Your Tax Dollars at Work: Senate Subcommittee Finds Massive Irregularities in UN’s North Korea Development Aid

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The Senate Permanent Subcommittee on Investigations has just released its report on the UN Development Program’s North Korea scandal.  Previous postings here concern the U.S. Ambassador’s original complaint,  Ban Ki Moon’s unrealized promises  of a full investigation, and the suspicious  termination of a whistleblower.  First, the main findings:

1. UNDP operated in North Korea with inappropriate staffing, questionable use of foreign currency instead of local currency, and insufficient administrative and fiscal controls.  

2. By preventing  access to its audits and not submitting to the jurisdiction of the UN Ethics Office, UNDP impeded reasonable oversight and undermined its whistleblower protections.

3. In 2002, the DPRK government used its relationship with the United Nations to execute deceptive financial transactions by moving $2.72 million of its own funds from Pyongyang to DPRK diplomatic missions abroad through a bank account intended to be used solely for UNDP activities and by referencing UNDP in the wire transfer documents.

4. UNDP transferred UN funds to a company that, according to a letter from the US State Department to UNDP, has ties to an entity involved in DPRK weapons activity.

Many thanks to the reader who leaked me an advance  copy of this.  If you’re interested, by the way, the Senate will hold hearings at 10 a.m. today,  so view all of this in light of previous moves in Congress to cut U.S. funding for the UNDP (which I predict will never actually come to pass).  You can read the whole report here:

[Fixed the links; sorry:   Report       //     Exhibits (which I haven’t read)     //     Hearing]

For all of you neocon conspiracy fans, note that the Chairman of the Committee is Democrat Carl Levin.  In case you wondered, the text following each bold italic quote is mine.

1. UNDP operated in North Korea with inappropriate staffing, questionable use of foreign currency instead of local currency, and insufficient administrative and fiscal controls.

And why was the staffing inapproprate?  Because of North Korean-imposed limits on staffing and North Korean insistence on using its own hand-picked spies development aid workers.  Their salaries, naturally, were paid directly to the government, despite suspicions that the regime was skimming off the top.   The regime also  required payment in convertible currencies, the regime could take advantage of inflated official exchange rates that valued the North Korean won at up to 20 times its real value. 

Does any of this sound familiar yet?

Why were the financial practices questionable?  Yes, Kim Jong Il was calling those shots, too.  The North Koreans picked the bank, the currency, and the people who handled all of the money.  It kept the records and severely limited the UNDP’s access to them.  In some cases,  unidentified North Koreans would show up at the UNDP compound, say they represented “development” projects, demand cash, and get it (the UNDP disputes this).  The foreign  UNDP staff couldn’t even  inspect the projects they were funding without advance notice and an escort of government minders.   All of this violated UN S.O.P.’s and “best practices.”  And when even that level of control wasn’t sufficient, the North Koreans tapped the UNDP workers’ phones and  rummaged through  their quarters.

One question that this report did not clarify either way  relates to previous  reports of counterfeit dollars allegedly found in a UN safe in New York, allegedly of North Korean origin (if not manufacture).  The lack of any further information on this is disappointing.

[Update:   The  explanation for this, if not the  answer, is  buried in the exhibits:

72. In the course of the audit UNP staff aleged that the UNDP DPRK country offce had in its possession $3,500 of counterfeit United States currency. UNDP indicate to the Board that “…in agreement with US authorities, the supected counterfeit dollars were handed over to the US authorities on 20 March 2007 in New York …” The Board did not investigate this matter further as it does not form part of the Board’s mandate. 

Too bad, because there’s a very tantalizing angle to this, as Ambassador Wallace noted last year:

As you are further aware UNDP frequently sponsored international travel for DPRK offcials. In a varety of intances UNDP’s locally hired employees (seconded from the DPRK government), appears to have “withdrawn” counterfeit U.S. currency from UNDP’s account at the DPRK’s Foreign Trade Bank (FTB) for such travel even after UNDP purportedly stopped uSing U.S. dollars in the DPRK country program in 2002.  [Page 121]

End update.]

2. By preventing  access to its audits and not submitting to the jurisdiction of the UN Ethics Office, UNDP impeded reasonable oversight and undermined its whistleblower protections.

Strong language.  And if your read the report, you’ll also see that the UNDP conducted several audits going back to 2001.  By 2005, an Albanian  UNDP staffer, Artjon Shkurtaj,  was also raising suspicions.  The UNDP then opted not to renew his contract, so Shkurtaj went to the Americans and talked.  The audits  showed significant but unspecified  irregularities, but the UNDP refused to give the donor nations — that would be the people who actually fork over your tax money — access to what those audits actually said.  After repeated requests, the UNDP finally made an exception and let the Subcommittee see them.

3. In 2002, the DPRK government used its relationship with the United Nations to execute deceptive financial transactions by moving $2.72 million of its own funds from Pyongyang to DPRK diplomatic missions abroad through a bank account intended to be used solely for UNDP activities and by referencing UNDP in the wire transfer documents.

Remember:  all of these transactions took place in the space of just six months, from  April to September of 2002.  The Subcommittee appears to have examined only transactions during this time period, but doesn’t explain why.  These fake UNDP transactions, like the real ones,  had to go through a third-country bank because North Korean banks can’t have correspondent accounts in the United States.   You’ll never guess which bank they used. 

The  fake UNDP transactions went through the Banco Delta Asia account of a Chinese entity, International Finance and Joint Trade Company (IFTJ).   IFTJ is a front for North Korea’s Foreign Trade bank, sharing the same office space, phone, fax, and telex  numbers in Macau and many of the same personnel.  The North Koreans used this account to send money from  Pyongyang to its foreign missions  in an effort to  conceal the money trail.  The report correctly does not describe this as money laundering, because it’s not exactly clear how the money was used, and legally, it’s only money laundering if you’re handling the proceeds of crime or using the money as an instrument of crime.

So what was the money used for?  Don’t ask me.  The direction of the  transfer from Pyongyang to the missions is interesting.  In recent years, we know that North Korean foreign missions have been expected to pay their own way, and they’ve found some creative ways of doing that.  The financial documents show that the North Koreans indicated that the money was for the purchase of real estate in Canada  and Britain.  Seriously, of all of the places on earth, why  Canada?  What’s more, as the Subcommittee points out, it’s not clear why anyone would wire money to an embassy in Sweden to buy a building in  Britain.   

Although we don’t know how the money was spent, we can narrow the range of plausible options.  The North Koreans’ story isn’t a likely one.   Aside from the aforementioned issues, there’s no plausible reason to conceal funds used  for the ordinary operating expenses of a foreign mission.  Criminal  conduct also seems unlikely; you’d expect  the proceeds of  crime to move in the opposite direction, if at all.  A more likely explanation  is that Pyongyang directed its foreign missions to procure certain expensive items without attracting attention  . . . and you don’t  need my help to speculate about just what those items might be.  I would only point out that most of this activity took place before UN Security Council Resolutions 1695 and 1718 were passed, in July and October of 2006, respectively.

The single strangest fact here is that the North Korean U.N. Mission not only agreed to  talk to the Subcommittee, but admitted that the transactions were intentionally deceptive.  Subcommittee investigators laid the evidence out in front of the North Koreans  and invited them to explain.  After much furious cabling to Pyongyang, the North Koreans agreed to talk and explained that after Bush called them a part of the Axis of Evil, they thought it was just a matter of time until we opposed sanctions.  Thus, by North Korean logic,  they had no choice but to use  this circuitious financial chain and hide their money.   I give them points for talking at all, but their  explanation isn’t very likely.  Even the North Koreans must have known that the United States would almost certainly not have sanctioned diplomatic missions, which would probably violate the Vienna Convention.

Here’s another curiosity.  This scandal emerged in early 2007, several months after North Korea suddenly recalled its Ambassador to the UN, Han Song Ryol.  It’s probably coincidence, but  an intriguing one.  You’d think that if there was a cause-effect, the timing would work the other way around.   I can’t quite rule it out, either.  Shkurtaj started talking to the U.S. Mission in May of 2006, at which point the Americans started poking around.  Han was called home in September 2006.  The Subcommittee began its investigation the following year.  Han certainly  wasn’t, um, fired for talking to the Subcommittee’s staffers.  There’s no evidence to connect these events, but  it’s good fodder for speculation.

4. UNDP transferred UN funds to a company that, according to a letter from the US State Department to UNDP, has ties to an entity involved in DPRK weapons activity.

In addition to everything else they controlled, the North Koreans  picked the UNDP’s  contractors, including one called Zang Lok:

UNDP regularly made payments to contractors on behalf of other UN agencies operating in North Korea. During the course of its investigation, the Subcommittee learned that payments on behalf of two UN agencies ““ totaling approximately $50,000 ““ were made to an entity named Zang Lok Trading Co. in Macau. According to a letter dated June 7, 2007, to UNDP from the U.S. Mission to the United Nations, Zang Lok “has ties to a North Korean entity that has been designated [by the U.S. government] as the main North Korean financial agent for sales of conventional arms, ballistic missiles and goods related to the assembly and manufacture of such weapons.  [Page 39]

From there, the report hints at more juicy morsels in its classified annex.  I should note two things here.  First, the UNDP didn’t seem to realize Zang Lok’s WMD connections.  Second, there is no direct evidence that UN money actually paid for weapons, programs, components, or technology, but the same conduct today would almost certainly violate UN Security Council Resolutions 1695 and 1718, which strictly control any funds that might support North Korean WMD programs.

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I should put all of this in its financial context:  we’re not talking about all that much money here.  Between 1995 and 2005, the UNDP says it spent a total of $33.5 million in North Korea.*    This is, however, a perfect  example of how well-meaning but rudderless organizations  become low-hanging fruit for ruthless and highly disciplined dictatorships.  The UNDP was welcome in North Korea as long as it was willing to be a cash cow for Kim Jong Il.   When it  the UNDP was  forced to demand the right to operate transparently and monitor how its money was spent, the North Koreans balked.  The regime preferred to force the  UNDP to terminate its  program than to  let its people actually enjoy benefits provided by foreigners.

The  more significant question here  is whether  the same thing might have happened to the World Food Program.  In fact, the report notes on Page 14 that North Korea  applied the same restrictions to the UNDP  that it  applied to other UN agencies.  There’s little doubt that WFP aid saved many lives during the Great Famine.  The WFP might also have saved millions more had it stuck to the same  code of conduct  it applied everywhere else on earth and operated independently from North Korean government distribution channels.  As a result, up to half of  its food aid may have been stolen from the bowls of the hungry by the regime and its officials (the United States was consistently the largest donor to the WFP’s North Korea operations).   In 2005, the  WFP responded to  growing controversy about diversion of food aid by demanding tighter monitoring.  The North Korean reaction?  To throw the WFP out of the country (it later let a few of its workers back in) and demand that the food aid program be converted to a “development” program.  The WFP actually tried to cave in to this demand, but donor nations, seeing the prospects for massive fraud and diversion, wouldn’t play.

Is it any wonder why Kim Jong Il preferred the UNDP’s model?

*   At footnote 67, the report notes the UNDP never quite did allow Subcommittee staffers full access to its financial records, so “the Subcommittee was thus unable to confirm the UNDP estimates of the total funds transferred to the DPRK regime over the last eight years.”

Update, 26 Jan 08:  The New York Times plays defense:  it’s not as bad as first claimed.  They quote Carl Levin’s tough questioning of Amb. Wallace  about amounts and sources  that, according to the final report, aren’t what Wallace had alleged last year.  Maybe, and maybe not.  Levin and the Times  must not have  read the quote in the footnote immediately above this update.  Wallace also points out that some of the documents  showing money transfers through BDA to the North Korean missions were supplied by … the North Koreans.   

Disputing the subcommittee’s finding that the $2.8 million sent abroad did not belong to the United Nations Development Program, he said: “The documents say it’s the U.N. imprimatur money. The North Koreans and now the U.N.D.P. say, “˜Well, maybe those documents are not accurate.’

“I didn’t make those documents, the North Koreans did, and they want us to believe it is not U.N. money. If you want to give them the benefit of the doubt, I would submit that I have a bridge for you in Manhattan that I’d sell you for $2.7 million.  [N.Y. Times, Warren Hoge]

And if the North Koreans probably didn’t buy vacation homes after all, reasonable suspicions are now pointing in more sinister directions.

Claudia Rosett is happy with the report.