North Korea and China's Latest Efforts on Increased Economic Ties

South Korea's Chosun Ilbo reported on Friday, 20 May 2011 (KST), North Korea and China are poised to start development work on two joint projects in the border areas. A construction project of developing an island called Hwanggumpyong, located a little less than 10 miles east of Dandong, China, on the Yalu River, will start on May 28, and construction of roads connecting Hunchun in China and Rajin-Sonbong in North Korea on May 30. High-ranking officials from both countries will visit Dandong and Rajin-Sonbong to launch the projects. According to a North Korean source, Chinese Commerce Minister Chen Deming and Jang Song-taek, the brother-in-law of North Korean leader Kim Jong-il and vice chairman of the National Defense Commission, are likely to attend both events. There is even speculation that Chinese Vice President Xi Jinping, widely tipped as the next president, and Vice Premier Wang Qishan will also attend.


I've posted a background paper on the Tuman Area Economic Development Project on this blog in January of 2010, and you can read the full paper here.


Here are also some of the latest news articles on this subject:
N.Korea, China to Launch Joint Economic Projects
N.Korea to Develop Special Economic Zone on Chinese Border
Chinese Businesses Pour into N.Korea's Rajin-Songbong
N.Korea's Cross-Border Business with China Picking Up


On a separate but related news, apparently, according to an Interfax News Agency report, a delegation of Russian officials has agreed to send 50,000 tons of grain to North Korea following wide-ranging discussion on relations between the two countries (I have not been able to locate the actual Interfax report.  The Chosun Ilbo is the source of my information here). The Russian delegation, led by Mikhail Fradkov, the director of Russia's intelligence agency, the Foreign Intelligence Service, apparently held a meeting with Kim Jong-il recently during which they discussed not only aid, but also economic projects and North Korea's nuclear weapons. Apparently, the report cites a Russian diplomatic source as saying that the conversation dealt with economic development in the far north of North Korea, notable a train connection (which has been discussed in the past as a part of the Tuman Area Economic Development Project) and the issue of a long-mooted gas pipeline connecting Russia with South Korea.

China and North Korea agrees to Open a New Container Shipping Route

* Article from Asahi Shimbun *

N. Korea, China eye shipping route
By Daisuke Nishimura
September 6, 2010 (Japan Standard Time)

China and North Korea have agreed to open a container shipping route from the North's Rason special economic zone, sources close to the Hunchun-based shipping company involved in the deal said. Hunchun is on China's border with Russia and North Korea.

The agreement was reached during the Northeast Asia Investment and Trade Expo, which runs until Monday in Changchun, China.

The new route, which starts at Rajin in North Korea, is expected to open by the end of December at the earliest, the sources said.

It is expected to handle about 300,000 tons of cargo annually, they said.

The envisioned route will link Rajin with foreign ports, such as Busan, but will be limited at its startup. It will begin shipping products into China from Europe and the United States via China's Qingdao.

Cooperation between China and North Korea has accelerated in the northeast amid heavy international sanctions levied against North Korea after the sinking of a South Korean warship in March.

In the Tumenjiang river area, other projects are also under way, including repairs to a cross-border bridge in Hunchun.

A private company based in Dalian, Liaoning province, is working to develop a pier at Rajin port. And sources said a company in Jilin province has acquired the right to use a pier at North Korea's Chongjin port, to the south of Rajin.

In a forum at the trade expo, North Korea's vice trade minister expressed hope that his country could make Rason into "a base for world-class processing trade and intermediate trade."

Meanwhile, China's inland Jilin province aims to secure sea routes to the Sea of Japan via North Korea's Rajin and Chongjin ports.

The Chinese government last year designated the Tumenjiang river area, which includes the Yanbian autonomous prefecture, Jilin and Changchun, as a pilot development zone.

The Greater Tumen Area Economic Project on the Move

It seems China and North Korea has moved forward on one of their economic venture. Japan's Kyodo World Service reported today China has completed the repair of the bridge in Hunchun at the Sino-North Korean border over the Tuman River, giving China a safer access to North Korea to reach Rajin Port. The report also says the Chinese government has approved a plan to transport coal and other items produced in Jilin, China, to Shanghai via Rajin, North Korea, in April this year.

Despite the Cheonan incident and continued North Korean temper tantrums, it appears the Sino-North Korean Tumen area project continues to roll.

Here's the entire Kyodo World Service report:

Yanji, China - China has repaired a bridge in Hunchun at the Chinese and North Korean border, giving it a safer access to North Korea for use of Rajin port to ship coal to Shanghai, according to Jilin Province officials.

China paid 3.6 million yuan ($528,526) to repair the bridge over the TUmen River, a project jointly pursued with North Korea, the officials said Tuesday.

Work was completed June 14.

The bridge serves as a gateway to Pier No. 1 at Rajin port, which a Chinese company has obtained the right to use for 10 years.

In April, the Chinese government approved a plan to transport coal and other items produced in Jilin to Shanghai via Rajin in northeastern North Korea.

China and North Korea have been in talks about financing of a plan to build a 50-kilometer road leading to the port, the officials said.

N. Korea Threatened Currency Violators with Death Penalty (Kyodo World Service)

Tokyo - North Korea banned the use of foreign currencies after the government revalued the won last December, threatening to impose the death penalty on violators, a Japanese journalist who specializes in North Korean affairs said Monday.

Jiro Ishimaru, founder and editor of Rimjin-gang, a magazine featuring reports and photographs by North Koreans living in the country, released a photo showing a North Korean government announcement on the ban dated Dec. 28.

The photo, taken in early January on the outskirts of Pyongyang by a contributor to the magazine, shows the notice was issued by the Ministry of People's Security on Dec. 28.

The notice announces a ban on the circulation of all foreign currencies as of Jan. 1 and urges members of the public who witness the illegal use of foreign currencies ''to immediately report to legal authorities.'' Ishimaru said the notice was apparently posted throughout the country but he believes the measure was relaxed by mid-February.

North Korea revalued the won last December and imposed restrictions on the quantity of old bills that could be converted into new ones. Under the revaluation, 1 new won is equivalent to 100 old won.

North Korea’s Economic Policy in 2010: Resolutely against the Insurmountable Tide of Market Expansion

By Park Hyeong Jung, Senior Research Fellow
Korea Institute of National Unification Online Series

The new year’s joint editorial for 2010 demonstrated the continuity of North Korea’s domestic and foreign policy since August 2009. As for the economic policy, North Korea will reinforce the measures against the market expansion which have been gradually strengthened since 2005 and culminated in the money exchange measures at the end of 2009. North Korea would confront with daunting challenges in 2010, caused by its conservative orientation, which faces against insurmountable wave of societal and economic changes in the society and the world.

Though it began in 2005, the conservative economic orientation became a component of North Korea’s new strategic posture since August 2009. After having finished offense against South Korea and the U.S. from October 2008 to July 2009, North Korea set out five policy objectives domestically and internationally: First, to be acknowledged as a nuclear weapon state; second, to negotiate Korean peninsula peace regime and to end hostile relations with the U.S.; third, to domestically construct ‘economically strong state’ through conservative policy and mobilization; fourth, to frame inter-Korean relations for exchange and cooperation while avoiding to discuss nuclear issues; and fifth, to endeavor strongly to attract foreign investment.

The content of new year’s joint editorial was dictated by these five strategic objectives. In the new year’s joint editorial, on the hidden diction of being a nuclear state, North Korea avoided hostile expressions against South Korea and the U.S. to induce and facilitate prospect for ‘friendly’ relations. As to South Korea, it took placatory expressions, such as ‘improvement of North-South Korea relations’ and ‘active promotion of inter-Korean reconciliation.’ As to the U.S., North Korea wanted to ‘finish hostile relations between the DPRK and the U.S.’and ‘to establish solid peace regime on the Korean peninsula through dialogue and negotiation.’

In truth, the joint editorial places its main emphasis not on deterring outside threat but on rearranging domestic conditions. Setting such emphasis signifies that after achieving allegedly a nuclear state in the early 2009 and thereby having favorably rebalanced power relations with the neighboring countries, the North Korean authorities have prioritized to rearrange relations between the regime and society on behalf of the former since the late 2009 and in 2010. In this, two points could be mentioned: First, North Korea would see this year as a year of relative stability in its foreign relations so they can focus more on domestic power balance between the regime and society. Second, they would like to manage the consequences of monetary reform started in November of 2009 which meant a draconian attack on the economic activities outside of the state control, and to pressure the restoration of state sector predominance in the economy.

Click here for the full article.

On December 12, National Surveys on Public Opinion Are Initiated by City (County) Party Officials Regarding Currency Revaluation

North Korean government "listening" to the people's opinion?

One explanation is that this could be an evidence for (albeit somewhat circumlocutory) the inability of the North Korean government to exert the kind of control over its population that it had been able to in the past.

The other is that the North Korean leadership is actually concerned about the state of the nation's economy. Speaking of economy, Kim Jong-il recently visited Rason (which was his first visit since Rason was named a free trade zone). That's somewhat interesting as well.


North Korea Today, No. 316 – Hot Topics (Good Friends)
12/17/2009

The Central Party issued a directive, “to listen to the people’s opinion as to what would be the best the government could do with food supply to the people and market prices.” Accordingly, beginning December 12, all the city and county party administration officials initiated national surveys on public opinion by selecting three households at random within each neighborhood unit. They paid visits to the randomly selected households and asked the heads of the households of their opinion on the currency revaluation. Questions were centered on whether laborers were compensated properly and whether the market prices were set appropriately. They also asked for frank and honest opinions about the national policies. They tried to persuade people hesitant to speak out that nothing would happen to them for their opinions. Information on the trends of public opinion collected in this manner by the propaganda section of city (county) party was sent to the central party through the provincial party. A party official made a comment, “City propaganda section listened to the words on the appropriateness of national policies and what people’s interests are. They found that presently, all the prices including grain price are going up too fast and closure of markets are causing hard times to people.”

Official Government-set Prices are publicly announced in the Markets

North Korea Today, No. 316 – Hot Topics
12/17/2009

North Korean authorities publicly announced the official national prices in the markets. Contents of announcement are as follow: 22 to 23 won per Kg for rice, 8 won for corn, 12 won for crushed maize, 10 won for corn noodle, 22 won for flour, 9 to 13 won for tofu soy, 50 won for soy oil, 12 won for red bean, 10 Won for string bean, 21 to 22 won for potato starch, 15 to 18 won for millet, 45 won for pork, 50 won for chicken, 40 won for dog meat, 45 won for rabbit meat, 30 to 50 won for whiting fish, 35 to 45 won for sea bass (a set of 2), 50 to 100 won for clams, 60 to 100 won for Atka mackerel, 3 won for an egg, 30 to 40 won for dried pepper, 40 won for powdered-sugar (sugar), 3 won for a cake of tofu, 30 to 40 won for a fresh octopus, 3 won for cabbage, 5 won for radish, 35 to 45 won for a package of food seasoning, 300 to 550 won for a ready-made men’s suit, 350 to 500 won for a ready-made women’s dress, 200 to 300 won for men’s underwear, 250 to 350 won for women’s underwear, 35 won for a pair of men’s jogging shoes, 30 won for a pair of women’s shoes, 200 to 300 won for a pair of men’s shoes, 250 to 400 won for a pair of women’s shoes, 10 50 15 won for market fee, 0.5 won for bicycle storage at market.

North Korea Revalues its Currency (Update)

According to China's Xinhua News Agency, the North Korea foreign ministry apparently orally confirmed to the foreign embassies stationed in Pyongyang today that it did, indeed, revalue its currency, with the exchange rate between the old and new notes being 100:1.

Here are some of the updated information from South Korea's Yonhap News Agency on the revaluation:

• According to the North's fixed exchange rate before the adjustment, a U.S. dollar was equal to 135 North Korean won.

• "Many citizens in Pyongyang were taken aback and in confusion. Those who were worried about their hidden assets rushed to the black market to exchange them with yuan or U.S. dollars. The yuan and the dollar jumped," one of the sources said.

• The revaluation was the first for North Korea since 1992 and the fifth since its government was founded in 1947. In the first reform in 1947 and the third in 1979 and fourth in 1992, currencies were exchanged 1 to 1 with no adjustment of denomination values. Only the second reform in 1959 raised the exchange rate to 100 to 1 as in the reported latest move.

• The latest reform appeared to be mostly aimed at tackling inflation as the local currency value has nosedived since the country made economic reforms in 2002 to make payments and prices more realistic and introduce market freedom. North Korea also may have sought to flush out money hidden in the underground economy, some stashed by citizens working abroad.

• South Korean officials said they could not yet confirm the report, as North Korea has yet to make an official announcement as it did all in its previous reforms. A currency reform was always reported by the country's official media, led by the Workers' Party newspaper, Rodong Sinmun, on the day it was implemented as a decision by the Cabinet or a central government committee headed by then President Kim Il Sung.

• "There have been no reports so far of a currency reform in North Korean media," Unification Ministry spokesman Chun Hae-sung said. "We checked the state media today, including the Rodong Sinmun, but there was no such report."

• No signs of currency reform were detected yet in joint industrial projects, such as the factory park in the North Korean border town of Kaesong, where South Korean investors pay North Korean wages in dollars, the spokesman added.

• Yang Moon-soo, an economy specialist at the University of North Korean Studies in Seoul, said he believes the currency reform has both economic and political aims. North Korea wanted to shed heavy inflation pressure, and in the process of exchanging the denominations, the government would be able to discover and question those who have amassed wealth, he said.

North Korea Builds 3G Phone Network With Egypt's Orascom

North Korea's telecom sector has been expanding and developing with the launch of the Koryolink 3G mobile service. The service is proving a surprise success story to observers of the country's media and telecoms scene. Here is a report from the BBC Monitoring on the Koryolink 3G mobile service.

Take-up of the service has proved popular among ordinary, albeit wealthier, Koreans living in Pyongyang despite the cost of handsets and a government levy on them. Expectations that the mobile phone service would be available only to political, military, administrative and business elites in North Korea have not been confirmed, according to figures from Egyptian telecom giant Orascom Telecom Holding, whose joint venture operation with state-owned Korea Posts and Telecom Corp (KPTC) was launched in December 2008.

The joint venture licence granted to CHEO Technology JV Co says that Orascom has a 75 per cent stake with initial capitalization of 400m dollars and KPTC will have a 25 per cent interest. The licence allows Orascom to offer mobile services over a 25-year period, with exclusive rights for four years.

Orascom - Egypt telecom giant

Orascom is the "leading regional telecom player and among the best regarded emerging market players in the world," its website says. It operates GSM (Global System for Mobile Communications) networks in seven different countries in the Middle East, Africa, and South Asia (Egypt, Bangladesh, Pakistan, Algeria, Tunisia, Zimbabwe and North Korea) with 78 million subscribers. In addition, it operates a number of leading internet service providers, as well as value-added services and handset distribution companies. The parent group also has extensive interests in the construction and hotel sectors. Orascom is currently involved in completing construction of Pyongyang's 105-storey Ryugyong Hotel, a project that had been delayed for 16 years.

Koryolink was launched amid much fanfare in the North Korean media. The official Korean Central News Agency (KCNA) said that "the first 3G mobile network was kicked off with due ceremony in Pyongyang on 15 December." Indicating the importance of the occasion, Vice-Premier Ro Tu-chol and Ryu Yong-sop, minister of posts and telecommunications and many other officials were in attendance, KCNA said.

North Korean TV showed clips of the launch ceremony and the subsequent news conference. Footage was later posted on YouTube.

Chairman and CEO of Orasco Naguib Sawiris attended both events. He was shown cutting a ribbon to open a Koryolink building, walking around the spacious premises of the Koryolink sales and service centre in central Pyongyang and giving a speech praising North Korea-Egypt relations. Koryolink currently has two large retail shops in central Pyongyang with an after-sales service centre planned to open by the end of the year. Scratch card sales outlets are located within KPTC post offices.

Orascom has brushed aside fears that the authoritarian nature of the North Korean state would severely restrict the number of people allowed to access mobile services and devices.

"This is not just about providing 3G mobile services; we are making history in a country that is developing and opening up in a remarkable way," Sawiris said.

Normal citizens sign up

Within two weeks of starting operations Koryolink had signed up thousands of subscribers, Wireless Mobile Telecom news reported. Registration began in January 2009.

Sawiris told PC World in February: "So far we have about 6,000 applications. The important point is that they are normal citizens, not the privileged or military generals or party higher-ups. For the first time they have been able to go to a shop and get a mobile phone."

The government levies heavy taxes on mobile handsets, taking the cost up to 600 dollars, making it unaffordable for the majority of people in North Korea. Sawiris agreed that the price was high, but Orascom was in talks with the government to reduce taxes, he said.

He admitted that the state continued to have the ability to monitor what its citizens were saying and can eavesdrop on calls if it wants. "That is the right of government," he said.

Koryolink offers local Korean versions of phones from China's Huawei and the cheapest subscription is around 850 North Korean won per month, or about 6 dollars at the official exchange rate, plus call charges. The black market rate used by many citizens and traders would be around 24 cents a month, but is unlikely to be used for transactions with a company in which the state holds a 25 per cent interest. Calls are charged at 10.2 won per minute. A premium package costs 2,550 won per month and call rates are 6.8 won per minute.

User base grows

In April, Choson Sinbo, a Tokyo-based newspaper, reported that the number of mobile phone users had reached 20,000, including some foreigners, by the end of March. Choson Sinbo is published by the General Association of Korean Residents, a pro-North Korea representative body. The report cited Yun Kwang-chun, an official at CHEO/Koryolink, as saying that Pyongyang intended to expand the 3G network to the whole of the country by 2012. At present, Koryolink is available in Pyongyang and on the highway linking it to the northern city of Hyangsan.

In August, Orascom said that the number of Koryolink subscribers had grown to 47,863 at end-June and that it was planning to cut prices to expand the user base, South Korea's Yonhap news agency reported. Operating profit reached 2.49m dollars in the April-June period, up from 312,00 dollars in the previous quarter. Second-quarter sales reached 8.01m dollars, with a profit margin of 31 per cent, up from 7 per cent in the first quarter. During the second quarter, minutes of use (MOU) rose to 199 per month, but average revenue per user (ARPU) fell to 22.8 dollars, compared with 24.7 dollars in the first quarter, Orascom reported. To capitalize on its subscriber growth momentum, Koryolink also introduced free text messages and further reduced connection fees.

Access

North Korea has also begun a limited internet service for mobile phone users, the government-run website Uriminzokkiri reported on 21 May. The TeleGeography website, a research division of the California-based PriMedia company, said the service allows North Koreans to access a website through their phones to see news reports carried by KCNA news agency as well as news about the capital Pyongyang. The Korean-language KCNA website as seen on an ordinary computer screen also allows users to listen to North Korean music and read information about books, art and investment opportunities in the country. But observers say it still unclear whether other services will be available when accessed via a mobile handset. The application seems only to allow access to a very limited official portal.

In July, South Korea's Choson Ilbo newspaper cited a Voice of America report that officials of the North Korean Workers' Party or the government are banned from using mobile phones for security reasons, but some observers have expressed scepticism. "We understand that mobile phones are used chiefly by foreigners, wealthy people, and trade functionaries," a South Korean government official said.

Volte face

North Korea banned mobile phones until November 2002 when it announced a limited European-style GSM service for elite North Koreans in Pyongyang and other major cities. But the network was largely taken down and handsets recalled following a massive explosion in April 2004 at Ryongchon railway station in the north of the country where leader Kim Jong-il had passed through shortly before. Suspicions of an assassination attempt triggered by a mobile phone, combined with a desire to limit the spread of the news, were said to be behind the decision. The authorities have also staged periodic crackdowns on residents in northern border areas who illegally use mobile phones through relay stations in China.

Meanwhile, the North's official Korean Central Broadcasting Station reported on 26 August that mobile communication networks were "being established on a national scale". It added that fibre-optic cables had been laid in all provinces to "upgrade communication capability and quality" and enhance the flow of information throughout the country". The report said that automation and digital capacity had increased seven-fold from 16 years ago, and the "realization of fibre-optic technology" was proceeding in provinces and towns.

Kim's Jong-il's volte face on allowing mobile phones is therefore all the more surprising in a country where information is strictly controlled and restricted and could signal a wish to catch up digitally with the rest of the world, especially with China. The decision represents a "hugely significant turning-point in the state's attitude towards telecommunications," the TeleGeography website commented.

Private markets thrive in North Korea

North Korean economy seems to have been in collapse for perpetuity, and to say that the central government's public distribution system is a failure would probably an Herculean understatement (or at least a gross understatement). The following article from the JoongAng Ilbo examines the ever-expanding size of private markets and accompanying underground economy in North Korea.

I can't remember where I read this, but I seem to remember reading somewhere that the size of underground economic activity in North Korea is about the same size as the official economic activity of North Korea. (Again, don't quote me on this...at least not yet...until I can cite the source where I might have gotten this information...or I could very well be mistaken...I will post the results of that research separately....)

Aside from purely regional interest, one can also glean the human will to survive when faced with adversity from this article.

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Markets persist despite restrictions: Ordinary citizens rely on the trading posts to provide the goods that the North’s failing distribution system cannot (JoongAng Ilbo – Brian Lee)

The following report has been written with the assistance of Dongguk University’s North Korea research center. A total of 30 North Korean defectors were interviewed in-depth for this article. All of their names have been changed out of consideration for their safety.

North Korea observers have pointed out that recent provocations by Pyongyang, in the form of several missile tests and the country’s second nuclear test, are meant to rally support for reclusive leader Kim Jong-il, whose health has been in question since he was reported to have suffered a stroke last summer, while laying the groundwork for a possible succession by one of his sons, widely believed to be Kim Jong-un.

Apart from going to great lengths to display its military might, the government has also been trying to crack down on the growing number of private markets that have mushroomed within the country, which are seen as a potential threat to the state. Nevertheless, experts say that despite the government’s efforts, the markets and the resultant underground economy have become the most effective way of meeting the daily needs of ordinary North Korean citizens, which the public distribution system for food and supplies has failed to do.

The markets have also given birth to a cadre of wealthy businessmen.

“In the North there are eight wholesale markets and about 300 retail markets,” said Dr. Hong Min, a North Korea specialist at Dongguk University who has visited some of the markets himself. “North Korea is at a stage where the markets and the ruling system coexist.”

Hong said that there are some similarities between the developments in North Korea and the reform measures taken by China in the late 1970s and ’80s, but said that the difference is that in North Korea there is no official blessing from the state.

Of the eight wholesale markets, six are located near the North Korea-China border, with ports nearby that give Chinese businessmen easy access to the North.

The biggest wholesale market is Pyongsong Market in South Pyongan Province, which has 5,000 retail booths. The daily floating population at the market is estimated at 100,000. Due to its proximity to Pyongyang, people from the capital area purchase their goods here, and thus the market is a major factor in determining prices in the capital city.

The wholesale markets are generally dominated by Chinese products.

It’s illegal to sell products from South Korea or Japan, but the demand for them is so great that they continue to be sold.

According to North Korean defectors and experts, the retail markets usually specialize in specific goods. Pohang Market in Chongjin, North Hamgyong Province, is known as a place for products considered to be luxury items in the North.

North Korean defector Kim Hyo-su, who once did business at the market, said that the medium-sized market had about 1,500 sales booths where secondhand products from Japan could be obtained.

“Party officials and people from the security organs would stop by to buy presents before heading to Pyongyang,” said Kim.

Unlike the pampered ruling class of the North, the majority of North Koreans use the markets to purchase anything from food to everyday items and other goods that the ailing North Korean economy cannot produce.

Observers say that North Korean officials acknowledge the need for the markets, but are keeping a keen eye on a venue they believe could become the catalyst for shaking the roots of the North Korean system.

The market matters

Inside the North’s political classification system, which divides North Korean citizens based on their level of loyalty to Kim Jong-il and the regime, the business class is marked as a suspect “wavering class” and is watched very closely.

The businessmen have to pay for taxes and permits and must refrain from trading in a list of forbidden goods. Prices are controlled by the state and officials monitor the markets constantly. The markets are under the tight control of management offices installed by the state that are in charge of collecting taxes and enforcing the law.

In January, the North attempted to close the big markets down and divide them into smaller units, but had to postpone the plan due to resistance from its citizens, according to several sources familiar with the incident. In April, the state tried to close Pyongsong Market, but failed again.

Attempts to stop the sale of South Korean or American products have also been unsuccessful.

“In the North, South Korean and American products are very popular,” said Han Su-san, a North Korean defector and former senior government official in the North. “People have to see the brand markings with their own eyes, so the merchants show their customers glimpses of the products when asked.”

North Korean defectors say the markets have become a necessary part of the North Korean system.

“Without food distribution, everybody is going to starve. If you stop the markets, it’s like a death sentence,” explained Kim Han-ho, who once did business in Onsung, North Hamgyong Province, and escaped from the North in 2006.

The markets have expanded rapidly since Pyongyang introduced economic reforms in 2002, but people like Dr. Hong dismissed as premature the notion that these markets, which have grown in size and quality, could eventually morph into entities that could lay the groundwork for fundamental changes in the North.

“The markets have grown, but they are not challenging the system itself. The two simply coexist. Nobody wants a change in the system.”

Park Sun-seong, a professor specializing in North Korean affairs at Dongguk University, also pointed out that North Korean businessmen are not the ones escaping from the North.

“They are elements that could pose a threat to the system, but they have accepted the system and built up their wealth,” the professor said.

Bribery rules

In a situation where party officials and security organs are constantly trying to put a lid on the markets, bribes are the order of the day. Security checkpoints and railroad stations situated at key junctions leading to the markets can only be passed by giving bribes to officials, according to statements given by several North Korean defectors interviewed for this article.

Hong Young-hui, a North Korean defector who sold goods at Pohang Market in Chongjin, recalls that when the daughter of the district party secretary went to Pyongyang for a two-week trip, businessmen in the market prepared food, clothing and Japanese products that she could give as presents.

Apart from such occasions, bribes and presents on official holidays are a must, making the party secretary of the area a “king,” in his own right, Hong said. He and other defectors said that people had to pay a premium in order to obtain booths in prime spots of the market.

The exact scope of the population directly or indirectly involved in market activities is unknown but some experts believe that the numbers are quite large.

Professor Park Young-ja of Sungkyunkwan University argued in a recent research study that up to 90 percent of the North’s population was in some way connected to activities linked to these markets because the country has virtually no industrial base or industries in which ordinary citizens can participate. Those sectors are the exclusive domain of the military, which operates on a separate economy.

Capitalizing on the markets, some businessmen have accumulated so much wealth that the bribes are relatively inconsequential.

Lim Han-o, who left the North in 2006 and lived in Onsung, remembered one visit to the apartment of a local businessman who was one of the wealthiest men in the area.

“He had his own phone, which is something that others can only dream of. His apartment was decorated with a South Korean TV, a sofa and a Japanese clothing cabinet,” Lim said. “Electricity is usually scarce but there was an air conditioner running, and it seemed that he was getting electricity from a separate source.”

The grasshoppers

Those who have no means of paying the official fees and bribes operate on the outskirts of the markets. Often dubbed “grasshoppers” in the North, they operate at the markets illegally without permits, but their numbers are so large that it is impossible to crack down on them.

The existence of the markets may also be one reason the food situation in the North is better than most would suspect. The widely held belief is that the supply of food in the North is at dangerous levels - a widespread famine in the mid 1990s was said to have killed tens of thousands of people - and that conditions have continued to deteriorate. But some experts who have dealt with the North personally have painted a somewhat less desperate picture.

“We have contacted various organizations, including the National Intelligence Service and the Unification Ministry here, and asked them for their assessments of the food situation in the North. We got completely different results and nobody really seems to know,” one U.S. official said, speaking on condition of anonymity.

The official, who is also familiar with the ongoing nuclear negotiations and has been to the North, cited one visit in which he asked the North Korean authorities to take him to a village that he had chosen at random in order to gauge the food situation.

“I don’t think there was enough time to prepare for our visit and put a show on. What we saw was a normal place with people that looked healthy. Certainly nothing like what you see in some countries in Africa.”

While in capitalist countries money is a sure way to power, in North Korea the wealthy businessmen are at the mercy of the state. Knowing that attracting too much attention can earn them the unwanted scrutiny of the state and bring their lives of comfort to an abrupt end, these businessmen try to hide their wealth as much as possible.

Analysts and North Korean defectors familiar with the circumstances think that the wealth of this particular group was already in the tens of thousands of dollars in the 1990s and has most likely increased.

Recent figures indicate that in the North’s black markets, 30 million North Korean won is equivalent to $10,000. The average monthly income of a North Korean worker is roughly 2,500 won. In a country where electricity, education and medical costs are supposedly covered by the state, the wealth of North Korean businessmen has reached astronomical heights by North Korean standards. The fact that this group has flourished within a system that is notorious for holding political prisoners may be a telling sign of how deeply embedded they have become.

“These businessmen are estimated to be involved in 70 percent of the North’s trade, and they are involved in every aspect of the North’s commercial activities,” Dr. Hong said. “They wheel and deal the money and hand out bribes.”

Vanity Fair reporting on North Korean counterfeit? I suppose North Korea is all the buzz these days....

An interesting article I found about the North Korean made Supernote - carried in Vanity Fair of all places...I am telling you...North Korea sells these days...

The article talks quite a bit about the North Korean Office 39 involvement with the production and circulation of supernote.

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Here's the article and the associated video:

North Korea’s Dollar Store: Office 39, North Korea’s billion-dollar crime syndicate, pays for Kim Jong Il’s missiles and cognac. Why did the Bush White House choose not to shut it down? (Vanity Fair)

By David Rose

Appropriately enough, I met Chen Chiang Liu on Las Vegas Boulevard. But it wasn’t at one of the casinos on the Strip that he loved so well; it was in a different kind of building a few miles to the north—the Lloyd D. George U.S. District Courthouse. Peering through the heavy mesh screen in a holding cell, he was a very unhappy man. Understandably so. It was March 5, 2009, and later that morning, he was due to be sentenced. Liu had been convicted of conspiracy and fraud involving millions of dollars made not by the Bureau of Engraving and Printing but by counterfeiting presses in a foreign country, presumably North Korea. The quality of these “supernote” forgeries is so high that he’d managed to pass enormous quantities through the electronic detection devices with which every Vegas slot machine is supposed to be equipped. The prosecutor was asking the judge to give him close to 25 years, and in the end Liu would receive more than 12.

Liu’s crimes threatened not only the integrity of America’s currency but the very fabric of international peace. They were part of a vast criminal enterprise believed to be controlled by the North Korean state, set up and used to finance its nuclear-weapons and ballistic-missile programs. All of this, intelligence analysts say, is coordinated by a secret agency inside the North Korean government controlled directly by “the Dear Leader,” Kim Jong Il, himself. The agency is known as Office 39. (Given the opacity of anything inside North Korea, experts differ on whether “Office” should be “Bureau” or even “Room”—and they also suspect that the number itself may change.) Until a few years ago, American law enforcement had Office 39 squarely in its sights—probing its networks, disabling its enablers, and gradually shutting off the sources of illegal hard currency. And then, peremptorily, the Bush administration shut this law-enforcement effort down.

Liu, who was born in Taiwan in 1962, uses the first name Wilson. He owed his fate to the trips to Vegas that he and his wife, Min Li, used to make every weekend from their home in San Marino, a wealthy neighborhood of Los Angeles. “My two daughters like the swimming in the pools and all that, so the whole family come to go swimming, shopping, and eating,” Liu said wistfully. “We see the shows, like Celine Dion: oh, her songs touch my heart. And in the evenings, we play the slot machines.”

Before Liu was finally apprehended, at Caesars Palace in July 2007, he used the casinos to launder counterfeit “supernotes” with a nominal value of several millions of dollars. Most of the notes have ended up in general circulation.

On April 4, 2009, 30 days after Liu was sentenced, North Korea launched its new Taepodong-2 long-range ballistic missile, a vehicle that, if successful, may be capable of reaching parts of the United States. The test brought immediate condemnation by the United Nations and many governments. North Korea denounced this reaction as an “unbearable insult” and expelled inspectors from the International Atomic Energy Agency. It had already withdrawn from international talks on its nuclear-weapons program. On May 25, North Korea conducted an underground nuclear-weapon test, the detonation of a device said to be as powerful as the one that destroyed Hiroshima in 1945. Again ignoring international protests, North Korea the next day fired three short-range missiles. On July 4, North Korea was at it again, firing seven missiles into the Sea of Japan—thereby threatening the whole of Japan and South Korea.

The link between Wilson Liu’s counterfeit bills and North Korea’s missiles and nuclear weapons is umbilical. “More than 70 percent of the missiles’ components are imported from overseas,” says Syung Je Park, a director of the Asia Strategy Institute, a think tank affiliated with South Korea’s military, whom I met (at his insistence) at a safe house in London. Park has debriefed more than 1,000 North Korean defectors, including Hwang Jang Yop, once the regime’s chief ideologist and Kim Jong Il’s tutor. North Korea depends on international aid just to keep famine at bay. “They need money,” says Park. “Where else can they get it?” The answer, he and senior U.S. officials believe, is by means of organized crime: not only the production of counterfeit currency but also the manufacture and export of counterfeit cigarettes and pharmaceuticals, and the sale of drugs such as heroin and crystal methamphetamine.

As noted, at the center of this activity lies Office 39. And a question that remains to be answered is whether the Obama administration will revive the efforts against it that President Bush declined to pursue.

It was the South Korean movie star Choe Eun Hee, kidnapped on the orders of Kim Jong Il in 1978 and forced to spend nine years making propaganda films, who first reported after her escape that Kim Jong Il is a cinéaste, with a fondness for James Bond movies. Should Kim decide to produce a homegrown spin-off, his screenwriters might well find suitable material in the quadrangular building in the leafy Central Committee precinct of downtown Pyongyang that houses Office 39. North Korea remains one of the world’s most opaque countries, and teasing out details about Office 39 is not easy. Like conventional non-state Mafias, it enforces a code of silence through violence and fear. I glimpsed this firsthand in my jail-cell interview with Liu. When he spoke of the family he was about to lose through incarceration, his despair was palpable, and later, when Judge James Mahan allowed him to address the court, he broke down entirely. But when I asked Liu why he had not made a deal with the prosecutors, using his inside knowledge to secure a lighter sentence, his reply revealed a very different emotion: simple terror. “The North Koreans are my friends,” he said. “I have a good connection with them. I can make money easily with them. But you can’t betray them.”

David Asher, who started watching North Korea at the Pentagon during the Clinton era, went on to serve from 2003 through 2005 as head of the State Department’s Illicit Activities Initiative, a wide-ranging investigation into Office 39 and its many-faceted activities. The program embraced the Treasury Department, the Drug Enforcement Administration, the Department of Defense, the Department of Justice, the C.I.A., and the F.B.I. “In one sense, Office 39 is like an investment bank,” says Asher. “It provides the money for the stuff Kim needs. Like any organized-crime syndicate, you’ve got a don, and you’ve got accountants, and it’s a very complicated business, keeping track of all this money and making sure the boss gets paid. But when members of the organization don’t deliver, they get killed.” According to Syung Je Park, Office 39’s elite headquarters staff, which numbers about 130, plans and supervises foreign operations (often leaving the execution to local criminals) and also runs large-scale facilities such as drug and cigarette factories and the printing presses that produce counterfeit banknotes. “Office 39 is central,” says Paul Janiczek, a former State Department analyst specializing in North Korea. “Everything I looked at came back to that entity.” Janiczek showed me a State Department chart that illustrates the Byzantine structures of North Korean power. It identifies the head of Office 39 as Kim Tong-un, who is said to be a former industrialist. Syung Je Park says that Office 39, one of whose jobs is to manage Kim Jong Il’s multi-billion-dollar personal bank accounts in Switzerland and other private banking havens around the world, works closely with other sections, such as Office 99, which raises funds by selling the missiles and other weapons whose development Office 39 makes possible, and Office 35, which focuses on trying to damage South Korea. But in North Korea’s labyrinthine hierarchy, Office 39 is paramount. Park says, “If Office 99 makes a profit, it all gets handed over to Office 39.

Crime, in other words, has become an integral part of North Korea’s economy. “It not only pays,” says Asher, “it plays to their strategy of undermining Western interests.” American and South Korean intelligence officials had long been aware that North Korea was behind a great deal of underworld activity: over the years, there have been at least 50 documented incidents, many involving the arrest or detention of North Korean diplomats in a score of countries, and linking them to drug trafficking, counterfeit currency, or both. But just how big these underworld enterprises are did not become clear until 2002, when Asher, working with William Newcomb, a senior economic analyst with the Bureau of Intelligence and Research, took a closer look at annually calculated “mirror statistics”—an attempt to estimate the regime’s hard-currency resources based on data that its trading partners provide about their own imports from and exports to North Korea. “We knew their economy was in deep trouble,” Asher says. “What we couldn’t understand was why they didn’t seem bothered by sanctions, or want to cut a deal over their nuclear-weapons program. They should have been bankrupt, but they seemed to be surviving.”

Asher and Newcomb concluded that, since 1990, North Korea’s accumulated legitimate trade deficit was well over $10 billion, and was increasing by around $1.2 billion a year. Yet, though the country had been unable to borrow money on international markets since the 1970s, it was managing to acquire enough hard currency to import not only military components but also the goods that fuel the “palace economy” of Kim and his cronies. Their lifestyle, dependent on the importing of cars, cognac, high-end electronics, and other luxuries, bears no relation to the impoverished North Korean norm. (In 1991 the North Korean government launched a “Let’s eat only two meals a day” campaign—an injunction the regime’s leaders did not themselves follow.) The gap between North Korea’s hard-currency needs and its means is filled by Office 39, which is estimated to bring in between $500 million to $1 billion a year or more.

Compared with the amount of American currency in circulation around the world—at least half of all U.S. banknotes are physically in the hands of people outside the United States—the total quantity of supernotes, believed to be made by North Korea, to date is small. However, their extraordinary quality can have disproportionate consequences. In 2004, Taiwan’s central bank issued a warning that supernotes had been turning up on the island. This caused a panic, and the Taiwanese banks were overwhelmed by customers seeking to return $100 bills totaling hundreds of millions of dollars, most of them perfectly genuine. “It was effectively a run on the dollar,” says Asher. “No one knew if their money was real or fake.”

The Secret Service, the branch of the Treasury Department that takes the lead against counterfeit currency, has maintained a worldwide investigation into supernotes since 1989, when the first sample—cruder than those found today—was detected by a bank teller in the Philippines, apparently because it didn’t “feel” right to the touch. Since 1996, the U.S. has tried to outwit the supernote manufacturers by twice changing the design of $100 bills, but the counterfeiters have kept pace. The supernotes have been found in countries throughout Asia, Europe, and the Middle East. Now, as the Liu case suggests, substantial quantities of supernotes are starting to circulate inside the United States.

They are crafted with extraordinary care. Klaus Bender, an authority on banknote printing, writes in his book Moneymakers that unlike other forgeries, and unlike any other currency except real U.S. banknotes, these supernotes use paper with long, parallel fibers, manufactured by a machine called a Fourdrinier and composed of 75 percent American cotton and 25 percent linen. Like genuine bills, modern supernotes are printed using “optically variable ink,” which appears to change color from bronze green to black depending on the angle of the light. (Indeed, their quality is so superb that Bender suggests they aren’t made by North Korea at all, but somewhere in America by the C.I.A.—a claim for which there is no evidence.)

The print quality is exceptional. Again like genuine dollars, the supernotes are produced on a special intaglio press so that their intricate design is raised above their surface. The “microprinted” features, 1/42,000th of an inch high, found on real dollars are reproduced exactly on counterfeit ones. At Liu’s trial in Las Vegas, the prosecution blew up images of the supernotes to hundreds of times their normal size, and even then, says an F.B.I. agent who worked on the case, the differences between the supernotes and genuine bills were invisible to the naked eye: “Frankly, if I’d been the defense attorney, I would have asked the prosecution, ‘How can you prove these are counterfeit?’ He could have persuaded the jury they were real.” Lorelei Pagano, a Secret Service counterfeit specialist, told a private banknote-industry conference in 2003 that the makers of the supernotes had likely included their few tiny flaws on purpose, so that they and their customers could tell the difference between the counterfeits and the real thing. Otherwise, there would be nothing to stop criminals from ripping off their suppliers by purchasing supernotes—which typically cost around a third of their nominal value—with other supernotes.

Wilson Liu’s nemesis is a man named Bob Hamer, a now retired F.B.I. agent whose recent book The Last Undercover describes his 26 years with the bureau, working mostly covertly. Hamer’s three-year investigation—code-named Operation Smoking Dragon—began not with supernotes but with counterfeit cigarettes, which were being shipped by freight container from China into California ports by the millions. These, too, says Asher, originated in North Korea, and were the subject of a report by the Coalition of Tobacco Companies, one of whose investigators made an undercover visit, posing as a buyer, to North Korean factories in Pyongyang and the northeastern city of Rajin. These turn out fake Western brands, such as Marlboros, in such quantities that they generate as much as $720 million in gross revenue each year. Hamer set up a number of front operations to get inside the cigarette-smuggling business, and soon had many contacts who dealt with him as if he were a smuggler, too. In the spring of 2004, Hamer and his colleagues were asked by F.B.I. headquarters to see if they could acquire North Korean supernotes. One of Hamer’s best customers, Chao Tung “John” Wu, who eventually pleaded guilty to smuggling counterfeit currency, cigarettes, and narcotics, as well as conspiring to broker a deal for Chinese-made, shoulder-fired missiles, but died before he was sentenced, promised he could supply them with the help of a man who was a frequent visitor to North Korea—Wilson Liu. The notes were so good, Wu said at a secretly recorded meeting, “you can even go to Las Vegas and slide them into the machines—they take them right away.”

Within a few weeks, Wu brought Hamer a sample of an “old” supernote, but advised him that before ordering in bulk he should wait for the forgers to perfect their version of the new, 2003-edition $100 bill. This took months, but finally, in March 2005, Wu called Hamer and said he had two samples, which he eventually handed over at an undercover warehouse in Pomona, California. Hamer gave them to a Secret Service agent and asked him to have them tested. Hamer remembers, “The guy called me a few days later and said, ‘Why’d you give me these? They’re real!’ I said, ‘If these are real and I’m paying 30 cents on the dollar for them, I’m going to remortgage my house and spend the proceeds on these notes.’” Hamer suggested that the Secret Service send them to the central lab in Washington, D.C., which confirmed they were indeed counterfeit.

Wu introduced Hamer to Wilson Liu at the Ritz-Carlton hotel in Pasadena. In the meeting, which was videotaped, Liu did not reveal exactly how he would obtain more supernotes, but boasted of his personal connections in North Korea. Wu urged Hamer to go ahead with a plan to have about a million supernote dollars shipped to the United States, saying he would guarantee the shipment, using a house Liu owned in Beijing as collateral. Wu also proposed building a crystal-methamphetamine plant inside North Korea as a means of penetrating drug-distribution networks in Asia. “We pushed this scheme hard,” Hamer recalls, “but the bureau wouldn’t allow us to invest in the manufacture of narcotics.”

Using funds generated from other undercover operations, Hamer wired $350,000 in two installments to the bank account of one of Liu’s contacts in Beijing. He made the first payment on April 6, 2005, and the next day received a FedEx package containing 15 supernotes and a computer memory stick with photos of multiple bundles of realistic-looking hundred-dollar bills. By the end of the month, a freight container laden with rolls of cloth was on its way to America, addressed to the Pomona warehouse. Among the bolts, Liu promised Hamer, would be supernotes with a nominal value of $700,000. He was as good as his word.

After further clandestine meetings and payments, Hamer went on to receive another $223,600. He held a final meeting with Liu at the Ritz-Carlton on August 17. Liu was late because he’d been delayed driving back from a trip to Vegas, telling Hamer he had become such a high roller that some of the Strip’s biggest casinos—the Mirage, the Mandalay Bay, and Caesars Palace—had awarded him “comp” status, entitling him to free food and lodging. He showed Hamer the bill of lading for another, pending container shipment. When it arrived, about a week later, the roll of cloth hid $983,500 in supernotes.

By then, Wu, Liu, and some of the cigarette smugglers were behind bars. Hamer had assembled the key players in Los Angeles for a fictitious “divorce party” at the Playboy Mansion that Hamer concocted for himself. Almost simultaneously, another F.B.I. operation, called Royal Charm, rolled up North Korean cigarette-and-supernote smugglers on the East Coast. (The suspects had all been invited to a “wedding” aboard an Atlantic City yacht.) Though under indictment, Liu managed to make bail and, while awaiting trial, continued to spend counterfeit bills in Vegas for close to another two years. He was caught a second time when the Secret Service, after receiving intelligence that supernotes were pouring into the casinos, installed sensitive detection equipment in the slots at Caesars Palace. Exactly how much Liu had managed to launder by this time remains unknown, but his MGM player’s-card account reveals that, in the MGM Mirage slots alone, he wagered more than $1.2 million in 2005, $1.8 million in 2006, and $574,000 in the first six months of 2007. From February 2006 until his second arrest, on July 30 the following year, he fed almost $2 million into the slots at Caesars Palace. Casino surveillance cameras eventually revealed his laundering technique. Again and again, Liu would appear to dispose of about a thousand supernote dollars, but would pull the lever to place a bet only a few times—so leaving a large unspent balance. Then he would press a button to get a ticket for the unspent amount and exchange it at the cashier for genuine dollars.

At Liu’s sentencing, last March, Assistant U.S. Attorney Tim Vasquez called the North Korean supernotes “a serious assault on the monetary system of the United States.” How significant might this assault be? For many years, U.S. agencies have claimed in public that the quantity of supernotes in worldwide circulation amounts to only about $50 million. By definition, any figure, especially one relating to forgeries of high quality, must be a guess. David Asher, in congressional testimony in 2006, suggested that the total might be in the hundreds of millions. But according to Syung Je Park, in 2007 North Korea bought a huge amount of the special Fourdrinier paper—“enough to print $2 billion.”

In his State of the Union address in January 2002, President Bush famously described North Korea as part of an “axis of evil,” together with Iraq and Iran. That stern rhetoric underpinned the efforts of the Illicit Activities Initiative. Aside from Smoking Dragon and Royal Charm, the initiative scored some notable successes. Some of them involved drugs. In response to U.S.-generated intelligence, the Australian Navy in 2003 boarded and seized the Pong Su, a North Korean vessel that had been carrying 150 kilograms of pure heroin. North Korea has been heavily involved in drug trafficking, both to its neighbors and farther afield, for many years. In 2003, U.S. defense officials said it had become the world’s third largest producer of opium, after Afghanistan and Burma. Unclassified Pentagon documents say this is converted to heroin at state-owned factories. China’s narcotics-control commission described North Korea as one of three “golden routes” for heroin supply, using a Chinese term—“Ku’mdallae”—which had a deliberate double meaning: the Chinese character “Ku’m” is also that used to represent the name Kim Jong Il. Office 39 also organizes the import of ephedrine, the main precursor chemical for making crystal methamphetamine, and the manufacture and export of the drug. Japanese police believe a high percentage of the meth sold on Japanese streets comes from North Korea. As Syung Je Park observes, “drug money and counterfeit money go to Office 39. Office 39’s money is directly controlled by Kim Jong Il. And Kim Jong Il’s first priority is to develop nuclear weapons and missiles.”

The Illicit Activities Initiative also went after banks. In June 2004, American pressure persuaded the government of Austria to shut down the Golden Star Bank in Vienna. Wholly owned by North Korea, Golden Star was suspected by Austrian intelligence of sponsoring the distribution of supernotes and also of attempting to buy fissionable material. Then, in September 2005, a month after the arrest of Wilson Liu and his associates in Los Angeles, the U.S. Treasury designated North Korea’s most important financial entrepôt, the Banco Delta Asia, in Macao, as an institution of “primary money-laundering concern,” in part because it was being used to distribute supernotes. The designation amounted to an American declaration that any entity that did business with the bank would itself be considered a pariah. “The Banco Delta was critically important to the regime,” says Juan Zarate, the senior official behind the Treasury Department’s action. (Zarate later became Bush’s deputy national-security adviser.) “Designating it compelled other institutions, especially Chinese ones, to realize that they risked jeopardizing their own business relationships with the U.S.” That, in turn, “gummed up North Korea’s ability to operate in the normal financial world—for example, to issue letters of credit in dollars to pay for what they were doing,” including arranging payment for parts for new missiles.

The Illicit Activities Initiative had a lot more planned. The final stage, which David Asher says President Bush had been fully briefed about, would have been the unsealing of criminal indictments. “We could have gone after the foreign personal bank accounts of the leadership because we could prove they were kingpins,” Asher says. “We were going to indict the ultimate perpetrators of a global criminal network.” “The world wanted evidence that North Korea is a criminal state, not a lot of hoo-ha,” says Suzanne Hayden, a former senior prosecutor at the Department of Justice who ran its part of the Illicit Activities Initiative. “The criminal cases would have provided the evidence. It would have been in the indictments. As with any money-laundering investigation, we would have identified the players and traced them back, from Macao to those who were behind it in North Korea.” Hayden spent several years attached to the International Criminal Tribunal for the former Yugoslavia, working on the case against the Serb leader Slobodan Milošević and his financial criminality. She sees close parallels between his activities and Kim Jong Il’s: “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.” The criminal cases, says Asher, were based on information from undercover agents, informants, and a vast surveillance operation. At the initiative’s outset, in June 2003, says Asher, his boss, former secretary of state Colin Powell, directed them “to use law enforcement, not intelligence, to prove beyond a doubt what they were doing,” noting, “I don’t want this to be like Iraq’s W.M.D.”—a lot of heated rhetoric with no smoking gun. The result, Asher says, was that “this was not an emperor-with-no-clothes scenario. We had video. We had audio. North Korean generals meeting with Chinese criminals, and with Secret Service and F.B.I. agents.”

Instead, the Bush administration suddenly decided not to proceed. What Asher describes as the “ultimate non-aggressive containment strategy” was unexpectedly curtailed. The reason: the administration believed that it risked provoking a permanent North Korean withdrawal from talks on its weapon and missile programs. Hayden says, “Suddenly, the rules had changed. The diplomatic piece of this came swooping in, and the imperative became ‘Let’s get them to the table,’ and that meant everything had to be ratcheted down.”

In fact, the program was not just halted but effectively thrown into reverse. Kim Jong Il made his continued participation in international talks contingent on having sanctions lifted, and in March 2007 the administration unfettered Banco Delta Asia and unfroze North Korean assets. Banks around the world that had shunned North Korean companies were now free to do business again. The North Korean heroin smugglers caught on the Pong Su were released and allowed to go home. Illicit activity was swiftly back to normal. Hayden says, “This is not going to go away. They’re not going to stop making supernotes and counterfeit cigarettes and drugs, because they’re desperate.” The most recent supernote seizure to come to court, unnoticed by the American news media, was in July 2008, when Mei Ling Chen had a parcel of what purported to be dried seafood mailed from Taiwan to a house she was visiting in Sunnyvale, California. Opened in a random search by Customs at San Francisco airport, it contained supernotes with a face value of $380,000. Secret Service agents inserted a tracking device, resealed the package, and let Chen receive it. When they arrested her, they learned she had already spent thousands of counterfeit dollars carried into the country a week earlier, on goods from Louis Vuitton, Footlocker, and other stores. The Secret Service believed that this may have been a way to launder the counterfeit money. (A common ploy, according to an affidavit by senior special agent William P. Bishop, is to return goods to stores and pocket a real-money cash refund.)

A statement from the U.S. Attorney’s office suggests that, in official circles, the importance of this case goes well beyond a scam against shopping-mall retailers: “The investigation into the [supernotes’] origin and distribution has been a top priority for the Secret Service. The Supernote investigation is an ongoing strategic case with national security implications.” The investigation has, the statement adds, “spanned the globe, involving more than 130 countries and resulting in more than 200 arrests.” Chen pleaded guilty, and on January 30, 2009, was sentenced to 33 months.

Earlier supernote issues have turned up in large amounts in the Middle East, in places such as the Bekaa Valley, in Lebanon. Syung Je Park says that Office 39 is targeting this region again, partly because counterfeit U.S. currency is less likely to be detectable outside the United States. According to Park, Office 39 has recently diversified into a new field—re-insurance fraud. In the past year, the North Korean government’s life-insurance corporation has recouped about $100 million from European companies for payouts it claims to have made on life-insurance policies of people killed in unrelated train, ferry, and helicopter crashes. Park says the policies were bogus. A London attorney who contested one of them in the U.K. High Court agrees: “Unfortunately, we could not prove it to the court’s satisfaction. In the end we had no alternative but to settle.”

With North Korea’s missile and nuclear-weapons tests earlier this year, any optimism about Kim’s transient return to the bargaining table has evaporated. In what looks like a return to the financial strategy pursued by the Illicit Activities Initiative, the Obama administration sponsored a U.N. resolution that, besides allowing searches of ships suspected of carrying weapons and components to North Korea, would also once again freeze the country’s foreign-held assets, curbing its ability to do business with the outside world. Meanwhile, the cases against the North Korean principals remain stalled, and the fuller picture they contain about Office 39 and its networks remains under wraps. What cannot be in doubt is the scale of the challenge now confronting President Obama. “The thing about Kim Jong Il is that he isn’t some kind of spoilt, tyrannical playboy, but a very smart Mafia don,” says Asher. “He knows every trick in the diplomatic playbook. He is a world-class criminal, and a world-class dictator.”