A Presentation for Sanction Experts in November 2017
1. The characteristics of the current North Korean foreign currency system
The beginning of the Arduous March in the late 1990’s saw the collapse of the Socialist financial system and the shift towards the principles of self reliance (Charyok Kaengsaeng; 자력갱생; 自力更生) which meant that each department was responsible for solving their own finances especially in regards to foreign currency.
However this policy shift was not achieved through a formal decision-making process in the Party or Cabinet but was actually based on Kim Jong-il’s slogan of ‘Following the Kanggye Spirit’– a city in Jagang Province which was seen to be a model for self-reliance. In fact, this problem is one that still has not been solved through official policies.
During this transitional period, the Workers’ Party has been unable to create new theories or policies regarding this new reality, but has been simply surviving. Until this new system is settled, there will be many battles of theories between the different institutions in North Korea.
1.1. The problems with state departments having to obtain their own foreign currency to sustain themselves.
- As each department became responsible for gathering its own foreign currency, North Korea’s Ministry of Finance stated that all of the currency gathered should be concentrated within the Ministry. A Party principle was set that the Ministry of Finance would manage all the foreign currency. So while each department was responsible for gathering foreign currency, the amount would have to be reported to the Ministry of Finance and could only be used according to the orders set by the Ministry. This system was strongly rejected by each of the departments, which asked why they were being controlled for the foreign currency that they had gathered themselves.
- Departments like the Ministry of Foreign Affairs that had to receive foreign currency from the Party or State had problems.
In 1993, the Ministry of Foreign Affairs established a trade company known as ‘Gobangsan’ which would buy Kamaz trucks from Russia and sell them to China.
When Kim Jong-il found out he was furious, saying that what kind of country will North Korea turn into if even the Ministry of Foreign Affairs becomes involved in business? And the company was dissolved immediately.
At the end of the day, according to North Korea’s economic theory, a department like the Ministry of Foreign Affairs that receives its funds from the State and is unable to create funds through economic activity is a budgetary system but in reality it is actually self-supporting.
- This is also a matter of the difference between departments such as the Ministry of Foreign Affairs which are operated by receiving foreign currency from the state and other departments within North Korea.
For example, there was an issue regarding who would manage and be responsible for the rent, office fees and bills of North Korean representatives sent abroad.
Before the late 1990’s as the funds needed to maintain an embassy was provided through Party funds and managed by the Ministry of Finance, there was no need to worry about the embassy operational costs.
However, despite the fact that the State had cut off any finances, there were no departments who came forward to say it would be responsible for the embassy budgets (diplomats’ wages, electricity bills, phone bills etc.)
Despite being a Socialist state the Ministry of Foreign Affairs imposed a fee on each of the departments’ offices and homes within the embassies which was rejected by the respective departments.
In the past whenever representatives would go overseas they would receive financial directions from the Ministry of Finance. However, now that the Ministry of Finance had no funds to give, the embassies rejected any directions.
This put the Ministry of Finance in a difficult position and led to the discussion of who was in ownership of the embassy.
As a result, the Ministry of Finance no longer gave financial directions and each department had no choice but to go overseas with foreign currency and pay the embassies for any fees. Eventually the Ministry of Foreign Affairs and Ministry of Finance worked together to decide on housing fees for each department.
In these circumstances, the Ministry of Foreign Affairs which had no source of income had no option but to look for a way to obtain foreign currency for themselves.
When looking at it from international standards these methods of procurement are considered to be illicit activities, from the perspective of North Korea’s socialist economic theory it was only natural that the methods turned out to be illegal ones.
1.2. While there are regulations for each department and details set out by the Ministry of Finance, a unified method of maintaining and managing foreign currency does not align with Kim Il-sung and Kim Jong-il’s ideology of economic management. As a result, the management of foreign currency cannot be placed officially in Party policy and is still in an ambiguous state.
It is similar to the fact that there are detailed regulations on the management of the North Korean markets (jangmadang 장마당) but are not officially written in the Party’s economic policies.
Despite the fact that political economy is now a mandatory subject in North Korean universities, the reality of North Korea’s economy is so different to the Party’s economic theory that the students are unable to study or debate on the topic.
2. The North Korean Ministry of Foreign Affairs’ Method of Procuring Funds
2.1. Renting Spaces Overseas
North Korea rents out buildings to local companies in Russia, Poland, Germany, Romania, and Bulgaria. With the average rent of 3-50,000 euros per month, there is an average of 3 to 4 million euros going into the maintenance fees of North Korea’s Ministry of Foreign Affairs.
2.2. Procuring funds from international and European NGOs’ aid funds
2.2.1. Domestic shipping costs for food and other aid products are received in cash or transferred to accounts.
For example, when food aid sent from the World Food Program (WFP) arrives at Nampo port, shipment costs from the port to the recipient are received in foreign currency. However, in reality the recipients but pay for the shipment costs themselves and the shipment fees provided by the humanitarian organisations enter the Ministry of Foreign Affairs’ account.
If 100,000 tons of food aid enters North Korea, the State earns tens of thousands of dollars in domestic shipment costs.
2.2.2. Funds are procured through humanitarian aid projects
International and European aid organisations based in North Korea carry out over 10 million dollars worth of humanitarian aid work.
While it would seem like that these projects are carried out according to international standards, as foreign organisations are not able to enter North Korea freely and North Korean companies monopolise the market, even if North Korean companies violate their contract or deliver faulty goods foreign companies are not at liberty to take disciplinary action.
For example, when schools were being rebuilt after the floods North Korea would ask for up to 1 million dollars when in fact the amount needed is much less. Then through using low-quality cement, steel or not paying workers, they are able to earn a lot of foreign currency.
2.2.3. Funds are obtained through North Korean employees working at international aid organisations in North Korea.
There are currently approximately 100 employees of humanitarian aid organisations living in Pyongyang which have employed North Korean civil servants and drivers.
On average the local North Korean workers receive between 300 to 500 euros a month.
In addition to their monthly salary, they also have other sources of income such as domestic business trip fees, water costs and payment for any work outside of official hours.
However in accordance with North Korea’s socialist economic system, they receive their state allowance (a monthly salary is not even 0.5 euros) and the salary they received from aid organisations enter the accounts of the Ministry of Foreign Affairs.
An average of 50,000 euros is given in cash to the Ministry of Foreign Affairs from foreign aid organisations. This money is then used to provide the families of the Ministry of Foreign Affairs with food every month including 3L of corn oil, 1kg of sugar, 500g of seasoning as well as 1kg of meat and 3 bottles of alcohol which are provided only during national holidays.
In fact, while North Korea’s economic status and the lives of the North Koreans have become much more difficult, workers of the Ministry of Foreign Affairs have a better standard of life than they did in the 1990’s.
2.3. Selling passports.
Unlike South Korea, passports are issued by the Ministry of Foreign Affairs.
In the past, passports were given for free to those permitted to travel overseas; nowadays they are sold.
At first they were sold for 10 euros, but now the price is gradually increasing.
The Ministry is earning more than 10,000 euros a year through the sale of passports.
2.4. Issuing visas
With the establishment of the Kim Jong-un regime, the tourist industry has grown tremendously to have about 5,000 western tourists from countries such as the US and about 300,000 Chinese tourists a year.
From the 2000’s tourist visas were issued for 10 euros and all fees from visa issuances are used for the Ministry of Foreign Affairs funds.
Over 3 million euros enter the North Korean Embassy’s account in China on average a year.
The North Korean embassy in the UK, issues to an average of 300 people a year, and thus is only able to procure about 3000 euros a year for the embassy’s maintenance fees.
3. Procurement of Illegal Funds from the North Korean Official Residences
3.1. The Structure of the North Korean Embassies
North Korean embassies are formulated of official diplomats who have been dispatched by the Ministry of Foreign Affairs as well as unofficial diplomats that have been sent by other departments.
These unofficial diplomats can then be categorised again into two: those who have been dispatched by the Party, Ministry of State Security. Ministry of People’s Armed Forces, Academy of Sciences, Bonghwa Clinic and the Ministry of Health; and diplomats with economic tasks such as from the Ministry of Foreign Trade, Party accountants and others responsible for economic activity.
The official diplomats that have been sent by the Ministry of Foreign Affairs, the party secretaries, security personnel, military officers and science technicians are not given tasks to earn foreign currency. However, those who have been sent from the economic sector are given an amount of foreign currency that they must procure every month.
And so, the statement that all North Korean diplomats are burdened with obtaining foreign currency is not true. There have been some North Korean diplomats who have defected who have stated that they lived with the psychological burden of having to procuring foreign currency, while there are some on the other hand that there are no such things as ‘foreign currency assignments.’
I have seen many journalists and North Korean experts confused over this statement.
North Korea strictly prohibits any official diplomats from participating in illegal businesses.
3.2. Regardless of the fact that diplomats are not burdened with ‘foreign currency assignments,’ many become heavily involved in illegal businesses and financial transanctions.
The reasons for this is as follows:
Firstly, the reality is that North Korea is deteriorating day by day and North Korean culture and tradition expects these diplomats who have returned from abroad to look after their family members.
When North Korean diplomats enter the diplomatic world, they must first think very carefully which direction they want to go in.
Those who were born with a silver spoon in their mouth and come from wealthy families will not go abroad but rather try to be part of international organisations which have many overseas business trips or be sent to places where they can earn a lot of money such as the Middle East, Asia or Africa.
However, those who do not have the family background but are intelligent and confident in their own skills will go to the United States or Europe. While they are aware that they will not earn a lot of money in these countries, the path to success is much faster.
Second is that despite being told not to carry out illicit market activities, the Ministry is continuously burdened with costs.
North Korea sends down contradictory instructions to its diplomatic missions every day.
For example, when a certain embassy had been selling whiskey but was caught by the host country, it was told ‘You were told not to do any illicit business, what is wrong with you? Conducting illicit business abroad brings shame and damages the authority of Comrade Kim Jong-un abroad.’
However, in the next telegram the embassy was told that in honour of Kim Jong-il’s birthday on February 16, everybody must donate money to the Kim Il-sung and Kim Jong-il fund. Upon looking at how much each individual has donated, their loyalty to the regime is then evaluated accordingly.
In fact there have been cases in which diplomats have been told to donate for the construction of Ryomyong Street or have been scolded for the fact that there are no animals from the Southern hemisphere ahead of the opening of Pyongyang zoo.
After South Africa said it would give some animals to North Korea, diplomats were told to give 1,000 dollars each to pay for the air fees.
After sending these telegrams, diplomats are given a rank from first to last according to how much they have donated. This ranking is then sent by telegram to each embassy across the world.
And so, when these telegrams have been received the diplomats don’t really have a choice but to submit the payments, in fact some see it as an opportunity to show their extreme loyalty and if they are lucky they can receive a special promotion.
In the case of Park Chon-jul, North Korea’s political councillor who was expelled from South Africa in December 2015 for trafficking rhino horns, he had earned tens of thousands of dollars in early 2015 through smuggling rhino horns to China. With this money he rented a plane from South Africa to Pyongyang to bring over animals and was named the ‘Republic’s Hero.’ He continued to traffick rhino horns for a while until he was caught and eventually expelled.
In reality despite the fact that he had rented a plane to send animals using the money he had earned from illegal trade, the Workers’ Party told each of the representatives around the world that Park Chon-jul had extreme levels of loyalty.
At the end of day, despite being told not to participate in illegal businesses, the Party sends financial demands every day and evaluates Party loyalty depending on how much money is given. As a result, it is no wonder that official diplomats have no option but to get swept away into illegal business.
3.3. North Korean Embassies’ Methods of Earning Illegal Foreign Currency
3.3.1. The most common method is making most of duty-free products in the host country.
Every country and region has different permissible ranges and levels of profit that can be earned through duty-free products, which is taken advantage of by North Korean diplomats.
Generally when North Korean diplomats receive their monthly salary it is managed by their wives who will buy and sell duty-free products and save up their profits to take back to North Korea.
For example, on October 2 2016 it was reported that the Kohsar Police Station in Pakistan’s Capital city Islamabad had received a report that North Korea’s First Secretary Hyon Ki-yong’s house had been burgled. Hyon stated that while he had left his house Pakistani police had burgled 10 jewelry boxes, 2 diamonds, 3,000 US dollars as well as 450 boxes of imported alcohol including 100 boxes of whiskey, 201 cases of wine, 60 cartons of beer and 6 boxes of tequila.
As the police began to investigate the case, the North Korean First Secretary told police the alcohol was imported legally and presented documents to back up his case– which is true.
Diplomats are able to sell a bottle of liquor that was bought without tax for 40 dollars for the price of 70 to 100 dollars in Pakistan. A carton of beer bought for about 30 dollars can be sold for 150 dollars.
In other words if all this liquor and wine had not been stolen, it would have been sold on the black market and would have brought in a tremendous amount of money.
3.3.2. Diplomats use their special positions and privileges to smuggle goods.
In the case of Iran, North Korean diplomats will go to Dubai where gold, electronics and luxury watches are cheaper and bring them back to Tehran.
Diplomats in Nepal will go to Singapore where the price of gold is cheaper and buy gold, bring it back to Nepal and hand it over to smugglers who in turn send it to India– which naturally brings in huge earnings.
It is common for North Korean diplomats to go to Singapore and buy products to smuggle to other countries.
In the case of South America, cuban cigars make the most money. For Africa it is rhino horns and ivory.
North Koreans in Russia selling musk, bear claws, tiger leather from Siberia to China earn an incredible amount of money. Viagra made in North Korea is sold in Mongolia while recently ivory from Myanmar and Laos has made its way over to China.
3.3.3. North Koreans living abroad have started businesses of selling products amongst each other.
North Koreans living in Russia have found a way to make a living by growing and selling bean sprouts, mung bean sprouts and tofu.
These North Koreans living in the Far East Region of Russia have taken advantage of the expensive prices of vegetable and started growing bean sprouts in their small toilets which are then taken out to the markets every morning. While their husbands earn approximately 500 dollars a month, their wives are able to earn an average of 3,000 dollars a month.
There are tens of thousands of North Korean labourers working in Russia.
As they are all men, they take it in turns to work in the cafeterias.
However, in Russia there is no Korean food like Kimchi, noodles or bean sprouts.
As a result the embassy have made noodle, Kimchi, rice cake and bean sprout production facilities which is then sold to the labourers by the wives of embassy workers.
3.3.4. Increase of the number of smuggled goods to North Korea
In each of the embassies the wives of officials send products back to North Korea to sell into the market. As for the North Korean Embassy in China, they use trains and trucks to send textiles and other products back to the North Korean market while the embassies in Russia send back medicine and pianos to North Korea.
3.3.5. Transporting money earned by overseas labourers to China
The money earned by North Korean doctors and labourers in the Middle East and Africa cannot be sent back to North Korea using the standard financial networks. As a result, the workers have to ask the North Korean embassies to send the money to China in a diplomatic pouch of which 10% is given to the embassy as commission.
As some doctors and labourers want to save the commission fees they attempt to take the money back to North Korea themselves, but as the case in the Sri Lankan airport recently, there are cases in which all these funds are confiscated.
As a result, they have no option but to depend on the embassy.
With the strengthening of the sanctions on North Korea’s finances, North Korea has developed a system where they send more Trade Bank Representatives to embassies in China and Russia so that the money can be sent to China and sent to the Trade Bank Representatives while the workers can fly back to North Korea empty handed.
4. North Korea’s attempts of overcoming the current sanctions
4.1. Instead of transferring funds using banks, diplomatic pouches are used to carry cash.
4.2. Funds have to be sent little by little on a regular basis to the embassy account
In the case of the UK, the source of money only needs to be revealed if the amount goes over 3,000 pounds. As a result, amounts of 1,000 or 2,000 pounds need to be sent regularly to the account.
4.3. In the case that bank accounts are difficult to set up, an internet account is used once or twice before being dissolved to set up a new one.
4.4. There are cases in which foreigners are used as a proxy to transfer funds
Recently, some international aid organisations have begun to use the method of using bank accounts belonging to Chinese-Koreans in China and paying them commission fees.