What's Behind North Korea's Recent Counterfeiting?

 
 

It’s Saturday morning in July. After taking the designer dogs for a stroll around downtown, they start the morning with expensive cappuccinos. The gym is calling, packed with body conscious 20-somethings clad in Elle or Adidas and eager to show some skin. Their afternoon is booked with a local plastic surgeon, because, after all, they need to be looking their best before some fine dining with friends, followed by movie night on the new 45-inch LED television.

These are the donju—the new monied class in the Democratic People’s Republic of Korea (DPRK) that has risen from the ashes of a failed public distribution system and benefactors of a market economy that has picked up momentum under Kim Jong-un. They live in relative luxury and reside in Pyonghatten’s newest high-rises and frequent expensive restaurants. But most importantly, if the Kim dynasty fails to keep up with their material appetite, they may be the key to change in the hermit kingdom.

Kim’s Loyalty Base Has Changed

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As the political myth that the Kim family has traditionally relied on for loyalty loses clout, and the state’s propaganda is increasingly viewed with skepticism, Kim Jong-un depends on this influential class for political support. The donju hold a number of important positions — from the ministry to the military, to running the regime’s establishments abroad and trying to attract investment into North Korea. Instead of loyalty driven by a fervent ideology and a shared historical memory that saw the Kim family as the anti-colonialist saviors of the Peninsula, the regime now relies on material gifts in return for support. North Korea’s recent 7th Party Congress, where attendees were given large flat screen TVs, is evidence of this political bargain.

But harsh new sanctions that include unprecedented enforcement by China, North Korea’s economic lifeline, may be threatening this relationship—and economic hardships have made these gifts harder to come by. China comprises more than 90 percent of Pyongyang’s trade, and strict enforcement of sanctions has dealt a heavy punch to the North Korean economy. According to data from Seoul’s Korea International Association, trade between these two countries is down 13 percent. And coal, North Korea’s leading export to China, has also plunged 27 percent. Additionally, after the closing of the Kaesong Industrial Complex, trade between North and South Korea has nosedived 99 percent, with imports from North Korea having dropped from over $140 million to just $11,000 in March.

As the international community blocks all sources of major income for the regime, including its state-run restaurants in foreign countries, the regime is shifting toward more desperate measures to procure goods needed to serve the donju’s trading desires and to shore up loyalty to the ailing dynasty. Short on cold hard cash, they are turning to the next best thing—counterfeit currencies.

Counterfeiting

Last month, a North Korean agent working for the infamous Operations Department, the department responsible for intelligence and espionage operations, was caught and arrested by Chinese authorities in Dandong after circulating counterfeit $100 bills to purchase electronics and household goods in China—items that were supposedly distributed to Party members during the birthday celebration of Kim Il-sung and during the 7th Party Congress in May. In total, the agent is reported to have brought in $5 million.

Also, the regime has ordered mass manufacturing of counterfeit Chinese yuan, despite a so-called alliance that is “forged in blood” between Beijing and Pyongyang. According to the South Korea-based defector organization North Korea Intellectuals Solidarity, defector sources say that a mint in Pyongsong specializes in the printing of large quantities of fake Chinese yuan.

After printing, the secret task force enters a three-step process. First, the counterfeits are tested in the local North Korean markets, then sent to a third country before being “distributed in massive quantities in China.” The process is undoubtedly a state-led construct, given the amount of official agencies it goes through. The regime uses its embassies abroad, with strong allegations also pointing to international criminal organizations, to enter the counterfeit bills into circulation.

If these activities seem familiar, it’s because North Korea is no stranger to counterfeiting currency. Holding the title as “the first country to counterfeit another state’s currency since Hitler’s Germany,” as California Representative Ed Royce stated in 2007, the regime manufactured the nearly undetectable “supernote” for decades. Credible assessments estimate profits between $15 and $25 million a year during that era.

The counterfeit era, directed personally by Kim Jong-il as far back as the late 1970s, evolved into an elaborate international crime ring that spanned over 130 countries. Long on the radar of U.S. law enforcement, the saga culminated in 2005 during a sham wedding dubbed “Operation Royal Charm” that resulted in 87 indictments. Later that same year, the U.S. Treasury Department designated Banco Delta Asia (BDA), as a “primary money-laundering concern” that resulted in the freezing of about $25 million in accounts linked to North Korea.

The years shortly after saw a dramatic downturn and near vanishing of the high-quality counterfeits, signaling a possibility that U.S. law enforcement simply made the risks and costs too high for North Korea. Katharine H. S. Moon, a North Korea expert previously stated that the supernotes are “not something people are seeing.”

What Recent Counterfeiting Tells Us About the Regime

The table that the Kim regime stands on for loyalty is wobbly at best, and Pyonghatten’s top one-percenters (who make up the remaining legs) are not willing to bear the burden of economic sanctions after having a taste of the good life. Aware of this populist relationship between Kim Jong-un and the donju—and under harsh financial and trade sanctions—the regime is reverting back to counterfeiting to pay for the goods needed to satisfy this critical power base. Kim Jong-un’s willingness to even counterfeit large quantities of Chinese yuan signifies this importance, as well as giving a snub to their traditional ally.

This crude counterfeiting of American and Chinese currency, of a low enough quality to be detected by a bank employee with a banknote counter (a far cry from the supernotes that challenged the U.S. Treasury) is a signal that sanctions are working, and the regime may be nearing the bottom of their bag of tricks. With financial and trade sanctions threatening the regime’s ability to trade material goods for political support, backroom conversations among the donju may begin to question the Kim family’s ability to support their new lifestyle and press for change.

Brian R. Moore is a Resident Fellow at Pacific Forum CSIS and a graduate student at Georgetown’s School of Foreign Service in the Asian Studies program. He tweets at @thebrmoore. Riza De Los Reyes is a graduate student at The George Washington University in the Security Studies program.

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