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The Peninsula

Counterfeiting: The Other Way North Korea Finances Its Regime

Published August 3, 2016
Category: North Korea

By Caleb Cho

In early June, a North Korean agent was arrested by Chinese authorities in Dandong, China, the largest border city facing North Korea, due to a number of fake 100 U.S. dollar bills exchanged for Chinese currency at two Chinese banks. The total amount of his deposit was reportedly $ 5 million worth, and the fund was being used to pay for commodities that North Korea had distributed to celebrate Kim Il-sung’s birthday and the 7th congress of the Worker’s Party of Korea (WPK). Several Chinese media also pointed to North Korea as the origin of new counterfeit 100 Chinese yuan bills circulated in some areas and cities in China, including Shaoxing in Zhejiang Province.

There is no tangible evidence showing that those fake bank notes were actually made and distributed by North Korea, however, there are enough testimonies and reports to draw that conclusion in spite of denial from the state. First, whenever a large amount of counterfeits surfaced, there were close personal connections with North Korea. In many cases, individuals or groups who held fake bills either were North Korean nationals or had visited North Korea or were business/political partners with the North. In 2005, Sean Garland, the president of the Irish Workers’ Party was arrested for selling high-quality counterfeit bills, so called “Supernotes,” after his visit to North Korea in 1998. According to a report published by Committee for Human Rights in North Korea (HRNK), several North Korean nationals including diplomats were convicted for counterfeit operations in Russia, Hong-Kong, Macau, Thailand and Cambodia in the mid-1990s.

Current major currency bills are made by cutting edge technology to prevent forgery. Only a handful of machinery worldwide can break anti-counterfeiting measures and make high-quality fake bank notes such as “Supernotes”. The HRNK report indicates that North Korea indeed purchased from Europe a printing press, which is identical to one used in the United States, and sent technicians to Europe to acquire skills and materials necessary to replicate genuine bills. Being acknowledged that, it is not so surprising that some Supernotes found in many different places worldwide are determined to be from the same family and to be created from one single place.

Lastly, but most importantly, counterfeit currencies are not rare in North Korea. In fact, fake bank notes are being sold at a relatively fixed price through the black market. For instance, in the capital city of North Korea, where allegedly counterfeits are produced, replicated foreign currencies are traded for 13-15% of their face value, and the prices are raised up to 20% nearby the border with China and Russia. According to testimonies from several North Korean defectors, Chinese currency brokers purchase North Korea-made counterfeits at 30%-50% of their face value,.

Even though counterfeiting can bring hard currency to the isolated regime, the mass manufacturing of fake notes sponsored by a state is extremely unusual and risky due to possible law enforcement from counterparty countries and international society. In fact, Nazi Germany was the only state that has considered, yet did not implement, counterfeiting on an industrial scale since World War II. Additionally, there are only a few forgery cases reported in the past decade, suggesting North Korea might have stopped the counterfeiting operation. Then the question is: why would North Korea restart printing and circulating fake banknotes? Why do they even replicate their closest ally’s currency bill- “renminbi”?

The answers may be found in current UN sanctions on North Korea and the leadership transition in the state. In March 2016, the UN Security Council decided to impose unprecedentedly harsh sanctions on the Democratic People’s Republic of Korea (DPRK) for its fourth nuclear test and recent missile launches. North Korea’s desperation was doubled since China agreed to join those sanctions this time. To make matters worse, Kim Jong-un had to take out a substantial amount of cash from his already shrunken pocket to show his generosity to the North Korean people and gain their loyalty for the new regime. U.S. government officials have estimated that annual revenue for North Korea from its counterfeiting would be around between $50 million to $ 250 million, which is comparable to the annual earnings from Kaesong Industrial Complex.

Counterfeiting is considered one of three “killer weapons,” along with nuclear weapons and drug trafficking. However, developing nuclear weapon demands strong financial support, and yet drug production also has a serious side effect -addiction. It is worth noting that the population addicted to drugs in North Korea has grown significantly since mid-2000s and now has become a social problem endangering the regime’s stability. On the other hand, counterfeiting does not result in either financial hardship or domestic abuse issues. That is why North Korea can never give up printing illicit money.

Caleb Cho is an intern with the Korea Economic Institute of America and a masters candidate in Economics at Tufts University. The views expressed here are the authors alone.

Image by KEI’s Jenna Gibson, Director of Communications. 

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