July 23, 2006
No Ordinary Counterfeit
By STEPHEN MIHM
On Oct. 2, 2004, the container ship Ever Unique, sailing under a
Panamanian flag from Yantai, China, berthed in the Port of Newark. As
cranes unloaded the vessel's shipping containers, which were filled
with a variety of commercial goods, dockworkers singled out a container
and placed it aboard a flatbed truck, which was driven to a warehouse a
few miles away. There, F.B.I. and Secret Service agents, acting as part
of a sting operation, gathered around the container and cracked it
open. Beneath cardboard boxes containing plastic toys, they found
counterfeit $100 bills worth more than $300,000, secreted in
false-bottomed compartments.
The counterfeits were nearly flawless. They featured the same high-tech
color-shifting ink as genuine American bills and were printed on paper
with the same precise composition of fibers. The engraved images were,
if anything, finer than those produced by the United States Bureau of
Engraving and Printing. Only when subjected to sophisticated forensic
analysis could the bills be confirmed as imitations.
Counterfeits of this superior sort - known as supernotes - had been
detected by law-enforcement officials before, elsewhere in the world,
but the Newark shipment marked their first known appearance in the
United States, at least in such large quantities. Federal agents soon
seized more shipments. Three million dollars' worth arrived on
another ship in Newark two months later; and supernotes began showing
up on the West Coast too, starting with a shipment of $700,000 that
arrived by boat in Long Beach, Calif., in May 2005, sealed in plastic
packages and wrapped mummy-style in bolts of cloth.
In the weeks and months that followed, federal investigators rounded up
a handful of counterfeiting suspects in a series of operations
code-named Royal Charm and Smoking Dragon. This past August, in the
wake of the arrests, Justice Department officials unsealed indictments
in New Jersey and California that revealed that the counterfeits were
purchased and then seized as part of an operation that ensnared several
individuals accused of being smugglers and arms traffickers, some of
whom were suspected of having connections to international crime rings
based in Southeast Asia.
The arrests also prompted a more momentous accusation. After the
indictments were released, U.S. government and law-enforcement
officials began to say in public something that they had long said in
private: the counterfeits were being manufactured not by small-time
crooks or even sophisticated criminal cartels but by the government of
North Korea. "The North Koreans have denied that they are engaged in
the distribution and manufacture of counterfeits, but the evidence is
overwhelming that they are," Daniel Glaser, deputy assistant
secretary for terrorist financing and financial crimes in the Treasury
Department, told me recently. "There's no question of North
Korea's involvement."
Last September, the Treasury Department took action to signal its
displeasure. The department announced that it was designating Banco
Delta Asia, a bank in Macao with close ties to North Korea, a
"primary money-laundering concern," a declaration that ultimately
led to the shutting down of the bank and the freezing of several key
overseas accounts belonging to members of North Korea's ruling elite.
In a public statement, Treasury officials accused Banco Delta Asia of
facilitating North Korea's illicit activities by, among other things,
accepting "large deposits of cash" from North Korea, "including
counterfeit U.S. currency, and agreeing to place that currency into
circulation."
The counterfeiting of American currency by North Korea might seem, to
some, to be a minor provocation by that country's standards. North
Korea, after all, has exported missile technology in blatant disregard
of international norms; engaged in a decades-long campaign of
kidnapping citizens of other countries; abandoned pledges not to pursue
nuclear weapons; and most recently, on July 4, launched ballistic
missiles in defiance of warnings from several countries, including the
United States.
But several current and former Bush administration officials whom I
spoke with several months ago maintain that the counterfeiting is in
important ways a comparable outrage. Michael Green, a former point man
for Asia on the National Security Council, told me that in the past,
counterfeiting has been seen as an "act of war." A current senior
administration official, who was granted anonymity because of the
sensitivity of relations between the United States and North Korea,
agreed that the counterfeiting could be construed by some as a hostile
act against another nation under international law and added that the
counterfeits, by creating mistrust in the American currency, posed a
"threat to the American people."
Whether counterfeiting constitutes an economic threat, the issue of
North Korean counterfeiting is aggravating diplomatic relations between
the two countries. According to some analysts, the freezing of North
Korea's bank accounts helps explain the regime's decision to launch
its missiles on July 4. Bill Richardson, the governor of New Mexico and
a former U.S. ambassador to the United Nations, visited North Korea
last fall, not long after the Treasury Department's crackdown. When I
spoke with him in mid-July, he said that the missile launch was in part
a protest of the department's actions. "When I was in Pyongyang in
October," he said, "my interlocutor raised the counterfeiting issue
and the freezing of the assets as a major irritant for the
government." He continued, "The counterfeiting issue, and the
crackdown on Banco Delta Asia, is a major factor which is contributing
to Kim Jong Il's posturing."
How much of a concern should the counterfeiting be? Is it worth adding
the issue to an already volatile diplomatic situation? The current
South Korean government, which has made d=E9tente with North Korea a
centerpiece of its foreign policy, has shied away from an open
confrontation with the regime over the issue. Even many American
law-enforcement officials who are upset that North Korea is
counterfeiting nonetheless question the view that the counterfeiting
poses an urgent threat. In Congressional testimony delivered in April,
Michael Merritt, deputy assistant director of investigations for the
Secret Service, which is responsible for protecting the nation's
currency from counterfeiters, said that the supernote was "unlikely
to adversely impact the U.S. economy based on the comparatively low
volume of notes passed."
The Bush administration, though, is taking a hard line. In response to
a question after a speech in Philadelphia in December, President Bush
himself suggested that counterfeiting is among the regime's gravest
affronts. "North Korea's a country that has declared boldly
they've got nuclear weapons," he said. "They counterfeit our
money. And they're starving their people to death."
Funny Money
In December 1989, while counting a stack of $100 bills, an experienced
money handler in the Central Bank of the Philippines became suspicious
about one bill in particular. It passed the usual tests for
authenticity but still felt a bit odd. The bill eventually found its
way to the offices of the United States Secret Service. All
counterfeits sent to the Secret Service headquarters, in Washington,
are examined under a microscope, scrutinized in ultraviolet light and
otherwise dissected to reveal their flaws and shortcomings, as well as
the printing techniques used in their manufacture. This information is
then cross-checked with a database of all known counterfeits.
As the mystery note underwent the usual scrutiny, it became apparent
that this was no ordinary counterfeit. For starters, it was printed on
paper made with the appropriate mix of three-quarters cotton and
one-quarter linen of real U.S. currency. Making secure paper with this
mix requires a special paper-making machine rarely seen outside the
United States.
In addition, the note was manufactured using an intaglio press, the
most advanced form of currency-printing technology available. These
intaglio presses are far more expensive than ordinary offset,
typographic or lithograhic presses, which yield inferior counterfeits.
An intaglio press coats the printing plates with ink, and then wipes
the surface clean, leaving behind ink in the recesses of the engraving.
The press then brings paper and plate together under pressure, so that
the ink is forced out of the recessed lines and deposited on the paper
in relief. While counterfeits made using the intaglio process had been
seen on rare occasions before, this note surpassed all of them in the
quality of the engraving.
As with other new species of counterfeits arriving in the offices of
the Secret Service, the bill was given its own flat-file drawer and
christened with a sequential number: C-14342. In time, its remarkable
quality earned it its more informal honorific: the supernote. But as
soon became clear, the supernote was merely one member of a family of
counterfeit notes. Technicians at the Secret Service soon linked it to
another intaglio note detected around the same time, C-14403. This
counterfeit had a few defects that the note from the Philippines did
not, suggesting it was manufactured before C-14342. Nonetheless,
C-14342 was soon known by the name Parent Note 14342, or PN-14342.
The Secret Service has drawn up what looks like a genealogical chart of
these and related bills, which agents showed me during a visit to their
Washington offices this spring. The chart displays the many members of
the supernote clan: C-21555, for example, the first "big head" $100
(so-called because of the design of the most recent U.S. bills), which
was initially identified in London; and C-22500, a more recent arrival
that appeared in Macao. The family, which now has 19 members and
remains unparalleled even in the world of high-quality counterfeits,
also includes two $50 notes: C-20000, a small-head supernote that
appeared in Athens, in June 1995; and C-22160, a big-head version,
first sighted in Sofia, Bulgaria.
Thanks to sophisticated tools, including mass spectroscopy and
near-infra-red analysis, along with old-fashioned visual inspection,
the labs of the Secret Service have established genetic links between
the family members. These links are not a matter of resemblance so much
as they are an indication of a common ancestry: the notes in the
PN-14342 family have been created by an individual or an organization
using the same equipment and the same materials, and most likely
operating from a single location.
As the number of supernotes multiplied, the question arose: who created
them? In theory, only governments can buy intaglio printing presses
used for making money, and only a handful of companies sell them. Those
facts alone pointed toward government involvement, but for some time
there was no consensus as to which nation was behind the
counterfeiting. Many of the supernotes surfaced in the Middle East,
notably in the Bekaa Valley of Lebanon and in Tehran. In 1992, Bill
McCollum, a Florida congressman and chairman of the House Task Force on
Terrorism and Unconventional Warfare, issued a report accusing Iran of
printing the supernotes. The report estimated that the value of
supernotes in circulation might eventually approach "billions."
The Secret Service, however, distanced itself from this accusation. In
a letter written in 1995 in response to a Government Accounting Office
report on counterfeiting overseas, the Secret Service called the task
force's allegations "unsubstantiated" and characterized its
conclusions as being based on "rumor and innuendo." In reality,
evidence was pointing elsewhere.
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
1990's, 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 Korea's 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 country's dictatorial ruler, Kim Jong Il,
dating back to the 1970's, years before he took over the reins of
power from his father, the country's 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 office's 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 Il's own rise to power through the
party apparatus. In the early 70's, after helping his father purge
the ranks of the Korean Workers' Party of competing factions, Kim
Jong Il assumed control of North Korea's covert operations, mostly
involving South Korean targets.
In the mid-70's, 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
Korea's 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 Korea's 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 regime's
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 country's
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: "Let's Eat Two Meals a Day" was one of the era's
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 didn't add up. It didn't 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 Korea's 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 Korea's 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 1990's, for
instance, British detectives began tracking Sean Garland, the leader of
the Official Irish Republican Army, a Marxist splinter group of the
I=2ER.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 10's,
20's, 50's and 100's 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=2EV.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. It's 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 McCollum's task force in the early
1990's, 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
1990's, 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 Korea's 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. "It's 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 they're going to
counterfeit our currency the entire time they're engaged in
diplomatic negotiations, what does that say about their sincerity?"
he asked me. "How can they want normalization with a country whose
currency they're counterfeiting? How can they expect it?"
However the diplomatic standoff is resolved, Asher said that he
believes North Korea won't 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 it's a routine update that's
being instigated by one country: North Korea."
Stephen Mihm teaches history at the University of Georgia. He is at
work on two books about the history of counterfeiting in the United
States, one to be published by Harvard University Press and the other
by HarperCollins.
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