange in international transactions.
Such degraded confidence in the dollar usually can be manifested either by a
surcharge on certain denominations when converting dollars to foreign exchange or
in certain denominations of the dollar not being accepted at all. Currently, this
affects Americans and other holders of dollar currency who rely on cash for
transactions rather than credit cards, checks, or bank transfers. If the counterfeiting
were to become extensive enough, however, it might depress the overall exchange
value of the dollar.
Even though the suspected amount of counterfeiting by the DPRK is relatively
small when compared with all U.S. currency in circulation, its importance to
Pyongyang and the ruling communist party could be significant. It apparently helps
fund travel abroad, meet “slush fund” purchases of foreign goods, and subsidize the
lifestyles of the privileged class in Pyongyang.
Even though the macroeconomic effect of a counterfeiting operation generating
around $15 million to $25 million per year is minor, counterfeiting, itself, is a
violation of U.S. law. The Treasury, including the Secret Service, and the Federal
Reserve have primary responsibilities for addressing the counterfeiting of U.S.
currency. The Federal Reserve’s role is to distribute and ensure the physical
integrity, including the authenticity, of U.S. currency. The Secretary of the Treasury
is responsible for issuing and protecting U.S. currency. The Bureau of Engraving and
Printing produces the currency. It has announced that one of its priorities for FY2007
CRS-13
38 The Department of the Treasury. Budget in Brief FY2007. P. 87.
39 U.S. General Accountability Office. Testimony. Counterfeit U.S. Currency Abroad:
Observations on Counterfeiting and U.S. Deterrence Efforts. February 27, 1996
(GAO/T-GGD-96-82).
40 The Department of the Treasury. Treasury Designates Banco Delta Asia as Primary
Money Laundering Concern under USA Patriot Act. Press Release JS-2720. September 15,
2005. See Federal Register, Vol. 70 No. 181, Sept. 20, 2005 (Notices), p. 55214. The
finding asserts that at least one regular North-Korean-front client of BDA was widely
reported to be conducting “numerous illegal activities, including distributing counterfeit
currency and smuggling counterfeit tobacco products” for over a decade. See also
Department of Treasury Press Release of September 15, 2005 (JS-2720), on Treasury
Designation of Banco Delta Asia as a Primary Money Laundering Concern and Treasury
Dept. FINCEN Advisory of December 13, 2005, on Guidelines to Financial Institutions on
the Provision of Banking Services to North Korean Government Agencies and Associated
Front Companies Engaged in Illicit Activities which encourages financial institutions
worldwide to take precautions that they are not used as a conduit for the laundering of
proceeds of DPRK illicit activities.
41 See Federal Register, Vol. 70 No. 181, Sept. 20, 2005 (Notice of Proposed Rulemaking)
p. 55217ff.
is to redesign the $100 note.38 The Secret Service conducts investigations of
counterfeiting activities, provides counterfeit-detection training, and is responsible
for anticounterfeiting efforts abroad.39
So far, the United States had taken a two-pronged (but overlapping) approach
toward North Korea’s alleged counterfeiting activities: law enforcement and
political/security pressures. The law-enforcement prong involves prosecuting or
sanctioning individuals and/or institutions involved in the distribution of the bogus
currency.
On September 15, 2005, the U.S. Treasury imposed USA PATRIOT Act Section
311 designations against Banco Delta Asia (BDA) in Macau. In the action, Treasury
stated that the bank was a “primary money laundering concern” because, among other
findings, sources indicated that “senior officials in Banco Delta Asia are working
with DPRK officials to accept large deposits of cash, including counterfeit U.S.
currency, and agreeing to place that currency into circulation.”40 On September 20,
2005, the Financial Crimes Enforcement Network of Treasury imposed special
measures against Banco Delta Asia that prohibited U.S. institutions or agencies from
opening or maintaining correspondent accounts on behalf of BDA and required
covered financial institutions to exercise due diligence to ensure that no
correspondent account is being used indirectly to provide services to BDA.41
The U.S. action against Banco Delta Asia caused an avalanche of responses both
in financial and political circles. It caused such a run on accounts at the bank that the
government of Macau had to take over BDA’s operations and place a temporary halt
on withdrawals. According to press reports, the Macau government shut down all
CRS-14
42 See Wall Street Journal Asia, “North Korea’s economy feels fallout of U.S. move-Lenders
sever ties after sanction threat against Macau bank,” by Gordon Fairclough, Feb. 14, 2006.
Note that as generally private North Korean individuals do not hold accounts outside the
country, widespread speculation exists that the nine individual accounts seized belong to the
upper echelons of the DPRK elite. The U.S. has accused Banco Delta Asia of accepting and
circulating DPRK origin supernotes.
43 Fairclough, Gordon. “Politics & Economics: Banks Cut Ties to North Korea — U.S.
Threat Toward One Lender Has Surprisingly Big Ripple Effect.” The Wall Street Journal,
February 14, 2006. P. A6.
44 James A. Kelly. An Overview of U.S.-East Asia Policy, Testimony before the House
International Relations Committee, Washington, DC. June 2, 2004.
45 U.S. Department of State. Bureau of Nonproliferation. The Proliferation Security
(continued...)
North Korea-related accounts including those belonging to 20 DPRK banks, 11
DPRK trading companies, and 9 individuals from North Korea.42
The financial effects of the BDA action have been larger than expected. The
crackdown also spread around the region, with Chinese, Japanese, Vietnamese, Thai,
and Singaporean banks making life much tougher for North Korean account holders.
In Macau, the North Korean trading firm used by Pyongyang as a de facto consulate
rolled up its operations as the Macau government placed Banco Delta Asia into
receivership. Not only has the action deprived major DPRK companies of an
international financial base and cut into the secret personal accounts of the
Pyongyang leadership, but it appears to have obstructed some legitimate North
Korean trade. DPRK banks and traders reportedly are having difficulty finding other
lenders to conduct their overseas business. Banks from other nations (such as the
United Overseas Bank of Singapore and the Korea Exchange Bank of South Korea)
have moved to sever contacts with North Korea, fearing that they, too, could face
U.S. legal action.43
The political/security prong attempts to stop the alleged counterfeiting activity
by changing the cost-benefit calculus of decision makers in Pyongyang. The strategy
is to increase costs and reduce benefits in order to induce decision makers to halt the
activity. The inducements used are aimed primarily at raising costs and include the
Illicit Activities Initiative, the Proliferation Security Initiative, diplomatic pressures,
as well as possible military threats and other policy related measures.
The Illicit Activities Initiative, coordinated by the U.S. Department of State, is
aimed precisely at North Korea’s alleged counterfeiting and other illicit activities.
It is being developed in cooperation with other nations.44 The Proliferation Security
Initiative (PSI) is part of the larger counter proliferation effort worldwide and aimed
at more countries and groups than just North Korea — but the DPRK does receive
a particular focus. The PSI activity has received support from more than 60 countries
and more formal participation from 11 countries, particularly Japan, Australia, the
United Kingdom, France, Germany, Italy, and Spain. Under the PSI, participating
countries cooperate to prevent transfers of weapons of mass destruction-related items
to or from nation states and non state actors of proliferation concern. It does this
through intelligence sharing, diplomatic efforts, law enforcement, and interdiction.45
CRS-15
45 (...continued)
Initiative (PSI) (Fact Sheet). May 26, 2005. Congressional Research Service report
RS21881, Proliferation Security Initiative (PSI), by Sharon Squassoni.
46 Sanger, David. Questions Without Answers: the Korean Conundrum [Review]. The New
York Times, January 19, 2006. Pg. E.9.
47 U.S. Department of State. North Korea-U.S. Statement. Press Statement 2005/T13-29,
September 19, 2005.
48 See, for example: Choe, Sang-Hun. Roh Warns U.S. Over N. Korea. Blunt Speech
Shows Rift Between Allies. International Herald Tribune, January 26, 2006, pg. 1.
49 Ambassador Lee Tae-sik’s Speech Given at the St. Regis Hotel (Washington, DC). The
Korea-US Alliance - A Partnership for the Future, February 7, 2006. Korea Economic
Institute. [http://www.keia.com/2-Publications/2-6-Other/LeeTSspeech.pdf]
Policymakers reportedly are divided on the ultimate goal of squeezing North
Korea on its alleged illicit activities. A group of policymakers (sometimes referred
to as the “hawks”) favoring regime change seeks ultimately to induce a crisis within
the DPRK that would lead to the downfall of Kim Jong-il. One way to achieve this
is to cut off the money the DPRK generates from counterfeiting, selling illicit drugs,
and exporting missiles. A second group of policymakers more in favor of
engagement, seeks to resolve the North Korean problem mainly by negotiations. Its
goal is to change the “bad behavior” of the DPRK by bringing the country into the
circle of peaceful nations and inducing it to act in accord with international
standards.46 Each group backs initiatives to curb Pyongyang’s alleged counterfeiting,
but each sees the measures in a different light.
Some observers surmise that the financial action against Banco Delta Asia
announced on September 15, 2005, fell too close to the September 19 joint agreement
by the DPRK, the United States, and other participants in the six-party talks to be a
coincidence. At the end of this fourth round of talks, the DPRK signed an agreement
that set out a “visionary view of the end point of the process of the denuclearization
of the Korean Peninsula.”47 These observers opine that the action was backed by so-
called “hawks” in the Bush Administration to scuttle progress being made on the
diplomatic front. The United States had known about the counterfeiting and money
laundering activities for years. Why wait, they say, until the middle of a round of the
six-party talks to take action?48 Pyongyang has used the Banco Delta Asia action as
a pretext to stay away from the six-party talks. Other observers state, however, that
law enforcement efforts have a timetable of their own and that the Banco Delta Asia
action occurred after a three-year investigation when the evidence gathering and other
preparations were complete.
The position of the United States is that counterfeiting is an illegal activity that
cannot be allowed to continue. This is a separate issue from the six-party talks. The
South Korean government also has taken a firm position on this. It has clearly
communicated to North Korea that such illicit activities are not acceptable and that
Pyongyang should unequivocally turn away from such illicit behavior once and for
all. South Korea also thinks the Banco Delta Asia issue and the nuclear negotiations
should not be linked and that North Korea should return to the six-party talks.49
Seoul reportedly has tried in vain to reach a compromise with the United States to
CRS-16
50 ROK Editorial Says ROK-US ‘Discord’ Over DPRK Counterfeiting ‘Worrisome.” Dong-
A Ilbo, in Korean, January 25, 2006, p. 31. Translation by the U.S. Embassy in Seoul.
Provided by Open Source Center.
51 Hayes Says Counterfeiting Issue Sidetracks Nuclear Negotiations. Nautilus Weekly,
February 27 - March 3, 2006 . Quote by Nautilus Institute Executive Director Peter Hayes
speaking on Chicago Public Radio’s Worldview Program.
52 U.S. Department of the Treasury. Treasury Officials Brief North Koreans on Actions to
Stem DPRK Illicit Financial Activity. Press Release JS-4099, March 7, 2006. “N. Korea
Agrees to Discuss Counterfeit Issue with U.S.” The Chosun Ilbo. (Digital edition) February
24, 2006.
53 Kessler, Glenn. N. Korea Sets Terms for Return to Nuclear Talks . The Washington Post,
March 9, 2006. P. A16. DPRK Reportedly Proposed ‘Method’ to Resolve Financial
Dispute, Waits for US Response. Open Source Center report of Yonhap news article: N.
Korea Vows Not To Join Nuclear Talks Unless U.S. Sanctions Are Lifted, March 8, 2006.
Center-Left ROK Daily Carries Exclusive Interview With DPRK Delegate to New York
Meeting. Open Source Center report of article in Seoul Hankyoreh (Internet version) in
Korean. March 8, 2006.
54 Herskovitz, Jon and Jack Kim. U.S. Says S. Korea Fake Notes Made in North. Reuters
News, February 22, 2006.
55 Kyodo World Service. 6-way Talks’ Delegates Leave Beijing After 5-Day Discussions.
December 23, 2006. Note: The United States does not consider the actions to be sanctions,
but North Korea has characterized them as such.
consider Pyongyang’s counterfeiting activities illegal conduct by individual North
Korean firms and not by the government of the DPRK.50 One observer stated that the
bigger question being asked by China and South Korea is why is the United States
chasing after North Korea’s “loose change” when the country is making plutonium,
the real currency of state power?51
On March 7, 2006, North Korea’s Li Gun (head of the North America division
of North Korea’s Foreign Ministry) met with Assistant U.S. Treasury Secretary
Daniel Glaser at the United Nations in New York as part of a back channel for
communicating with each other.52 The U.S. side spent about 20 minutes explaining
its actions against Banco Delta Asia and what it expected from the DPRK. The
DPRK reportedly suggested several actions to resolve the issue and for it to return
to the six-party talks (including the lifting of the financial sanctions on Banco Delta
Asia, forming a joint U.S.-North Korean task force to examine the counterfeiting
concerns, giving North Korea access to the U.S. banking system, and providing North
Korea with technical help on identifying counterfeit bills).53 Separately, the U.S.
ambassador in Seoul indicated that Washington wants Pyongyang to prove that tools
used to counterfeit U.S. currency had been destroyed as evidence that North Korea
had abandoned such illegal activities.54
In December 2006, North Korea agreed to return to the six-party talks, but
during the talks Pyongyang refused to discuss denuclearization officially until the
Banco Delta financial sanctions were lifted.55 Pyongyang, however, did send the
president of the Foreign Trade Bank of North Korea (Oh Gwang-chul) along with
other financial experts to meet with Deputy Assistant Treasury Secretary Daniel
Glaser in the first meeting of a working group on U.S. financial sanctions that met
CRS-17
56 U.S. Offers Compromise Over N. Korea’s Dollar Forgeries. Chosun Ilbo (Digital
Chosun), December 20, 2006.
57 Reuters. Crackdown on North Korea Strains US-South Ties. January 28, 2006.
58 Chinese Banks Cut Transactions with North Korea-related Firms (From Kyodo News
Service). BBC Monitoring Asia Pacific. March 13, 2006.
59 ROK Daily Cites Diplomatic Source: PRC Confirms DPRK Money-Laundering in Macau
Open Source Center report of article by Chosun Ilbo (WWW-Text in English), January 11,
2006. [Chosun Ilbo headline: “China Finds N.Korea Guilty of Money Laundering”]
60 Fifield, Anna. “North Korea Is ‘Looking to Beat’ US Financial Sanctions.” Financial
Times, March 13, 2006. P. 1.
61 Treasury Issues Advisory on North Korean Banking. Bulletin News Network, the White
House Bulletin, March 16, 2006.
alongside six-party talks. A second meeting is to be held in January 2007. In these
talks, the U.S. side reportedly stated that the BDA issue could be resolved early if
North Korea punishes the counterfeiters and destroys their equipment.56 This is
viewed by some as an easing of the U.S. position as it opens the possibility for
resolving the BDA issue in order for the six-party talks to go forward.
Although South Korea has reluctantly supported the U.S. position on the
counterfeiting issue, the country has different interests. While Washington is using
both law enforcement and political means to place financial pressure on Pyongyang,
Seoul is looking for some compromise. The basic interests of the Bush
Administration lie in stopping the proliferation of weapons of mass destruction,
fighting terrorism, and protecting U.S. currency. South Korea, under President Roh
Moo-hyun, has placed priority on attaining regional peace, regional prosperity,
engagement, and eventual long-term unification with the DPRK.57
Since Portugal has returned Macao to China, Beijing now has supervisory
responsibility over Banco Delta Asia. China has been attempting to modernize its
banking system, and for one of its banks to be accused of money laundering clearly
does Beijing no good. This places pressure on China to ensure that Banco Delta Asia
and other banks are clean. Immediately after the Banco Delta action, major Chinese
banks dealing with foreign exchange reportedly refrained from transactions with
North Korean-related firms.58 China conducted a three-month investigation of the
accusations against Banco Delta Asia that, according to South Korean diplomatic
sources, confirmed the suspicions. Based on the findings, China reportedly is trying
to convince North Korea that it needs to take steps in the matter.59
North Koreans also are reportedly attempting to circumvent the financial
measures, but they have declined to disclose how they are doing it.60 Traditionally,
North Koreans have used Chinese banks for many of their international transactions,
and some surmise that Kim Jong-il’s trip to southern China in January 2006 may
have included an attempt to move some North Korean accounts to a financial
institution there. The U.S. Treasury has said that some reports suggest that North
Korean agencies have been transferring assets to banks in China.61 Others note that
Austrian banks have not refrained from making transactions with North Korea.
CRS-18
62 Major Chinese Banks Refrain From Dealing with N. Korean Firms. Kyodo News. March
13, 2006.
63 Japan to raise North Korea’s alleged laundering, drug trafficking in talks (From Kyodo
News Service), BBC Monitoring Asia Pacific, February 1, 2006. p. 1.
64 For legislation, see; CRS Report RL33567, Korea-U.S. Relations: Issues for Congress,
by Larry A. Niksch.
65 U.S. asks NK to Join Int’l Group on Money Laundering. Yonhap English News. March
12, 2006.
66 Brinkley, Joel. U.S. Squeezes North Korea’s Money Flow. The New York Times, March
10, 2006. p. 12.
Financial transactions with North Korea apparently still can be done through Austria
and Switzerland.62
Japan also seeks to defuse tensions with the DPRK, but Japan has cooperated
with the United States in both the Proliferation Security and Illicit Activities
Initiatives. In talks in February 2006 on normalization of relations with Pyongyang,
Japan announced that it intended to take up North Korea’s illicit activities, including
counterfeiting, in order to strengthen policy coordination with the United States and
the European Union.63
Congress will likely continue its interest in this topic including oversight of
Bush Administration actions, holding hearings to clarify U.S. policy, or using the
congressional pulpit to send messages to North Korea.64 Congress may explore
possible criminal charges against Kim Jong-il in a manner similar to those against
Manuel Noriega, the former leader of Panama, for drug trafficking. Other policy
levers using human rights or other issues also could be employed. The United States
has suggested to the DPRK that it join the Asia-Pacific Group on Money Laundering
(APG), a 30 member group (including the United States, Japan, and South Korea)
launched in 1997 as a sub-organization of the Organization of Economic Cooperation
and Development. It is aimed at preventing illegal financial activities in the
Asia-Pacific region and would subsequently require the disclosure of all of the
DPRK’s illicit financial activities.65 North Korea experts believe, however, that it
will not be easy for the North to join the 30 member group.
The current strategy of the Bush Administration reportedly is to pressure North
Korea but continue the diplomatic process. The fundamental issue is whether the
United States should place its policy bet on the success of the six-party talks with
various economic and security inducements to achieve the ultimate goals of
dismantling the DPRK’s nuclear weapon program or whether it should continue to
administer economic and other pressures to induce Pyongyang to give up its nuclear
ambitions and use the six-party talks as the vehicle to accept a possible North Korea
capitulation.66
Since, the effect of the Banco Delta Asia action has Pyongyang scrambling, a
question is whether the United States could ease its financial pressure on North
Korea enough for the six-party talks to go forward or whether it should tighten the
financial squeeze more — even at the risk of raising the ire of China and South
CRS-19
67 Samuels International Associates, The Nelson Report, January 16, 2007.
Korea. Neither of these countries thinks an economic collapse or regime change in
North Korea is likely to result from economic sanctions, and neither desires to deal
with the economic and political effects that would follow should such a collapse
occur. Yet to be determined, is the extent to which such broader strategic
considerations should perhaps govern the ultimate, detailed response to the problem
of North Korean counterfeiting of U.S. currency and other crime-for-profit-activity.
Currently the Bush Administration and Congress face a dilemma. The BDA
action (along with the U.N. sanctions prohibiting the export of luxury goods to the
DPRK) seem to be having a larger than anticipated negative effect on Pyongyang.
The DPRK, however, refuses to budge in the six-party talks on its nuclear weapons
program until the BDA problem is resolved and the sanctions are lifted. The
question is whether the BDA and other sanctions will place enough pressure on
Pyongyang to move on the nuclear weapons front or whether the sanctions merely
will impose additional hardships on North Korea’s general population (non-elites
without close ties to the military or Communist party) and provide a pretext for
Pyongyang to avoid discussing its nuclear weapons program and buy more time to
develop them. The trade-off seems to be between imposing a current real financial
burden on the DPRK but making no progress in halting that country’s nuclear
weapons program or lifting the financial sanctions in exchange for a verifiable halt
to North Korea’s alleged counterfeiting activities and a dim prospect that progress
might be made in the six-party talks. What is clear is that the BDA sanctions have
made Pyongyang more willing to meet and talk with the United States, but
indications from the December 2006 six-party talks were that the DPRK was focused
totally on the financial sanctions and that its negotiators had not received authority
to respond to U.S. and other proposals related to their nuclear weapons program.67
... Assuming that both the gross domestic product and the rate at which money changes hands remain constant over a given interval of time, an increase of x% in the money supply will cause an approximate increase of x% in the inflation rate [12]. As of February 2006, the U.S. cash supply totaled about $780 billion [22]. Out of these, there are an estimated total of $180 million forged U.S. banknotes in circulation worldwide, that is around 0.01% of total currency. ...
Conference Paper
Full-text available
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Chapter
The Bush administration’s freezing of North Korean bank accounts in Macau’s Banco Delta Asia and North Korea’s provocative course of action of testing nuclear device in 2006 are brought into the analytical framework to investigate whether they need to be understood as a continuation or a substantial shift of foreign policy which led to structural changes. The analysis focuses on role-makings of the United States and North Korea, as active role enactments to reconstruct the social structure of the SPT, and critically assesses the social structure built through role collaboration between China and South Korea prior to North Korea’s nuclear test.
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The anti-money laundering laws of the US are the most powerful in the world. Their broad provisions and extra-territorial reach pose risks to financial institutions around the world. Although they are not widely understood, recent cases demonstrate how these laws operate. In this paper I briefly describe Macau, the new gambling capital of the world; analyze the alleged role of Banco Delta Asia (BDA), a small, family-owned bank in Macau, in money laundering on behalf of North Korea; and offer some observations on the controversial use of Section 311 of the USA Patriot Act.
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The paper begins with the question: how applicable are European and North American criminological theories to the situation in Asia? It takes a transnational and comparative perspective in relating contemporary and historical trends in crime, crime definition and crime control in a variety of Asian countries that comprise the so-called Confucian sphere. It provides a criminological critique of the ‘Asian values debate’ and, through an analysis of trends in crime, crime definition and crime control in China and Japan, of organised crime across the region, as well as selected examples of state-organised crime, seeks to provide a perspective on the developing criminological discourses of ‘the Orient’. The paper argues that, although cultural aspects are important and interesting in understanding the crime situation in the region, ultimately it is changes in politics and governance, economy and society that are most efficacious in explaining current criminological trends and developments.
See "Garland stands accused by US over counterfeit made in North Korea
See "North Korean Counterfeiting Complicates Nuclear Crisis" by Martin Fackler, New York Times, January 29, 2006, p. 3. See "Garland stands accused by US over counterfeit made in North Korea," Irish Times, October 17, 2005. Garland was arrested October 7, 2005, as a result of pending U.S. proceedings against him. See also Department of Justice Press Release of October 8, 2005, on Arrest of Leader of Irish Workers Party.
The South Korean media reports that authorities there had discovered 1,400 supernotes (presumed to be of DPRK origin) in April 2005, but little more is known about such reports. See "DPRK's manufacturing of counterfeit money was common sense within the National Intelligence Service
  • See Chestnut
See Chestnut, pp. 144-145. The South Korean media reports that authorities there had discovered 1,400 supernotes (presumed to be of DPRK origin) in April 2005, but little more is known about such reports. See "DPRK's manufacturing of counterfeit money was common sense within the National Intelligence Service," Chosun Ilbo (Internet Version) December 27, 2005.
Fake US Supernotes Find Their Way to HK. Pyongyang's Counterfeit Bills Are Seized from American in Transit
  • Greg Torode
Torode, Greg. "Fake US Supernotes Find Their Way to HK. Pyongyang's Counterfeit Bills Are Seized from American in Transit." South China Morning Post, March 5, 2006, (continued...)
Questions Without Answers: the Korean Conundrum
  • David Sanger
Sanger, David. Questions Without Answers: the Korean Conundrum [Review]. The New York Times, January 19, 2006. Pg. E.9.
  • See
  • Choe
See, for example: Choe, Sang-Hun. Roh Warns U.S. Over N. Korea. Blunt Speech Shows Rift Between Allies. International Herald Tribune, January 26, 2006, pg. 1.
Dong-A Ilbo, in Korean
  • Rok Editorial Says
  • Dprk Rok-Us 'discord' Over
  • Counterfeiting 'worrisome
ROK Editorial Says ROK-US 'Discord' Over DPRK Counterfeiting 'Worrisome." Dong-A Ilbo, in Korean, January 25, 2006, p. 31. Translation by the U.S. Embassy in Seoul. Provided by Open Source Center.
Quote by Nautilus Institute Executive Director Peter Hayes speaking on Chicago Public Radio's Worldview Program
Hayes Says Counterfeiting Issue Sidetracks Nuclear Negotiations. Nautilus Weekly, February 27 -March 3, 2006. Quote by Nautilus Institute Executive Director Peter Hayes speaking on Chicago Public Radio's Worldview Program.
N. Korea Agrees to Discuss Counterfeit Issue with U.S
U.S. Department of the Treasury. Treasury Officials Brief North Koreans on Actions to Stem DPRK Illicit Financial Activity. Press Release JS-4099, March 7, 2006. "N. Korea Agrees to Discuss Counterfeit Issue with U.S." The Chosun Ilbo. (Digital edition) February 24, 2006.
P. A16. DPRK Reportedly Proposed 'Method' to Resolve Financial Dispute, Waits for US Response
  • Glenn N Kessler
  • Korea
Kessler, Glenn. N. Korea Sets Terms for Return to Nuclear Talks. The Washington Post, March 9, 2006. P. A16. DPRK Reportedly Proposed 'Method' to Resolve Financial Dispute, Waits for US Response. Open Source Center report of Yonhap news article: N.
  • Jon Herskovitz
  • Jack Kim
Herskovitz, Jon and Jack Kim. U.S. Says S. Korea Fake Notes Made in North. Reuters News, February 22, 2006.