North Korean Counterfeiting of U.S. Currency
North Korean Counterfeiting of U.S. Currency
Updated April 16, 2008
Dick K. Nanto
Specialist in Industry and Trade
Foreign Affairs, Defense, and Trade Division
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 over several years from counterfeiting. The illegal nature of any counterfeiting
activity makes open-source information on the scope and scale of DPRK
counterfeiting and distribution operations incomplete. South Korean intelligence has
corroborated information on North Korean production of forged currency prior to
1998, and certain individuals have been indicted in U.S. courts for distributing such
forged currency. Media reports in January 2006 state that Chinese investigators 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 (BDA) bank in Macao (a
territory of China) was 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 June 2007, the $25
million in BDA accounts had been transferred to a bank in Russia for DPRK use.
This issue had been holding up progress in the six-party talks on North Korea’s
nuclear program. The $25 million has been released, but the financial sanctions
remain in place. 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 has been replaced by CRS
Report RL33885, North Korean Crime-for-Profit Activities, and will not be updated.
Contents
U.S. Interests and Actions...........................................1
Limits on Information..............................................2
The Need to Counterfeit Currency.....................................3
Alleged Areas of DPRK Criminal Activities.............................4
Amount of Bogus U.S. Currency......................................8
Denial of Counterfeiting by North Korea...............................9
State-Sponsored Counterfeiting?.....................................10
A Summary of Main Points.........................................11
Policy Implications...............................................12
Law Enforcement and the Banco Delta Asia Action..................13
Political/Security Measures.....................................16
Policy Responses.............................................18
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 over
several years 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
1 See section “Amount of Bogus U.S. Currency,” below.
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 (BDA). As discussed in the section on policy implications below, this action
froze some $25 million in North Korean accounts in that bank and caused financial
institutions in other countries also to close many of 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 On
February 13, 2007, however, as a sideline to a new six-party agreement, the United
States reportedly assured North Korea that it would settle the BDA issue. It took
until June, however, for the $25 million to be transferred through the New York
Federal Reserve Bank to a bank in Russia. North Korea confirmed its receipt on June
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 the
newly redesigned $100 note to begin circulating in FY2009.3 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 remains 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
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, Bureau of Engraving and Printing Budget Statement, FY2008,
February 9, 2007.
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
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 its5
merchandise trade deficit. 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.
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.
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,
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 illicit8
activities.
Shortly thereafter, National Intelligence Director John Negroponte, in testimony
before Congress, stated that North Korea “produces and smuggles abroad counterfeit9
U.S. currency as well as narcotics and other contraband.”
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:
6 See generally CRS Report RL32167, Drug Trafficking and North Korea: Issues for U.S.
Policy, by Raphael Perl.
7 See CRS Report RL33885, North Korean Crime-for-Profit Activities, by Raphael F. Perl
and Dick K. Nanto. 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
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.
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
incidents with links to Macao banks, North Korea, and North Korean10
diplomats.
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 criminal11
organizations around the world.
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 1960s.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
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, Unitedth
States Senate 108 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.
The section in the 2006 report on the DPRK was repeated in the 2007 report because no new
information had been received.
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 thest
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
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 on January 20, 2006, stated that Chinese
investigators have independently confirmed allegations of DPRK counterfeiting.18
14 See “Korea Exchange Bank cuts ties with Macau bank accused of laundering money for
North Korea,” Associated Press Report (Seoul) February 3, 2006. See also “No sign of
North Korea making fake bills since 1998: spy agency,” Yonhap, February 3, 2006. Note
that media 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
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, December 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, February 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
(continued...)
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
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, six have occurred since 1999, the time after which the NIS
reportedly is unable to conclude that the DPRK continued producing counterfeit
18 (...continued)
York Times, January 29, 2006, p. 3.
19 See generally, remarks of Acting Assistant Attorney General, John C. Richter of August
rmrksOprSmokngDrgnNroylChrm082405O.pdf]
20 See “Arrest ties Pyongyang to counterfeit $100 bills,” by Bill Gertz, Washington Times,
September 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.
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
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
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,
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,
27 See Sanger, David E., “U.S. Is Shaping Plan to Pressure North Korea,” New York Times,
(continued...)
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.
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 for several years.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.
27 (...continued)
February 14, 2005, p. A-1. Note that this amount is more likely to be $48 million, although
apparently not publically cited.
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, November 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,
Pressure over the matter.29 A January 24, 2006 commentaries 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.”30 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
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.”31
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.
29 A Swiss report on North Korean counterfeiting is reported to have expressed serious doubt
that North Korea is capable of manufacturing the fake bills, which it said were superior to
the real ones. See Hall, Kevin G., Swiss Authorities Question U.S. Counterfeiting Charges
against North Korea, McClatchy Newspapers, May. 22, 2007.
[http://www.mc clatchydc.com/ staff/kevi n_hall/v-print/story/16472.html ]
30 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.”
31 See KCNA (official North Korean News Agency) broadcast of 1006 GMT, February 9,
MSN News, February 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.
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 in32
supporting North Korea’s fragile economy.
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.
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.33
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 of34
value, i.e., more open and economically successful societies. Numerous arrests
32 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, February 14, 2005, A-1.
33 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.
34 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
(continued...)
outside the United States and recent indictments clearly involve individuals with
links to the government of North Korea or its state-run enterprises.35 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 an36
act of economic warfare — a direct attack on the U.S. financial system. 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.37 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 $10038
notes, the denomination allegedly counterfeited by the DPRK.
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.
34 (...continued)
downplaying the scale of alleged DPRK counterfeiting activity — but nevertheless
according it the high policy priority the actual level of such activity warrants.
35 See footnote number 198.
36 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.
37 The Federal Reserve Board. Currency and Coin Services. On Internet at
[ h t t p : / / www.f e de r a l r e s e r ve .gov/ p a yme nt s ys t e ms / c o i n / d e f a u l t .ht m]
38 The Federal Reserve Board. Currency in Circulation: Value. On Internet at
[ h t t p : / / www.f e de r a l r e s e r ve .gov/ p a yme nt s ys t e ms / c o i n / c ur r c i r c va l ue .ht m] .
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
is to redesign the $100 note.39 The Secret Service conducts investigations of
counterfeiting activities, provides counterfeit-detection training, and is responsible
for anticounterfeiting efforts abroad.40
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.
Law Enforcement and the Banco Delta Asia Action
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.”41 On September 20,
39 The Department of the Treasury. Budget in Brief FY2007. P. 87.
40 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) .
41 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, September 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
(continued...)
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.42
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
North Korea-related accounts including those belonging to 9 DPRK banks and 23
DPRK trading companies. These reportedly included accounts from the core organs
of the North Korean Regime.43 When details of the accounts reached Kim Jong-Il,
he reportedly was surprised to find that some accounts had been kept secret from him
and some account-holders either did not exist or had already died.44
The financial effects of the BDA action were 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.45
41 (...continued)
worldwide to take precautions that they are not used as a conduit for the laundering of
proceeds of DPRK illicit activities.
42 See Federal Register, Vol. 70 No. 181, September 20, 2005 (Notice of Proposed
Rulemaking) p. 55217ff.
43 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, February 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.
44 General Secretary Kim Did Not Know the Existence of Some North Korean Accounts
Frozen in Macau. Sentaku, July 1, 2007, p. 21. (Original in Japanese, translated by Open
Source Center, article No. JPP20070728032001)
45 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.
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.46 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).47 Separately, the U.S.
ambassador in Seoul indicated that Washington wanted Pyongyang to prove that
tools used to counterfeit U.S. currency had been destroyed as evidence that North
Korea had abandoned such illegal activities.48
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.49 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
alongside six-party talks. A second meeting was held in January 2007. In these
talks, the U.S. side reportedly stated that the BDA issue could be resolved early if
North Korea punished the counterfeiters and destroyed their equipment.50 This was
viewed by some as an easing of the U.S. position as it linked the BDA action to the
six-party talks and opened the possibility for resolving the BDA issue in order for the
talks to go forward. The Bush Administration had held that the U.S. financial
sanctions against Banco Delta for collaboration with North Korean criminal activities
were a separate issue from the nuclear negotiations.
46 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
47 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.
48 Herskovitz, Jon and Jack Kim. U.S. Says S. Korea Fake Notes Made in North. Reuters
News, February 22, 2006.
49 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.
50 U.S. Offers Compromise Over N. Korea’s Dollar Forgeries. Chosun Ilbo (Digital
Chosun), December 20, 2006.
On February 13, 2007, a new six-party agreement on North Korea’s nuclear
program and energy needs was concluded.51 In announcing this Agreement, Assistant
Secretary of State Hill pledged to settle with North Korea within 30 days the issue
of U.S. financial sanctions against the Banco Delta bank and the freezing of North
Korean accounts of $25 million in Banco Delta. After several failed attempts to
transfer the $25 million, the DPRK recovered its funds in June 2007 when the New
York Federal Reserve Bank agreed to transfer them through its facilities to a bank in
Russia. (The transfer through the Federal Reserve Bank arguably made the funds no
longer illicit.) This allowed the DPRK to proceed with its commitments under the
February 13 agreement.
Although the $25 million in the BDA accounts has been released, the financial
sanctions still remain. It is yet unclear, therefore, what the impact of the release of
funding will be on the DPRK’s ability to conduct future banking transactions. Will
the DPRK be given a clean bill of health by the international banking community?
Also to be determined is the impact of the release of such funds on any future
attempts by the United States to signal to the international banking community that
a nation, individual, or corporate entity — is suspect of, or involved in — illicit
activity. Will the United States be viewed as using the banking system for political
purposes and, thereby, eroding some of the goodwill it has with the international
banking community?
Political/Security Measures
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.52 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
51 For details, see CRS Report RL33567, Korea-U.S. Relations: Issues for Congress, by
Larry A. Niksch.
52 James A. Kelly. An Overview of U.S.-East Asia Policy, Testimony before the House
International Relations Committee, Washington, DC. June 2, 2004.
to or from nation states and non state actors of proliferation concern. It does this
through intelligence sharing, diplomatic efforts, law enforcement, and interdiction.53
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.54 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.”55 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?56 Pyongyang used the Banco Delta Asia action as a
pretext to stay away from the six-party talks and then to delay implementing the
February 13 six-party agreement by several months. 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. In order to keep the six-party talks moving ahead, the
United States arranged for the $25 million in BDA accounts to be released, but still
maintains the designation of BDA as a money laundering concern. The South
Korean government also has taken a firm position on the counterfeiting issue. 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
53 U.S. Department of State. Bureau of Nonproliferation. The Proliferation Security
Initiative (PSI) (Fact Sheet). May 26, 2005. Congressional Research Service report
RS21881, Proliferation Security Initiative (PSI), by Sharon Squassoni.
54 Sanger, David. Questions Without Answers: the Korean Conundrum [Review]. The New
York Times, January 19, 2006. Pg. E.9.
55 U.S. Department of State. North Korea-U.S. Statement. Press Statement 2005/T13-29,
September 19, 2005.
56 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.
and for all.57 Seoul reportedly has tried in vain to reach a compromise with the
United States to consider Pyongyang’s counterfeiting activities illegal conduct by
individual North Korean firms and not by the government of the DPRK.58 One
observer stated that the bigger question being asked by China and South Korea is
why is the United States has been chasing after North Korea’s “loose change” when
the country is making plutonium, the real currency of state power?59
Policy Responses
The response by other nations to the alleged counterfeiting by the DPRK is
intertwined with other strategic and political interests. In the case of South Korea,
although the country 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.60
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.61 China conducted a three-month investigation of the
accusations against Banco Delta Asia that, according to South Korean diplomatic
sources, confirmed the suspicions. However, a confidential audit of the BDA by
Ernst & Young ordered by Macanese banking regulators reportedly found no
evidence that the bank knowingly laundered counterfeit U.S. currency on behalf of
57 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]
58 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.
59 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.
60 Reuters. Crackdown on North Korea Strains US-South Ties. January 28, 2006.
61 Chinese Banks Cut Transactions with North Korea-related Firms (From Kyodo News
Service). BBC Monitoring Asia Pacific. March 13, 2006.
North Korea.62 China reportedly tried to convince North Korea, however, that it
needed to take steps in the matter.63
North Koreans also are reportedly attempting to circumvent the financial
measures, but they have declined to disclose how they are doing it.64 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.65 Others note that
Austrian banks have not refrained from making transactions with North Korea.
Financial transactions with North Korea apparently still can be done through Austria
and Switzerland.66
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.67
The U.S. 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.68 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
62 Hall, Kevin G. Macau Bank Audit Comes Up Clean, News & Observer, Raleigh, N.C.,
April 17, 2007. pg. A.3. (The audit was obtained by the McClatchy Newspapers.)
63 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,
64 Fifield, Anna. “North Korea Is ‘Looking to Beat’ US Financial Sanctions.” Financial
Times, March 13, 2006. P. 1.
65 Treasury Issues Advisory on North Korean Banking. Bulletin News Network, the White
House Bulletin, March 16, 2006.
66 Major Chinese Banks Refrain From Dealing with N. Korean Firms. Kyodo News. March
67 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.
68 For legislation, see; CRS Report RL33567, Korea-U.S. Relations: Issues for Congress,
by Larry A. Niksch.
activities in the Asia-Pacific region and would subsequently require the disclosure
of all of the DPRK’s illicit financial activities.69 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 appears to be to pressure North
Korea on its illicit activities but put top priority on the diplomatic process. Since, the
effects of the BDA action had Pyongyang scrambling, the fact that the Bush
Administration eased its financial pressure on North Korea enough for the six-party
talks to go forward indicates that it has decided that the nuclear issue takes priority
over punishment at this time. The BDA action (combined with UN sanctions
prohibiting exports of luxury goods to the DPRK) seemed to generate results because
they harmed the North Korean elites, including Kim Jon-Il, directly. Policies aimed
at an economic collapse or regime change in North Korea, however, appear to be off
the table at this time — partly because neither China nor South Korea thinks an
economic collapse or regime change is likely to result from economic sanctions and
neither country desires to deal with the economic and political effects that would
follow should such a collapse occur. Both countries are trying to improve the DPRK
economy — South Korea through investing in special industrial zones (such as the
Kaesong Industrial Complex70) and China through direct investment in
manufacturing and in providing equipment to businesses in North Korea.
How the broader strategic considerations will govern future responses to the
problem of North Korean counterfeiting of U.S. currency and other crime-for-profit-
activity is now unclear. What is clear is that the BDA sanctions made Pyongyang
more willing to meet and talk seriously with the United States and other of the six-
party countries and they provided real evidence to Pyongyang that flaunting
international laws and norms can cause serious negative consequences for its inner
circle of elites. In U.S. discussions with the DPRK on the normalization of relations,
ceasing any counterfeiting of U.S. currency would seem to be sine qua non.
There is some concern, however, that the settlement of the $25 million in BDA
accounts may have elevated the Russian presence in the six-party talks.71 A report
from the July 2007 six-party sessions indicates, however, that the Russian delegate
was on vacation and had a special envoy attend in his place.72
69 U.S. asks NK to Join Int’l Group on Money Laundering. Yonhap English News. March
70 See CRS Report RL34093, The Kaesong North-South Korean Industrial Complex, by
Dick K. Nanto and Mark E. Manyin.
71 Hiraiwa, Shunji. What Russia Aims for After the North Korea Issue, Tokyo Toa, July 1-
J PP20070724038002).
72 Kasahara, Toshihiko and Shoji Nishioka, Six-Party Talks Resume After Four-Month
Hiatus; Talks Settling Down to US, DPRK Taking Lead; Russian Representative Absent,
Mainichi Shimbun, July 19, 2007 (Nikkei Telecom 21 Database Version, in Japanese,
Translated by Open Source Center, document No. JPP20070719036001, Japan: Six-Party
Talks Resume with US, DPRK Apparently Taking Lead).
Some suggest, moreover, that transferring the funds through the New York
Federal Reserve Bank to a bank in Russia for transfer to the DPRK presents the
image that the U.S. government could have “violated” specific financial sanctions
imposed on North Korea. On June 12, 2007, a group of House Republicans led by
U.S. Representative Ileana Ros-Lehtinen, asked the Government Accountability
Office to evaluate whether the BDA transfer was consistent with U.S. anti-money
laundering and counterfeit laws.73 In response to the transfer of the $25 million back
to North Korea, Representative Ed Royce stated that the action “will undermine the
very tools that it has used to effectively go after proliferators and state sponsors of
terrorism.”74
The U.S. side also ultimately linked the BDA law enforcement action to the
denuclearization issue in the six-party talks despite early insistence that the two
issues were separate and independent. The U.S. side had been critical of the DPRK
for refusing to proceed with the six-party talks until the BDA issue was resolved.
The effect of acceding to Pyongyang’s demands in this case seems to have increased
the level of trust and confidence between the two countries, but it also could indicate
to Pyongyang that the United States had lost confidence in one of its own policies.75
The implications for U.S. policy of the BDA action go beyond the problems
with the DPRK. The Patriot Act has provided the United States with a powerful tool
to disrupt the financial underpinnings of unsavory regimes or hostile groups. The use
of this tool is still under development, and it is not clear whether it should be
employed as an end in itself or as a tactical weapon that is part of a larger strategic
plan with ample coordination between the Departments of the Treasury, State, and
Defense.
U.S. law enforcement actions against foreign banks and their operations,
moreover, have far reaching consequences for an industry that often prefers to be
secretive and has operational interests that often compete with each other. Banks
must provide service to customers of all kinds and take a loss on counterfeit currency
found that is surrendered to government authorities. At the same time they may be
asked to cooperate in enforcing laws that may hurt their customers or reduce their
earnings. BDA-type actions (which can be seen as sending mixed signals or which
are followed by about-face changes in policy) also give rise to the question of what
73 Letter to David M. Walker, Comptroller General of the United States from Ileana Ros-
Lehtinen, Christopher H. Smith, Dan Burton, Edward R. Royce, Mike Pence and Joseph R.
Pitts. June 12, 2007. The letter asks the General Accountability Office to “evaluate whether
State Department and Treasury Department actions undertaken to facilitate the transfer of
North Korean funds are fully consistent with the enforcement of Section 311 of the Patriot
Act and with the sanctions regime imposed under the UN Security Council Resolution
74 Rep. Royce Reacts to Reports of North Korean Funds Transferred Through Untied States
Bank, US Fed News Service, Including US State News. Washington, D.C, May 11, 2007.
75 Yi, Yo’ng-hwa. Evaporation of Suspicions Over DPRK’s Highly Enriched Uranium
Program Starts Bush Administration’s “Inevitable Slide,” Sapio, July 25, 2008, pp. 8-10 (in
Japanese, translated by Open Source Center, document No. JPP20070718036002, Japan:
Academic Explains Reasons for US-DPRK “Honeymoon Relationship”).
effect they might have on U.S. leverage with the banking community and on
cooperation from banks on other international problems. At issue here is whether in
the future, foreign banks will be as willing to take measures that will be unpopular
with their customers given the risk that the United States may at some point reverse
course because national security interests or diplomatic exigencies hold sway?
Central to the policy debate is the issue of “crying wolf” and U.S. credibility.
If the BDA case and the North Korean counterfeiting issue are downplayed in order
for the six-party talks to go forward, will future U.S. law enforcement concerns be
taken seriously? Next time international cooperation from the banking community
is required to restrict criminal conduct, to what degree will the United States be
perceived as just a lone wolf “howling in the wind?”