North Korean “Counterfeiting Scheme” Redux: What is Behind These Renewed Allegations?

North Korean “Counterfeiting Scheme” Redux: What is Behind These Renewed Allegations?

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As relations with North Korea show signs of improvement two recent articles have brought to the fore old and unconfirmed allegations of North Korean state-sponsored counterfeiting. Both the August 24 issue of The Independent1 and the September issue of Vanity Fair2 advance arguments for North Korea’s guilt and do little to hide their desire for the U.S. to take a more aggressive approach to that nation.

David Samuels’ article in The Independent relies for the most part on oft-repeated stories. I’ve addressed many of those in an earlier article for the Korea Policy Institute and so I will focus here for the most part on the Vanity Fair article. David Rose, contributing editor at Vanity Fair, makes the centerpiece of his article the conviction last year of Taiwan national Chen Chiang Liu on charges of passing counterfeit currency.

Chen Chiang Liu was arrested for feeding $100 supernote bills into slot machines at Las Vegas casinos, playing a few rounds, and then obtaining legitimate cash by turning in the unused balances for refunds. According to Rose, a man convicted of smuggling claimed that Liu was a frequent visitor to North Korea. In a taped discussion with undercover FBI agent Bob Hamer, Liu had at one point mentioned having personal connections in North Korea. Yet the U.S Department of Justice press release issued on the conviction of Chen Chiang Liu states that Liu and his co-conspirators told the undercover agent “that the counterfeit bills were manufactured by unidentified suppliers and co-conspirators outside of the United States.”3 On the other hand, Hamer reports that he recorded co-conspirator Chao Tung Wu on hidden camera telling him that the money was manufactured in North Korea and distributed via the Russian embassy in Beijing. Wu apparently offered to have Hamer travel with him to Beijing and sit outside the embassy while he made the transaction.4 Hamer’s secretly recorded tapes which were played at the trial revealed the conspirators talking of the counterfeit currency as being produced in North Korea and passed through official Chinese contacts to the Russian embassy.

A damning claim, but look more closely and one notes that the stories are hearsay. There is no direct eyewitness account relating to production. Posing as a customer, Hamer purchased around $2 million in counterfeit currency. He felt he was trusted and that the conspirators were telling him the truth. But was he trusted? How wise would it have been to reveal to a new customer information on the scope of the operation, including the sources of production and distribution? A more plausible alternative would be that the conspirators constructed a believable cover story in order to protect the suppliers, and what story would be more believable to a political conservative such as Hamer than one of North Korean culpability and Chinese and Russian complicity? Yet another possibility is that the conspirators were indeed loose-tongued, but that the suppliers had been wise enough to misdirect them as to the source and distribution channels. No criminal enterprise would last long if its members blabbed essential information to new contacts.

There is something else that does not quite ring true with the story. Is it really credible that Russia and China would risk important economic and diplomatic relations with the U.S. for the sake of the paltry sums being negotiated by Liu?

Why would North Korea counterfeit U.S. currency? “They need money,” Vanity Fair quotes Park Syung Je, director of a think tank associated with the South Korean military, as saying. “Where else can they get it?” Rose points out that former State Department official David Asher and economic analyst William Newcomb have calculated the amount of North Korea’s hard-currency reserves based on data supplied by that nation’s trading partners and came to the conclusion that North Korea is running a trade deficit of about $1.2 billion per year. That shortfall, they assert, is plugged through illegal means. “It not only pays, it plays to their strategy of undermining Western interests,” Asher says. Specifically, the North Korean “Office 39” is said to be responsible, “which is estimated to bring in between $500 million and $1 billion a year or more.” Estimated by whom, the article does not say. Nor is there any indication as to how outsiders arrived at those figures, presumably no easy task as it concerns a secrecy-shrouded organization whose supposed raison d’ĂȘtre is criminal activity.

Given North Korea’s sanctions-induced exclusion from international credit, the argument appears convincing. North Korea is importing more goods than it can afford and no credit can be obtained. Therefore, this level of trade can only be sustained through illegal means. Yet, as I have shown in an earlier article on the subject, the production of supernotes requires significant investment. As Rose himself admits, the total quantity of supernotes “to date is small.” Little more than $50 million has circulated. The volume is inadequate to compensate for the expense of production. For North Korea, this would be a money-losing endeavor.

To evade this awkward fact, Rose reports that David Asher testified before Congress that the total “might be” in the hundreds of millions. Setting aside the speculative nature of that assessment, let us assume for the moment that despite all evidence, Asher is correct. Also assume that the total runs toward the high end, at $800 million. The deal Hamer negotiated with Liu called for him to purchase supernotes at the rate of thirty cents on the dollar.5 That is the price the middle-man would receive. To ensure a profit for the middleman, the producer would inevitably receive less. For the sake of argument, we will assume that the producer receives the lion’s share of this portion, 25 cents on the dollar. In that case, the sale of supernotes at the level of Asher’s speculative estimate would have yielded a mere $200 million. We will make one more assumption, that somehow no expense was involved, that all of the labor, the factory, the expensive equipment and supplies cost nothing. Divide those earnings over the last decade, and we come up with a figure of $20 million per year, which would do little to alleviate an average annual deficit of $1.2 billion. As for the secondary motivation of “undermining” U.S. interests, the quantity of supernotes is so miniscule compared to the total legitimate production of U.S. currency as to have no effect. Furthermore, the bulk of supernotes have circulated outside of the United States. A more ineffectual operation would be hard to imagine.

While North Korea surely has serious trade balance issues, it is likely that Asher and Newcomb’s calculations did not take all factors into account. North Korea earns much of its foreign currency through the sale of military hardware. It may be presumed that not every purchaser of arms from North Korea is going to want to make information on those transactions public. Similarly, one of North Korea’s trading partners is Myanmar, a nation whose leadership tends to be secretive. It is not likely that Myanmar would report the extent of its contract with North Korea for the construction of a tunnel system.6 It is not clear if barter trade is taken into account in Asher’s and Newcomb’s calculations, but this is an important element in North Korea’s international trade. For example, North Korea receives palm oil from Malaysia through the Palm Oil Credit Payment Arrangement, which includes a significant barter component.7 Some of North Korea’s contracts with Chinese firms call for payment in coal. According to a Chinese trade official, “There are mines there, under production by big Chinese companies. We give them oil, equipment, everything, they give us ore. It’s a kind of barter.”8 Barter arrangements make sense for cash-strapped North Korea.

The biggest gap in Asher’s and Newcomb’s estimates relates to China, North Korea’s main trading partner and immediate neighbor to the north. Trade between the two nations rose to $2.79 billion in 2008, a large portion of which was funded by the Chinese government. Most of the imports North Korea receives are paid through credit supplied by China. “The North Koreans pay with some money, but they have a very short money supply, so credit is very important,” says Shi Yinhong, an international relations expert at Beijing People’s University. “The Chinese government has never said how much it gives in either credit or aid. This is a secret, but it is in China’s interest to maintain a stable North Korea.”9 There, certainly, is the means for North Korea’s survival, rather than paltry sums said to be earned from the sale of supernotes as well as other criminal operations.

It should also be mentioned that the term “supernote” is sometimes used loosely to describe any high-quality counterfeit. While Bob Hamer’s description of Liu’s counterfeits seems to indicate the strong possibility that real supernotes were involved, one cannot be sure.10 Earlier this year another Taiwanese national, Chen Mei-ling, was sentenced to prison for importing counterfeit currency into the United States.11 The U.S. Secret Service determined that the counterfeits fell into the “supernote category,” a phrase which indicates that there are a variety of counterfeits circulating, of varying but high quality. A little over a year ago, Taipei police closed down what was termed “the most sophisticated counterfeiting factory ever found in Taiwan,” whose “printing technology shocked the U.S.”12 Apparently that factory’s output fell into the supernote category while not quite achieving the near-perfect level of supernotes themselves. The use of the same term for both a specific thing and a generic category muddies the waters when supernotes are being discussed. Just which supernote is being referred to at any one time is not always apparent.

There are certain conclusions that Rose wants to lead us to. The experts that he relies on tend to have a certain ideological bent, lending support to the thrust of his argument. David Asher is a senior associate fellow with the Asian Studies Center at the right-wing Heritage Foundation. He played a key role in the Bush Administration’s campaign to sever North Korea’s access to foreign currency and normal international banking operations. Prior to joining the Bush Administration, he was associate director of the Asian Studies Program at the deeply reactionary American Enterprise Institute.13 Park Syung Je is a long-time critic of South Korean engagement with the North. He rejected the opening of the tourist center at Mt. Kumgang with the comment, “If you support a dictator, people die.”14 He was equally dismissive of former South Korean President Roh Moo Hyun’s efforts at improving relations with North Korea. “We have to ask ourselves why we support North Korea with aid,” he complained. “They don’t want to reform. They don’t want to change.”15 These are men who want to see relations with North Korea worsen.

And here we come to the point of the articles. Rose laments the Bush Administration’s closing down of the Illicit Activities Initiative, the linchpin of which was the attempt to shut off North Korea’s access to foreign exchange. The Obama Administration has yet to make any meaningful diplomatic gesture towards North Korea; instead it has gradually ratcheted up the pressure through the steady addition of sanctions. There has been discussion concerning the direction of policy, and opponents of negotiations with North Korea are taking the initiative by shaping public opinion through articles such as these. The rhetoric can get overheated at times. Rose writes that Liu’s crimes “threatened not only the integrity of America’s currency but the very fabric of international peace.” The test firing by North Korea of seven missiles on July 4, 2009 was an action “threatening the whole of Japan and South Korea.” Uniquely so, one might add, given the frequency with which nations around the world test fire missiles without managing to threaten their neighbors. Rose reports that the Bush Administration was at one point planning to issue several criminal indictments against individuals in the leadership of North Korea, and quotes former senior prosecutor at the State Department Suzanne Hayden as saying, “The most difficult thing is connecting evidence of criminality to a state’s leader, because there is so much deniability built in. But there isn’t a whole lot of activity in North Korea that isn’t sanctioned by the leadership, and the evidence we had already built up was very good. These cases were very doable.” It is difficult to imagine an action more calculated to permanently destroy any chance of diplomacy than the indictment of North Korean leaders on trumped up criminal charges.

David Samuels in his article for The Independent notes in a sarcastic tone, “The failure of Bush’s second-term diplomacy offensive makes it all the more unlikely that Obama’s campaign promises about the wonders of engagement will result in real-world success. While Bush’s late-blooming interest in diplomacy may have seemed churlishly overdue, it also carried a credible threat of force.” Samuels disappointedly notes Obama’s “failure to respond decisively” to North Korea’s test firing of missiles, when what apparently was called for was hostility and belligerence. Similarly, Rose in his article for Vanity Fair wants to frame how his audience views relations with North Korea. “What cannot be in doubt is the scale of the challenge now confronting President Obama,” he concludes. Nor, one might add, can there be any doubt about how neo-conservatives are attempting to use scare tactics to influence policy. Those forces will not rest until diplomatic contacts with North Korea have been expunged forever and the region teeters on the edge of crisis.

The two articles appeared in the wake of indications that accusations against North Korea about the production of supernotes could have provided the basis for expanding sanctions. After meeting with Secretary of State Hillary Clinton in June, South Korean foreign minister Yu Myung-hwan said the U.S. was expected to hit North Korea with new sanctions over the counterfeiting issue, an action which South Korea and Japan were asked to join.16

The recent announcement by the Obama Administration of its willingness to engage in bilateral talks with North Korea as a step toward resuming the six-party talks is a heartening development. It is likely that alarmist stories concerning North Korea will continue to appear, as opponents of dialogue step up efforts to block progress. They will argue that punishment is the only suitable response to a nation so irremediably criminal in nature. The voices of reaction, as ever, will be loud in the pursuit of their narrow interests. It is time for proponents of a peaceful resolution of U.S.-North Korean issues to speak out. There is much riding on the outcome.

Gregory Elich is on the Board of Directors of the Jasenovac Research Institute and on the Advisory Board of the Korea Truth Commission. He is the author of the book Strange Liberators: Militarism, Mayhem, and the Pursuit of Profit.

 


1David Samuels, “Counterfeiting: Notes on a Scandal,” The Independent (London), August 24, 2009.
2David Rose, “North Korea’s Dollar Store,” Vanity Fair, September 2009.
3Gregory A. Bower, U.S. Attorney, District of Nevada, “Federal Jury Convicts Man in ‘Supernotes’ Counterfeiting Case,” U.S. Department of Justice, September 17, 2008.
4Bob Hamer, “North Korean Counterfeit and Few Seemed to Care,” Big Hollywood, March 18, 2009.
5Bob Hamer, “North Korean Counterfeit and Few Seemed to Care,” Big Hollywood, March 18, 2009.
6“North Korea Aids Burma Tunnels,” Radio Free Asia, June 18, 2009.
7“North Korean Keen on Buying More Palm Oil from Malaysia,” Utusan Online (Kuala Lumpur), June 23, 2004.
8“North Korean Coal Exports Hint at Barter,” China Post, August 5, 2009.
9“China, NKorea Trade Boom Despite Rocket Tensions,” Agence France Presse, April 5, 2009.
10Bob Hamer, “North Korean Counterfeit and Few Seemed to Care,” Big Hollywood, March 18, 2009.
11Press release, “Woman Sentenced to 33 Months for Bringing $400,000 in ‘Supernotes’ to the United States,” U.S. Department of Justice, Northern District of California, U.S. Attorney Joseph P. Russoniello, January 30, 2009.
12William Lowther, “US Fears Return of Taiwan-Made Supernotes,” Taipei Times, February 1, 2009.
13http://www.heritage.org/about/staff/davidasher.cfm
14Evan Osnos, “North Korea Takes a Shot at Capitalism,” Chicago Tribune, December 11, 2005.
15Paul Wiseman, “Koreas Agree to End War, Boost Economies,” USA Today, October 5, 2007. See also Park’s views in the International Crisis Group’s paper, “Korea Backgrounder: How the South Views its Brother from Another Planet,” December 14, 2004.
16“Lee Chi-dong, “U.S. May Sanction N. Korea for Alleged Criminal Acts: Minister,” Yonhap (Seoul), June 12, 2009.

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