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http://snipurl.com/yixs No Ordinary Counterfeit By STEPHEN MIHM (NYT Magazine, July 23, 2006) (continued) A Picture Emerges With a country as closed and secretive as North Korea, information about government activities is hard to come by. But in the late 1990s, a new source of information arrived in the form of defectors. Starvation, corruption and desperation had prompted thousands of North Koreans, many of them government officials, to flee the country. In 1997, two high-ranking bureaucrats Hwang Jang Yop, a former secretary of the North Korean Workers Party, and Kim Duk Hong, head of a government trading company sought political asylum at the South Korean Embassy in Beijing. They were the most prominent officials to defect, but they were hardly alone: thousands of North Koreans have fled to South Korea. Many thousands more have escaped to China. In the international intelligence community, vetting accounts from defectors about activities in North Korea soon became a specialty as well as a necessity, for the accounts were not always reliable. Raphael Perl, an analyst at the Congressional Research Service who has written extensively on North Koreas counterfeiting operations, told me that a lot of defectors or refugees give us information, but they tell us anything we want to know. You have to question the reliability of what they say. Nonetheless, the most trustworthy of these accounts, when combined with more traditional intelligence sources, permitted a best guess of what might be happening in North Korea. And as far as counterfeiting was concerned, the picture that emerged suggested that moneymaking had long been a passion for the countrys dictatorial ruler, Kim Jong Il, dating back to the 1970s, years before he took over the reins of power from his father, the countrys founder and first president, Kim Il Sung. Today, on Changgwang Street in Pyongyang, the capital of North Korea, there is a barricaded compound of government buildings. Judging from satellite photos, these are unremarkable, rectangular structures that suggest no special purpose. Yet according to a North Korean specialist based in Seoul whom I spoke with recently, and who has interviewed many high-ranking North Korean defectors, including Hwang Jang Yop and Kim Duk Hong, these buildings are the home of Office 39, a government bureau devoted to raising hard currency for Kim Jong Il. (The specialist was granted anonymity because of the sensitivity of relations between North and South Korea.) While the operatives of Office 39 may well direct legitimate enterprises, including the export of exotic mushrooms, ginseng and seaweed, a substantial portion of the offices revenue comes from its involvement in illicit activities: drug manufacturing and trafficking, sales of missile technology, counterfeit cigarettes and counterfeit $50 and $100 bills. According to Ken Gause, director of the Foreign Leadership Studies Program at the CNA Corporation, a policy group in Virginia that consults on national-security issues, the activities of Office 39 overlap with those of two other offices that occupy buildings in the same complex. The first, Office 38, manages the money acquired by Office 39, he said, while the second, Office 35, handles kidnappings, assassinations and other such activities. All three divisions employ the same narrow coterie of elites, and all answer directly to Kim Jong Il, who lives in a villa less than a mile away. The history of the operations of Offices 39, 38 and 35, Gause told me, closely follows Kim Jong Ils own rise to power through the party apparatus. In the early 70s, after helping his father purge the ranks of the Korean Workers Party of competing factions, Kim Jong Il assumed control of North Koreas covert operations, mostly involving South Korean targets. In the mid-70s, according to defector accounts related to me by the North Korean specialist, Kim Jong Il issued a directive to members of the Central Committee of the Korean Workers Party instructing that expenses for covert operations against South Korea be paid for by producing and using counterfeit dollars. Officials in charge of the operation supposedly brought back $1 bills from abroad, bleached the ink and then used the blank paper to print fairly sophisticated counterfeit $100 bills though nothing close in quality to a supernote. Many of these notes were later used by North Korean agents implicated in attacks on South Korean targets, like the operatives arrested for the bombings of a South Korean government delegation in Rangoon in 1983 and a Korean Airlines jet in 1987. According to the same defector accounts, Kim Jong Il endorsed counterfeiting not only as a way of paying for covert operations but also as a means of waging economic warfare against the United States, a way to fight America, and screw up the American economic system, as the North Korean specialist paraphrased it to me. In a similar vein, according to Sheena Chestnut, a specialist on North Koreas illicit activities who has also interviewed several key defectors, counterfeiting was seen as an expression of the guiding idea of the regime: the concept of juche. Often loosely translated as self-reliance or sovereignty, the idea of juche entails an aggressive repudiation of other nations sovereignty a reaction to the many centuries in which Korea capitulated to its larger, more powerful neighbors. It appears that counterfeiting actually contributed to the domestic legitimacy of the North Korean regime, Chestnut told me. It could be justified under the juche ideology and allowed the regime to advertise its anticapitalist, anti-American credentials. By 1984, as North Koreas planned economy began to fall apart, Kim Jong Il, who by that time was effectively running much of the government, issued another directive, according to the North Korean specialist, who told me he has obtained a copy of the document. It explained that producing and using counterfeit U.S. dollars was a means, in part, for overcoming economic crisis. The economic crisis was twofold: not only the worsening conditions among the general population but also a growing financial discontent among the regimes elite, who had come to expect certain perquisites of power. Counterfeiting offered the promise of raising hard currency to buy the elite the luxury items that they had come to expect: foreign-made cars, trips for their children, fine wine and cognac. Laundering, Wholesaling and Redesigning Earlier this year, I visited David Asher, a former senior adviser for East Asian and Pacific affairs in the State Department and an outspoken critic of the North Korean regime. In late 2001, he explained to me, Assistant Secretary of State James Kelly asked him to study why the North Korean regime had not collapsed, given that the countrys economy had declined even further over the previous decade, with industrial output alone falling by as much as three-quarters. Former Communist countries had ended their subsidies, Kim Il Sung had died, the country was stricken by floods and famine and the food-distribution system had collapsed. (Party slogans betrayed more than a hint of desperation: Lets Eat Two Meals a Day was one of the eras more uplifting exhortations.) Yet Kim Jong Il, defying all expectations, managed to cling to power. How this was happening was perplexing, given the huge trade gap, even with adjustments for aid flowing into the country, Asher recalled. Something just didnt add up. It didnt account for why Kim was driving around in brand new Mercedes-Benzes or handing out Rolexes at parties and purchasing truly large quantities of cognac. As Asher and his colleagues began amassing intelligence, evidence of an array of illicit activities began surfacing everything from ivory smuggling to the production of high-grade methamphetamine. And counterfeiting was at the core. The more we found out about this counterfeiting of dollars, the more we thought it was outrageous, Asher told me. These activities provided what Asher calls an alternative framework for existence and the palace economy of Kim Jong Il. In the spring of 2003, the State Department established the Illicit Activities Initiative, an interagency effort designed to investigate and counter North Koreas criminal activities, and appointed Asher coordinator. The department began to systematically collect a variety of forensic and other evidence gathered by its own investigators, the Secret Service and elements of the intelligence community linking North Korea to the supernotes. (Asher declined to comment on the nature of the evidence, most of which remains classified.) In addition, the department put together circumstantial evidence of North Korean counterfeiting that had been accumulating for more than a decade. In 1994, for example, authorities in Hong Kong and Macao apprehended five North Korean diplomats and trade-mission members carrying about $430,000 in bills that turned out to be counterfeits of the supernote variety. Additional North Korean diplomats, including an aide close to Kim Jong Il who was attached to Office 39, were caught trying to launder millions of dollars worth of supernotes over several years, prompting an increased scrutiny of North Koreas diplomatic and trading missions. Thwarted, the regime seems to have changed tactics, harnessing new distribution networks and wholesaling the counterfeits to third parties who would funnel them to criminal gangs. In the late 1990s, for instance, British detectives began tracking Sean Garland, the leader of the Official Irish Republican Army, a Marxist splinter group of the I.R.A. According to an unsealed federal indictment in Washington, Garland began working with North Korean agents earlier in the decade, purchasing supernotes at wholesale prices before distributing them through an elaborate criminal network with outposts in Belarus and Russia, as well as Ireland. (Garland denies the charges and is currently fighting extradiction to the United States from Ireland.) Details of the actual manufacture of counterfeit notes also began filtering into the State Department, much of the information derived from defector accounts. According to similar accounts compiled by Sheena Chestnut and the North Korean specialist in Seoul whom I spoke with, the regime obtained Swiss-made intaglio printing presses and installed them in a building called Printing House 62, part of the national-mint complex in Pyongsong, a city outside Pyongyang, where a separate team of workers manufactures the supernotes. In 1996, frustrated by the high-quality imitations of its currency in worldwide circulation, the United States government redesigned the money for the first time since 1928. Out went the old-fashioned symmetrical designs, replaced by the big-head notes. Almost everything about the new design was aimed at frustrating potential counterfeiters, including a security thread embedded in the paper, a watermark featuring a shadow portrait of the figure on the bill and new microprinting, tiny lettering that is hard to imitate. The most significant addition was the use of optically variable ink, better known as O.V.I. Look at the bills in circulation today: all 10s, 20s, 50s and 100s now feature this counterfeiting deterrent in the denomination number on the lower-right-hand corner. Turn the bill one way, and it looks bronze-green; turn it the other way, and it looks black. O.V.I. is very expensive, costing many times more than conventional bank-note ink. A Swiss company named SICPA is the major manufacturer of O.V.I., and the United States purchased the exclusive rights to green-to-black color-shifting ink in 1996. Other countries followed, purchasing color-shifting inks of different colors for their own currency. One of the first countries to do so, interestingly enough, was North Korea, whose currency, the won, counterfeiters ignore. North Korea purchased O.V.I. from SICPA that shifts from green to magenta. For the purposes of counterfeiting American currency, it would be a smart choice: magenta is the closest color on the spectrum to black. The green-to-magenta ink can be manipulated to look very close to green-to-black ink, Daniel Glaser of the Treasury Department told me. They took this stuff the same year we went to O.V.I. According to Glaser, the North Koreans managed to fiddle with the new ink, obtaining an approximation of the O.V.I. on the bills. Though there is some dispute on the timing, the first counterfeit big-head supernotes might have arrived on the market as early as 1998. Like the earlier generation of supernotes, the big-head imitations show an ever-growing attention to detail. They would certainly fool me, said Glaser, who points out that the defects of the supernote are arguably improvements. He recalled looking at the back of a $100 supernote under a magnifying glass and noticing that the hands on the clock tower of Independence Hall were sharper on the counterfeit than on the genuine. >From all accounts, superb quality is a feature of much North Korean contraband: methamphetamine of extraordinarily high purity; counterfeit Viagra rumored to exceed the bona fide product in its potency; supernotes. Its an impressive product line for a regime that can barely feed its people. When I discussed this with Asher, he let out a sigh. I always say that if North Korea only produced conventional goods for export to the degree of quality and precision that they produce counterfeit United States currency, they would be a powerhouse like South Korea, not an industrial basket case. The Threat How many supernotes are in circulation, and what sort of provocation do they represent? Most government officials interviewed for this story declined to give an estimate, but several, including Michael Merritt of the Secret Service, noted that his agency has removed $50 million worth of supernotes from circulation. That is a far cry from the billions predicted by Representative Bill McCollums task force in the early 1990s, and while it may still sound like a lot, it is insignificant relative to the $12 trillion dollar American G.D.P. When supernotes are discovered in a smaller foreign economy that makes use of American currency, they can cause a local crisis of confidence in the dollar (this has happened in Taiwan and Ireland, for instance). But in the United States, the economic threat is minimal. For this reason, many analysts, particularly those outside the administration, like Raphael Perl of Congressional Research Service, express concern about making the issue into a diplomatic crisis. Perl, who agrees that the North Koreans are behind the counterfeiting, told me that because American government officials often view the violation of the currency as a matter of national honor, there is an emotional factor that could get blown out of proportion. In the process, he argued, counterfeiting can become conflated with other, more pressing problems posed by the North Korean regime, like its nuclear threat. This conflation may also be deliberate. According to Kenneth Quinones, who was the North Korea country director in the State Department in the 1990s, hawks in the current administration may be trying to use the counterfeiting issue to impede negotiations with the regime over its nuclear program. Critics of this approach note that the freezing of the North Korean bank accounts took place in the same month that participants in the six-party talks, the multination negotiations over North Koreas nuclear program, hammered out an agreement that the regime would abandon its nuclear-weapons program. North Korea soon reneged on its promise to abandon its nuclear program and has since refused to rejoin the talks until the United States lifts the designation on Banco Delta Asia. The hawks, Quinones told me, are attempting to use these sanctions to help bring down the regime. The senior administration official interviewed for this article dismissed that claim. The notion that there was a grand conspiracy by hard-liners is just wrong, he told me. Its not accurate. This was done as a law-enforcement action by appropriate U.S. government agencies based on the facts of the case. Even if the counterfeiting is not worthy of being a diplomatic issue unto itself, the fact that North Korea is counterfeiting may still serve as a grim reminder of the difficulty of good-faith negotiations with North Korea. Just consider that the supernotes that were seized by law-enforcement officials in New Jersey and California arrived in the United States while the six-party talks were going on. Asher, for one, was stunned by the audacity of the regime. If theyre going to counterfeit our currency the entire time theyre engaged in diplomatic negotiations, what does that say about their sincerity? he asked me. How can they want normalization with a country whose currency theyre counterfeiting? How can they expect it? However the diplomatic standoff is resolved, Asher said that he believes North Korea wont continue to counterfeit much longer. Next year, the Bureau of Engraving and Printing is issuing an updated version of the $100 bills. The notes will be expensive to manufacture, requiring the purchase of a new set of presses at a cost that Asher estimated in the hundreds of millions of dollars. The Treasury Department characterizes the next generation of notes as part of a routine redesign that it will undertake on a regular schedule every decade. But Asher has no illusions as to the timing. It might be a routine update, he said, but its a routine update thats being instigated by one country: North Korea. Stephen Mihm teaches history at the University of Georgia. 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