North Korea: The Secrets Of Office 39

Courtesy of The Financial Times, an interesting article on how a shadowy organization’s alliance with the Queensway Group is helping Pyongyang bring in cash in the face of isolation:

In the middle of last year, the residents of Pyongyang began to notice a new fleet of taxis operating in the North Korean capital. With their maroon and gold bodywork, the gleaming sedans were easy to spot as they cruised the city’s orderly streets. The cars bore the taxi company’s logo: KKG.

The swiftness with which KKG edged out rival taxi operators — one of which was rumoured to be linked to the security services — piqued curiosity about who was behind the new outfit. The same logo has been spotted on 4x4s, on a billboard displaying a planned riverside property development and on buses at Pyongyang airport. Like other North Korean cabbies, the drivers of the KKG taxis asked their fares to pay in foreign currency: mainly Chinese renminbi, but also euros or dollars. And therein lay a clue.

For all their rhetoric about the paramount need to develop a nuclear arsenal, North Korea’s rulers have no more pressing task than bringing in foreign exchange. Without it, experts say, the regime would be at risk of crumbling under international sanctions. Taxi fares alone could hardly fill the gap. But the KKG cabs are just a small part of a much larger endeavour.

The KKG taxi fleet is one product of a partnership between a group of Hong Kong-based investors and a secretive arm of the North Korean state that seeks to cut international business deals, a Financial Times investigation has found.

The North Korean government’s alliance with the so-called Queensway Group, a syndicate of businesspeople with a record of forging ties with pariah states, is opaque. But it seems clear that it is one of a handful of crucial business ventures that allow the world’s most isolated regime to sustain itself.

“KKG is one of several joint ventures in North Korea and it’s one of the biggest ones,” says an Asian official who asked not to be named because of the sensitivity of the matter. “Most North Korean companies are under US or EU or UN sanctions. They always change names, like their ships change flags. But most of the companies belong to military leaders or the ruling Workers’ party of Korea. And they are on the sanctions list. So they need any foreign company that could give them an opportunity to trade with foreign countries.”

While western powers’ relations with Iran and Cuba appear to be thawing, the hermit kingdom’s political isolation is as deep as ever. Even China, long an ally, has grown frostier with Pyongyang in recent years. A UN investigation last year described “unspeakable atrocities” perpetrated against the inmates of its prison camps. The sabre-rattling under Kim Jong Un — including a cyber attack against Sony that Washington blamed on Pyongyang and last month’s test-firing of a ballistic missile from a submarine — has added fresh impetus to efforts to understand how the regime plugs itself into the world economy.

The domestic economy has either contracted or grown at 1 per cent in recent years, according to South Korean government estimates based on limited data, with annual exports of about $3bn falling well short of the import bill. As prices for the coal and other commodities that North Korea exports to China fall, business networks such as the one behind KKG are likely to become increasingly vital in garnering crucial foreign exchange for the regime.

The North Korean end of the KKG network leads to a shadowy organisation called Office 39 of the Workers’ party, according to Asian and US officials. The US has described Office 39 as “a secretive branch of the government?.?.?.?that provides critical support to [the] North Korean leadership in part through engaging in illicit economic activities and managing slush funds, and generating revenues for the leadership”.

North Korea’s rulers have had to resort to such tactics after years of international sanctions. Imposed in response to nuclear tests in 2006, 2009 and 2013, the sanctions comprise an arms embargo designed to stop North Korea trading weapons and sourcing parts for its atomic programme; an asset freeze to apply financial pressure to the leadership; and a ban on luxury goods that is meant to deprive senior figures of the trappings of power, from lobster and cigarillos to furs and yachts. The UN sets the overall structure of sanctions; states decide what to prohibit.

But annual reports by a UN panel that monitors the sanctions describe a game of cat-and-mouse, as North Korea’s rulers use an ever-shifting web of subterfuge to disguise commercial activities abroad. The most recent UN report, sent to the Security Council in February, documents arms sales in Africa and the use of “flags of convenience” to conceal North Korean control of shipping. The UN report also suggests that “legitimate business structures have been used for illegitimate activities”. In 2010, the US added Office 39 to its sanctions list. The EU followed suit.

North Korea has brought in foreign exchange by exporting guns, methamphetamines, mushrooms and indentured labourers. Perhaps most lucratively, it also sends textiles, coal and minerals across its border with China. Andrea Berger, a North Korea expert at the UK’s Royal United Services Institute, a think-tank, says: “Office 39 is extremely important. It’s generally regarded as the regime slush fund.”

The EU says Office 39 reported directly to Kim Jong Il, North Korea’s ruler from 1994 until his death in 2011, when his son, Kim Jong Un, took over. Office 39 is “among the most important organisations assigned with currency and merchandise acquisition”, the EU says. The US and the EU also imposed sanctions on what they said were Office 39 front companies. One, which is known as Korea Daesong General Trading Corporation and several similar names, “is used to facilitate foreign transactions on behalf of Office 39”, the US Treasury said. The company did not respond to a request for comment. The EU describes it as part of the broader Daesong group, “the largest company group of the country”.

According to the Asian official and JR Mailey, a researcher at the Pentagon’s Africa Center for Strategic Studies, Daesong is one of the backers behind KKG. Another, according to these people and court documents from Hong Kong, is the business network known informally to those who have studied it as Queensway Group, after the address of its headquarters at 88 Queensway in Hong Kong’s financial district.

Global footprint

Over the past decade, the Queensway Group has built a multi-billion-dollar corporate empire that stretches from Zimbabwe to Manhattan.

The precise nature of the KKG partnership is unclear — whether it is an incorporated joint venture or a more informal arrangement. Searches by the FT yielded no records for a company called KKG that matched the profile of the one active in North Korea. Nor did searches in English and Korean for Kumgang Economic Development Corporation, KKG’s name when written in Korean characters. That suggests that KKG is either simply a brand, or, if it is a company, it is registered within North Korea, which does not keep company records online. The FT was unable to find contact details for KKG.

The relationship between KKG’s backers was formed around the end of 2006. According to the Asian official, details of whose account were corroborated by others, the Queensway Group’s foray into North Korea was spearheaded by the frontman who has advanced its interests in Africa and elsewhere. He goes by at least seven names — but is best known as Sam Pa.

An FT investigation last year found that Mr Pa and his fellow founders of the Queensway Group have connections to powerful interests in Beijing, including Chinese intelligence and state-owned companies. They also have ties to big western groups: Queensway Group companies are in business with BP in Angola, Glencore in Guinea and others.

Mr Pa did not respond to requests for comment. Only one of the Queensway Group figures and companies contacted for comment replied. Jee Kin Wee, group head of legal at China Sonangol’s arm in Singapore, says his company and KKG “are separate and unrelated companies”. He did not clarify the link between his company in Singapore and its sister company, China Sonangol International Holding, registered at the Queensway address in Hong Kong. That company is jointly owned by Mr Pa’s business associates and Angola’s state oil group. It is named in Hong Kong court documents as having made payments related to KKG projects.

Mr Wee did not answer specific questions about the Queensway Group’s dealings in North Korea. But he stressed that “China enjoys full diplomatic and economic relations with North Korea and?.?.?.?scores of countries around the world, including EU countries, have bilateral diplomatic relations with North Korea”.

Mr Pa is said to have met senior North Korean officials as he began his courtship of the regime in 2006. At the time, Pyongyang needed new partners. It had found itself increasingly locked out of the global financial system. A year earlier, the US had accused Macau-based Banco Delta Asia of laundering money for the regime, causing the near-collapse of that bank and prompting others to avoid North Korea.

Mr Pa struck a deal with Daesong for an eclectic range of North Korean projects, the Asian official says, ranging from power plants to mining to fisheries. Money started to flow — although it is unclear how much flowed directly into North Korea. A ledger published in a 2013 Hong Kong high court ruling in a dispute between some of Mr Pa’s business associates refers to Queensway Group payments including “Pyongyang city bus system”, “Korea airport”, “Korea: 5,000 tons of soyabean oil” and “exhibition sponsored by the Korean consul”. There are no further details. But the list of payments also contains references to KKG.

Corporate presence

KKG first came to the attention of Pyongyang’s residents around 2008. That year, photographs posted online showed a billboard displaying a spectacular image of a planned property development close to the Pyongyang Mullet Soup Restaurant. Located by a bend in the Taedong River, the planned properties included a pair of shimmering skyscrapers that would not have looked out of place in London’s riverside Canary Wharf business district. The new development was to be called KKG Avenue and bore the same KKG logo that would appear on Pyongyang taxis.

KKG Avenue made little headway beyond some rickety hoardings and preliminary work on foundations, according to foreign officials, visitors to Pyongyang, photos and satellite images.

Despite such setbacks, KKG has been described at least once as a major North Korean company. A 2014 presentation by Hawtai Motor Group, a privately owned Chinese carmaker based in Tianjin, indicates that the company supplied the vehicles for the KKG taxi fleet. The presentation describes KKG as one of “North Korea’s largest state-owned enterprises”. Hawtai declined to comment.

Some who have observed Queensway’s thrust into North Korea say it is seeking to replicate a model it pioneered in Africa: striking infrastructure-for-natural resources deals with oppressive governments such as Angola’s, Zimbabwe’s and a military junta that briefly ruled Guinea. The group appears to have set its sights on North Korea’s untapped potential for oil.

Mr Mailey, who was one of the authors of a 2009 US congressional report who recently published a second detailed study of the group, says: “The KKG taxis might earn the regime some foreign currency from tourists visiting Pyongyang, but most signs point to the oil and mining sectors as the Queensway Group’s true target.”

This entry was posted on Wednesday, June 24th, 2015 at 10:23 am and is filed under North Korea.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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