Appeasement Money Laundering NK Economics U.S. & Korea

Kim Jong Il Unplugged, Part 11: Eyes on Seoul

Green eyeshades are turning toward Seoul, Kaesong, and Kumgang.  If you think things were bad before, this is where U.S.-Korea relations will be severely tested.  The U.S. Treasury Department isn’t going to put up with Seoul acting as Kim Jong Il’s financier for long, and  with the  likely exceptions of some shady  Russian banks  and whatever China is secretly providing at the state-to-state level, South Korea is Kim Jong Il’s last cash cow.


That poll yesterday — the one that showed the ruling Uri Party’s approval rating at nine percent — also showed that only 15% support continued government support for Kumgang.   That’s bad news for the project, which is a congenital money-loser due to Kim Jong Il’s demands  for a bigger part of the take, even as the number of visitors declines.  Kumgang needs government support, and after the  2007 elections, it may not be able to count on it.

Hyundai Asan, which organizes package tours to North Korea’s Mt. Kumgang, has seen the fee it pays Pyongyang per visitor grow a whopping 78.3 percent over the last two years. It paid US$33.75 a head in 2004 but $59.50 now.

Documents the Unification Ministry submitted to Grand National Party lawmaker Chin Young on Friday say Hyundai Asan agreed to pay an entrance fee to Mt.Kumgang according to the number of tour days as of July 1, 2004 and set the fee at $10 for a day trip, $25 for a two-day trip and $50 for a three-day trip. On May 1 last year, it agreed to raise it to $15 for a day trip, $35 for the two-day trip, and $70 for a three-day trip. On July 1 this year, after a fractious period in relations between Pyongyang and the firm, it agreed to another hike to $30 for the day trip, $48 for the two-day trip and $80 for the three-day trip.

[….]   It was the first time the breakdown has become public.

Even without Treasury in the picture, the trends were not working in Kumgang’s favor.  Besides the aforementioned, there’s  also the public rift between the North Koreans and Hyundai Asan and  a public strong-arm of Hyundai Asan by the UniFiction Ministry.  This endeavor isn’t going to turn a profit anytime soon.  Enter the Treasury Department, which will soon ask  what no one in South Korea really wants to say: “How  does Kim Jong Il  spend that money?”  Some think they know the answer, and that answer puts Kumgang on a collision course with U.N. Security Council Resolution 1695.


Kaesong’s new troubles  were reflected in a decision to delay a planned expansion of the industrial park.   First,  its  inclusion in a proposed Free Trade Agreement with the United States is a dead letter. That means that  Kaesong’s main  advantage, cheap labor, may  be offset  by a competitive disadvantage against other Korean manufacturers, whose products  would receive lower import duties at U.S. ports, thus setting them up for other advantages that go with the economics of scale.  Without FTA treatment, it’s hard to see what  manufacturer wouldn’t prefer China, where the authorities at least understand the value of keeping their commitments.

The U.S. government is also  reiterating its seriousness about the enforcement of U.N.S.C.R. 1695, and I predict that Kaesong  will  soon start  getting more of the wrong kind of attention from the  U.S. Treasury Department.  The Finance Ministry,  which seems to be the one part of the Korean government that’s still on good terms with America, has sometimes seemed to reflect Treasury’s concerns, even when that required it to contradict the UniFiction Ministry. Recently, it  sent a warning letter to businesses  operating in North Korea, reflecting  a stricter  reading of  U.N.S.C.R. 1695,  which requires states to exercise “vigilance” in avoiding funding for North Korean weapons programs.  This contradicted  Lee Jong-Seok’s  “don’t ask, don’t tell” interpretation.  This sets us up for the widening of that rift to Kaesong. 

The dispute involves the Kaesong Industrial District Management Committee, which is legally a North Korean entity, but whose membership is either composed of South Korean investors in Kaesong and North Korean officials.  The investors use the Committee’s accounts at the Woori Bank to pay the North Korean regime for the workers’ wages.   This is interesting to me  in two ways:  first, Kim Jong Il presumably doesn’t pay them in dollars, so the mystery about what the workers are really paid deepens; second, you have to wonder where the money really does go.

The South Korean papers  seem more interested in finding a scandal that will hurt Roh in the sunset of his deeply unpopular presidency.  Their angle was the compliance of those transfers with South Korean law.  The papers implied, but never really explained, that South Korean law prohibits North Korean entities from controlling South Korean bank accounts (I looked for the law myself, with no luck.  Anyone?).   This week, the Joongang Ilbo  claimed to have  “government documents” proving that UniFiction Minister Lee Jong Seok and his underlings  “pressured Woori Bank to consider allowing North Korea to open a bank account.”  The JI also had confirmation from an unnamed  Unification Ministry official, who tied to characterize this as “just a discussion and not formal pressure against the bank,” and claimed that “the bank made its own decision, without being pressured by the ministry.”  If the law actually says what the JI implies it says, this alleged  letter from the UniFiction Ministry  does seem like (1) subtle pressure, and (2) a slippery, obfuscating interpretation of the law.

“The committee is composed of South Korean members, thus opening the account under its name is within the scope of approved inter-Korean cooperation projects,” the ministry told the bank in the letter.

The committee, however, is a North Korean corporation established under North Korean laws. Contrary to the ministry’s claim, North Korean officials are also working there. Minutes of a meeting on March 7, where government officials discussed the issue, were also provided to the JoongAng Ilbo, showing the Unification Ministry apparently pressured the bank despite objections from other ministries. “We urge the bank to make a wise decision,” the ministry said, according to the minutes.

Minister Lee  denies  pressuring Woori or violating the law, saying that “[n]o South Korean bank has opened accounts for exclusive use by North Korea or its officials.”   Ordinarily, Lee’s word would not move my meter very far, particularly with all of the qualifications in that denial.  Later, Lee admits that  the holder of the account  is legally a North Korean entity, but says  that we should  ignore that and listen to  him instead.

The organization, the Kaesong Industrial District Management Committee, is a North Korean entity by legal definition, according to the minister. But, he said, it is a South Korean body, established and managed “by our people and for our convenience.”

“Naturally, (the bank) opened accounts for the management committee, headed by (South Korean) Chairman Kim Dong-keun,” Lee said in a regular press briefing.

“It is a very fanciful story to say (the bank) opened the accounts for North Korea and that this may be linked to North Korea’s efforts to evade U.S. financial sanctions, but one that helps no one,” the minister said.

The Joongang Ilbo is now backing off the story of UniFiction Ministry pressure on the Kaesong Committee account, but asserting that the Ministry applied pressure elsewhere:

But the ministry apparently did try to use its influence in a related but separate matter; other documents provided by Representative Kwon showed that it pressed the bank to allow the North Korean General Bureau of Special Zone Development, which oversees Pyongyang’s capitalist experiments in operating special economic zones, to open other accounts. Woori Bank, supported by the finance and foreign ministries and the National Intelligence Service, objected strongly and prevailed at a meeting in Seoul on March 7.

Meanwhile, the Finance Ministry was voicing its  disapproval of the financial  arrangements surrounding Kaesong  in documents leaked to the Chosun Ilbo:

In the documents, the ministry points out that anonymous dollar transactions could lead to trouble in tax collection, and be used as means for money laundering, customs evasion and payments for smuggling. They could also distort the international account balance, since they are not included in foreign exchange statistics, the ministry said. “To speak extremely, with the transaction method, the North can make a camouflage purchase of a South Korean company and use it as a channel for surreptitious remittances of illegal money from foreign countries,” Lee said.

Can you say, “money laundering concern?”  In other words, this probably is  bad policy,  very risky business for Woori,  and  contrary to  an honest reading of  U.N.S.C.R. 1695, but it’s not at all clear that we have the makings of Kaesong-gate here.