SPEAKING
FREELY Smoke signals from BAT's North Korea
venture By Lora Saalman
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
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On January 10, North
Korean leader Kim Jong-il traveled in a luxury
train to China's Guangdong province to
sample socialist-flavored capitalism. Just a few
months earlier, the North Korean Workers Party
introduced reform measures granting foreign
investors tax cuts and
allowing them to sell goods produced in North
Korea without tariffs.
For an economy that
ostensibly issued halting economic reforms in
1984, these new measures constitute a revolution,
albeit one with Chinese characteristics. In
accordance with its giant neighbor's model, North
Korean economic reform is predicated as an
alternative to the instability of political
liberalization. Unforeseen social and political
shifts are to be cushioned by financial solvency
to keep the regime intact. With China's assistance
and unofficial aid, sustainable growth may one day
be achieved in North Korea. Yet a darker side to
North Korea's economic awakening remains.
Kim Jong-il's visit comes on the heels of
accounts of North Korean money-laundering in Macau and the US decision
last June and again in October to freeze the
assets of various North Korean companies and
financial institutions. While many of these firms
are beyond the reach of US sanctions, implied
misconduct has already led to runs on the North
Korean-affiliated financial institution Banco
Delta Asia in Macau.
As allegations swirl
of money-laundering through counterfeit cigarettes
and currency, a less-known story has emerged on
British American Tobacco's previously undisclosed
four-year-old joint venture in North Korea. It
presents the dilemma of doing business in a
country in desperate need of revenue but with a
poor track record of allocating resources to its
people. This cautionary tale begs the question as
to where exactly Pyongyang's joint-venture profits
are going.
For North Korea, which lacks
many of the basic laws for financial transparency
and good governance, capital investments are more
than economically precarious. Shared contact
information and dubious management practices among
North Korean companies are ubiquitous.
Daesong-BAT is one of a handful of Western
joint ventures in North Korea. The far-reaching
tentacles of its North Korean partner illustrate
the complexity of verifying the background and
connections of any North Korean entity. Like many
of its compatriots, North Korea's Sogyong General
Trading Corp (Sogyong) boasts circuitous and often
indirect ties to entities engaged in
proliferation, international trade, shipping, and
money-laundering. These indicators point to larger
concerns as to whether joint ventures,
particularly Western ones, can be manipulated by
North Korea for illicit financing of the regime or
even to sustain its alleged WMD (weapons of mass
destruction) programs.
Joint ventures
and front companies In establishing
Daesong-BAT, British American Tobacco teamed up
with Sogyong General Trading Corp, a
Pyongyang-based state trader best known for its
carpet exports. Sogyong, however, also exports
such products as handicrafts, furniture and
agricultural produce, while importing machinery,
electronics, fishing tackle, chemicals and
fertilizer. It is not uncommon for North Korean
state-run enterprises to deal in everything from
machinery to fishing tackle. Yet eclectic product
lists make trade in illicit drugs and weapons all
the more difficult to track. Cigarettes are just
one more product in the Sogyong export-import
pantheon.
North Korean company product
lists also rarely convey their full range of
trade. Seemingly innocuous industries are often
manipulated as front companies. Last year, for
example, Japan's Ministry of Economy, Trade and
Industry (METI) listed what appeared to be an
innocuous North Korean food manufacturer, Sosong
Food Factory, for its participation in nuclear,
missile, chemical and biological-weapons
proliferation. Cigarettes, like food, have been
used at times to mask the real objects being
transferred. In one case, Japan in 2002 seized a
Chinese vessel and found that the declared store
of cigarettes on board actually contained drugs
thought to have come from North Korea.
While not as licentious as drug or human
trafficking, even the black-market trade of
cigarettes could have a tangible impact on North
Korea's financing, as seen in Eastern European
illegal cigarette rings. These factors highlight
the danger of taking a North Korean food or even
carpet manufacturer at face value.
North Korea's network Among the
elements of obfuscation, the company name
Daesong-BAT merits attention. Rather than
combining or modifying the titles of the two
partner companies to form Sogyong-BAT, Daesong-BAT
combines British American Tobacco's acronym with a
name that could either point to North Korea's
Daesong district or Daesong General Trading Corp
(Daesong). If it turns out to be the latter, Japan
and other governments have prominently featured
Daesong for its ties to missile and nuclear
proliferation.
Incidentally, Daesong
maintains one of the most extensive and convoluted
North Korean networks, with more than 10
subsidiaries. It also is suspected of falling
under Bureau 39, which earns foreign currency for
North Korea. A direct connection between
Daesong-BAT and the sinewy Daesong franchise has
yet to be established but, as illustrated below,
nothing is clear cut in North Korean business
relations.
Because of the lack of
transparency and convoluted nature of North Korean
companies, contact information often serves as the
first stencil for tracing overlap between
industries. In the case of Daesong, the US Central
Intelligence Agency's Open Source Center follows
the use of the same fax number to establish
potential business and branch linkages. If the
same logic is applied to Sogyong, another pattern
emerges. Sogyong shares common fax numbers with at
least two companies, Korea Foodstuffs Trading Corp
(Foodstuffs) and Korea Kwail Trading Corp (Kwail).
These companies in turn share fax numbers with
nearly 100 companies in North Korea.
Among
North Korean firms sharing contact information
with Sogyong-linked entities, Japan's METI and
official European export monitors have listed at
least six as end-users associated with North
Korean WMD programs. In October, the US government
targeted one in particular, Korea Ryonha Machinery
Joint Venture Corp (Ryonha), freezing its assets
under US jurisdiction and placing it on the US
Specially Designated Nationals and Blocked Persons
list. Ryonha is a prime example of the complex web
of North Korean subsidiaries. Last June, the US
Treasury Department also targeted the assets of
its parent company Korea Ryonbong General Corp,
formerly known as Lyongaksan, which heads five
other US-designated entities.
Ryonha is
not an aberration among companies converging with
Sogyong. Among other Foodstuffs and
Kwail-connected entities, Korean company databases
list Korea Pyongyang Trading Corp as a distributor
of methane gas derived from animal excrement.
Apparently, effluent is not its only fetid source
of income. The Japanese government has listed the
very same company, along with subsidiaries of two
other firms tracing back to Sogyong, namely Korea
Ryonhap Trading Corp and Korea Jangsu Trading
Corp, for nuclear, missile, chemical and
biological weapons proliferation.
Proliferation networks may not be the only
mechanisms at Sogyong's fingertips. Contact
information also links the two Sogyong-connected
associates with at least four North Korean
financial institutions. Among these, Koryo Bank
and Korea Joint Bank have alleged ties to the
now-infamous Banco Delta Asia in Macau. Banco
Delta Asia's own purported involvement in
counterfeit-currency distribution and
counterfeit-cigarette smuggling does not bode well
for Daesong-BAT, no matter how convoluted their
connections. Banco Delta Asia may have three
degrees of separation between it and Sogyong, but
in North Korea's fishbowl of finance this does not
preclude cooperation.
Banco Delta Asia is
also reported to maintain a close business
relationship with Macau-based Zokwang Trading,
which its own vice general managing director
claims is a part of North Korea's Daesong General
Trading Corp. Daesong, as mentioned earlier, has a
pervasive proliferation record. It also has
reported links to Changgwang Sinyong Corp
(Changgwang), which has been repeatedly sanctioned
by the United States for its missile-proliferation
activities and sales to Iran and Pakistan. Zokwang
in turn deals in missiles and nuclear-power-plant
components, all the while maintaining a
partnership with the notorious Changgwang.
Combined with Sogyong's branch in the joint
\-venture hub Shenyang, China, even indirect ties
to Macau suggest that Sogyong has the ability to
tap into proliferation, industrial and financial
networks in China and beyond.
Proliferation, industry and finance mean
little without the means to transport goods and
technology. Sogyong-associated entities Foodstuffs
and Kwail share fax numbers with North Korea's
national airline Air Koryo, which has also been
cited by official European monitors for
proliferation. A 2003 Far Eastern Economic Review
article even named Air Koryo as the transportation
mechanism for Daesong's suspected military
assistance to Myanmar. Sogyong's own shipping
vessels Sogyong 1 and 2, which were detained in
Japan on safety violations in December 2004 and
January 2005, complete the final leg of the
contact-linked proliferation, financing and
shipment triangle. This network belies a much more
intricate set of alliances than the
domestic-consumption-based joint venture touted by
British American Tobacco and Sogyong General
Trading Corp.
Standards of business
conduct British American Tobacco's website
advocates transparency in international business
and laudably eschews bribery, corruption, illicit
trade, and money-laundering. In October, BAT
executives further contended in The Guardian that
the company's North Korean cigarette joint venture
fuels only domestic consumption, not exports to
China or elsewhere. In spite of these
reassurances, BAT is no stranger to the dangers of
black-market cigarette production and
transshipment. A February 2000 article in The
Guardian even accuses BAT of complicity, by
knowingly allowing illicit smuggling of its
cigarettes to occur.
In the case of
Daesong-BAT, British American Tobacco officials
have admitted to knowing little of the company's
North Korean joint-venture operations. Ominously,
BAT has stated that an unnamed Singapore division
controls its North Korean joint venture. Lack of
oversight combined with a dubious North Korean
offshore mechanism for managing an ostensibly
domestic industry raises significant warning
signs. The incestuous relationship between
state-run North Korean entities that share fax
numbers of companies and banks listed for WMD
procurement and money-laundering through
counterfeit tobacco should also elicit concern.
These are not simply dilemmas for British American
Tobacco, but pose challenges to any companies
forming joint ventures in North Korea.
Economic integration, as in China's case,
may bring North Korea more into step with
international norms and standards. Ironically,
engagement that is likely to lead to greater
future transparency may also be manipulated for
North Korea's short-term illicit gains.
In
2003, the British government pressured BAT to
close down its cigarette factory operations in the
military dictatorship of Myanmar because of
concerns over that country's lack of human rights.
Given the legion of obstacles impeding
transparency in North Korea, BAT and other Western
firms could be contributing to the worsening of
more than human rights. They could be aiding and
abetting illicit North Korean financing that is
alleged to fuel Kim Jong-il's slush fund and WMD
programs.
Lora Saalman is a
research associate at the Wisconsin Project on
Nuclear Arms Control. The views expressed in this
article do not necessarily reflect those of the
Wisconsin Project. Her areas of interest include
China, the Koreas, and South Asia.
(Copyright 2006 Lora Saalman. Used by
permission.)
Speaking Freely is an
Asia Times Online feature that allows guest
writers to have their say. Please click hereif you are interested in
contributing.
