North Korea uses cash couriers, false names to outwit sanctions

SEOUL/UNITED NATIONS Mon Feb 18, 2013 10:39am IST

North Korean leader Kim Jong-Un (4th R) and officials attend a wreath laying ceremony in front of a statue of North's founder Kim Il-Sung and his son and late leader Kim Jong-Il at the Mangyongdae Revolutionary School in Pyongyang on the occasion of birth anniversary of the late leader Kim Jong-Il, which falls on Saturday, in this undated recent picture released by the North's official KCNA news agency on February 16, 2013. REUTERS/KCNA

North Korean leader Kim Jong-Un (4th R) and officials attend a wreath laying ceremony in front of a statue of North's founder Kim Il-Sung and his son and late leader Kim Jong-Il at the Mangyongdae Revolutionary School in Pyongyang on the occasion of birth anniversary of the late leader Kim Jong-Il, which falls on Saturday, in this undated recent picture released by the North's official KCNA news agency on February 16, 2013.

Credit: Reuters/KCNA

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SEOUL/UNITED NATIONS (Reuters) - Kim Kwang-jin says that when he worked for North Korea's state insurance company in Singapore in 2003, he stuffed $20 million into two suitcases one day and sent it to Pyongyang as a special gift for then leader Kim Jong-il.

He received a medal for that, Kim Kwang-jin said.

North Korea, sanctioned by the United States since the 1950s and later by the United Nations after its nuclear tests, has been shuffling money for decades from illicit drugs, arms and financial scams and is now more expert at hiding it to fund its weapons programmes and its leaders' opulent lifestyles.

"There is tremendous difficulty identifying bank accounts," said a South Korean government source who is directly involved in yet another sanctions push in the U.N. Security Council after the North conducted a third nuclear test this week.

A source who has access to the top levels of government in both North Korea and China, its only major ally, told Reuters that Pyongyang was not afraid of sanctions and was considering two more nuclear tests and a rocket launch this year.

"It is confident agricultural and economic reforms will boost grain harvests this year, reducing its food reliance on China," said the source.

With limited trade and natural resources, Pyongyang's revenues are heavily reliant on money-making scams ranging from fake $100 bills to arms sales and drugs money, according to reports by the U.S. government. Some diplomats and officials call it "The Soprano State" after the U.S. television series.

In 2005, $25 million of the regime's cash was frozen at Macau-based Banco Delta Asia, which was designated a "primary money laundering concern" by the U.S. Treasury.

That case stands as practically the only public success in seizing funds from the isolated country that is now led by 30-year-old Kim Jong-un, the third of the Kim dynasty to rule.

The $25 million was released after protracted negotiations led by Kim Kye-gwan, the North's long-standing negotiator with the United States, and U.S. envoy Christopher Hill, officials present at the talks said.

Pyongyang has learned from that episode and buried its funds even deeper, said the South Korean official, who spoke on condition of anonymity.

"The bank accounts are split up a lot," the official said, meaning the money is divided into small amounts so that a freeze on one account would not greatly affect the total.

The official has tried to identify North Korean funds for years and was involved in previous sanctions pushes, although he said that identifying accounts and transactions was near impossible because of the use of fake names.

THE INSURANCE SCAM

Kim Kwang-jin, now living as a defector in South Korea, said the $20 million sent to Kim Jong-il in 2003 came from insurance scams by Pyongyang's Korea National Insurance Corp (KNIC), which exaggerated claims from re-insurers and underwriters for events such as weather damage, ship and aircraft losses.

When contacted by Reuters by telephone and email, KNIC was not immediately available for comment.

Kim Kwang-jin said the money from the scams he participated in was funneled into what he termed North Korea's "royal court fund" - money for Kim Jong-il and his inner circle.

"Kim Jong-il sent a letter of thanks to the people in my company (KNIC). And some of us received presents like DVD players and blankets. I later got a medal too," said the 46-year-old.

Unlike oil-exporting Iran, which is heavily sanctioned by the United States and United Nations as well as others, North Korea's puny $50 billion economy produces few goods other than minerals and seafood sold to China. Its trade with China was put by Beijing at $5.7 billion in 2011.

The U.S. Treasury Department's Financial Crimes Enforcement Center estimated in 2005 that North Korea may earn as much as $500 million annually from counterfeiting, and another $100 million to $200 million annually from narcotics trafficking.

In just one known example of its role as a "narco-state", a North Korean ship was raided by the Australian navy in 2003 and found to be carrying $50 million worth of heroin, according to the government in Canberra.

Kim Kwang-jin, who defected in 2003 with his family in Singapore, estimated the Pyongyang "royal court" fund at $4.5 billion, of which $2 billion was inside North Korea, $2 billion overseas and a further $500 million in the underground economy of various countries. He said he derived the estimates from his experience as a senior officer handling funds for North Korea.

It was not possible to verify Kim's estimate, although other estimates made by defectors and academics are roughly similar.

The South Korean government source said that part of the new sanctions regime would include trying to intercept shipments of suitcases stuffed with cash to Pyongyang which enable North Korea to evade sanctions on banks.

'BULK CASH' METHOD

North Korea often uses its diplomats and other officials to ferry cash, according to Kim and other defectors and diplomats. This method, called "bulk cash", is largely untraceable.

U.S. diplomats said new sanctions against North Korea that the Security Council might consider could be to add more names to a U.N. blacklist and measures similar to those in place for Iran, which include a U.N. arms embargo, a variety of asset freezes and a ban on some banking relations.

In addition, "you can strengthen the provisions to do with enforcing embargoes, inspecting ships", said a senior U.N. diplomat, speaking on condition of anonymity.

Ship inspections have been a feature of the North Korean sanctions regime for a long time. Under a Security Council resolution, U.N. member states can inspect North Korean sea, air and land cargo, and seize and destroy any goods transported in violation of sanctions imposed for its nuclear tests.

North Korean ships have been inspected in India, Thailand, and the United Arab Emirates as well as on the high seas.

Another area where U.N. sanctions could be strengthened is enforcement, especially in China, diplomats say. U.N. experts who monitor sanctions violations have said Pyongyang regularly flouts the sanctions, sometimes by shipping banned goods such as weapons via China.

"If the Chinese would be willing to inspect half of what goes through Dalian harbor, that would be big," said George Lopez, a former U.N. North Korea sanctions monitor, now at the University of Notre Dame.

China's central bank and foreign ministry did not respond to requests for comment as it was the Lunar New Year holiday.

But the source with access to top officials in both countries said China would again support U.N. sanctions, although he declined to comment on what level of sanctions it would be willing to endorse.

"There will be new sanctions which will be harsh. China is likely to agree to it," he said, without elaborating.

He said however that Beijing would not cut food and fuel supplies to North Korea, a measure that it reportedly took after a previous nuclear test.

THE HONG KONG LINK

In January, the Security Council added a raft of companies to a list of sanctioned entities in response to North Korea's long-range rocket launch late last year, which violated a ban on Pyongyang from developing missile or nuclear technology.

These included a company called Leader (Hong Kong) International, listed with a Hong Kong address that was named as a subsidiary of Korea Mining Development Corp., the country's main arms dealer and exporter of ballistic missile technology, according to the U.S. Treasury.

Checks by Reuters journalists at multiple addresses associated with the company in China and Hong Kong turned up no direct trace of the company or its managers.

Corporate records show the Hong Kong address for a similarly named company, Leader (Hong Kong) International Trading Ltd, as the same as that listed in the U.N. report, although the office moved in 2007.

A Chinese public security branch office is situated at an address listed for that company's director in Dalian, about 300 km (185 miles) from the North Korean border.

"Companies and individuals are using different names. China may know, but wink at it," Kim, the defector, said.

(Additional reporting by Ju-min Park and Narae Kim in SEOUL; James Pomfret in GUANGDONG; Grace Li and Anne Marie Roantree in HONG KONG; Michael Martina in DALIAN; Paul Eckert in WASHINGTON; Michelle Nichols at the UNITED NATIONS and Benjamin Kang Lim in BEIJING; Writing by David Chance; Editing by Raju Gopalakrishnan, Claudia Parsons and Mark Bendeich)

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