Yonhap: Chinese company stops buying North Korean coal

In what could be the latest financial hit to Pyongyang, Yonhap reports that an important Chinese customer has stopped buying coal from North Korea:

A Chinese company in the northeastern border city of Dandong has been ordered by China’s commerce ministry to halt its coal trade with North Korea starting next month, according to a state-run Chinese newspaper Wednesday.

Citing an unnamed Chinese businessman who operates a coal business with North Korea, the state-run Global Times newspaper said the order appeared to be linked to a measure against North Korea’s nuclear test last month.

“A relevant department of the Commerce Ministry and the General Administration of Customs issued the order and, as far as I understand, the Liaoning provincial government received the information,” the newspaper quoted the Chinese businessman as saying.

The report, however, did not identify both the businessman and the Chinese company. [Yonhap]

If the report is true — I emphasize, if — this could be a very big deal. By most accounts, coal is one of North Korea’s most important exports, if not the most important. Combined with the reported freezing of North Korean bank accounts, the loss of Kaesong revenue, and (of less significance) the drop-off in the restaurant business, multiple factions within the North Korean government may have just lost their main sources of revenue. The loss of that revenue could cause some factions to turn on each other for cash. It would also be a blow to Kim Jong-un, who needs cash to consolidate his power, and who faces a major party conference in May:

North Korea’s Kim Jong-un regime may face resistance from its military should the armed forces grow disgruntled at its bungled economic policy under the communist party-centric politics, a government-commissioned report showed Tuesday. [….]

[T]he military could call for reshaping the political order in its own favor if Kim fails to shore up the country’s debilitated economy and ensure sustainable military expenditures, the report pointed out.

“The stability of the Kim regime and party-military relations hinges on the country’s economic growth and continued military spending,” the report said.

“In the event of an economic failure, a shift in the Kim regime could emerge as the military — rather than regular North Koreans — would first demand a shift in party-military relations or call for a military-centric order.” [Yonhap]

See also the similar thoughts from Ken Gause, which I wrote about here.

The fact that China is taking credit for this arouses my suspicions, as did the reports that China ordered its banks to freeze North Korean bank accounts. Such an action would be welcome, of course, but seems questionable in light of China’s public and private opposition to financial pressure on North Korea. Further fueling those suspicions is the possibility of an alternative explanation, in section 104(a)(8) of the new sanctions law.

(a) Mandatory Designations.—Except as provided in section 208, the President shall designate under this subsection any person that the President determines—


(8) knowingly, directly or indirectly, sells, supplies, or transfers to or from the Government of North Korea or any person acting for or on behalf of that Government, a significant amount of precious metal, graphite, raw or semi-finished metals or aluminum, steel, coal, or software, for use by or in industrial processes directly related to weapons of mass destruction and delivery systems for such weapons, other proliferation activities, the Korean Workers’ Party, armed forces, internal security, or intelligence activities, or the operation and maintenance of political prison camps or forced labor camps, including outside of North Korea;

I take no credit for this paragraph, by the way. The first suggestion of this idea I saw came from none other than Senator Marco Rubio. And here are the consequences of that designation:

(c) Asset Blocking.—The President shall exercise all of the powers granted to the President under the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) to the extent necessary to block and prohibit all transactions in property and interests in property of a designated person, the Government of North Korea, or the Workers’ Party of Korea, if such property and interests in property are in the United States, come within the United States, or are or come within the possession or control of a United States person.

We know for a fact that North Korea mines coal and other minerals in its prison camps — just look at the satellite imagery. It mined coal in Camp 22 and Camp 18, still mines it in Camp 14, and mines copper in Camp 12. It mines gold in Camp 15, and probably other camps. That means that Chinese mineral buyers have real exposure here. As with other recent reports, it bears close watching.

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In The Weekly Standard: Kaesong, where life imitated Monty Python & the Holy Grail

large wooden badgerIn Monty Python and the Holy Grail, the Knights of Camelot are on a quest for the Holy Grail, but find their way barred by a group of ornery French knights – never mind what they are doing in England – who have walled themselves inside an impregnable castle. After a pathetic attempt to breach the walls fails, Sir Bedivere the Wise devises a scheme to do
through guile what could not be done through force. He persuades King Arthur to build a large, hollow wooden rabbit, leave it at the castle gate just before nightfall, and wait for the curious French knights to pull it inside. The French do so, at which point it occurs to the Englishmen that they were supposed to be inside the rabbit. Bedivere’s “ingenious” plan ends with the French catapulting the empty rabbit back onto the humiliated English.

On several levels, this scene is a near-perfect analogy for South Korea’s and our own failed efforts to “engage” North Korea, right down to the French knights’ vitriolic-yet-awkward taunts. (The Korean Central News Agency, for example, has a curious affinity for the word “brigandish.”)

Read the rest at The Weekly Standard.

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The End of Sunshine: S. Korea suspends ops at Kaesong, “suspected” of funding N. Korea’s WMD programs

Year after year, and almost alone, I have argued that the Kaesong Industrial Park was incompatible with U.N. Security Council resolutions sanctioning Pyongyang. At Kaesong, “South Korea has 124 companies … employing 54,700 North Korean workers … whose wages are paid to a North Korean state agency.” All told, those fees, taxes, and “wages,” which the North Korean workers probably never saw after Kim Jong-un took his cut, totaled $110 million last year alone.

Contrary to Kaesong’s founding purpose of promoting North-South engagement and people-to-people contact, the workers were heavily supervised and prohibited from direct action with their South Korean bosses, who had to relay their directives through North Korean state minders. And because Seoul never really knew how Kim Jong-un used the money, I argued that Kaesong was a violation of U.N. Security Council resolutions that required it to know, and to “ensure” that they money was not used for prohibited weapons programs.

Here, for example, is a quote from the first Chapter VII resolution against Pyongyang, UNSCR 1718:

Screen Shot 2016-02-10 at 6.56.56 AM

And here is UNSCR 2094, which South Korea itself voted for as a non-permanent member of the Security Council at the time:

Screen Shot 2016-02-10 at 6.58.31 AM

Screen Shot 2016-02-10 at 6.58.51 AM Mind you, I said I was almost alone in arguing this, because as then-Treasury Undersecretary David Cohen said in 2013, “Precisely what North Koreans do with earnings from Kaesong, I think, is something that we are concerned about.” I’ve publicly challenged the Unifiction Ministry to say whether it knew how Pyongyang was spending the funds it earned from Kaesong (it never responded).

But with Seoul’s decision today to “temporarily” halt operations in Kaesong comes this stunning admission from the Unifiction Minister himself:

The suspension of activity there comes amid calls from the United States and South Korea for tougher U.N. and other sanctions against the isolated North following the rocket launch and its fourth nuclear test on Jan. 6.

South Korean Unification Minister Hong Yong-pyo told media North Korea was suspected of spending funds from Kaesong on advancing its nuclear weapons and long-range missiles programs, and the suspension of operations was to stop funds being used for that.

“We are not going to be able to crack North Korea’s nuclear and missile programs by sticking to the same kind of response we have taken all along,” Hong told a briefing. [Reuters]

Cue the usual bitching from Kaesong investors who profit from what amounts to slave labor by its workers, and from leftists who say that closing Kaesong (as opposed to Pyongyang’s conduct) will raise tensions. But here in Washington, opinion had shifted decisively against Kaesong, and calls for its closure had become deafening.

Don’t take this the wrong way. I welcome Seoul’s decision and its refreshingly truthful admission. By closing Kaesong, Seoul can now call on other nations to enforce sanctions without having those nations laugh in Seoul’s face. But really, how long did Seoul “suspect” that Pyongyang was using its Kaesong earnings this way? Based on Cohen’s statement, since at least 2013. Seoul’s admission today will make it almost legally impossible for Seoul to reopen Kaesong again under similar arrangements, now that it has admitted, in effect, that those arrangements were in violation of the Security Council’s resolutions. But if Pyongyang ever becomes serious about engagement, change, and reform, perhaps both sides can agree to reopen Kaesong on the condition that all of those wages and taxes are paid in kind, as food aid, distributed to North Korea’s hungry, by the World Food Program.

Dream on. And, God willing, good riddance to the Sunshine Policy, which died today.

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Did a U.S. university teach North Korea to track down dissidents?

Just after Christmas, Reuters reported on the analysis of two German IT experts who downloaded a copy of North Korea’s Linux-based Red Star operating system and analyzed its code. Inside, they found something both horrifying and completely predictable. Red Star contains code for “tagging, or watermarking, every document or media file on a computer or on any USB stick connected to it.” Meaning?

That means that all files can be traced. “It’s definitely privacy invading. It’s not transparent to the user,” Grunow said. “It’s done stealthily and touches files you haven’t even opened.”

Nat Kretchun, an authority on the spread of foreign media in North Korea, said such efforts reflected Pyongyang’s realisation that it needs “new ways to update their surveillance and security procedures to respond to new types of technology and new sources of information”. [Reuters]

BoingBoing calls this “a marvel of paranoid terribleness, with lots of marvellously bad features.” (sic)

The one I was most interested in is its covert insertion of watermarks into every file that it touches, either on the OS’s launch disk or removable USB sticks. This is used to track down North Koreans who share illicit media files with their friends and mark them out for punishment in the country’s notorious gulags. [BoingBoing]

Quartz calls it “a dictator’s wet dream:”

One of Red Star’s key features is a watermarking system that secretly creates a record of everyone who’s touched that file.

Red Star quietly adds a unique identifier to media files—pictures, Word documents, or videos—the moment they are accessible. For example, if a USB drive containing an illicit document is plugged into a computer running Red Star, that file is automatically tagged with that computer’s unique identifier. If that file is copied to another machine, the new machine’s identifier is added to the watermark. [Quartz]

The BBC says the watermarking function allows “the state to trace the journey of that file from machine to machine,” “identify undesirable files and delete them without permission.”

The watermarking function was designed in response to the proliferation of foreign films and music being shared offline, says Mr Grunow. “It enables you to keep track of where a document hits Red Star OS for the first time and who opened it. Basically, it allows the state to track documents,” he says.

The system will imprint files with its individual serial number, although it is not known how easily the state can link those serial numbers to individual users.

One element puzzling Mr Grunow is the discovery of an extended version of the watermarking software which he and Mr Schiess do not fully understand, but which he says may help identify individual users.

“What we have seen is the basic watermarking, but we found evidence of an extended mechanism that is far more sophisticated, with different cryptography,” he says.

“It could be that this file is your individual fingerprint and they register this fingerprint to you, and that could help them track down individual users.” [BBC]

Perhaps I can contribute something to the answer to this mystery. Reading this, my elephantine memory recalled that back in 2002, former U.S. Ambassador to South Korea Don Gregg, who takes an oddly understanding view of North Korea’s human rights abuses, brokered an academic exchange program between a U.S. university and a North Korean university to share (among other technologies) something called “digital watermarking,” which inserts distinctive metadata into digital media to trace copyright violations. 

One application of digital watermarking is source tracking. A watermark is embedded into a digital signal at each point of distribution. If a copy of the work is found later, then the watermark may be retrieved from the copy and the source of the distribution is known. This technique reportedly has been used to detect the source of illegally copied movies. [Wikipedia]

According to this book, entitled “Techniques and Applications: Digital Watermarking and Content Protection,” governments can also abuse this technology for censorship. 

“[I]t is important to note the potential that particularly usage tracing and control mechanisms have for misuse by political entities. Outright censorship or the mere knowledge that any access to information is subject to surveillance by governmental entities can result in a severe curtailment of individual freedoms of expression and ultimately thought due to a lack or selective availability of relevant information. [Page 11]

Most of the online evidence of Gregg’s exchange program has since vanished from the Internet, but thanks to the Wayback Machine, we can still retrieve this 2003 academic paper, which lists Gregg and North Korea’s former U.N. Ambassador as co-authors. It describes a “bilateral research collaboration” project between Syracuse University and North Korea’s Kimchaek University of Technology (KUT), concerning a series of information technologies, including “digital copyright and watermarking programs.”

The project claimed to have “tacit support” from the U.S. State Department.

The 2003 paper provides scant detail on what technology was actually transferred to the North Koreans, but a 2009 online newsletter from Syracuse claimed that the “ongoing collaborative initiative” had “enhanced IT capability in North Korea.” The program kept up a steady drumbeat of activity, including more delegation visits, for several years.

The Syracuse posting also raises the perennial question about engagement with Pyongyang — who changed who? If the objective of engagement is to reform North Korea, lure it into the norms and standards of civilization, and reconcile it with the U.S. and South Korea, its effect seems to have been closer to the opposite. Instead, the North Korean participants inflexibly praised Kim Jong-il and justified his nuclear proliferation, while the American academics they engaged parroted Pyongyang-friendly views of North Korea’s history, and even its nuclear program. There is more evidence that Syracuse’s program reinforced North Korea’s resistance to the norms and standards of civilization than evidence that it encouraged North Korea to conform to them. Sorry for the long quote:

“With the division of the peninsula, the U.S. virtually created a ‘Korea problem,’” says George Kallander, assistant professor of history and expert on Korea, who is on research leave this semester at the Academy of Korean Studies in South Korea. “Koreans themselves did not have a problem. Their country had never been divided like this before.”

He points out the importance of Korean pride and tenacity. “The division of the peninsula was unprecedented and no Korean wanted it. Korea has at various times in the past used foreign forces to overcome domestic political and military problems, but always, always, always Korea has prevailed. This period of division is an anomaly and will not last.

“No matter what people say, the Koreas will unite someday.”

The 1945 partition set the stage for today’s high-stakes diplomacy over North Korea’s nuclear weapons. In April of this year, North Korea withdrew from the Six-Party Talks on nuclear disarmament and has since taken steps to restart its plutonium reprocessing facility and tested a weapon.

Jongwoo Han, an adjunct professor of political science and an expert on Korean politics, traces the evolution of the North Korean weapons program to 1991, when the Soviet Union’s collapse changed the balance of power in Asia and made relationships with America much more important. North Korea began to develop its nuclear strategy as a bargaining chip to gain recognition from the United States.

“North Korea knows its regime security is guaranteed only if the United States recognizes it,” says Han, the co-leader of the exchange program with Kim Chaek University. [….]

In 2002, a North Korean diplomat told Han, “We are going to go all-in” in playing the nuclear development card to gain recognition from the United States, as Han wrote in a 2009 article in the Australian Journal of International Affairs. He explained, “Pyongyang has pursued nuclear proliferation primarily in order to attain security and economic aid,” a point the late South Korean President Kim Dae-jung made in 2007 as he hosted visitors from Syracuse. 

[George S. Bain, Syracuse U., Maxwell School, News & Events, 2009]

Oh, and in the newsletter, Gregg pointed to Kim Jong-un’s Swiss education, suggesting that this time, reform was finally here! I could fisk that, but Gregg’s reaction to Kim Jong-un’s fourth nuclear test has so much greater a wealth of material, and Don Kirk has already done a fisking for the ages. It’s a must-read.

Ironically, the target of Red Star’s watermarking function is to stamp out intellectual and cultural engagement between North Koreans and the Outer Earth. Increasingly, that engagement takes place through computers that North Koreans purchase in the markets. Many — though we can’t be sure how many — probably use Red Star. Groups like the North Korea Strategy Center, founded by gulag survivor Kang Chol-hwan, are smuggling flash drives and DVDs loaded with books and movies into North Korea as part of a guerrilla engagement strategy designed to bring social change to one of the world’s most isolated, deprived, and militarized societies. That’s the kind of change Pyongyang is determined to stop.

The question that deserves closer technical examination, then, is whether an American university has unwittingly helped the North Korean security forces track down and punish North Koreans who read that content. We can divide that question into subparts.

  • Did Syracuse University teach North Korea digital watermarking? By its own claims, it intended to do so, although Syracuse hasn’t clearly said what technology it actually transferred. 
  • Did North Korea deploy a similar technology to censor digital content? Yes. 
  • Did North Korea use Syracuse’s technology, or a derivative of that technology, to censor digital content? For now, that’s probably impossible to know, but it seems like a strong possibility. It’s fair to point out that the regimes in Iran, China, and other countries also employ similar samizdat-tracking software. We can’t rule out other sources. 

What should be clear is that this revelation gives Syracuse an ethical responsibility to suspend its exchange program with KUT pending a thorough, independent, and transparent review. That review should examine the watermarking technology in North Korea’s OS, compare it to the technology Syracuse transferred to North Korea, and determine whether the technologies Syracuse shared with KUT are subject to misuse. 

Really, then, the questions this post raises are logically related to those raised by the still-unanswered allegations that exchange programs are training North Korean hackers, or helping North Korea weaponize anthrax. Proponents of exchange programs with North Korea can’t be oblivious to the nature of the regime they’re engaging, and the potential for it to misuse the technologies they share. Instead, they have a heightened duty to safeguard against the misuse of potentially harmful technologies with a regime of this nature.

Unfortunately, those involved in Syracuse’s project may be far too gullible to see this. That’s why it should not be left to them to reevaluate the ethical responsibility of their IT exchange programs with North Korea.

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Attention North Korean generals: You have exactly six months to plot your coup.

Notwithstanding some reports to the contrary yesterday, it looks like Kim Jong-Un’s big party congress will proceed in May, as planned. According to the Korean Institute for National Unification, a South Korean think tank, personnel changes will be on the agenda:

North Korean leader Kim Jong-un is expected to reveal his new aides in a major community party convention to be held in May next year, a South Korean government think tank said Tuesday. [….]

Chances are high that it will set the stage for a “political ceremony for the full-scale resignation of the second revolutionary generation led by Choe Ryong-hae and the rise of the third and fourth revolutionary generations to power,” the institute said in a report on the outlook for next year’s security situation involving the North.

Choe, a party secretary, was one of the closest confidants to Kim but he has reportedly been demoted and underwent “re-education” as a punishment for an unconfirmed reason.

As to the scheduled party congress to be attended by more than 3,000 officials, the KINU said it would introduce more new faces in the ruling elite rather than fresh policies.

“A new line-up of power elites in the Kim Jong-un administration will be revealed,” it said, adding Kim is apparently confident of his grip on state affairs. “That would have been a basis for Kim Jong-un’s decision to open the 7th party congress in 2016.” [Yonhap]

Beware the Ides of May, comrades.

You can read the original report of KINU’s soothsayer analyst here. It doesn’t say much about its sources for these predictions, but rather, seems to be based solely on the author’s analysis of historical patterns of succession and power consolidation in other totalitarian states, along with a healthy dose of speculation so unleavened it would be kosher for Passover. It isn’t what you’d call exact science or inside knowledge.

It also predicts that His Corpulency is “unlikely to conduct a nuclear test in 2016,” and may “offer an olive branch toward the South in his New Year speech,” to which I’ll respond by referring you to this evergreen analysis of North Korean New Year speeches. Frankly, the genre of post-New Year speech analysis tends to be so cherry-picked, wishful, and contrived that you almost have to admire KINU for not waiting for the actual speech to (over-)analyze it.

KINU also joins in the widespread speculation that Kim will announce new economic reforms. In the wake of the Orascom fiasco and a series of other financial misadventures in “engagement” (Masikryong, the Kaesong shutdown, the Ebola quarantine, tourist arrests) I don’t doubt that His Porcine Majesty will want to at least talk about reforms, to bait a whole new class of suckers to bring him some money. Hey, talking about reforms is Pyongyang’s equivalent to GoFundMe. But in their practical effect, North Korea’s economic reform plans tend to be a lot like Kim Jong Un’s weight loss plans: more aspirational than empirical.

Take the latest reports that Pyongyang has just arrested scores of Chinese North Koreans, who make up a critical component of the North’s nascent merchant class. The report has since been denied by Chinese media, but if you were a hwagyo considering a new venture beyond the no-smile line, you’d be a fool to discount the possibility that there was at least some truth to the report. And after all, it’s not the first such report we’ve seen this year.

Or, take the so-called June 28th agricultural reforms — functionally, nothing more than sharecropping, an arrangement which everyone knows has never been used to exploit anyone, ever — and which KINU also expects Kim to build on during the upcoming congress. More than three years after their announcement, the evidence for those “reforms” remains scant, and North Koreans tell the Daily NK that they’re non-existent, as a practical matter.

It all sounds like astrology to me, but KINU has done some excellent work, including this very extensive new white paper on human rights, which actually shows that Kim has increased his political isolation and repression of his own population.

After 20 years of wishful talk about reforms in North Korea, political repression is as severe as ever, inter-Korean tensions are as high as they’ve ever been, the centrifuges at Yongbyon are spinning like a politician’s Twitter feed, and our best evidence is that the economic gap between the Koreas continues to widen. It’s hard to imagine that Kim Jong-Un will allow the necessary interaction between its population and the Outer Earth for reforms to work, if that interaction increases the risk that his subjects will learn the truth, or alternatively, that we will.

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Inter-Korean phone calls can keep the promises of the Sunshine Policy

Twenty years of state-to-state engagement between North and South Korea have not lived up to Kim Dae-Jung’s promises. Pyongyang has taken Seoul’s money, nuked up, and periodically attacked South Korea for good measure. Rather than reforming, it has invested heavily in sealing its borders. Pyongyang sustains itself on foreign hard currency, even as it cuts off the flow of people, goods, and information to its underprivileged classes. It knows that if it fails to do this, members of those classes will achieve financial, material, and ideological independence from the state.

In their efforts to seal the borders, the North Korean security forces’ principal targets have been the Chinese cell phones whose signals can cross a few miles into North Korea, and which provide North Koreans with their last fragile link to the outside world. Today, there is a real danger that this link will be cut, and that the market-driven changes in North Korean society — changes driven by the people, despite the government’s attempts to suppress them — will cease.

Now, imagine if signals from South Korean cell providers began spreading across the DMZ into North Korea, with steadily expanding ranges. You saw how Pyongyang reacted to loudspeaker propaganda, which reached a few thousand conscripts at best. Imagine the subversive potential of North Koreans being able to call their relatives in the South directly, reading the Daily NK on smart phones, sending photographs or video of local disturbances to Wall Street Journal reporters, or downloading religious pamphlets from South Korean megachurches. Small beginnings like these could be profoundly transformational. If, eventually, North Koreans gain the ability to talk to each other, free of the state’s interference, these beginnings could become the foundations of a new civil society in North Korea. That could vastly mitigate the chaos and cost of reunification.

And yet, Seoul hesitates to allow this kind of people-to-people engagement, ostensibly because it is paralyzed by paranoia that North Korean spies would also use this network.

South Korean police expressed concerns over the national security implications of mobile phone conversations between North Korean defectors in the South and their relatives in the North.

A police official who spoke to South Korean press on the condition of anonymity said the security concerns call for the passage of a law at the National Assembly that could step up surveillance, South Korean outlet Financial News reported on Friday.

Many North Korean defectors who have resettled in the South keep in contact with their families, who are able to circumvent North Korea regulations through the use of Chinese mobile phones. One unidentified woman defector said she calls her family in the North 3 or 4 times a week, to confirm money transfers through a broker based in China. [….]

Police officials in Seoul are saying the conversations between family members can leak sensitive information that can pose a threat to South Korea’s national security, but amendments to Seoul’s Protection of Communications Secrets Act could reduce risks. [UPI]

But given the frequency with which North Korean agents are exposed in the South — just keep scrolling — the Reconnaissance General Bureau, the United Front Department, and their assortment of spies, street thugs, slashers, hackersassassinsagents of influence, and fifth columnists in the South seem to be the only North Koreans who aren’t having trouble with “inter-Korean engagement.”

It’s a silly, short-sighted paranoia that’s tantamount to refusing to treat a disease for fear of the treatment’s side effects. The answer to spies using the phones is called law enforcement. More broadly, if Seoul doesn’t want to deal with North Korean espionage and influence operations in perpetuity, it should open a second front in Kim Jong-Un’s information war, and start running a few information operations of its own. 

One of the most important uses of inter-Korean phone links could be their use for money transfers. Plenty of families in the North rely on those remittances to survive, or to start small businesses that provide for their families. Seoul has been ambivalent about these remittances, too:

South Korea technically bans the transfers, but an official at Seoul’s Ministry of Unification, which handles North Korea policy, says that the government has little incentive to stop the remittances.

“They fall into a gray area,” said the official, requesting anonymity because he was unauthorized to speak about the policy on record. “We always say no money should be sent to North Korea in case it is diverted for military purposes. But in this case, we’re not talking about huge amounts. And it’s for humanitarian purposes. So long as that’s the case, we won’t pursue it.” [WaPo, Chico Harlan, Feb. 2012]

Seoul has even fretted that small-time remittances from North Korean refugees to their families back home might violate international sanctions. Which is an argument that takes a lot of chutzpah, if you contemplate the millions of dollars Seoul pours into Pyongyang through the Kaesong Industrial Park each year.

South-to-North remittances have always been risky and expensive. Remitters charge commissions as high as 30%. Today, with Kim Jong-Un’s information crackdown on illegal calls over the Chinese border, money transfers often require North Korean family members and remitters to risk their lives:

In May this year, a North Korean defector in her 40s took a call from an unknown number at her office in the South Korean capital Seoul.

It was from her brother, who she had not seen for more than a decade, calling illegally from North Korea after tracking her down.

He was speaking from a remote mountainside near the border with China, and was in dire need of money to help treat another sister’s late stage cancer, she said.

Accompanied by a Chinese broker, the brother had spent five hours climbing up the mountain, avoiding North Korean security and desperately searching for a signal on a Chinese mobile telephone. Contact with anyone in the South is punishable by death in North Korea, one of the world’s most isolated states. [Reuters, Ju-Min Park, July 2012]

Defectors objected strongly to a 2011 proposal by Seoul to require licenses for South-to-North remittances. Personally, I’m not sure that a licensing procedure is such a bad idea, if it’s administered efficiently. Licensing can help prevent South Koreans from sending money to government officials — and maybe even spy-handlers — while channeling legitimate remittances through the more honest and reliable remitters.

To ease the burden of the new red tape, Seoul might consider a new way to reduce the cost of a remittance, say, by allowing direct South-to-North transfers that don’t have to run through Chinese banks or Chinese cell phones:

Consortiums led by information technology service giants Kakao Corp. and KT Corp. won a preliminary license to launch South Korea’s first Internet-only bank Sunday, the financial regulator said, opening the new business market in the long-slumping banking industry. [Yonhap]

The online bank will start operation by next June, and will team up with KakaoTalk, which is already gaining popularity with North Koreans because of its anonymity and functionality with weak signals. North Koreans already use Kakao to arrange money transfers from South Korean banks to clandestine North Korean hawaladars.

The FSC said Kakao Bank has an innovative business plan with broader customer lists based on KakaoTalk, which has more than 34 million members.

Kakao is already running mobile payment tools such as KakaoPay and BankWalletKakao.

K-Bank is initiated by KT, the largest fixed-wire operator. Its partners involve No. 1 bank Woori Bank, leading IT solution provider Nautilus Hyosung Inc., GS Retail Co. and Hyundai Securities Co. [Yonhap]

For the last 20 years, South has poured $7 billion in no-questions-asked aid and favorable trade arrangements into Pyongyang’s coffers, blithely unaware of how Pyongyang was spending that money. As far as Seoul knows, Pyongyang used some of that money to nuke up. Yet in the name of “engagement” with Kim Jong-Il, Seoul took bold risks to draw North Korea into the global economy and gradually induce it to disarm and reform. It didn’t work, but the money still flows.

Today, however, Seoul is afraid to take a chance on the kind of people-to-people communications that are changing North Korea profoundly. If those communications become regular and safe, suddenly, they start to sound like the first steps in a plausible plan to keep the Sunshine Policy’s gauzy promises about engagement, change, reform, and reunification.

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Defectors: PUST is training North Korean hackers

Not for the first time, the Pyongyang University of Science and Technology, a showpiece for academic engagement between North Korea and the Outer Earth, stands accused of teaching its elite students to work as hackers in Kim Jong-Un’s notorious cyberwarfare units. 

North Korea is reportedly recruiting graduates from Pyongyang University of Science and Technology for cyber warfare.

North Korean defector Jang Se-yul, who worked in the North’s electronic warfare command, and another defector Yi Chol claimed on Wednesday in a news conference in Seoul that graduates from the university are assigned to the military for cyber terrorism.

The defectors also said that training institutions affiliated with the Ministries of People’s Armed Forces and People’s Security send trainees to the university to learn advanced science and technology.

The defectors urged South Korean religious and civic groups to reconsider their aid to the North Korean university, which was jointly established by the two Koreas in 2009 and produced its first graduates last year. [KBS]

It takes some searching to find out just what PUST teaches its students, and that search is ultimately unsatisfying. PUST’s home page leads to a Korean-language page that says it’s being upgraded. A site maintained by the foundation that funds PUST provides only the most general information about PUST’s curriculum. But Martyn Williams publishes more detailed information:

The university hasn’t published a detailed syllabus for its courses, but said the computer science includes elements on computer hardware systems, wireless communications, data communications and networks, digital communications, pattern recognition (linked to robotics and industrial automation courses), artificial intelligence, data structures, algorithm design, web programming and object-oriented programming.

These certainly sound like skills that could, at the very least, be useful foundations for an education as a hacker.

It’s not the first time an engagement program was accused of teaching North Koreans to be hackers. A year ago, The Telegraph claimed that a British university’s exchange program, which brought “two offspring of the regime’s elite,” then studying at PUST, to Westminster University to learn such topics as “understanding cyber attacks and assessing whether networks are vulnerable to malicious hackers.”

The course is designed for would-be IT engineers in large firms, and teaches students how to build large internet and mobile phone networks.

One optional module covers “techniques to secure computer networks, and critically evaluates them in the light of a variety of types of attacks,” according to course literature.

“The topics you will cover include network security concepts, computer and network system attacks, cryptography, web security, wireless security, network security tools, and systems. During the practical sessions, you will use an isolated computer laboratory to explore a range of software tools available to audit vulnerabilities in networks and to configure security.” [The Telegraph]

The report claims no knowledge of how the North Korean students used this training.

Like PUST, North Korea’s principal hacking unit, known as Unit 121, is also populated with young, high-songbun elites. According to The Inquisitr, “the candidates who pass a rigorous series of tests and trials are sent to study at top universities — and then sent to Russia and China for an additional year of specialized training in computer hacking and cyberwar techniques.” According to this detailed report on Unit 121 by Hewlett-Packard, candidates for Unit 121 “are then sent to Kim Il-sung University, Kim Chaek University of Technology.” The report does not mention PUST specifically.

From the beginning, however, there have been concerns that PUST would provide the North Korean regime with sensitive technology useful for its weapons programs, in potential violation of U.N. Security Council resolutions. This has required careful interaction with the U.S. Commerce Department, to obtain export licenses. One PUST supporter claims that “PUST’s curricula have been vetted by government and academic nonproliferation experts,” but concedes that “[t]he School of Biotechnology was renamed the School of Agriculture and Life Sciences because U.S. officials were concerned that biotech studies might be equated to bioweapons studies.”

Concerns about North Korea’s misuse of biotechnology were subsequently validated, when experts claimed that a Swiss-funded engagement program to teach North Korea to make bio-insecticides was likely capable of producing biological weapons. (As early as 1998, your correspondent, while serving with U.S. Forces Korea, was vaccinated for anthrax.)

PUST’s claims that it would become a portal of free thought and the free exchange of ideas have not panned out, and the campus atmosphere sounds like just what you’d expect from any place where North Koreans interact with foreigners — the secrecy of Sea Org, the militancy of the Peoples’ Temple, and the dress code of a Mormon mission school.

For example, “PUST has been promised academic freedom, the likes of which has been virtually unknown in North Korea, including campus-wide internet access.” Suki Kim’s memoir of her time teaching at PUST refutes this. Indeed, Kim claims that she was “under strict orders not to reveal anything about the Internet,” a claim that is somewhat at odds with the more troubling claims that PUST and foreign exchange programs taught PUST students how to exploit its vulnerabilities as hackers. According to PUST’s Wikipedia page, “[g]raduate students and professors have internet access, but it is filtered and monitored.”

The very reaction by PUST’s founders to Kim’s book also helps answer our litmus question for engagement projects with North Korea: “Who changed who?” Despite its promises of academic freedom, PUST makes its faculty agree not to discuss what they saw at PUST. Then, after Suki Kim’s departure and the publication of her book, co-founder James Kim criticized her bitterly for telling a global audience about the smothering censorship she saw there. In other words, instead of opening minds, PUST ends up acting as Pyongyang’s extraterritorial censor.

Amid the secrecy of North Korea’s political system, it’s probably impossible for anyone but the North Korean government — and a lucky few who escape from its grip — to know which PUST students, if any, eventually join Unit 121. All that we can say for now is that the reports call for further investigation, and for more transparency by PUST about exactly what it’s teaching North Korea’s young elites, and where its students go after they graduate.

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Orascom’s Big Turkey Drop: Why the SEC should require disclosure of investments in N. Korea

For years, Koryolink was the showpiece of economic engagement with the North Korean government. The service, a partnership between Pyongyang and the Egyptian conglomerate Orascom, provided cell phone service to North Korean officials, elites, security forces, and a few other customers with enough cash and connections to afford them. As a sweetener for Kim Jong-Un, Orascom also clothed the Ryugyong Hotel, the awkwardly naked (and still vacant) colossus of an embarrassment to Pyongyang’s economic system. According to the Daily NK, taxing Koryolink has become a significant source of hard currency for the regime.

For a few years, Koryolink looked like a solitary exception to the rule that Pyongyang always reneges on its bargains, but a few months ago, thanks to Martyn Williams, we first heard that Orascom and the North Korean government were at odds over exchange rates and the repatriation of Orascom’s earnings. Attempts to mediate the dispute turned sour after Pyongyang set up a competing cell service provider and demanded a majority interest in Koryolink.

Then, last Sunday, Orascom announced that it would remove Koryolink from its consolidated financial statements, and Yonhap has since reported that Orascom has lost control of Koryolink. Some reporters have even suggested that Pyongyang would nationalize Koryolink. Orascom may be facing the write-off of $585 million trapped in banks in Pyongyang. And so began Orascom’s Big Thanksgiving Turkey Drop.

The stock market ended trading with retreats across its main indices, its benchmark index dropping by 2.01 percent, continuing a dip that started on Monday. [….]

Ahmed Zakaria, the director of customer accounts at Okaz Securities Brokerage said that rumours of the nationalisation of OTMT’s North Korean operation Koryolink are “still dominating the market.”

“There are great fears because of this rumour,” he said.

Orascom Telecom, whose executive chairman is telecom magnate Naguib Sawiris, who denied the rumours, is listed in the Egyptian stock exchange. Its stock fell by 13.2 percent since the beggining (sic) of trading this week, after the company said on Sunday that it is excluding its North Korean investment from its financial statements. [Aswat Masriya]

On Monday alone, Orascom Telecom’s stock fell 7.6%, and “dragged down” the entire Egyptian market. Although ISIS’s bombing of a Russian airliner over Egypt contributed to the broader losses, the collapse of Orascom’s share prices was largely due to shareholder concerns (or panic) about Koryolink. By Tuesday, the losses had reached 13.2%; by week’s end, according to the Wall Street Journal, it had fallen more than 28%.

Even this is only part of the story; after all, there have been whispers about Orascom’s troubles for months now. For the year to date, the losses amount to a whopping 58%. Reuters shows a pessimistic “analysis consensus,” meaning that the stock may fall further this year. This leaves Orascom’s Executive Chairman, Naguib Sawaris looking foolish.

Orascom, understandably not wanting to aggravate the situation, denies that Koryolink has been nationalized, and blames sanctions instead of Pyongyang’s policy decisions. This excuse doesn’t withstand scrutiny. The sanctions, as currently enforced, would only be a problem if Orascom’s holdings are trapped inside the Foreign Trade Bank of North Korea or another sanctioned North Korean bank. There is no shortage of non-sanctioned banks in North Korea that Orascom could theoretically use, including the Central Bank of the DPRK.

Furthermore, Orascom has no one to blame but its own poor choice of partners, and of course, its North Korean partners themselves. Even if Orascom’s woes were a consequence of sanctions, Orascom fully assumed that risk. It obtained its license to set up Koryolink in 2008, two years after the U.N. Security Council imposed its first two rounds of sanctions, with UNSCR 1695 and 1718. It can hardly blame the U.N. and its member states for tightening the sanctions — modestly at that — in response to two additional nuclear tests.

Even if Naguib Sawaris and the Orascom management chose to overlook those risks, they still should have warned their shareholders about them. In the United States, the Securities and Exchange Commission requires issuers with investments in countries that are (or may be) subject to sanctions to disclose those investments in their public filings. That requirement applied to North Korea until 2008, when President Bush rescinded North Korea’s listing as a state sponsor of terrorism. Certainly Orascom’s ties to Pyongyang were no secret, but how many other companies are invested in North Korea more discreetly? How many Americans hold mutual funds that are invested in those companies? 

Although I’ve long argued here that North Korea sanctions today are far weaker than is widely assumed, it is also true that companies linked to North Korea face significant sanctions exposure. Pressure is growing in Congress to re-list North Korea as a terror sponsor. A far greater threat is that Pyongyang’s next provocation will cause Congress to pass more comprehensive sanctions legislation, now pending in both houses of Congress.

Surely these are risks that any ethical issuer should inform its investors about.

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The Great Engagement Debate: Stanton v. Delury at NCNK

On October 22nd, the National Committee for North Korea invited me and Professor John Delury of Yonsei University to a debate, in which we each offered three proposals for the next president on North Korea policy, all premised on a delusion of grandeur that Donald Trump really cares what either of us thinks.

The debate was held in a beautiful conference room on the top floor of the Hart Senate Office Building overlooking the Capitol. There was a great crowd — probably about 60 people. Stephen Noerper, the Senior Vice President of the Korea Society, moderated.

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Naturally, the debate became a debate about the Sunshine Policy, the Sunshine Lite Policy, and other Sunshine hybrids and mutations that have dominated U.S. and South Korean policy for most of the last 20 years. And while I could hardly agree less with Professor Delury on policy matters, I also found him to be an exceedingly likable and genial person. I’m glad to have met him, and honored to have debated him. My only regret is that there wasn’t video, but the transcript is here.

Many thanks to Keith Luse and NCNK for their kind invitation, and to Daniel Wertz for arranging this, and for his careful attention to the transcripts.

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Jeffrey Fowle’s mission to N. Korea no dumber than the rest of them

In this age of click-bait listicles, The Atavist has published a rare example of real journalism, in which reporter Joshua Hunt traces the story of Jeffrey Fowle from its origins (in a dream!) to its anticlimax. Fowle, you will recall, is the Ohio municipal worker who went to North Korea, “certain that God had a plan for him,” left a Korean-language Bible next to a toilet in Chongjin, got himself arrested and detained for six months, and nearly lost both his job and his wife. Later, asked if it was all worth it, Fowle answers in the affirmative.

Fowle’s master plan was as follows: (1) smuggle one Korean-language Bible through customs at Sunan Airport, (2) lug it across North Korea, in his jacket pocket, under the watchful eyes of his minders; (3) leave it in some discreet place, to be found by some random person who is totally not a Ministry of Public Security Officer tracing his every step; (4) wait for said person to experience a miraculous conversion; (5) assume that said person will propagate the transformation of the world’s most controlled society into a clandestine house church; and (6) if caught, pretend he dropped his sole link to his spiritual life accidentally.

Through sheer luck, Fowle achieves steps 1 and 2, but things come badly unglued at step 3. To buy himself time, Fowle places the Bible under a wastebasket, rendering his whole cover story (see step 6) implausible. The reader is left with an impression of a man driven more by the best of intentions than by natural gifts of intellect or common sense.

At this point, Fowle quickly learns that North Korea has a unique gift for isolating the individual — in this case, a nearly friendless man who, thanks to a combination of flawed judgments and flawed relationships, soon finds that he has no friends at all. As we’ll soon see, Fowle’s relationship with Koryo Tours turns out especially badly for him. To anyone of at least average judgment, the ethical context foreshadows this.

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Admittedly, the idea that you can change a society — especially this one — by leaving a Bible next to a toilet for the janitorial staff sounds dumb enough. It might be the perfect story for coastal elites to titter at the Bible-thumping flyover loser.

To be sure, Fowle emerges from the story as a pathetic figure, but I can’t say that his master plan sounds any dumber than more secular messianic master plans that have gained widespread elite acceptance. Behind every flawed engagement theory lurks the premise that liberal white people (or liberal Koreans) radiate magical sunbeams of love that melt icy hearts. Their assumptions about the penetration of their ideas through the elaborate defenses of the State Security Department and the Ministry of Public Security are every bit as irrational as Fowle’s, and they’ve done far more then the likes of Fowle to perpetuate the very controls they claim to be subverting, through billions of dollars in aid and profitable trade.

We see these theories expressed in shallow or self-serving arguments that tourism is changing North Korea or improving the lives of its people, or that the Associated Press can teach KCNA propagandists to be objective journalists. Who is supposed to be changing who again?

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To me, the most laughable master plans are those of the messianic capitalists — many of whom come from the political left in their home countries — who think they have a lot to teach North Korean arms dealers and money launderers about profits, international banking, and the global economy.

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Predictably, and immediately after Fowle finishes “using the toilet,” the MPS minders have traced his every step and found his “lost” Bible, complete with a (legitimately) forgotten picture of his family. At this point, Koryo Tours’ Simon Cockerell becomes the first one to interrogate the tourists, and is the one who extracts the confession from Fowle that he dropped the Bible.

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Cockerell doesn’t admit that he immediately ratted Fowle out to the North Koreans, but any reader can infer as much. Depending on who was watching, Cockerell might have pulled Fowle aside and told him to shut his mouth, but he didn’t. Instead, he effectively became a willing interrogator — effectively, just another MPS minder. Cockerell and others in his industry often argue that their presence is changing North Korea, but the opposite seems closer to the truth.

Meanwhile, Fowle continued to dig himself into a deeper hole.
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I’ll let Robert J. Samuelson close this post.

Ever since World War II, our foreign policy has rested on an oft-silent presumption that shared prosperity is a powerful and benevolent force for social stability, peace and (often) democracy. All the emphasis on free trade and globalization is ultimately not a celebration of economic growth for its own sake. It’s a means to larger ends of social cohesion and political pluralism.

In this, we have mostly projected our own domestic experience onto the world at large. Americans’ obsession with material progress — which seems excessive and even vulgar to many — is largely what has enabled us to be a multiethnic, multicultural, multiracial and multireligious society. Everyone can strive to get ahead. There’s a large common denominator. [….]

The second defect is more unnerving and dangerous. It is the true Achilles’ heel of American foreign policy: Significant blocs of humanity ignore or repudiate our faith in the power of shared prosperity. They put other values and goals first. Nationalism is one obvious alternative — Putin’s Russia being a good example. The case of China is more complicated. Although it is obsessed with economic growth, it’s also indulging a nationalistic urge to reassert itself on the global stage. [Robert J. Samuelson, Washington Post]


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Of fools and their money: Martyn Williams on Orascom’s North Korea fiasco

Martyn Williams of the North Korea Tech blog has a must-read story at IT World about how Orascom’s investment in North Korea’s Koryolink mobile phone service “went horribly wrong.” That such a headline can be written is, by itself, a stunning reversal. During the early years of Kim Jong-Un’s reign, Koryolink was the poster child for more sanguine North Korea watchers, who believed that once a Swiss-educated reformer had taken the throne, a Pyongyang Spring must surely follow.

For the first few years, Koryolink really did look like a grand success, touting millions of customers, and ostensibly breaking down some of North Korea’s internal isolation. Optimistic observers assumed away, or perhaps beyond, a system architecture that facilitated state control, censorship, and eavesdropping, and the fact that cost alone put Koryolink out of reach of everyone but the elites. They held their tongues when Koryolink poured millions of dollars into white elephant projects like the Ryugyong Hotel while millions of North Koreans went hungry. They ignored the security forces’ use of Koryolink to shut down the very cross-border movement of people, information, and goods that has been the greatest driver of change by North Korea’s poor and underprivileged.

In the end, however, the fatal blow to Koryolink is more likely to be Pyongyang’s own greed than the moral, ethical, or legal, hazards of dealing with His Corpulency:

Orascom’s efforts to get its profits out of North Korea have been unsuccessful, partially because of international sanctions imposed on the country but mainly by the government’s refusal to let the money go.

To transfer money out of North Korea, Orascom needs permission from the government and it hasn’t been granted, despite it being a partner in the joint venture.

The government hasn’t acted because it can’t afford to.

The profits are held in North Korean won, but the currency isn’t traded internationally and the government’s official rate is set artificially high, at 100 won to the U.S. dollar. At that rate, Orascon’s holding at the end of last year was worth $585 million.

But at the black market exchange rate, which is effectively the real value of the currency in North Korea, the cash is worth only $7.2 million. And therein lies the problem. The government can’t afford to pay the money at the official rate, and it can’t be seen to officially recognize the black market rate. [IT World, Martyn Williams]

After months of negotiations between Pyongyang and Orascom deadlocked, Pyongyang set up a rival carrier to compete with its now-captive partner. Eventually, it even forced Orascom into merger talks in which it would be the majority partner.

That led to a dramatic statement from Orascom when it reported its financial results Monday — “in the group management’s view, control over Koryolink’s activities was lost.”

What are we to take from all of this? First, that His Corupulency has not made the decision that Burma’s rulers have, to open and reform the society he rules, or to deal fairly with foreign investors. The careful observer will perceive a cooling in the ardor of even such pro-engagement stalwarts as Andray Abrahamian, who was, until last year, one of the most enthusiastic promoters of commerce with Pyongyang. Judging by his Twitter feed, Abrahamian appears to be spending more time in Rangoon than Pyongyang lately.

Second, despite all of this evidence, there will always be an endless parade of gullible foreign investors who will follow in the footsteps of Hyundai Asan, Volvo, Yang Bin, David Chang and Robert Torricelli, Chung Mong-HunNigel Cowie, and Orascom, which I predicted back in 2008 would “eventually meet the same fate.” All of them have, to one extent or another, abandoned their investments in the Central Bank of the DPRK. The oil and gas company GeoExPro seems like a strong candidate to be next. Pyongyang, like the smarmy barkers of carnival midways, is counting on a small, yet endless, supply of suckers who are too greedy and ill-informed to know better.

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Tourists put $43M in Kim Jong-Un’s pockets last year

Despite a string of high-profile arrests of foreign tourists recently, Darwin’s light continues to draw slummers — and record hauls of their money — into Pyongyang:

North Korea earned tens of millions of dollars from foreign tourists in 2014, around half of the hard currency it won from the lucrative inter-Korean industrial park, a researcher said Sunday.

North Korea’s income from foreign tourists is estimated at US$30.6 million to $43.6 million last year, considering about 95,000 Chinese tourists and 5,000 tourists from Western countries visited the country, Yoon In-ju of the Korea Maritime Institute said in a paper.

North Korea’s annual income from the Kaesong Industrial Complex in the North’s border town of Kaesong, accommodating 124 South Korean firms that employ more than 50,000 North Korean workers, reached $86 million in 2014. [Yonhap]

For years, the peddlers of North Korea tours have fended off moral and ethical questions about their funding of a brutal, repressive regime by saying that their contribution to Pyongyang’s finances was negligible.

Trips aren’t cheap either – four nights can cost around £1,000 excluding flights – and it is a profitable enterprise for all involved. But those working in the industry argue that the money trickling through to the government is small – and if they were to cease operations tomorrow the impact on the regime would be negligible. [The Guardian]

Few journalists ever asked the tour companies to show us their books, but now we know that tourism is, in fact, a non-negligible source of income for the regime. It’s time to take a fresh look at whether the tour companies’ payments to Pyongyang violate U.N. Security Council sanctions, which prohibit the payment of funds that “could be used” for North Korea’s WMD programs or luxury goods purchases.

“11.  Decides that Member States shall, in addition to implementing their obligations pursuant to paragraphs 8 (d) and (e) of resolution 1718 (2006), prevent the provision of financial services or the transfer to, through, or from their territory, or to or by their nationals or entities organized under their laws (including branches abroad), or persons or financial institutions in their territory, of any financial or other assets or resources, including bulk cash, that could contribute to the DPRK’s nuclear or ballistic missile programmes, or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, or to the evasion of measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, including by freezing any financial or other assets or resources on their territories or that hereafter come within their territories, or that are subject to their jurisdiction or that hereafter become subject to their jurisdiction, that are associated with such programmes or activities and applying enhanced monitoring to prevent all such transactions in accordance with their national authorities and legislation; [….]


“14.  Expresses concern that transfers to the DPRK of bulk cash may be used to evade the measures imposed in resolutions 1718 (2006), 1874 (2009), 2087 (2013), and this resolution, and clarifies that all States shall apply the measures set forth in paragraph 11 of this resolution to the transfers of cash, including through cash couriers, transiting to and from the DPRK so as to ensure such transfers of bulk cash do not contribute to the DPRK’s nuclear or ballistic missile programmes, or other activities prohibited by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution, or to the evasion of measures imposed by resolutions 1718 (2006), 1874 (2009), 2087 (2013), or this resolution; [U.N. Security Council Resolution 2094]

Whether the tour companies are violating U.N. sanctions, and the domestic laws of the countries from which they operate, depends on the answers to questions that regulators and reporters aren’t asking: How do these tour companies pay Pyongyang? What currencies do they use? Most importantly, where does the money go, and what is it used for? Governments have ethical, moral, and legal obligations to ask those questions, and to demand clear answers backed by credible evidence. It’s past time for U.S., U.K., and EU authorities to audit the tour companies, and to block payments by any third-country tour companies that refuse to show that they’re complying with U.N. sanctions.

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The more North Korea trades, the more it reforms, right? Wrong.

Yesterday, I questioned the premises of economic engagement with Pyongyang — that Pyongyang is socialist, that trade is capitalism, that capitalism inexorably erodes socialism, and that capitalism (least of all, state capitalism) is inherently liberal and peaceful. I argued that Pyongyang adopted state capitalism decades ago, and that it has grown steadily more menacing and repressive ever since. It feigns socialism to feed our false hopes of reform and arguments against sanctions, to tempt investors, to recruit apologists who embrace its socialist pretenses, and to justify the economic totalitarianism it uses to starve and isolate the vast majority of its subjects. Pyongyang doesn’t practice socialism; it imposes it on the underclasses. The underclasses are the only ones who can change that.

Sincere advocates of changing North Korea by engaging Pyongyang may accept that their best intentions didn’t work, yet still not lose heart. If they’re willing to rethink engagement in terms of engaging the people rather than the state, they’ll find more reason than ever to believe that change is in sight. For example, it now seems likely that within the next five years, anyone, anywhere in the world, will be able to access the internet. The signal might come from Google’s Project Loon, or Facebook’s Internet.org, or maybe some combination of both. Universal internet access will shatter Korea’s virtual DMZ; eventually, it can break the physical one, too. The day is coming when North Koreans will be able to attend South Korean classes, sermons, movies, clinics, lectures, and family reunions. There can be a revolution in the people-to-people engagement that the Sunshine Policy promised, but couldn’t deliver, if South Koreans have the vision and the courage to weave a virtual Ho Chi Minh Trail of clandestine communication from South to North. North and South Koreans can use this network to rebuild the North’s civil institutions from the ground up, to establish shadow governments, to build the capacity to resist the state’s most repressive policies, and to begin the process of reconstruction.

Today, however, the South Korean government remains too timid to broadcast to its northern countrymen on AM radio. My friend (and now, National Assemblyman) Ha Tae Kyung, interviewed by the Daily NK, calls for Seoul to make broadcasting a part of its unification policy, which at present desperately lacks a Phase 2. Ha wonders how the Blue House and the Unifiction Ministry can be serious about reunification when they haven’t called for radio broadcasts to the North, broadcasts that could play an important part in the cultural and social reunification.

Of course, Pyongyang will try to enforce the poverty and isolation of its subjects as if its survival depends on it. Just as it cracked down on its northern border, tracks down and arrests the users of Chinese cell phones, and sends distributors of foreign media to the gulag, it will try to arrest, imprison, terrorize, or kill anyone who listens to South-to-North broadcasts, or who makes inter-Korean phone calls. Yet the right policies on our part can give the people a fighting chance.

This picture taken on April 6, 2013 shows a Chinese border guard standing on a look out post by the bridge that crosses the Yalu river to the North Korean town of Sinuiju across from the city of Dandong. The US is pressuring China's new President Xi Jinping to crack down on the regime in North Korea or face an increased US military presence in the region, The New York Times reported late April 5, 2013. CHINA OUT AFP PHOTO (Photo credit should read STR/AFP/Getty Images)

[STR/AFP/Getty Images, via WaPo]

Isolating a country costs money, and with the decline in the Chinese economy, Pyongyang may be having more difficulty finding that money. The Wall Street Journal‘s Alastair Gale cites Chinese trade data showing that “[t]he value of North Korean exports to China … fell 9.8% through August from the year-earlier period … accelerating from a 2.4% decline last year.” Meanwhile, another report confirms what I’ve long suspected — that the security forces are funding themselves through some of this trade:

North Korea’s feared State Security Department (SSD) has established a new “trade organization” tasked with earning foreign currency from China, according to sources who say the branch will likely use its broad powers to tap into channels used by the impoverished nation’s subsistence smugglers.

The SSD, also known as the Ministry of State Security, set up the organization “very recently” with its headquarters in the capital Pyongyang and several satellite offices in “local areas” of North Korea, a source from North Hamgyong province, along the border with China, told RFA’s Korean Service.

“While the whole nation is aware of the shortage of foreign currency in North Korea, it seems strange to establish a new trade organization under the SSD, which traditionally monitors the population’s activities to ensure they do not contravene the rules of the regime,” said the source, who spoke to RFA on condition of anonymity, after recently visiting China.

In addition to keeping an eye on the political actions of the public in North Korea, the SSD’s secret police force keeps tabs on North Koreans who travel to and from China, as well as telephone communications in border areas.

Sources said the move will likely have implications for North Koreans who subsist on Chinese currency they earn by running smuggling operations over the border. [….]

A source based in China who maintains a close relationship with North Koreans earning foreign currency there told RFA that a “large number of people belonging to the SSD” had been dispatched across the border since spring to “monitor and control the activities of North Korean residents” in the country.

“Since they are ostensibly working for foreign currency, they are called ‘trade representatives,’ just like others [who have been sent to earn cash for the regime],” said the source, who also declined to provide his name. [Radio Free Asia]

The regime’s use of trade to finance this crackdown sets up a zero-sum competition between state capitalism and free-market capitalism, the kind that has genuine potential to transform North Korean society. The SSD’s profiteering is neither a quiet capitalist revolution nor a sign of reform that is washing away the foundations of socialism. It pays for the enforcement of isolationism, and makes North Korea more unequal, oligarchical, and totalitarian (read: fascist). This may also be true of Pyongyang’s other trade relations, too, but we can only guess, because its finances are so opaque that not even the Treasury Department knows how it uses the proceeds.

In addition to broadcasting and people-to-people engagement, then, sanctions targeting the SSD’s assets are an important part of a policy to protect North Koreans from censorship and help them liberalize their society. By starving the security forces of cash, anti-censorship sanctions would deny the SSD the means to equip and pay its officers. They would foster the corruption that facilitates smuggling, and preferentially support engagement through independent free markets. The use of sanctions to fight censorship and support freedom of expression is nothing new. Treasury has anti-censorship sanctions against Iran to “facilitate communications by the Iranian people.” Why not North Korea?

Ha is dismissive of sanctions, perhaps because he lumps all kinds of sanctions together, and (like most people) doesn’t know the significant gaps in their enforcement. It’s a common myth that sanctions against Pyongyang are still strong, although I’ve previously debunked this myth in detail. Ha argues that the trade sanctions Seoul imposed on Pyongyang in 2010, after the attack on the ROKS Cheonan, haven’t made Pyongyang apologize or come to the negotiating table. He concludes that “economic sanctions don’t have effects, but broadcasts do.”

Respectfully, I think Assemblyman Ha is missing a few key points, including the role sanctions can play in protecting his North Korean listeners. First, the lifting of these trade sanctions has been at the top of Pyongyang’s list of demands since 2010. If it can be argued that loudspeaker propaganda was effective because Pyongyang sounded desperate to switch it off, the same can be argued of the bilateral trade sanctions.

Second, by lumping all “sanctions” together, Ha overlooks what is beyond serious dispute — that financial sanctions hit Pyongyang where it hurt most:

Practically overnight, banks throughout the region, even in China, began turning away or throwing out North Korean government business. By this one simple act, Mr. Zarate writes, “the United States set powerful shock waves into motion across the banking world, isolating Pyongyang from the international financial system to an unprecedented degree.” [….]

Then, Mr. Zarate writes, a North Korean representative contacted the United States, seeking relief from the 311. At the State Department’s insistence, negotiations began in Beijing, and appeared to end when a Chinese bank volunteered to handle a measly $25 million of North Korean money the authorities in Macau had frozen.

Mr. Zarate writes that “the amount of money wasn’t the issue” and that the North Koreans “wanted the frozen assets returned so as to remove the scarlet letter from their reputation.”

Then, he says, something amazing happened. Despite its government’s support of North Korea, the Chinese central bank refused to approve this solution, indicating that it, too, wanted nothing to do with a bank hit by a 311. “Perhaps the most important lesson was that the Chinese could in fact be moved to follow the U.S. Treasury’s lead and act against their own stated foreign policy and political interests,” he writes. “The predominance of American market dominance had leapfrogged traditional notions of financial sanctions.” [N.Y. Times Review, “Treasury’s War,” by Juan Zarate]

Third, the May 24, 2010 sanctions are narrow sanctions with narrow purposes — they exclude Kaesong, after all. Ha has a vision for reunification and has articulated it; Park Geun-Hye doesn’t and hasn’t. Still, even Park’s limited goals can be valid ones. Trade sanctions deter Pyongyang by imposing a (small) price for murdering South Koreans with premeditation and malice aforethought. They’re also consistent with U.N. Security Council resolutions, which prohibit member states from providing “public financial support for trade with the DPRK (including the granting of export credits, guarantees or insurance to their nationals or entities involved in such trade) where such financial support could contribute to the DPRK’s nuclear or ballistic missile programmes.” South Korea voted for those sanctions when it was a member of the Security Council. The other members of the Security Council approved them, in large part for South Korea’s own protection. Seoul can’t very well ignore them now.

We now have evidence that regime-controlled trade funds the oppression that isolates North Koreans, retards change, and helps Pyongyang repress the people who would listen to the broadcasts Ha supports. If the world wants North Korea to change, it has to give free markets — North Korea’s only independent institutions, on which most North Koreans depend for their survival — a fighting chance to survive. As long as Pyongyang’s oligarchy has unrestricted access to our financial system, it will use it to isolate and repress its people. We should seek to shift North Korea’s internal balance of power away from the ones with the guns and food toward those without. That means giving North Korea’s people information and access to markets. That, in turn, means blocking the funds that pay for Pyongyang’s policy of isolation and oppression.

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The Myth of North Korean Socialism: How Pyongyang’s Profiteers Fooled the World

Over this long weekend, I’ve been reading Brian R. Myers’s new book, “North Korea’s Juche Myth,” a copy of which Prof. Myers was kind enough to send. Myers argues that juche, that cryptic ideology reporters often mention but never explain, is a sham ideology that is both overblown and seldom understood, by foreigners as well as North Koreans. Very roughly translated, juche means that man must be the master of his own destiny (in contrast to North Korea’s reality, in which individuality is uniquely suppressed). Myers argues that juche is a loanword from the Japanese zhuti, first seen in an 1887 Japanese discussion of Kant, and became a term of common usage in both Koreas. Pyongyang built the Juche Myth to give Kim Il-Sung ideological gravitas, and to decoy naive foreigners away from its real — and more implacable — ideology of racism, nationalism, and xenophobia, which Myers described in “The Cleanest Race.” (You can hear Myers explain his argument here, in an interview with Chad O’Carroll.) Myers argues that Pyongyang maintains this duality (triality?) by code-switching between its foreign propaganda, its propaganda for its elites, and its propaganda for its underprivileged classes. (As we have seen.)

I’m not prepared to declare myself convinced of the entire argument before I finish the book, but I’m already mulling my own companion volume: “North Korea’s Socialist Myth.” The thesis of this book (or rather, this post) will be that Pyongyang’s claims of socialism are a sham, meant to lure naive or self-serving foreigners with more money than good sense, with a mirage that its profiteering represents progress toward ever-receding reforms. In recent years, that mirage has gained Pyongyang $7 billion dollars in South Korean aid, perhaps billions more from other gullible investors, and probably billions in sanctions relief from those who did not want to interfere with these phantom reforms.

By feigning socialism, Pyongyang also gains a small, fanatical, and almost influential following of apologists on the far left — apologists who are themselves willing to overlook not only its gross inequality, but also its racism (Barack Obama: “a wicked black monkey … an ugly sub-human … suitable to live among a troop of monkeys in the world’s largest African animal park, licking at the crumbs tossed by onlookers“), its homophobia (Michael Kirby: “a disgusting old lecher with 40-odd-year-long career of homosexuality”), its misogyny (Park Geun-Hye: “a whore [who] lifts her skirt to lure strangers“), its acts of war, its crimes against humanity, and the violence of their own allies.

Socialist ideology also justifies the economic totalitarianism by which Pyongyang prevents its subjects from achieving economic independence, and the other forms of independence (of thought, of movement, from want, from fear) that would inevitably follow. Socialism is not something that Pyongyang practices, it’s something that Pyongyang imposes on the weak and vulnerable. Its real economic policy is — and has long been — unrestrained state capitalism,* shielded by deceptive financial practices, and revealed only when its agents are caught carrying it out. Which is often, for those who are paying attention. (* See comments.)

Pyongyang has long been a profiteer from the un-socialist vices of gambling (both online and in pachinko parlors), narcotics smuggling, slaverymoney laundering, cigarette smuggling, currency counterfeiting, gold smuggling, pharmaceutical counterfeiting, the trade in endangered species, and even prostitution. For decades, it has permitted as much capitalism as necessary to maintain its elites, its security forces, and its weapons programs, but never enough to allow meaningful interaction between foreign ideas and non-elite North Koreans. The long-predicted penetration of capitalism into North Korean society did happen — not because the regime accepted reforms, but despite Pyongyang’s best efforts to suppress it. (Since the succession of Kim Jong-Un, once touted as a Swiss-educated reformer, the regime has made significant progress toward stanching the flow of goods and information into the peoples’ economy.)

Pyongyang’s controlled isolation was not a difficult thing to foresee, for those who read Nicholas Eberstadt’s quotations of past North Korean policy pronouncements. A sample:

It is the imperialist’s old trick to carry out ideological and cultural infiltration prior to their launching of an aggression openly. Their bourgeois ideology and culture are reactionary toxins to paralyze people’s ideological consciousness. Through such infiltration, they try to paralyze the independent consciousness of other nations and make them spineless. At the same time, they work to create illusions about capitalism and promote lifestyles among them based on the law of the jungle, in an attempt to induce the collapse of socialist and progressive nations. The ideological and cultural infiltration is their silent, crafty and villainous method of aggression, intervention and domination….

As a reflection of Pyongyang’s doctrine, this statement is as true of North Korea’s peoples’ economy as it is irrelevant to Pyongyang’s palace economy. In North Korea, socialism is for little people. For decades, Pyongyang sustained itself on state capitalism while enforcing socialism on the expendable underclasses, wallowing in bacchanalian luxury while a million or two people starved to death. North Korea remains one of the world’s least equal societies.

KJU ski kju airport

This week’s reporting on North Korea’s big parade reenforces the evidence of widening inequality, showing us both the relative prosperity of Pyongyang (James Pearson, Reuters), but also the unabated poverty of the rural provinces (AP, Eric Talmadge), and the hardships of those who must still evade tightened border controls to work in China illegally, to support their families at home (Anna Fifield, Washington Post).

Pyongyang, by contrast, has now had decades of exposure to capitalism, but capitalism has not pacified North Korea, any more than it pacified Hitler’s Germany, Imperial Japan, Baathist Iraq, or Xi Jinping’s China. Rather, in all of these cases, state capitalism fueled each state’s military-industrial complex. The experience of the last two decades provides no basis to believe that capitalism on Pyongyang’s terms will transform North Korea into anything but a more stable, more repressive, and better-armed version of itself.

Of course, to accept what should be obvious by now, one must abandon the hope which sustained a fading generation of American and South Korean policymakers — that Pyongyang will eventually allow more than minimal economic reforms, and that trade (beyond enriching the state and perpetuating its policies of repression at home and extortion abroad) will eventually lead to broad economic, social, and political reforms. Pyongyang’s construction boom, cell phones, traffic jams, and Mickey Mouse merchandise have become the slender reed on which the Sunshine school sustains itself. But so what?

For years, I’ve challenged advocates of “engagement” with Pyongyang — as opposed to engagement with the North Korean people — to name a significant and positive change their policies have brought about. I have yet to hear an answer. The comments are open.

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N. Korea’s expatriate labor needs ethical and financial limits

N. Korea increasingly relies on expat labor for hard currency

A series of new reports suggests that the export of labor has become a major source of income for Pyongyang. The Financial Times cites an NGO estimate that the regime earns $1.5 to $2.3 billion a year from contract labor, in line with educated estimates of its annual revenue from missile sales ($1.5 billion) or arms deals with Iran ($1.5 billion to $2 billion). (Update: Marcus Noland questions that estimate, and thinks the more likely figure is between $150 million and $200 million, which is still a lot of bling.) Ahn Myeong-Cheol, a former prison camp guard and leader of the NGO NK Watch, says that there are now 100,000 North Koreans working overseas, double the number it had posted overseas in 2012. Ahn believes North Korea is increasing its use of contract labor to compensate for arms revenue lost to U.N. Security Council sanctions. Marzuki Darusman gives the lower estimate of 20,000. In testimony appended to the end of this post, Greg Scarlatoiu of the Committee for Human Rights in North Korea puts the figure at around 53,000. He also offers this very specific breakdown:

Currently, 16 countries reportedly host workers sent by the North Korean regime: Russia (20,000), China (19,000), Mongolia (1,300), Kuwait 5,000), UAE (2,000), Qatar (1,800), Angola (1,000), Poland (400-500), Malaysia (300), Oman (300), Libya (300), Myanmar (200), Nigeria (200), Algeria (200), Equatorial Guinea (200) and Ethiopia (100).4 Although North Korea is not a member of the International Labor Organization (ILO), all but two of the 16 states officially hosting North Korean workers are ILO members.

Scarlatiou cites this study by the Asan Institute, which I haven’t read, as the source of these figures.* For years, North Korean workers have been sent to stitch BMW headrests in Europe; build political monuments in Africa (at costs that are suspiciously above market value); mine coal in Malaysia; and cut down trees in the 40-below cold of Siberia without proper winter clothing or safety equipment. Recently, Radio Free Asia reported that North Korean managers were deported for pimping out female textile workers in China. Needless to say, such working conditions fall far short of ILO standards.

Media scrutiny causes Qatar to fire N. Koreans over labor violations

Recently, Qatar became a target for criticism by human rights groups for using North Korean labor to build venues for the 2022 World Cup. Pressure on Qatar has led one construction company to fire 90 North Korean workers, or half of its North Korean work force, for “a series of violations and misconduct by the North Korean workers and their supervisors.” A North Korean company called Genco (not to be confused with that other shady front company of literary infamy) employs the workers.

“The Korean supervisors responsible for the wellbeing of their workers have been continuously forcing them to work more than 12 hours a day. The food provided to their workforce is below standards. Site health and safety procedures are ignored regularly,” said one representative of the company, according to the document. [VOA News]

UPI adds that at least one North Korean worker died due to violations of safety standards. A hundred other North Korean workers continue to work at the company’s construction projects in Qatar. The report did not make clear whether the projects were related to the World Cup. The FT found severe conditions at one Gulf State construction project, where North Korean managers forced their workers to keep toiling in the 120-degree heat, when foreign laborers from other Asian countries took shelter.

As a result of this scrutiny, North Korea has tried to impose information blockades around its expatriated workers. In April, Radio Free Asia reported that the regime has directed its workers to physically assault reporters who try to cover them, and smash their cameras. New Focus also reported that the regime had forbidden its workers in China, where dubbed South Korean dramas are broadcast regularly, from watching TV. Workers were previously “allowed some degree of freedom” if they moved in groups of two or three. Now, they’re forbidden from leaving the work area except in groups of 15 or more. Those who break the rules are sent back to North Korea. God only knows what happens to them (and their families) after that.

Workers receive little or none of their “wages”

Whether you define North Korea’s labor arrangements as slave labor may depend on how you define the term, and on the circumstances of each project. How much of their wages North Korean overseas laborers get to keep varies from project to project:

Current and former North Korean overseas workers describe how the vast majority of their nominal wage is lost to management fees and contributions to the ruling Korean Workers’ Party. Their testimonies suggest a common system where managers agree to send a set monthly sum back to North Korea. If funds are short, the workers may be denied their wages or made to contribute to the remittance.

Yet workers can still earn $1,000 for a year’s work — a significant sum in North Korea, where most rely on the black market for sustenance and where bribery can be a crucial means of obtaining professional or other opportunities, such as securing education for their children. “The bribes to get into a good university are expensive — Kim Il Sung University is about $10,000,” says one former overseas worker. [Financial Times]

In some cases, defectors reported that they were left with nothing after party contributions were deducted; their bosses told them to be thankful they got two meals a day. The FT’s sources reported that they received either a small percentage of their nominal wages, or in one case, most of a $4-a-month pittance. One said that the money was enough to buy a decent apartment at home. Another, quoted in The Chosun Ilbo, said he was allowed to keep $100 out of a nominal salary of $750. The fact that North Korean workers in Muslim countries are regularly caught bootlegging alcohol suggests that their take-home earnings are insufficient to feed themselves, and their families. At Kaesong, arguably the most-scrutinized of all these arrangements, it still isn’t clear whether the workers receive any cash wages at all.

Defenders of these labor-export arrangements argue that the North Korean workers there earn more and live better than those who remain behind, but the same justification might also be true of a child prostitute in Cambodia, or other human trafficking victims of any number of nationalities and circumstances. It still doesn’t justify exploitative and dangerous working conditions, which are harmful to the North Korean workers, to workers in the host countries, and ultimately, to those imprisoned inside North Korea by a system perpetuated by exploitation.

Toward a More Ethical Model of Engagement

There are two possible approaches to this problem. One approach is suggested by the conduct of the Qatari firm that fired half its North Korean work force, and warned that the rest would be fired if they failed to comply with labor standards. In this 2014 paper, Marcus Noland argued that Kaesong and other consumers of North Korean labor should agree to a code of ethics, akin to the Sullivan Principles, which were used to pressure South Africa to treat its African work force more fairly. But as Noland notes, the adoption of the Sullivan principles “did not occur in isolation;” companies adopted them under the threat of boycotts, divestment campaigns, shareholder resolutions, and eventually, U.S. sanctions laws. Users of North Korean labor must also comply with the financial transparency requirements of U.N. Security Council Resolution 2094, which prohibits the provision to North Korea of economic resources that could be used for prohibited weapons programs.

If users of North Korean labor agreed on a similar code of conduct, there would be far fewer objections to these arrangements, and the balance of equities in this debate might shift. That code would have to include basic worker safety protections, and guarantees that the workers would receive, spend, and repatriate a living wage. The regime could receive the remaining proceeds to purchase food, medicine, and other humanitarian needs and services in kind.

Because moral suasion doesn’t work on everyone, standards that conflict with profit motives need hammers. In the case of South Africa, the hammers included the fear of reputational harm, and eventually, sanctions. Under Section 104(a)(1)(F) of the North Korea Sanctions Enforcement Act, those who engage in transactions in forced labor or human trafficking would be subject to the blocking of their assets in the dollar-based financial system.

Greg Scarlatoiu’s testimony here: Testimony of Greg Scarlatoiu Final

~   ~   ~

* This is my cue to unburden my soul of something. Some months ago, I bruised an Asan scholar and OFK reader by writing (on reflection, unjustly) that Asan “largely” (then changed to “sometimes”) “reflects the views of, and serves the interests of, the South Korean government.” I’ll keep the original basis for that conclusion to myself, but Asan’s work since then has convinced me that it simply isn’t true. I don’t think there’s any question that Asan is the foremost Korean think tank publishing work on North Korea today. I apologize for the slight.

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Why legal investments in North Korea are a money laundering risk

You’ve often seen me write about the importance of “financial transparency” in transactions with North Korea. For a decade, economic engagement has mostly been done by one of two models: (1) controlled interactions with members of the elite, the actual effects of which are negligible at best; and (2) barbed-wire capitalism, where a few North Korean officials relay orders from foreign managers to hand-picked workers, and where the regime seals the whole enterprise off to prevent it from influencing the local community.

The former are, for the most part, of little financial significance. The latter may represent a significant source of income for illegitimate uses, and may also help the regime hide its flows of dirty money.

It wasn’t supposed to be this way by now. The idea behind economic engagement was to gradually draw North Korea into compliance with the rules that the civilized world lives by. Yet ten years later, the South Korean Unification Ministry can’t tell us how much (if anything) Kaesong’s workers receive after the regime takes its cut from their wages, and the Undersecretary of the Treasury recently expressed his concern about just how North Korea is spending that money.

The U.N. Panel of Experts now expresses a related worry — that North Korea could be using its ostensibly legal businesses to conceal and launder the proceeds of illicit activity:Screen Shot 2015-03-03 at 7.32.53 AMScreen Shot 2015-03-03 at 7.33.11 AMA few days ago, we saw that North Korean diplomats have been smuggling gold to earn hard currency for Pyongyang. That’s not just of concern because of how North Korea spends the earnings, but also because of concerns about conditions in which the gold is mined. As noted here, however, North Korea continues to run most of this business through the dollar system.

Screen Shot 2015-03-03 at 7.33.23 AM

Hence, the renewal of FATF’s warning about “countermeasures.”

Recently, a scholar friend emailed me that his opponent in a debate had criticized the effrontery of blocking North Korean assets that are the co-mingled proceeds of legal and illicit activity. In fact, that is standard law enforcement practice, because co-mingling is the essence of how criminal organizations conceal the illicit origin of their earnings.

Defendants often commingle SUA proceeds with legitimate funds. The government need not prove that all proceeds in a transaction were unlawfully derived, but must be able to trace some of the proceeds to a SUA. Criminally derived proceeds deposited with legal funds are considered to be withdrawn last unless the account/business is deemed to be permeated with fraud. This implies that the business operations are so intertwined with fraud that to segregate the legitimate operation and profits is impossible. Special agents should work closely with the attorney for the government when investigations involve commingled funds to ensure the elements of the crime are met. [IRS]

That’s why Congress, and many third-country parliaments, have long given their law enforcement agencies the authority to seize co-mingled funds.

The Treasury Department could do a great deal to regulate transactions with North Korea — and perhaps, put more food into empty bellies and drive the development of a true market economy — simply by requiring OFAC to license them. As a condition of each license, the Treasury Department could ask the applicant for assurances that the ultimate end-use of the funds would be for items that would benefit the people: food, clothing, medicine, consumer goods, materials for civilian construction projects, or electronic items like desktop computers that help to open up information flows.

To make this requirement truly effective, the EU Central Bank could impose similar requirements for Euro-clearing transactions. If Canada, Britain, Australia, and Switzerland joined, they would collectively cover just about all of the world’s convertible currencies, leaving only trades in Chinese Yuan unregulated. Of the latter, the Treasury Department could still target the most egregious with secondary sanctions.

In his paper about labor conditions in Kaesong, Marcus Noland called for investors in North Korea to adhere to a single set of minimal standards, akin to the Sullivan Principles. What I’m calling for here is a financial analogue to the Sullivan Principles — a requirement that investors ensure that their money will be used to better the lives of the North Korean people, rather than being wasted on weapons and luxury goods.

The real flaw in the engagement argument today, ten years after it began, is that it can’t show any significant, enduring, positive impact on North Korea, its treatment of its people, or its relations with the wider world.

It’s unfortunate that so many advocates of engagement are too focused on making nice with their minders to insist that the regime make any of the changes they once promised. Two good places to begin would be transparency in their labor and financial arrangements. If they did, they might strengthen their argument by showing that they’ve made legitimate, positive change in how North Korea does business.

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Somehow, I don’t think this will encourage Kim Jong Un to engage with us.

I think Marzuki Darusman is a good man who means well, but it’s difficult to derive a coherent policy from this:

“This is a new thing, spotlighting the leadership and ridiculing the leadership. In any authoritarian, totalitarian system, that is an Achilles’ heel,” Darusman said in an interview in Tokyo, where he held talks with the government on an investigation into North Korea’s abductions of Japanese citizens.

If this kind of ridicule seeps into North Korea, it could become lethal for the regime, he said. “If they want to preserve their system, the only way to do that is not to close themselves off from the international community but to actively engage,” he said. [Washington Post, Anna Fifield]

OK, so they need “engagement”–presumably, trade–to preserve the system, which we all agree should not be preserved. So should we cut off trade?

But the world also should be actively engaging with the Kim regime to draw it out of its self-imposed isolation, Marzuki Darusman said Friday, calling the United States’ increasingly aggressive approach toward North Korea “unfortunate.”

“In the overall picture, I think much hinges on the way the U.S. acts,” said Darusman, a former attorney general of Indonesia. A harder line against North Korea could “stall or delay the process that needs to be put into place,” he said.

I don’t get it. If ridicule of His Porcine Majesty scares the bejeezus out of the little gray men in Pyongyang, and if we’re supposed to use engagement to mock His Porcine Majesty mercilessly, why does Marzuki suppose that Kim Jong Un would widen engagement rather than stick with the current, controllable kinds of engagement that are serving North Korea’s priorities rather nicely? Meanwhile, Kim Jong Un continues to succeed at smothering the penetration of real capitalism.

Marzuki is a distinguished jurist who has done a great service to humanity by the facts he’s helped to establish. Maybe that’s enough for one man for one lifetime.

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Reports: Musan mine to lay off 10,000 workers; coal exports halted

At the end of last year, the Daily NK reported that North Korea’s iron ore exports to China had stopped, but offered two different explanations for that — a price dispute with China, and a shortage of hydroelectric power caused by drought. One of the reports claimed that the power cuts halted the massive iron ore mine at Musan, which had caused “major disruptions” at the Kim Chaek and Songjin steel mills. All three facilities are propaganda showpieces of North Korean industry.

Screen Shot 2015-01-21 at 7.35.26 AM

[The massive Musan mine. The yellow line on the left is the border with China]

In a follow-up report, the Daily NK now blames electricity shortages and a price dispute with China for plans by North Korea to lay off 10,000 of the 23,000 workers at Musan. The decision isn’t going over well with the workers:

For most, the focal concern is what happens next, as no jobs are guaranteed to those laid off. “Officials at the mine may say that they’re struggling with deciding on whose names to add to the list, and workers are irate, saying that ‘they can’t get away with this!’” the source said, noting that the surrounding village has been cast into a state of “unrest” because of the cutbacks. [Daily NK]

According to last year’s reports, however, labor shortages in the coal mines have caused North Korea to send inexperienced convicts to work there, causing a high rate of disabling and fatal accidents. One would think that the regime could find work for these men, even if that work is in Malaysia.

But now, Radio Free Asia reports that North Korea’s coal exports to China have also “dropped off dramatically,” and that the North has exported “little if any” coal to China this year. According to the report, North Korean coal has a high sulfur content and can’t pass China’s new air quality standards. RFA also links North Korea’s troubles to lack of hydroelectric power, indirectly. North Korea can’t export its coal, because it has to send it to thermal power plants, to keep the lights on in Pyongyang.

(Me: on top of all that, North Korea’s railroads and the locomotives that run on them are poorly maintained, and they’re mostly powered by electricity. Putting a lot of coal trains on the network will further strain the infrastructure.)

With mineral products accounting for more than 60% of North Korea’s exports to China, and with China being the destination for 90% of North Korea’s exports, one might expect to see these disruptions (if they’re sustained) reflected in Pyongyang’s luxury goods imports for 2015.

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