Category Archives: Counterfeiting

Review: Treasury’s War, by Juan Zarate

Let me begin with an apology for the lack of posting lately. While tossing a football around with some friends, I took a direct head-on hit to that finger you need for typing words that contain the letters “l” or an “o,” which turn out to be less dispensable than you might think. The time I didn’t spend typing, I spent reading instead:

Treasury's War cover

[clicking the image takes you to Amazon]

If you want to understand why the Banco Delta Asia action worked so well, how financial sanctions bankrupted al Qaeda, and how they’re bankrupting Iran today, you have to read this book. If you’re reading this site, however, the odds are you’re interested in what Zarate has to say in chapters 9 and 10, where he writes about North Korea, Banco Delta Asia, and Chris Hill.

Zarate, who is usually effusive in his praise for the people he worked with in government, clearly has no use for Hill. Hill comes off looking like a boorish, incompetent asshole who, despite repeated explanations of how Section 311 worked, either didn’t grasp the concept or didn’t care. According to Zarate, Hill’s minions reduced Daniel Glaser to tears by bullying him into simply switching off the section 311 action–and its downstream effects–almost instantly, which is a lot like asking Treasury to instantly give North Korea a new reputation for honest financial dealings with a banking “ecosystem” that’s extremely concerned about reputations and access to correspondent accounts in U.S.

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Over at Foreign Policy …

Professor Sung Yoon Lee and I have a piece up discussing the world’s next, almost-certain-to-be-lost opportunity to respond to North Korea more effectively than having Susan Rice continue to beat her cranium against the Great Wall of China at the Security Council.  It’s a blend of Professor Lee’s prognostications about what the North will do next, and some of the financial constriction ideas I’ve been pushing as one of those Three C’s.

I’ll say this about FP — it’s certainly a great place to find an audience that isn’t, erm, accustomed to reading that sort of proposal, which makes me all the more appreciative that they decided to publish it.  I’m sure the comments will be just … fascinating.

I want to offer my sincere thanks to Professor Lee for his co-authorship, without which I doubt FP would have given this serious consideration.  Admittedly, there are many people who share his linguistic head start toward understanding the pathology of North Korea; very few who are his equal in judgment, intellect, and knowledge; and none who can communicate that understanding so cogently to those of us who aren’t Korean.  Honestly, I think his English is actually several levels better than mine.

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End of Bureau 39 Wouldn’t Mean the End of N. Korea’s Criminal Enterprises

Reports last week claimed that, according to “sources familiar with North Korean affairs,” North Korea had shut down Bureau 39 of the Workers’ Party — responsible for obtaining hard currency by any means necessary, including illicit activities — and Bureau 38, responsible for managing the regime’s overseas funds.

Are any of the reports true?  My default position about any “insider” reports from Pyongyang is skepticism, and a quick Google search reveals that we’ve heard many versions of this story before.  For example, Office 38 has variously been reported to have been merged into Bureau 39 as early as 2009 (Yonhap), restored in June 2010 (Chosun Ilbo) and February 2011 (Reuters), and then merged into the Moranbang Bureau, another government entity in October of this year (Kyodo).  At the very least, it’s hard to believe these reports could all be true, and kremlinologist Ken Gause correctly cautions against taking even the most recent ones at face value.  Changing the names of the organizations may be nothing more than a superficial way to dodge Treasury Department sanctions, most recently reaffirmed in Executive Order 13,551.

Even if North Korea really did merge, split, and rename these organizations so many times, it seems unlikely in the extreme that it would cease its counterfeiting, drug dealing, money laundering, or other illicit activities.

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At Last, Plan B

This afternoon, the Treasury Department finally announced its long anticipated sanctions against North Korea, in the form of a sweeping new executive order. The order, pursuant to the International Emergency Economic Powers Act, authorizes the blocking of assets of “any person” providing what Treasury calls “material support” for North Korea’s WMD proliferation, money laundering, counterfeiting, trade in luxury goods, bulk cash smuggling, and pretty much everything North Korea does that violates UNSCR 1718 or 1874, or the U.S. Criminal Code.

In addition to the new order, Treasury also imposed new sanctions against several North Korean entities under the existing Executive Order 13382. Below the fold, I’ve pasted the text of the Executive Order, President Obama’s letter forwarding the EO to the Speaker of the House, two Treasury press releases, and some remarks by OFK favorite Stuart Levey, all of which I’ve archived here to aid your research and mine.

My initial reaction is that the new EO gets it just right. It’s narrowly targeted at North Korea’s illicit activities, but it’s also broad enough to cover the main ones — arms and drug trafficking, money laundering, currency and pharmaceutical counterfeiting, and the squandering of its resources on luxury goods while North Korean children starve in the streets.

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Plan B Watch

According to Yonhap, Treasury will roll out its new North Korea sanctions this week. I am giddy with anticipation. And on a related note, I hope the boys at Treasury are Daily NK readers (or better yet, sources):

The No.39 Department, which is responsible for the management of Kim Jong Il’s private funds, holds the bank account with the British Virgin Islands branch of FirstCaribbean International Bank (FCIB), a prominent bank in the Caribbean region.

According to an expert source familiar with China and North Korea, the No. 39 Department’s secret overseas account exists under the name “Hana Holdings”. It is apparently held with the Road Town branch of the bank, which is based in Barbados and has branches in 17 countries.

Explaining the importance to North Korea of the No.39 Department account, the source told Daily NK, “Due to recent UN Security Council sanctions, the No. 39 Department is experiencing considerable difficulties with its overseas financial trade. Currently, excluding Chinese banks, their only active overseas account is that held with FirstCaribbean International Bank.”

Also, he added, “The only bank through which the No. 39 Department can make overseas transfers is FirstCaribbean International Bank in the British Virgin Islands, since their other secret bank accounts are all blocked.”

As usual, there’s a Chinese connection.

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Plan B Watch: Einhorn Goes to Tokyo, Pressure Builds on China

The latest reports in the Korean press tell us that the President will soon sign an over-arching executive order that will subsume the authorities of Executive Order 13,382 (see sidebars), and will also allow the blocking of assets used for proliferation, drug trafficking, and currency counterfeiting:

In a press briefing on Monday, Department spokesman Philip Crowley said, “We have no doubt that North Korea has engaged directly in counterfeit operations as a means of bringing currency into the country. This is a longstanding practice.” [Chosun Ilbo]

Several reports discuss plans by Treasury to blacklist specific individuals and institutions suspected of being involved in illegal activity and money laundering:

Observers say a financial services blacklist of individuals to be announced in the new sanctions will likely include O Kuk-ryol, vice head of North Korea’s National Defense Commission, which is led by Kim Jong-il and his family. O is known to be managing a company that tries to attract foreign investment to the North. [Joongang Ilbo]

It will be interesting to see whether the executive order will make findings that Bureau 39, or perhaps the North Korean government itself, is a primary concern for money laundering. That description has been applied to other states for much less — that is, a lackadaisical rather than intentionally criminal approach to the proceeds of illicit activity.

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Plan B Watch: Robert Einhorn Visits Seoul; State Directs Strong Criticism at China

Robert Einhorn, President Obama’s special adviser for non-proliferation and arms control, is visiting Seoul and Tokyo this week. He is accompanied by Daniel Glaser, who works with Treasury’s Undersecretary for Terrorism and Financial Intelligence, and who was a key architect of the Banco Delta Asia sanctions in 2005 and 2006. At the risk of making a comparison that Glaser might not necessarily welcome, his presence in Seoul has far more deterrent value than parking an aircraft carrier off the coast of Nampo.

einhorn-in-seoul-july-2010.jpg

[Robert Einhorn and his South Korean counterparts. Photo: Korea Herald]

Einhorn and other U.S. officials have given more hints about what financial measures the government is like to take, and what they’re doing to secure international cooperation with them. What’s less clear is whether financial measures are a means to get North Korea to talk, to disarm, or to overthrow a regime determined to do neither. The answer probably depends on how North Korea responds to the pressure over the next year. I’ll predict now that once it begins to have an effect, North Korea will coo seductively about disarmament talks … if only we’d just lift the sanctions. That’s when the administration will be tested again.

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Plan B Watch: A Shot Across China’s Bow?

Hey, did the State Department threaten the Bank of China and the Bank of Shanghai? Or to put the question more bluntly, did someone just grow a pair?

A diplomatic source here said the U.S. will blacklist more North Korean entities and individuals in the coming weeks so that international financial institutions would cut off ties with them.

Any foreign banks refusing to sever business ties with the North Korean entities and individuals in question will have U.S. financial institutions suspend ties with them, the source said. “Think of Citibank or Bank of America suspending business ties with Bank of China or Bank of Shanghai. That will be a great burden to China.”

What I wouldn’t give to see the case of the vapors Peter Lee must be having at this moment. Of course, I care little and know less about Lee’s background, but I wonder if the manic oscillation between contemptuous arrogance and resentful victimhood is a function of life in a society where destiny is so often imposed on the resentful by the arrogant. If it’s futile or worse for a Chinese citizen to curse the policies of his own government, there’s no less futility in cursing the policies of the American government.

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Plan B Watch: Treasury Targets 100 Suspicious N. Korean Accounts Worldwide

According to multiple newspaper reports published since late last week, the Obama Administration’s new asset-freezing campaign against North Korea began in earnest in June. The Treasury Department, having identified about 200 accounts worldwide suspected of storing the proceeds of banned weapons sales, currency counterfeiting, counterfeit cigarettes and Viagra, proliferation, drug trafficking, and other things that all sovereign nations to do pay for yachts for their despotic rulers.

Treasury focused on 100 accounts where its evidence was strongest and quietly persuaded the banks holding those accounts to freeze them. In contrast to the approach applied in the case of Banco Delta Asia, Treasury approached these banks quietly and got their more-or-less voluntary cooperation — and given the conspicuous example of BDA, who wouldn’t cooperate? (FYI to the Hankyoreh: the amount frozen in North Korea’s BDA accounts was $25 million, not $250 million. Not that the Hanky’s reporting on North Korea reveals much accuracy, insight, objectivity, or any of the other qualities one looks for in journalism.)

Reading between the lines of the stories, Treasury appears to be going after patterns of large cash deposits and withdrawals, of the sort that would require the filing of a Suspicious Activity Report if conducted in an American financial institution.

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Plan B Watch: Clinton Announces Tightening of N. Korea Sanctions

Well, it’s about damn time:

The Obama administration announced Wednesday that it would impose further economic sanctions against North Korea, throwing legal weight behind a choreographed show of pressure on the North that included an unusual joint visit to the demilitarized zone by Secretary of State Hillary Rodham Clinton and Defense Secretary Robert M. Gates.

The measures, announced here by Mrs. Clinton after talks with South Korean officials, focus on counterfeiting, money laundering and other dealings that she said the North Korean government used to generate hard currency to pay off cronies and cling to power. [N.Y. Times]

Clinton announced the sanctions as she visited the DMZ, while accompanied by SecDef Gates, and while displaying her supernatural frost-projection powers against a hapless North Korean border guard. I count at least three priceless expressions in this photo.

clinton-dmz.jpg

The Treasury Department announcement I linked here yesterday now looks to be just the first part of the Obama Administration’s dangerously overdue and initially weak response to the sinking of the Cheonan, using at least some of the legal and financial tools I’ve advocated using for the last several years.

“Today, I’m announcing a series of measures to increase our ability to prevent North Korea’s proliferation, to halt their illicit activities that helped fund their weapons programs and to discourage further provocative actions,” Clinton told a news conference in Seoul after high-level security talks with South Korean officials.

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You Say That Like It’s a Bad Thing: “China Hand” Fears Treasury Sanctions

I’m apparently not the only one who cocked an eyebrow at the refusal of a State Department spokesman recently to rule out applying new sanctions to be directed at North Korea to third-country entities.

The United States Wednesday did not preclude the possibility of freezing North Korean assets in foreign banks to effectively cut off resources for the North’s development and proliferation of weapons of mass destruction.

“I’m not going to predict any particular step that we’re contemplating, but these are steps that are available to us under existing U.S. international law,” State Department spokesman Philip Crowley told reporters at a daily news briefing.

He was responding to the question if Washington was considering freezing North Korean assets at foreign banks just like it froze more than US$25 million in North Korean accounts in Banco Delta Asia in Macau in 2005. [Yonhap]

Whether we actually set about doing this or not, the response itself is significant. One only hopes that investors in Kim Jong Il’s regime will take enough heed to proceed in an orderly manner to the rooftops of their embassies in Pyongyang with semaphore flags and briefcases stuffed with all the dollars — and yuan — they can carry.

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Is the Obama Administration Ready for Plan B at Last?

Well, finally!

The Obama administration is considering going after the assets of North Korean entities and individuals to punish Pyongyang after the sinking of a South Korean warship, sources familiar with the matter said on Friday. Freezing offshore assets would be the first tangible U.S. action to make North Korea pay a price for the March 26 sinking of the Cheonan corvette in which 46 South Korean sailors died. Pyongyang has denied responsibility for the incident.

While there have been extensive U.S. sanctions on Pyongyang for decades, such a move could influence North Korea because it would hit accounts controlled by military and political leaders whom U.S. officials believe must have authorized the attack.

Speaking on condition that they not be identified, the sources said targeting North Korea’s illicit funds appeared to be one of the few ways the United States can get the attention of the leadership of the impoverished communist state. They also said there is a growing view within in the Obama administration that former President George W. Bush’s 2005 move to blacklist a Macau bank for allegedly laundering North Korean money was ultimately useful in pressuring Pyongyang. [Reuters, Arshad Mohammad]

One minute, you’re an isolated crank shouting at the heavens from the wildness, the next moment, well … you’re an isolated crank whose ideas were several years ahead of their time.

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Plan B Watch

I really, really like the way the South Korean Foreign Minister is talking lately, and I hope he also expresses the sentiments of U.S. officials with whom he’s spoken:

Strangling the flow of cash to North Korea is the most effective non-military way to hold the Stalinist country accountable for the sinking of the Navy corvette Cheonan, Foreign Minister Yu Myung-hwan said Tuesday.

“The U.S. is keeping a close eye on North Korea’s trafficking of counterfeit banknotes, drugs and tobacco while strictly applying existing sanctions on the North,” Yu told the Chosun Ilbo. He said the U.S. has a web of mechanisms to thwart North Korea’s trade, financial transactions and weapons exports but has not yet been running them to full capacity. Now, however, it will gradually step up action.

The U.S. has monitored North Korea’s illicit activities including the forgery of banknotes but has held off from punitive measures so far. “It’s quite possible to punish North Korea effectively through individual actions taken by South Korea’s allies such as the U.S., Japan and the EU even if the UN Security Council won’t impose additional sanctions on North Korea,” Yu said.

Strangling off the cash flow would be effective, he said, because the North “has to import parts to develop weapons of mass destruction including nuclear weapons, so restricting the cash flow will make that more difficult and discourage North Korea from pursuing provocations.”

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Robert Einhorn to Lead North Korea Sanctions Implementation Effort

einhorn.jpgThe Joongang Ilbo is reporting that Clinton Administration alumnus and counter-proliferation expert Robert Einhorn is going to be put in charge of “streamlining the process by which it implements” international sanctions against North Korea, sanctions that are likely to be enhanced after an international investigation found that North Korea torpedoed and sank the South Korean warship Cheonan.

“The U.S. administration was seeking more efficient management of implementation of sanctions, which had been divided between the State and the Treasury departments,” the source said. “Philip Goldberg, the assistant state secretary at the Bureau of Intelligence and Research, had been doubling as the implementation coordinator, but Einhorn is poised to take over.

“The U.S. government also tried to strengthen its sanctions system after the second North Korean nuclear test last year, when Goldberg was named the coordinator,” the source said. Goldberg was appointed to his Bureau of Intelligence and Research post in February.

Another source said Einhorn’s nomination is also part of the U.S. government’s efforts to follow up on President Barack Obama’s order to review “existing authorities and policies” on North Korea. Soon after South Korean President Lee Myung-bak unveiled Seoul’s countermeasures against Pyongyang Monday, the White House expressed its support and said in a statement, “This review is aimed at ensuring that we have adequate measures in place and to identify areas where adjustments would be appropriate.

You can read more information about Philip Goldberg here and here.

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Sanctions Update

The Chosun Ilbo reports that Ambassador Phillip Goldberg has kept himself busy crossing the globe, meeting with government officials and bankers in Russia and China, and shutting down North Korean accounts, even as Stephen Bosworth and others met with the North Koreans to talk nuclear diplomacy.

North Korea invited U.S. North Korea envoy Stephen Bosworth on Aug. 4, when former U.S. president Bill Clinton was in Pyongyang to win the release of two American journalists. The same day, Goldberg was on his way to Moscow, where he met Russian Vice Foreign Minister Alexei Borodavkin and reportedly asked Russia to crack down on a mafia gang based on a tip-off that it had been involved in the laundering slush funds for Kim Jong-il.

South Korean and U.S. intelligence authorities believe that North Korea recently earned a lot of foreign currency by smuggling ivory from Africa and distributing fake Viagra as well as selling drugs and circulating counterfeit dollars.

The North allegedly laundered money or operated secret bank accounts with the help of the Russian gangsters after it became practically impossible for the North to carry out normal transactions using the real names of top officials or agencies. Russia then passed an advisory circular which the U.S.

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Must Read: On N. Korean Counterfeiting

We’ve seen much first-rate reporting on North Korea’s “supernote’ counterfeiting recently, and here’s one via The Independent that frankly outdoes all of them in its scope and detail, and fills in many missing details. I’m not going to even try to quote just one part of this. Just go and read.

The comments are edifying in their own way. The British left is fond of saying that it isn’t really anti-American, just anti-Bush. And yet nothing seems to have changed for The Independent’s readers. If there is no policy America can adopt that can make these bitter, envious, yappy little Yorkies like us, can’t we learn to just ignore them? Now that they’re biting the ankles of Barack Obama, most of the press already has, but that’s another story.

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How Kim Jong Il Got Away With Counterfeiting Our Money

Having finally found time to read all of David Rose’s excellent Vanity Fair piece on North Korea’s supernote counterfeiting operation, I agree absolutely with Richardson and Curtis; it’s an excellent piece of journalism. For a fuller understanding, it should be read in the context of two others. Stephen Mihm’s New York Times report explained how North Korea assembled Intaglio printing presses and optically variable ink from the same Swiss manufacturer that supplies them to the U.S. Bureau of Engraving and Printing. Bill Gertz’s Washington Times report explained the kremlinology of the operation inside North Korea itself, attributing the operation’s direction to one General O Kuk Ryol. Rose’s story explains how North Korea uses Chinese criminals to smuggle supernotes into the United States and launder them at stores and casinos.

Both of the latter articles rely heavily on quotations from people involved in investigating the scheme, including an FBI agent and former State Department official David Asher. (I’m intrigued by Rose’s use of the term “palace economy,” one that I’ve often used and which I thought was my own creation.) These leaks suggest a degree of frustration with baseless conspiracy theories that had begun to circulate, most notably via hack journalist Kevin G.

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A North Korean Connection to Those Counterfeit Bonds?

counterfeit-bonds.jpgIt’s very short on specifics, but it’s the first published report affirmatively linking those fake bonds to North Korea:

An Italian newspaper reports a recent mysterious case involving US$134.5 billion worth of counterfeit bonds has a North Korea connection. Earlier this month two Japanese nationals were caught in Italy allegedly trying to smuggle the bonds into Switzerland.

Il Messaggero says the fake bonds may have been manufactured in North Korea since the two men are North Korean agents and are believed to have been seeking to purchase weapons.  [Chosun Ilbo]

When the Justice Department first indicted the former IRA terrorist, Stalinist splinter cell leader, and alleged supernote co-conspirator Sean Garland, it claimed that one of the purposes of the plot was to destroy the U.S. economy.  North Korea appears not to have printed anywhere near enough supernotes to do that, but printing good facsimiles of bearer bonds worth billions would be another matter entirely.  Fortunately, the bonds appear to have been obvious fakes, despite the good quality of the printing:

“They are all fraudulent, it’s obvious. We don’t even have paper securities outstanding for that value,” said Mckayla Braden, senior adviser for public affairs at the Bureau of Public Debt at the US Treasury department.

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