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North Korea's Counterfeit Goods Targeted

As the North Korea nuclear crisis deepens, an interagency team inside the Bush administration is working with East Asian governments to curb what U.S. officials say is Pyongyang's booming trade in counterfeit cigarettes, pharmaceuticals and currency.

The Secret Service also is pursuing a criminal investigation of North Korean entities for their alleged involvement in making counterfeit dollars in Asia, according to an official close to the investigation. If a case goes forward, it would mark the first time a North Korean entity would be charged in a U.S. court with dealing in illicit businesses.

Larry Wilkerson, who was former Secretary of State Colin Powell's chief of staff, said in an interview that the effort -- which officials named the Illicit Activities Initiative -- was launched to augment, rather than undercut, diplomacy. He said the State Department believed that to get Pyongyang to give up its nuclear program, the U.S. would have to offer inducements. Washington also must show that "we could severely cut off North Korea's economic lifeline" if the country's leader, Kim Jong Il, doesn't come to the negotiating table, Mr. Wilkerson says.

The North Korea initiative, Mr. Wilkerson says, was launched by the State Department in support of a wider Bush-administration effort to choke off the global trade in weapons of mass destruction. Yesterday, the White House touted its Proliferation Security Initiative, which calls for the interdiction of suspect international ships, for notching nearly a dozen successes in curtailing missile and nuclear-related technology headed to countries such as Iran.

President Bush said in a news conference yesterday that the U.S. remains committed to a diplomatic initiative to disarm North Korea.

"The best way to convince Kim Jong Il to ... give up his weapons is to have more than one voice saying the same thing," he said.

During the past nine months alone, customs agents in South Korea and Taiwan -- to whom U.S. officials say they are providing intelligence -- have seized shipments of counterfeit cigarettes valued in the millions of dollars, according to officials in these countries. In many cases, North Korea isn't believed to be making the cigarettes but probably is allowing criminal syndicates to produce fake Marlboro, Mild Seven and State Express 555 smokes inside its borders to gain new sources of income as their revenue from ballistic-missile exports dwindles.

As recently as 2001, Pyongyang earned about $560 million from missile sales to countries such as Iran, Pakistan and Libya, according to an estimate by U.S. Forces Korea, the American military command in South Korea. This revenue has slipped as U.S. authorities have worked with allies, through programs like the Proliferation Security Initiative, to curb a global black market in weapons of mass destruction. International focus on Pakistan's and Libya's weapons trade has helped dry up traditional markets for North Korean arms, say defense analysts.

U.S. officials working with the Bush administration's interagency team, called the North Korea Working Group, say Washington is focused on cutting off Pyongyang's remaining illicit hard-currency earnings. In recent days, this initiative has grown in importance, they say, as talks between the U.S. and North Korea show few signs of progress.

Through the 1990s, the U.S. government tended to downplay allegations of North Korean involvement in distributing narcotics and counterfeit currencies. Washington's primary agenda of dismantling Pyongyang's nuclear and missile programs was seen as at risk of being undermined by any attempt to combat North Korea's alleged involvement in illicit businesses.

A formal labeling of North Korea as a narcotics-producing country, U.S. officials say, would force the U.S. to stop shipments of nonhumanitarian aid, causing it to lose a potential tool in bargaining with the North Koreans.

In 2003, Australia intercepted a heroin-smuggling ship from North Korea after a three-day chase.

In recent years, this attitude within the State Department and other U.S. agencies has shifted. Members of Congress are pushing Washington to hold Pyongyang accountable for its alleged dealings in heroin and methamphetamines, accounts of which date to the 1970s. The Bush administration also sees North Korea's illicit businesses as a fundamental part of Kim Jong Il's program to develop weapons of mass destruction.

"Before, we just looked at the product, but now we're looking at the profits," says Raphael Perl, a senior analyst at the Congressional Research Service, who tracks the activities of the North Korea Working Group. "We now realize that these profits are funding the nuclear program."

In all, Mr. Perl estimates North Korea now earns $500 million annually from sales of counterfeit products. That is up from $100 million before Sept. 11, 2001. North Korea's total annual economic output in 2004 is estimated at $20.8 billion, according to the Bank of Korea, South Korea's central bank.

Within this context, the North Korea Working Group has gained traction over the past year, say officials who have worked with it. The interagency body includes members of the Treasury Department, Pentagon, Secret Service and Central Intelligence Agency and has been run from the Bureau of East Asian and Pacific Affairs at the State Department. A former financier and North Asia specialist at the State Department, David Asher, has been the point man for the initiative, say officials who have worked with it.

Mr. Asher, a State Department adviser rather than a career foreign-service officer, lived in Tokyo in the 1980s and '90s, when he studied the business dealings of Japan's North Korean population.

He has traveled across Asia in recent years to gather intelligence on Pyongyang's overseas businesses, say former State Department colleagues. Mr. Asher visited China's eastern border with North Korea to learn about Pyongyang's alleged smuggling operations and met with South Korean and Australian customs agents who have been involved in containing North Korea's narcotics trade.

During the past year, the North Korea Working Group has studied North Korea's alleged trafficking of counterfeit cigarettes, which seems to have climbed as military sales have dwindled, U.S. officials says.

In December 2004, customs officials at Busan, South Korea's largest port, intercepted three containers stuffed with 2.9 million packs of counterfeit cigarettes, including Marlboro, Mild Seven and State Express 555. The cigarettes, which customs officials valued at about $5.9 million, had arrived on a Chinese ship that had visited the North Korean port of Rajin before arriving in Busan.

South Korean customs officials, however, said they couldn't be sure whether the contraband had come from North Korea. "The fact that the ships stopped in Rajin doesn't mean the cigarettes were produced in North Korea," cautions Kim Yourp, chief of the investigation section of the Korea Customs Service in Busan. They could have been made in China -- widely believed to be the world's No. 1 maker of fake cigarettes -- where the ship also made stops, he said.

An executive at a multinational tobacco company said the cigarettes do appear to have come from North Korea. "They match samples we believe originated in North Korea," the executive said. But, he said, "it's impossible to be absolutely sure."

U.S. officials also are watching North Korea's alleged counterfeit-dollar operations. In August, the Secret Service worked with Taiwan's Anti-Counterfeiting Task Force to uncover $140,000 of fake U.S. currency. Taiwanese investigators today say the stash could be part of a larger counterfeit-dollar operation run out of North Korea that could have as much as $20 million in fakes in circulation.

In a speech last month, Douglas H. Paal, director of the American Institute in Taiwan, Washington's de facto embassy in Taipei, called the discovery of a large quantity of North Korean super notes -- or high-quality counterfeit U.S. dollars -- circulating in Taiwan over the summer a "frightening wake-up call."

Write to Jay Solomon at jay.solomon@wsj.com and Gordon Fairclough at gordon.fairclough@wsj.com

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