Friday, May 25, 2007

North Korea Funny Money Story Gets More Interesting

Another nail has been tapped into the coffin of the North Korea Supernote counterfeiting story by McClatchy.

Recall Stanley Au’s sworn statement that Banco Delta Asia didn’t come across significant quantities of counterfeit currency in the deposits of North Korean account holders since 1994, the U.S. claim that Pyongyang is faking our currency looks ever more dubious.

Add to the mix, a 2006 Congressional Research Service report that had this to say:

Subsequent press reports (of February 2, 2006) cite a Uri Party Member of Parliament’s account of a closed briefing by South Korea’s National Intelligence Service to members of Korea’s National Assembly to the effect that North Koreans were arrested abroad for counterfeiting offenses in the 1990’s but that the Service had no evidence of the North making bogus currency after 1998. (Raphael Perl and Dick Nanto, North Korean Counterfeiting of US Currency, March 22, 2006, Order Code RL33324)

That’s probably because after the 1996 redesign of the US currency (meant to foil the new computer age threats such as digital scanning by switching to special inks and security threads), counterfeiting US currency became really, really hard and incredibly expensive and the North Koreans probably, quite sensibly, got out of the business.

Now McClatchy reports that the Swiss police issued a report challenging US assertions that North Korea is printing US$100 Supernotes:

The Swiss federal criminal police, in a report released Monday, expresses serious doubt that North Korea is capable of manufacturing the fake bills, which it said were superior to real ones.
The fact that the Swiss are questioning the veracity of the U.S. allegations against North Korea carries special weight in the insular world of banknote printing.

McClatchy quotes financial journalist Karl Bender:

"The producers of the most sophisticated products used in banknote printing are Swiss or at least of Swiss origin. That goes for the (specialty) inks and that goes for the machines," said Klaus Bender, a German foreign correspondent and the author of "Moneymakers: The Secret World of Banknote Printing."

"Can the North Koreans do it, are they doing it? The answer is couched in diplomatic language, (but) the answer is clearly no," Bender said.

In January, Bender also posted a long, technical article on what makes the US$ 100 bill so difficult to counterfeit, and does a persuasive job of debunking hardline talking points about North Korean access to presses and inks.

He also claims that Interpol’s US director convened a conference in the summer of 2006 to make the case for North Korean counterfeiting of the Supernote.

However, at the end of the one-day conference, to which even specialists from the United States had been flown in, not one single conference participant was fully convinced of the American viewpoint, according to a survey. Some were even making jokes. The South Koreans, who should really have been interested in the topic, did not even attend.

I find this interesting, because if there was a criminal case—as opposed to an unproved accusation—concerning North Korean complicity in Supernote counterfeiting, Interpol would have been carrying the ball instead of the U.S. State and Treasury Departments.

The fact that Interpol—and its highly regarded secretary general (previously the U.S. Treasury Department’s Undersecretary for Enforcement) Ron Noble, could not make the case against North Korea is of itself significant.

A few interesting elements in the McClatchy article caught my attention.

First, the notes, though perfect to the naked eye, contain microscopic errors that appear to be deliberate, in order to make the bills detectable under close examination:

The supernotes are identical to U.S. banknotes except for added distinguishing marks, which can be detected only with a magnifying glass. In addition, under ultraviolet or infrared light, stripes appear or the serial numbers disappear on the supernotes.

As a for instance, the McClatchy article shows an enlargement (reproduced here; click on the image for a nice, clear view) of the spire of Independence Hall on the back of the century note. The good note has a gap in the outline; the “bad” note has neatly closed it.

McClatchy quotes the Swiss report as saying these distinguishing marks apparently make it impossible for the notes to be passed within the US:

On their return to the U.S., the issuing bank after examination can easily distinguish the `supernotes' from originals using banknote testing equipment, due to altered infrared characteristics. For this reason, the United States over the years has hardly suffered economic damage due to the `super dollar.'

Second, considering the prodigious criminal effort that would be involved in acquiring the necessary presses and inks, and tracking 19 redesigns of the US notes (not to mention adding those puzzling markers that make the bills impossible to pass within the US), only $50 million worth of Supernotes has been seized over 16 years.

$50 million is a drop in the bucket. There are $780 billion in US greenbacks circulating now, two-thirds of them overseas.

And how long does it take to crank out $50 million in hundred dollar notes?


In theory, if North Korea were producing the notes, it could print $50 million worth of them within a few hours - as much as has been seized in nearly two decades, the report said.

Of course, the North Koreans could have ordered up another, completely perfect, set of plates and kept the presses running entirely undetectable Supernotes for the other 364 days of the year, an idea that conspiracy theorists would find irresistible...

...especially since the only way to pass a significant, obviously suspicious wad of hundreds of millions or billions in US currency, even if the bills were perfectly undetectable, would be with the collusion of Chinese or Russian banks—and their governments.

Now that's a conspiracy. Anybody want to run with that one?

Ladies and gentlemen, I present Balbina Hwang:

Balbina Hwang, a researcher at the Heritage Foundation, says the North Korean government has been making and circulating forged $100 bills for more than a decade."They produce some of the best quality supernotes," she says, adding that the North Koreans make $250 million a year from the bills. (Bill Gertz, Arrest ties Pyongyang to counterfeit $100 bills, Washington Times, September 20, 2005)

Bender treats this number with scorn, and it’s easy to see why. In a report by the Federal Reserve Board in 2002 , the total amount of counterfeit currency circulated per annum is estimated at $40 million—less than 1/10,000 of total US currency in circulation.

Given an estimated profit of 50% of face value for counterfeit currency, Hwang’s guesstimate implies the North Koreans would be circulating $500 million in funny money per year—about ten times what the U.S. government estimates total worldwide counterfeit flows to be.

But it’s interesting to have an idea of the kinds of useful if dubious assumptions the hardliners were plugging into their North Korea equations to make their policies work.

Which makes me wonder if hardline architect of the North Korea sanctions David Asher’s chain of logic went like this:

Let’s assume North Korea has the capability of forging supernotes;

then I will further assume that the notes are undetectable so we hardly ever find them;

then I will assume they are forging them in enormous quantities to cover their current account deficit;

finally I will assume that Chinese banks are knowingly accepting and laundering these funds;

Therefore I will threaten the Chinese government with a money laundering investigation under Patriot Act Section 311 unless they cease and desist in providing financial services to the North Koreans...

...and I will initiate an action against Banco Delta Asia to demonstrate the seriousness of my intentions.

I think this is as good an explanation as any for Mr. Asher’s notorious “monkey” statement:

“Banco Delta was a symbolic target. We were trying to kill the chicken to scare the monkeys. And the monkeys were big Chinese banks doing business in North Korea...and we’re not talking about tens of millions, we’re talking hundreds of millions.” David Asher, oral testimony, April 18, 2007

Suspicions of money laundering on Pyongyang’s behalf might have served as a convenient pretext for threatening China if it didn’t moderate its support of North Korea.

However, I don’t know if Mr. Asher would take such a big step on the shaky assumption that North Korea was grinding out hundreds of millions of dollars in absolutely undetectable supernotes. I suppose we’ll have to await the publication of his memoirs to learn his true feelings on the subject and whether I am pummeling a straw man on this subject.

A conspiracy theory that seems much more likely to me is that the CIA or the Russian secret service—which must have some of the most sophisticated press facilities in the world for forging every imaginable document from currencies, financial instruments, and passports in small runs to one-off picture IDs, business correspondence, and compromising photographs—would have the capacity to do a limited run of phony dollars with special markings, maybe for a sting.

Bender notes:

In light of all these facts, leading representatives of the high-security printing industry and counterfeit money investigators have been wondering for some time now what the CIA is actually doing in its secret printing works. There is a machine in this plant, which is located in a well-known city north of Washington, which is exactly of the type required for printing these super counterfeit bills.

(By the way, this statement is a lot clearer and more categorical than the clumsy translation from the Frankfurter Allgemeine Zeitung that Kevin Drum excerpted : It is in this facility, thought to be in a city north of Washington D.C., where the printing presses needed to produce the Supernotes is said to be located.)

Bender doesn’t accuse the CIA of printing the supernotes, but he does note an interesting area in which suspicions of US involvement could be tested—the color shifting ink.

Maybe, against all odds, the North Koreans were able to reverse engineer the inks.

Maybe not.

We could find out.

The top-secret color shifting ink is only manufactured by Sicpa and is exclusively reserved for the BEP [the U.S. Bureau of Engraving and Printing—ed.] ... It would be easy for the Swiss corporation to determine whether the inks on the «supernotes» really are original Sicpa inks. Secret markings known as «tagging» permit the security inks to be traced right back to an individual production batch.

However, at the Interpol conference mentioned at the beginning of this article, Sicpa of all people were conspicuous in their absence. There is a reason for their silence: BEP is a major customer and vital for Sicpa’s survival.

Interesting story.


David said...

Nice article CH.

One small footnote, the McClatchy piece notes that the report was issued Monday.

The report was placed on the Swiss Police website on Monday. However, it was in fact issued in November 2006.

Funny that UST et al have not queried it or responded to it in all this time?

Could it be they hoped no one would read it??

Computer Bruce said...

Even "undetectable" currency would still be detectable, because each U.S. Federal Reserve Note carries a registered serial number.

When wornout currency is returned to the Treasury for destruction, the serial numbers are recorded.

So, if the "undetectable" currency is in circulation, it would be found, eventually.

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Anna said...

"Funny money" sounds very funny in a political context. Clenbuterol