When the Secret Service first found high-quality counterfeit dollars circulating in the Middle East over three decades ago, North Korea wasn’t the prime suspect; Iran was. The counterfeits were so good that experts could only tell them from the originals by the superior quality of their printing, so the Secret Service named them “supernotes.” The Secret Service’s suspicions shifted to North Korea in 2000, after Cambodian authorities arrested Yoshimi Tanaka, a Japanese Red Army hijacker who had taken refuge in North Korea and was traveling in a North Korean diplomatic vehicle, on counterfeiting charges. Those suspicions eventually converged on Bureau 39 of the Korean Workers’ Party. Bureau 39’s job is to launder money. It earns money overseas, both legally and illegally, commingles it all together to make the dirty money untraceable, and launders the proceeds through slush funds that the regime uses to buy just about everything starving kids can’t eat. North Korean diplomats also help launder supernotes.
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Since 2000, North Korea’s involvement in currency counterfeiting has been well documented. In 2004, the Justice Department indicted Sean Garland, the leader of a breakaway Marxist faction of the IRA, for buying supernotes from North Korean embassies and reselling them for a profit (an Irish court later refused to extradite Garland to the U.S. to stand trial). In 2005, the passing of supernotes was the principal basis for designating Banco Delta Asia as a primary money laundering concern and blocking it out of the financial system. In 2006, the Federal Reserve estimated that “approximately $22 million in supernotes has been passed to the public […] and approximately $50 million in supernotes has been seized by the U.S. Secret Service.” In 2008, a Las Vegas jury convicted Chen Chiang Liu of passing supernotes through casinos.
Although the supernote story invariably drew the usual assortment of conspiracy kooks, hack journalists, and North Korean sympathizers out of the woodwork, better quality investigative journalism makes a strong case against Pyongyang. In a 2006 report for the New York Times, Stephen Mihm explained how North Korean buyers went to the same Swiss suppliers who sold our own Bureau of Engraving and Printing, or BEP, its intaglio printing presses and optically variable ink. (The North Koreans’ interest ought to have raised immediate suspicions with the Swiss; after all, why would North Korea, whose own currency is non-convertible and worthless, need top-of-the-line presses and ink designed to foil counterfeiters?)
David Rose followed Mihm’s reporting with a detailed 2009 story for Vanity Fair, explaining how the feds linked the counterfeits to North Korea, how North Korea smuggles supernotes into the United States, and how Condoleezza Rice’s State Department suppressed a Justice Department indictment of Kim Jong-il for the counterfeiting operation. The International Consortium for Investigative Journalists has also reported on the smuggling of supernotes into the United States. Other reports have pinned control of the supernote operation on General O Kuk-ryol.
North Korean counterfeiting costs Americans money. The BEP redesigned the $50 note in 2003 and redesigned the $100 note twice since 1996, in part to stay ahead of the supernote’s criminal craftsmanship. In a 2009 report, the Federal Reserve said that it “budgeted an average $610 million for printing, shipping, counterfeit deterrence and other currency-related costs,” and that a currency redesign would also cost “up to $390 million for nonrecurring equipment upgrades for manufacturers of cash-accepting devices.” The current design of the $100 note is from 2013. (The BEP’s website doesn’t mention a botched 2010 redesign.) All of these costs are passed on to American taxpayers and consumers.
In recent years, reports of supernote arrests waned, although the problem never went away entirely. In 2012, South Korean authorities arrested a woman for “attempting to infiltrate South Korea by pretending to be a defector, and … circulating some $570,000 worth of supernotes in Beijing and Shenyang from 2001 to 2007.” This was still old news, but in 2013, the Undersecretary of the Treasury for Terrorism and Financial Intelligence confirmed that North Korea continued “to try to pass a supernote into the international financial system,” although it was “less of an issue than it was a few years ago” and had “calmed down to some extent.” As recently as March of this year, Vice News figured that the supernotes had vanished. It quoted Michael Madden as saying, “I don’t think they’re currently involved in counterfeiting anymore.” According to Kathy Moon, supernotes are “not something people are seeing.”
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Perhaps they spoke too soon. This week, Yonhap reported that authorities in Hong Kong recently found supernotes on a businessman arriving from Pyongyang. Last week, The Joongang Ilbo reported that “a North Korean agent was arrested in the border city of Dandong in Liaoning Province, northeastern China,” for his involvement in “distributing counterfeit U.S. dollars.” The story quotes an unnamed source as saying that the agent “brought $5 million in cash into China from North Korea” to buy “household goods and home appliances” as gifts for North Korean elites for Kim Il-sung’s birthday (April 15th) and the Workers’ Party’s congress (May 7th). The paper notes that because of new sanctions, “Pyongyang is being blocked from financial transactions giving it access to U.S. cash.”
“The $5 million was exchanged at the Industrial and Commercial Bank of China and the Agricultural Bank of China for some 30 million yuan [$4.6 million] and then deposited,” the source said. “But a number of the notes were found to be counterfeit $100 bills when they were run through the banknote counter by a bank employee, so Chinese authorities ordered the relevant account be frozen and arrested the North Korean agent.” [Joongang Ilbo]
In February, I posted about reports that the Industrial and Commercial Bank of China, China’s largest bank, had “suspended cash deposit and transfer services for accounts owned by North Koreans.” Either that report wasn’t true, the bank quietly unfroze some of those accounts, or China’s largest bank isn’t taking its Know-Your-Customer obligations very seriously and needs to fire its compliance officer. (On June 2nd, Treasury dramatically raised the risk to banks that service North Korean clients by designating North Korea as a primary money laundering concern, and banning all direct and indirect correspondent account services for North Korean banks.)
Picking up with our story, Chinese authorities then went to the North Korean’s home in Dandong, where they confiscated 30 million yuan and an unspecified quantity of gold bars. The agent’s use of counterfeit dollars, yuan, and gold provides further evidence that they are having serious cash flow problems. Last week, I posted about a Daily NK report that North Korean agents were defaulting on their debts to Chinese creditors, and an NK News report that some North Korean purchasers had inexplicably stopped buying goods from their Chinese suppliers in March. According to the Daily NK, those experiencing cash flow problems include Bureau 39 agents.
Intriguingly, the Daily NK also reported that a North Korean agent couldn’t raise the cash to buy flat-screen TVs from China to dole out as highly coveted swag for the elites (in violation of U.N. sanctions, which prohibit North Korea from importing “luxury goods”). I speculated then that the North Korean agents’ accounts may have been frozen by their Chinese bankers. These reports support that speculation and offer one possible explanation.
“North Korea’s economy is entering a state of paralysis because of a shortage of dollars, and there is a high likelihood that it is systematically counterfeiting notes and in the process of wide-scale distribution,” the source added.
“Starting from March, a large amount of supernotes were found in border regions between China and North Korea and China’s three northeastern provinces [Liaoning, Jilin and Heilongjiang], and many have pointed to North Korea as the source of production and circulation,” Park Byung-kwang, a senior researcher with the Seoul-based Institute for National Security Strategy, said.
A follow-up report from The Joongang Ilbo — which has historically done some outstanding reporting on North Korean money laundering — identified the North Korean agent arrested in Dandong as an officer in an agency “responsible for major espionage missions against Seoul.” That’s a good description of the Reconnaissance General Bureau, or RGB, which is also responsible for acts of international terrorism, including abductions, assassinations, and a 2014 cyberterrorist attack against the United States. Consistent with the Daily NK‘s report last week, the agent “was going to pay that businessman for trade goods but could not do so apparently because of his arrest.”
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So why, after allowing Bureau 39 and RGB agents to operate on their territory for years, would the Chinese suddenly crack down? For one thing, counterfeiting harms the interests of China’s banking industry, which hasn’t seemed so steady recently.
Here’s an even better reason: a defector organization, North Korea Intellectuals’ Solidarity, says that North Korea is distributing “massive quantities” of “counterfeit Chinese currency under the supervision of Kim Jong Un.” Or so says “a source based in North Korea.” The Korea Times also reports that Chinese authorities are on alert for counterfeit renminbi after multiple Chinese press reports that counterfeits “have recently been circulated in several Chinese cities, including Shaoxing in Zhejiang Province.” Local press speculation has pointed fingers at North Korea. The state-run Global Times, known for its nationalism and anti-Americanism, has also reported that counterfeit renminbi found in Dalian “were identified as North Korean.”
The yuan has circulated widely in North Korea since a disastrous 2009 currency reform — really, a mass confiscation — backfired and obliterated the market value of the North Korean won. Printing fake yuan would be an easy way for the North Korean government to cheat the donju — the well-connected traders who obtain most of Pyongyang’s needs from Chinese vendors, and the Chinese vendors themselves. Bureau 39 agents who are under intense pressure to fund Kim Jong-un’s priorities may be tempted to use supernotes and superyuan to meet their quotas.
NKIS’s allegations are somewhat consistent with previous reports. Its source in North Korea says that the superyuan are printed in Pyongson. Stephen Mihm’s 2006 report for the New York Times identified Pyongsong as the city where supernotes were printed. On the other hand, NKIS also claims that North Korea started printing yuan in 2013, which contradicts a 2007 report by the journalists Hideko Takayama and Bradley Martin that North Korea was printing counterfeit renminbi nearly a decade ago. What seems more likely is that North Korea printed small amounts of yuan before 2007 and stopped when the story broke, given the obvious danger Kim Jong-il would have seen to his relationship with his principal backer.
Today, with China’s banks having finally been forced to choose between their North Korean clients and their access to the U.S. financial system — and having largely opted for the latter — Kim Jong-un may feel less compunction about sticking it to China.
We can add these reports to the evidence that North Korean agents are under significant financial pressure, although I can’t say whether the chicken or the egg came first.* Did the North Koreans turn back to counterfeiting just because it’s their nature, thus causing their accounts to be frozen, or did sanctions and the freezing of their accounts cause the North Koreans to turn to counterfeiting out of financial desperation? Whatever the reason, dumping funny money into the Chinese economy will further strain Sino-North Korean relations, and will add fuel to arguments to expel the North Korean trading companies and agents who pass the counterfeit bills. This time, North Korea’s criminal activities are an even greater threat to China than they are to us.
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* Of course, the egg came first, silly. Dinosaurs laid eggs millions of years before the first chicken did, after all.