The shadowy world of North Korea’s palace economy

On the August 29, Joongang Daily, one of South Korea’s major national newspapers, broke sensational news. According to an unnamed high level source, a senior North Korean banking official named Yun Tae-hyong, recently disappeared while on a business trip to Russia. Reportedly, he took about $5m from Daesong Bank.

Frankly, one has to be quite careful when it comes to such stories and reports. In the past, the South Korean and Japanese media has frequently reported rumours about defections that eventually proved to be false. Nonetheless, Joongang Daily is a reputable newspaper, not known for its sensationalism. Thus, its editors were probably quite certain when they decided to publish such allegations. And it should also be noted that it fits in well with what we have been hearing out of Pyongyang of late.

Daesong Bank, where Yun was an official, is a very peculiar institution. It is for all intents and purposes the command centre of what is known as North Korea’s “palace economy” – a network of trade companies, industrial enterprises, mines and banks that are not managed by the North Korean cabinet, but rather are under the immediate control of the ruling Korean Workers’ Party (the local incarnation of the communist party) and its oligarchy.

Daesong Bank and associated institutions are often described as the managers of the Kim dynasty’s slush funds. It is often stated that the major source of income for the “palace economy” is contraband (i.e. narcotics, counterfeit $100 bills etc). While such reports are not completely lacking foundation, they are seriously exaggerated. The actual picture is somewhat less menacing, but perhaps more interesting.

From smuggling drugs to banking

The North Korean “palace economy” began to emerge in the mid-1970s. Around this time, the North Korean state quietly abandoned its policy of centralised foreign trade, which was typical for the communist regimes. From the 1970s, the larger North Korean government agencies and industrial enterprises were allowed (indeed, encouraged) to trade with overseas partners directly.

In the late 1970s, a multitude of foreign trade companies appeared in North Korea. These companies usually had flowery names like “Morning Shine” (Zogwang), “Jade Stream” (Okryu) or “New Rise” (Sinhung). Behind such lofty brands there were a number of industrial enterprises and bureaucratic agencies, some of which you would not normally associate with foreign trade. Indeed, foreign trade companies were founded, among others, by such institutions as the department of logistics of the Korean People’s Army, the chief political directorate of North Korea”s police and by the security police.

These foreign trade companies were created to earn foreign currency, which was then meant to be used for the needs of their founding agencies. In real life, however, most of these companies were highly autonomous and, with the passage of time, their managers adopted truly capitalist ways of management, pocketing significant part of profits. This process accelerated since the late 1990s, when the number of such companies increased (roughly 300 such companies are known to exist today).

From the very beginning a special role was played by a number of companies bearing the name Daesong (meaning “great prosperity”). Those in the know have always been aware that these companies are controlled by the mysterious Bureau 39, a key part of the top bureaucracy of the Korean Workers’ Party. It was only logical that the party would be permitted to have its own money earning machinery – after all, far less significant institutions had such powers from the late 1970s. However, the party in North Korea is not just an institution, it is the single most powerful political hierarchy in the country. Thus, one should not be surprised that Bureau 39 and its official face, the Daesong group of companies, was given significant privileges (for example, monopoly rights on gold mining and gold export).

But what about frequent media accusations that drug trafficking and the counterfeiting of US banknotes are done by the Bureau 39? Indeed, from the mid-1970s and until the early 2000s, the North Korean government used to be deeply involved in the production and international smuggling of opium and other narcotics. Its involvement with counterfeiting, while not completely proven, appears to be highly likely. It seems that these and operations were indeed controlled by Bureau 39, at least partially, through some of the companies, which are part of the Daesong group (and with likely involvement of Daesong Bank).

Nonetheless, the oft-repeated description of the Daesong Bank as solely or largely the financial arm of a vast drug smuggling and counterfeiting operation is misleading. Much of its assets are derived from far more mundane commercial activities – the sale of seafood, gold, coal and iron ore, export of labour and the like. It is true that Bureau 39 (and, hence, Daesong group) makes some money from illegal commerce, but by no means does all its revenue come from illegal sources.

It is has been stated that the Daesong bank and other institutions affiliated with Bureau 39 are the main provider of financial resources for the North Korean missile and nuclear programme. This accusation appears to be more dubious: It seems that most of the financial burden of nuclear and missile development is shouldered by other agencies, many of which have their own networks of foreign currency earning companies.

Escaping death

There is little doubt that Daesong Bank and other companies subordinated to Bureau 39 are probably involved in nuclear and missile programmes from time to time, but their major mission is different. They don’t exist to clandestinely purchase uranium enrichment equipment or long-range missile guiding systems. Instead, they were principally created to finance the luxurious lifestyle of the Kim dynasty member and their close associates.

This is not a cheap task. Last year, Dennis Rodman, not a person to be easily impressed by luxury, expressed his astonishment after his visit to one of Kim Jong Un’s countryside palaces. The eccentric sport star described the lifestyle there as “a seven-star party“, where only a small group of private guests were present. Needless to say, such palaces, parties and yachts do not come cheaply, and the medical expenses for the gerontocracy that is North Korea’s top elite are not cheap either. Paying for all this, as well as amassing a currency reserve for a political rainy day, is the major operating rationale behind the existence of Bureau 39 and its affiliates.

We do not know what made Yun Tae-hyong take flight (assuming, of course, that reports are indeed true). Nonetheless, it might have something to do with a recent murderous feud in the Pyongyang royal family. In December of last year, the Supreme Leader and Marshal Kim Jong Un had his uncle Chang Song-taek arrested and executed – an unprecedented event in North Korean history.

In the following months, a large purge of Chang’s family and associates ensued. Chang and his coterie had been deeply involved with the activities of the Bureau 39. It is not surprising then that many of the key figures in the “palace economy”, being former associates of Chang, are now under serious threat. It is quite possible, then, that Yun Tae-hyong had good reason to believe he would soon be recalled (or abducted) to Pyongyang, and thus decided to do a runner.

At any rate, his escape (if successful) may turn out to be the most important defection since Hwang Jang-yop, the creator of North Korea’s official Juche ideology, who fled to South Korea in 1997. Yun Tae-hyong knows a lot about how the North Korean economy actually functions as well as about illegal banking operations, insurance fraud, smuggling and the lifestyle of the North Korean top leaders. The disclosure of this information will greatly damage North Korea’s political, diplomatic and operational capabilities. And of course, this unprecedented escape seemingly confirms that not everything is as quiet as it might appear in Pyongyang.

Andrei Lankov is professor of Korean Studies at Kookmin University, Seoul. He is the author of The Real North Korea: Life and Politics in the Failed Stalinist Utopia.

Follow him on Twitter: @andreilankov