[Senate Hearing 109-887]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 109-887
 
                 NORTH KOREA: ILLICIT ACTIVITY FUNDING
                               THE REGIME
=======================================================================



                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                     INFORMATION, AND INTERNATIONAL
                         SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 25, 2006

                               __________

        Available via http://www.access.gpo.gov/congress/senate

       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs



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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

           Michael D. Bopp, Staff Director and Chief Counsel
   Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL 
                         SECURITY SUBCOMMITTEE

                     TOM COBURN, Oklahoma, Chairman
TED STEVENS, Alaska                  THOMAS CARPER, Delaware
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
LINCOLN D. CHAFEE, Rhode Island      DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia             MARK PRYOR, Arkansas

                      Katy French, Staff Director
                 Sheila Murphy, Minority Staff Director
            John Kilvington, Minority Deputy Staff Director
                       Liz Scranton, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Coburn...............................................     1
    Senator Carper...............................................     3

                               WITNESSES
                        Tuesday, April 25, 2006

Peter A. Prahar, Director, Office of Africa, Asia and Europe 
  Programs, Bureau for International Narcotics and Law 
  Enforcement Affairs, U.S. Department of State..................     4
Michael Merritt, Deputy Assistant Director, Office of 
  Investigations, United States Secret Service, U.S. Department 
  of Homeland Security...........................................     6
Seong Min Kim, Vice Chairman of the Exile Committee for North 
  Korea Democracy, and President, Free North Korea Radio.........    15
David L. Asher, Institute for Defense Analysis...................    17
Chuck Downs, Author, ``Over the Line: North Korea's Negotiating 
  Strategy''.....................................................    19
Marcus Noland, Senior Fellow, Institute for International 
  Economics......................................................    21

                     Alphabetical List of Witnesses

Asher, David L.:
    Testimony....................................................    17
    Prepared statement...........................................    57
Downs, Chuck:
    Testimony....................................................    19
    Prepared statement...........................................    69
Kim, Seong Min:
    Testimony....................................................    15
    Prepared statement...........................................    52
Merritt, Michael:
    Testimony....................................................     6
    Prepared statement...........................................    49
Noland, Marcus:
    Testimony....................................................    21
    Prepared statement...........................................    75
Prahar, Peter:
    Testimony....................................................     4
    Prepared statement...........................................    35

                                APPENDIX

Chart submitted for the Record by Senator Coburn entitled 
  ``Uncovering Supernotes''......................................    33
Chart submitted for the Record by Senator Coburn entitled 
  ``Satellite Image of the Korean Peninsula''....................    34
Questions and Responses submitted for the Record from:
    Mr. Phahar...................................................    86
    Mr. Merritt..................................................    93


            NORTH KOREA: ILLICIT ACTIVITY FUNDING THE REGIME

                              ----------                              


                        TUESDAY, APRIL 25, 2006

                                   U.S. Senate,    
          Subcommittee on Federal Financial Management,    
      Government Information, and International Security,  
                      of the Committee on Homeland Security
                                          and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:30 p.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Tom Coburn, 
Chairman of the Subcommittee, presiding.
    Present: Senators Coburn and Carper.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. The Subcommittee of the Homeland Security 
Committee on Federal Financial Management, Government 
Information, and International Security will come to order. I 
want to welcome all of our guests. Thank you for being here, 
those that are testifying, as well.
    The Orwellian, so-called ``Democratic People's Republic'' 
of Korea, otherwise known as North Korea, is a rogue nation and 
one of the most dangerous regimes in the world. North Korea is 
a closed society under the grip of the ruthless dictator, Kim 
Jong-Il. From the little we know about this secretive 
dictatorship, it is clear that there is little the regime won't 
do in order to increase its stranglehold of power and its 
threat to the world.
    While the attention of the world is focused on nuclear 
proliferation in Iran, North Korea is continuing its own 
dangerous proliferation. Since the last decade, when we heard 
the same platitudes from North Korea that we are hearing today 
from Iran--about so-called ``peaceful nuclear energy'' 
pursuits--we have instead seen the regime develop nuclear 
weapons and sell their technologies to Iran and others. Just 
recently, we've heard reports that North Korea shipped missiles 
to the Iranians. It is my hope that the United States is 
aggressively working with South Korea and other allies to 
instigate a rigorous interdiction policy to prevent such 
devastating shipments from occurring in the future.
    But the purpose of this hearing is to explore other facets 
of North Korea's agenda beyond weapons proliferation, although, 
as we will see, these illicit activities are in no way 
independent of weapons proliferation. The regime of Kim Jong-
Il, including its own nuclear program as well as its support of 
terrorist states, receives much of its funding from a vast 
criminal network of state-sponsored illicit activity. North 
Korea engages in drug trafficking, counterfeiting of U.S. 
currency, counterfeiting of products, including 
pharmaceuticals, and slave labor producing goods it then 
exports, and also slave labor in foreign countries.
    The unclassified information that we know about these 
activities leaves no doubt that they are, in fact, state-
sponsored. In the criminal cases that have been made public, 
North Korean diplomats and state-owned companies were directly 
involved in activities such as narcotics trafficking and money 
laundering. Testimony from North Korean defectors describes 
with great detail the horrifying conditions of the political 
prisons and concentration camps inside of North Korea and the 
forced-labor farms and factories that are owned by the North 
Korean Government and operated in places like the Czech 
Republic, Russia, Libya, Bulgaria, Saudi Arabia, and Angola.
    The income from these illicit activities is substantial and 
provides a reliable revenue stream supporting the regime's 
weapons programs, both internal and with its terrorist allies. 
Experts say that this state-sponsored criminal network is 
generating between $500 million and $1 billion annually. With 
income this substantial, it is easy to see why the North Korean 
regime is still able to pursue its proliferation agenda despite 
sanctions and isolation.
    Drug smuggling, counterfeiting, and slave labor are 
integral to sustaining the regime's agenda, including 
bolstering the power of the government, maintaining oppressive 
control over its citizens, feeding and equipping an enormous 
military force, and continuing nuclear weapons proliferation. 
By cracking down on this illicit activity, the United States 
could substantially erode this economic ``crutch'' which 
enables the regime to remain hostile and unresponsive at the 
Six Party negotiation table.
    It is imperative that our North Korean policy is 
comprehensive--utilizing all intelligence, all government 
expertise and leverage, and implementing every statutory tool 
at our disposal to protect Americans, South Koreans, and other 
allies, and even the unfortunate innocent Korean population 
from the dangers of Kim Jong-Il's tyrannical rule.
    This week is North Korean Freedom Week. Some of our 
witnesses and many of those who helped us in preparing for this 
hearing are people who courageously defected from North Korea 
at great personal peril. I would like to take a moment to honor 
these men and women by recognizing those who have joined us 
today and ask them to rise from their seats.
    All of you have made a tremendous sacrifice to be here 
today--many of you have left behind your spouse, children, 
family, and friends. It is our goal here today to ensure that 
you have not made this sacrifice in vain. Thank you so much for 
your courage.
    [Applause.]
    Senator Coburn. Behind Senator Carper, you will see a 
satellite photo which I keep on my desk at all times. It is 
under my glass on my desk in my personal office. It is a photo 
of the Korean peninsula, taken at night by satellite. The South 
is all lit up with the light of economic development--
infrastructure for electricity and industry literally makes the 
terrain glow in the dark from the satellite's point of view.
    Just a few decades ago, South Korea was as poor as some of 
the poorest countries in the world. Now, it is an economic 
powerhouse that has joined the world community and brought 
democracy and a high standard of living for its citizens.
    Above South Korea, the rest of the peninsula is pitched in 
black--no development, no infrastructure, no industry, no hope, 
no future. It is a stark reminder I like to keep for myself 
about the intangible fruits of freedom, economic development, 
the rule of law, and a government accountable to its citizens. 
No amount of black-market thuggery such as counterfeiting, 
narcotics production, and trafficking in persons, will bring 
light to North Korea.
    I hope that today's hearing can remind us that when people 
are ruled by force and deprivation, by fear and oppression, 
when their God-given freedom is suppressed, the soul of the 
nation, like its topographical satellite image, is trapped in 
darkness. But we are not helpless. America can make a 
difference in the darkest corners of the earth as America 
always has. Our security depends on it.
    I want to end as I began, with a reference to George 
Orwell, who once said, ``In an age of universal deceit, telling 
the truth is a revolutionary act.'' I hope today we will peel 
back the veil and tell the truth about North Korea.
    I want to thank again all our witnesses for being here 
today. I look forward to your testimony.
    I would like to recognize my Co-Chairman and partner in our 
oversight duties, the Senator from Delaware, Tom Carper.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. Thanks, Mr. Chairman. It is great to be 
with you again, and to our witnesses today, welcome. To our 
special guests, a very special welcome to each of you.
    As our Chairman has said, this is a week that we also think 
of as North Korean Freedom Week. I think the idea of scheduling 
a hearing--I don't think this is just a coincidence, but the 
idea of scheduling a hearing that can offer some insights into 
a way to get North Korea back to the negotiating table where 
human rights, where humanitarian aid, and our nuclear weapons 
concerns can be discussed could not be more timely.
    North Korea's public declaration in 2005 that it had a 
nuclear deterrent confirmed what many believed was already the 
case and why U.S. strategic interests and foreign policy in the 
Asian-Pacific region should be elevated. Since 2002, North 
Korea claims to have reprocessed enough spent fuel to yield 
between eight and ten nuclear weapons. In addition, U.S. 
officials maintain that North Korea is pursuing uranium 
enrichment for a nuclear weapons program using technology 
apparently sold them by Pakistani scientist A.Q. Khan.
    In September, a breakthrough was made in getting North 
Korea to agree to relinquish its nuclear arsenal and related 
capabilities in exchange for aid through these so-called Six-
Party Talks. However, since that monumental agreement, the Six 
Party Talks have been on hiatus. I am told that this hiatus is 
in part due to North Korea's affront to the U.S. Treasury 
Department's designation of a bank in the region as a front for 
North Korean counterfeiting operations at the exact moment in 
which the talks were moving forward.
    In any event, today's hearing is important in determining 
the North Korean Government's role in counterfeiting, their 
role in drug trafficking, and their role in other illicit 
activities, but more importantly, to what extent these 
activities are used to support North Korea's nuclear weapons 
program.
    Today's hearing is also important for determining what role 
U.S. efforts to target North Korean illicit activities should 
play. I think it is easy to argue that the United States and 
the international community should act to prevent North Koreans 
from selling illicit drugs and passing counterfeit currency 
because they are detrimental to the U.S. economy and, in 
general, really, to society. However, I think it is also 
important to consider how our focus on these activities could 
be instrumental in getting North Korea back to the bargaining 
and negotiating table.
    Again, we look forward to the testimony of these witnesses 
and others that will come before us today. Thank you for 
joining us, and Mr. Chairman, I thank you for convening this 
hearing.
    Senator Coburn. Thank you, Senator Carper.
    Our first panel will be recognized. I would ask all our 
witnesses to limit their oral testimony to 5 minutes. Your 
complete written statement will be made a part of the record 
and we will hold our questions until the entire panel has given 
their testimony.
    First, let me introduce Peter Prahar. He is a member of the 
Senior Foreign Service and is now serving at the State 
Department as the Director of the Office of Asian, African, and 
European Programs in the Bureau for International Narcotics and 
Law Enforcement. He was the Deputy Director of that office from 
2001 until 2003.
    Michael Merritt was appointed Deputy Assistant Director of 
the Office of Investigations at the Secret Service in 2005. His 
areas of responsibility include the Criminal Investigative 
Division, the Investigative Support Division, the Forensic 
Services Division, and all foreign offices for the U.S. Secret 
Service.
    Thank you, Mr. Prahar, and you are recognized for 5 
minutes.

 TESTIMONY OF PETER A. PRAHAR,\1\ DIRECTOR, OFFICE OF AFRICA, 
 ASIA AND EUROPE PROGRAMS, BUREAU FOR INTERNATIONAL NARCOTICS 
     AND LAW ENFORCEMENT AFFAIRS, U.S. DEPARTMENT OF STATE

    Mr. Prahar. Mr. Chairman, thank you for the opportunity to 
appear today before you to discuss narcotics trafficking and 
other criminal activity with a connection to the Democratic 
People's Republic of Korea, the DPRK, and what actions the 
Department of State is taking to address these activities. 
Please allow me to briefly summarize the material in my written 
statement.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Prahar appears in the Appendix on 
page 35.
---------------------------------------------------------------------------
    Let me begin by stating that there is no doubt that the 
government of the Democratic People's Republic of North Korea, 
the Korean Workers' Party, and the Korean People's Army are all 
involved in criminal activity in order to, we believe, obtain 
hard currency. We are well aware of the possibility that DPRK's 
state-directed criminality could contribute to the financing of 
DPRK weapons development by a state that is listed as a state 
supporter of terrorism and could offer financial support to a 
state that is otherwise failing economically. The profit 
realized from these illicit activities could be an important 
source of funds for the regime and its leadership, although 
given the covert nature of these activities and the challenge 
of obtaining reliable information on the DPRK, any estimates 
are necessarily highly speculative.
    My colleague from the U.S. Secret Service will discuss the 
production and distribution of counterfeit U.S. currency, which 
is taking place with the full consent and control of the North 
Korean regime. This is a crime and a very serious one.
    Additionally, security enforcement investigators for major 
American, British, and Japanese cigarette companies have 
concluded after extensive investigation that at least one 
factory located in the DPRK manufactures and trafficks in 
counterfeit cigarettes. There are reports of as many as 12 such 
factories, some of which appear to be owned and operated by 
North Korean military and security organizations, while others 
appear to pay the DPRK for safe haven and access to 
transportation infrastructure to conduct their criminal 
activities. These factories have the capacity to produce 
billions of packs of counterfeit cigarettes annually.
    This criminal activity extends to the United States itself. 
Industry investigators report that from 2002 through September 
2005, DPRK source counterfeit Marlboro cigarettes, for example, 
were identified in 1,300 incidents in the United States.
    Finally, there are also indications, as yet rather sketchy, 
that North Korea has entered the enormously lucrative market 
for counterfeit pharmaceuticals.
    With regard to narcotics production and trafficking, 
however, the evidence we have to date is somewhat less 
conclusive. As we have reported, over a period of 30 years, 
officials of the DPRK have been repeatedly apprehended for 
trafficking in narcotics and engaging in other criminal 
activity, such as passing U.S. currency and trafficking in 
endangered species. In my written statement, I have also given 
several examples of cases in which state-owned assets, 
particularly ships and even military patrol vessels, have been 
used to facilitate and support international drug trafficking 
ventures. This list is meant to be illustrative rather than 
exhaustive. Others have compiled and placed in the public 
record lists of numerous incidents involving the DPRK.
    Although there have been no public reports of specific 
incidents linking the DPRK to narcotics trafficking since 2004, 
given DPRK involvement in other forms of state-directed 
criminality and the authoritarian centralized nature of the 
DPRK state, the Department of State retains the view it stated 
at the 2005 International Narcotics Control Strategy Report 
that it is likely, but not certain, that the North Korean 
Government sponsors criminal activities, including narcotics 
production and trafficking ``as a way to earn foreign currency 
for the state and its leaders.''
    What is the Department of State doing about DPRK illicit 
activities? First, the Department is working through the 
Illicit Activities Initiative to ensure that information 
available in law enforcement channels is compared and 
coordinated with information available in diplomatic and 
military channels. This interagency coordination mechanism is 
working. For example, the Illicit Activities Initiative Working 
Group on Illicit Finance coordinated the sharing of 
intelligence that led to the Treasury Department's designation 
last September of a bank in Macau, Banco Delta Asia, as a 
primary money laundering concern pursuant to Section 311 of the 
USA PATRIOT Act, primarily based on its links to North Korean 
Government agencies and front companies involved in illicit 
activities.
    On the diplomatic front, the Department of State has 
alerted our allies and friends to the possibility of state-led 
criminality by the DPRK and encouraged a vigorous law 
enforcement response. Major narcotics seizures by Taiwan and 
Japanese authorities demonstrate the commitment and capacity to 
control this. And we have made it clear to the North Koreans 
and other countries involved within the context of the Six 
Party Talks that outstanding bilateral issues, including DPRK's 
involvement in illicit activities, need to be resolved before 
we can normalize our relations.
    The Department of State continues to work with and 
acknowledges the critical work being done by other agencies of 
the U.S. Government in combating North Korean illicit 
activities.
    In closing, I would like to thank you, Mr. Chairman, for 
this opportunity to discuss this issue. Focusing the public 
spotlight on this aspect of DPRK state behavior is one of the 
ways to increase the risk and deter such criminal activity in 
the future. I am happy to answer your questions.
    Senator Coburn. Mr. Prahar, thank you very much. Mr. 
Merritt.

  TESTIMONY OF MICHAEL MERRITT,\1\ DEPUTY ASSISTANT DIRECTOR, 
OFFICE OF INVESTIGATIONS, U.S. SECRET SERVICE, U.S. DEPARTMENT 
                      OF HOMELAND SECURITY

    Mr. Merritt. Mr. Chairman, I would like to thank you as 
well as the distinguished Ranking Member and other Members of 
the Subcommittee for the opportunity to address you today 
regarding the Secret Service's investigative efforts into the 
production and distribution of high-quality counterfeit U.S. 
currency, Federal Reserve Notes, which in this case are 
collectively referred to as the Supernote.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Merritt appears in the Appendix 
on page 49.
---------------------------------------------------------------------------
    The worldwide use of the U.S. dollar as the currency of 
choice continues to grow. With as much as two-thirds of the 
approximately $750 billion of U.S. currency in circulation 
outside of our borders, the U.S. dollar is truly a global 
currency. In addition to dollarized economies--those nations 
that have adopted the U.S. dollar as their own currency--
businesses and individual interests worldwide depend upon the 
integrity and stability of the U.S. dollar.
    This is why counterfeiting activity can have a profound 
effect on not only our economy, but the international markets, 
as well. Counterfeiting reduces consumer confidence in our 
currency and has the potential to affect the perception, and 
thereby the strength, of the dollar in all dependent economies.
    The Supernote family of counterfeit notes was first 
detected in 1989. Since its initial discovery, the 
investigation into its origin and distribution has been a top 
priority for the Secret Service. The Supernote investigation is 
an ongoing strategic case with national security implications. 
This investigation has spanned the globe, involving more than 
130 countries and resulting in more than 170 arrests.
    Through extensive investigation, the Secret Service has 
made definitive connections between these highly deceptive 
counterfeit notes and the Democratic People's Republic of 
Korea. Our investigation has revealed that the Supernote 
continues to be produced and distributed from sources operating 
out of North Korea.
    The Secret Service has seized approximately $50 million of 
the Supernote globally, which equates to seizures of 
approximately $2.8 million annually. To provide a frame of 
reference, during the fiscal year 2005, the Secret Service 
seized over $113 million in counterfeit U.S. currency.
    The high quality of these notes and not the quantity 
circulated is the primary concern for the Secret Service. The 
Supernote primarily circulates outside of the United States. 
The Supernote is unlikely to adversely impact the U.S. economy 
based upon the comparatively low volume of notes passed. 
However, the introduction of the Supernote into a micro economy 
can have a significant influence not only due to the monetary 
losses sustained as a result of the Supernote passes, but also 
because of the loss of integrity of the U.S. dollar.
    It should be noted that the Supernote, while highly 
deceptive, is detectable with minimal training. There are also 
machines which are commercially available that can detect the 
Supernote.
    Throughout the 1990s, numerous North Korean citizens 
traveling throughout Europe and Asia working in an official 
capacity were apprehended by law enforcement for passing large 
quantities of the Supernote. In each of these cases, the North 
Korean officials evaded prosecution for these crimes based upon 
their diplomatic status.
    The Secret Service has developed and employed a three-prong 
strategy to address the distribution of this counterfeit. The 
first part of the strategy focuses on containment based on an 
aggressive investigative response to all appearances of this 
counterfeit currency. Secret Service agents posted around the 
world work closely with their foreign counterparts to identify 
and arrest distributors of this counterfeit as rapidly as 
possible.
    The second part of our strategy focuses on disruption. With 
the support of the international law enforcement community 
through Interpol, this strategy is designed to deny North Korea 
the supplies and equipment required to manufacture high-quality 
counterfeit notes.
    The third part of our strategy focuses on education. The 
Secret Service provides detailed training seminars to financial 
institutions and law enforcement personnel across the globe on 
the detection of counterfeit currency.
    Mr. Chairman, that concludes my prepared statement and I 
would be pleased to answer any questions that you or other 
members of the Subcommittee might have. Thank you very much.
    Senator Coburn. Thank you, Mr. Merritt.
    Mr. Merritt. Yes, sir.
    Senator Coburn. Mr. Prahar, who is the present director of 
the Illicit Activities Initiative and who does that director 
report to?
    Mr. Prahar. The Illicit Activities Initiative I referred to 
in my written statement as well as my oral statement is, in the 
current form, building on work previously done by a group 
called the North Korea Working Group. The participants, there 
are about two dozen participants in this Illicit Activities 
Initiative program. They are organized in five specialized 
interdepartmental committees dealing with smuggling, narcotics 
trafficking, money laundering, counterfeiting, as well as 
abuses of diplomatic privileges. These committees are directed 
by the Department's Office of Korean Affairs in the Bureau of 
East Asian and Pacific Affairs and they have a direct reporting 
chain to senior officials in each member agency. I believe that 
answers the question.
    Senator Coburn. But there is not one individual who reports 
directly on that, or that is in charge of that working group?
    Mr. Prahar. The Director of the Office of Korean Affairs 
reports to the Assistant Secretary of State for East Asia and 
Pacific Affairs, sir.
    Senator Coburn. And the group is currently meeting? Do you 
have----
    Mr. Prahar. The current group meets very actively.
    Senator Coburn. And you answered the questions on who that 
group is. Has the State Department considered appointing a 
North Korean czar that operates in the Secretary's office and 
coordinates with all the pertinent agencies and foreign allies 
to create a comprehensive policy on North Korea, including the 
WMD proliferation? Has that been considered, or is that 
ongoing? Can you teach us a little bit about that?
    Mr. Prahar. Certainly, Senator. The suggestion is an 
interesting one. The Illicit Activities Initiative--as it is 
currently operating and constituted--we believe is a model, 
frankly, of interagency cooperation. I cited one example of 
success involving Treasury Department's Section 311 designation 
of this bank in Macau.
    On the theory of if it isn't broke, we won't fix it, we 
don't believe this is a broken process. We believe it is 
mobilizing the resources and the expertise and the legal 
authorities throughout the U.S. Government to deal with this 
very serious problem we have in North Korea. The answer, of 
course, again, goes back to who is responsible within the 
Department of State for affairs within East Asia and the 
Pacific. It is the Assistant Secretary for East Asia and 
Pacific Affairs and the Secretary of State.
    Senator Coburn. Thank you. Is it possible to bring 
indictments against Kim Jong-Il and his high-level government 
officials in charge of the regime? One of the things that 
hasn't been said but has been referred to: There are violations 
of international law here, as well.
    Mr. Prahar. We regularly and systematically review 
intelligence about all suspected narcotics traffickers and 
entities in the world, including North Korea. We have not yet 
gotten sufficient information to designate any North Korean 
individuals or organizations under the Kingpin Act. An 
indictment would require probably a certain level of evidence 
that I don't believe exists. You might wish to direct that 
question, though, to the Department of Justice.
    Senator Coburn. OK. Is there enough information to put 
North Korea under the drug majors category?
    Mr. Prahar. No, sir. That is another item that we consider 
on a regular basis within the Department of State. As you know, 
a country can be put on the majors list for basically two 
reasons. First of all, it is producing 1,000 hectares or 
cultivating 1,000 hectares or more of opium poppy or coca. We 
have been unable to confirm reports that we have received over 
time that there is significant opium poppy cultivation in North 
Korea, so we have been unable to consider North Korea for 
placement on the majors list for its involvement as a major 
cultivator or drug producer.
    The other way to get on the majors list is as a major drug 
transit country having a significant impact on the United 
States. We have no information of drugs entering the United 
States through North Korea, although we are very concerned 
about the possibility of that happening, especially given the 
apparently well-established cigarette smuggling networks that 
are in place. We certainly can't meet the threshold requirement 
of demonstrating a significant impact on the United States.
    But this is something, Senator, that we consider regularly 
within the Department of State. If we have information that 
will substantiate that finding, that is a recommendation we are 
going to make.
    Senator Coburn. Is there some thought that there is a new 
direction for the drug trafficking coming out of North Korea 
rather than from North Korea directly? Would you comment on 
that?
    Mr. Prahar. Yes. We have not noticed or detected any major 
drug activity with a DPRK link since 2003 when a vessel named 
the Pong Su was stopped by Australian authorities off the coast 
of Australia. There are many explanations or possible 
explanations for that.
    One is perhaps that the North Korean regime has decided to 
follow the path of the least resistance and make its money 
through illicit activities by counterfeiting currency, 
counterfeiting cigarettes, and counterfeiting drugs. These are 
enormously lucrative and don't have some of the problems 
associated with them that large-scale state-directed narcotics 
trafficking would certainly have.
    Another possible explanation is, as you suggested, that 
there has been a change in trafficking networks from maritime-
based efforts to take drugs to drug markets or deliver them to 
organized Asian criminal groups to using land borders and 
moving product to Asian organized trafficking groups across 
land borders, which would be less visible to us. So there are a 
couple of possible explanations why we haven't seen significant 
drug activity since 2003.
    Senator Coburn. Thank you. My time has expired. Senator 
Carper.
    Senator Carper. I had to step out of the room and take a 
phone call from one of our colleagues over in the House of 
Representatives, so I apologize for missing your testimony. I 
have glanced through it, though. Would you start off by 
outlining for us the different forms of criminal activity that 
we have associated with North Korea? They include drug 
trafficking, counterfeiting currency, maybe trademark 
violations, but just kind of go through the list, if you will, 
and then I am going to ask you to come back and see if you can 
maybe not quantify them, but at least give us some idea what 
the magnitude of importance one is over the other.
    Mr. Prahar. Certainly, Senator. I would say there are 
probably five major categories of criminal activity that have 
been associated with the DPRK. In my testimony, I spoke of the 
counterfeiting of U.S. currency, and Mr. Merritt has done that, 
as well.
    A major source of income to the regime and its leadership, 
we believe is the counterfeiting of cigarettes. This is a 
potentially enormously lucrative business, again with a U.S. 
connection and, of course, these cigarettes have shown up in 
Asian markets, as well.
    We also see, as I said in my testimony, some sketchy 
evidence that the DPRK is also counterfeiting pharmaceuticals. 
This is something that we are watching very carefully. We will 
work with industry to develop accurate information about it, as 
we have with the cigarette industry, to deal with and report.
    There are a number of incidents involving trade in 
endangered species. These typically involve North Korean 
diplomats or state enterprise employees, whatever, stopped at 
one international border or another with something that is a 
covered product of the Convention on Endangered Species, the 
CITES Agreement.
    And finally, the issue of drugs. As I said, the evidence 
with regard to state-directed drug production and trafficking 
is less conclusive than in some of the other categories that I 
have discussed.
    Senator Carper. Now, the second half of my question was--
and I thank you for that enumeration. The second half of my 
question was giving us some idea of what the magnitude in terms 
of relative importance of each of those categories might be.
    Mr. Prahar. Any assessment of the value of a criminal 
activity to the DPRK is just necessarily highly speculative. We 
have seen and heard, as Senator Coburn had, estimates that the 
total value of this business is $500 million to $1 billion. I 
certainly can't confirm that today.
    What I can say is it appears from what we understand about 
the cigarette counterfeiting that it may be the single most 
lucrative item in their portfolio.
    Senator Carper. I am sorry, which one?
    Mr. Prahar. Cigarette counterfeiting. Again, our 
information with regard to pharmaceutical counterfeiting is 
very sketchy. We can't even begin to put an estimate on the 
value of that. Mr. Merritt has spoken about counterfeiting of 
U.S. currency and the U.S. Secret Service has taken some $50 
million in U.S. currency out of circulation since 1989. The 
value of trade in endangered species, again, almost anyone's 
guess on what that could amount to.
    And finally, probably the most controversial and difficult 
thing to get to is the value or the possible value of narcotics 
production and trafficking. We don't know how much, if any, 
illicit drugs are produced in North Korea. If opium poppy is 
being grown, we don't know the yield of those fields so we 
don't know how much opium gum is generated by these yields. We 
don't know how much of this opium gum is actually used for what 
could be considered legitimate purposes, such as pain killers 
for the Korean People's Army. We don't know how much is 
actually entering, if any, the illicit trade, or what value the 
North Koreans may be getting in selling these drugs to 
organized crime groups. In general, we know that cultivators 
and producers at the lower end of the drug chain don't reap the 
huge profits and value that people do distributing at retail. 
North Koreans are not distributing the drugs at retail.
    So unfortunately, I think the honest answer that people can 
give is it is very difficult and a highly speculative process 
trying to assess the value of these illicit activities.
    Senator Carper. Is it likely that any time soon we will 
have a better idea what the nature of those activities are and 
the magnitude of them?
    Mr. Prahar. We watch this issue extremely carefully and, as 
you know, there have been some Federal indictments filed on 
both coasts recently. Ongoing investigations and prosecutions 
of this type may reveal additional information about this. We 
believe that these funds, as I said in the testimony, could be 
supporting weapons of mass destruction development and 
otherwise supporting a tottering regime and the leadership 
elite of that country. So it is a matter of great concern.
    Senator Carper. I would like to come back maybe in a second 
round and pursue that, if we could, but thanks so much for 
responding to those questions.
    Senator Coburn. Mr. Merritt, would you explain to us how 
the PATRIOT Act is involved in operations to combat 
counterfeiting and trafficking? What specific aspect of that 
Act has allowed you, for example, in Macau to identify and then 
put a bank on notice or on a list that will lessen its impact 
in terms of trafficking?
    Mr. Merritt. Actually, Mr. Chairman, the Treasury 
Department makes that determination. We were fortunate in that 
we were the recipients of the Section 311 instituted by the 
Treasury Department in the Macau bank in China. There was an 
incident prior to that with the involvement through a series of 
transactions of a deposit of $600,000 in the Supernote into one 
of these accounts, the Taehung Trading Company, which is a 
Korean Workers' Party-sponsored company. Two diplomats were 
detained for that and then a search incident to arrest at the 
Taehung Trading Company. Other Supernotes were found. Again, 
because of the diplomatic status, nobody was arrested. But as 
far as that having affected our investigation at the time, sir, 
that came later. But I think it is one of the reasons they did 
use for that particular approach.
    Senator Coburn. Tell me what other agencies the Secret 
Service works with besides the State Department in order to 
combat this counterfeiting by North Korea.
    Mr. Merritt. I would say that for us, obviously, our 
authority and the jurisdiction we have to investigate 
counterfeiting stops at our borders, per se, the authority 
given us by Congress. Now, because this has been such a 
protracted, lengthy investigation spanning 16, almost 17 years, 
we have depended heavily on our foreign law enforcement 
counterparts. Most of the Supernotes circulate outside of the 
United States. We have depended mostly on them.
    Now, recently, we have been partners in some investigations 
involving some of the aspects with the FBI of counterfeiting 
cigarettes, but primarily, counterfeiting is--we pretty much 
work it based on our 141 years of expertise and experience.
    Senator Coburn. One other thought. The reports that we have 
read or looked at say that North Korea obtained most of their 
counterfeiting technology from European sources. Is there 
anything that the Secret Service can do to protect the currency 
and technology that is possessed by foreign companies? Is there 
anything that we in Congress can do to help give greater 
protection to that technology not falling into the hands of 
somebody who is going to use it inappropriately?
    Mr. Merritt. Interesting question, Mr. Chairman. Part of 
the strategy that we have employed in combating counterfeiting, 
as I mentioned, there are three strategic, three different 
approaches: Aggressive investigative technique, the education 
for the general public and businesses on how to identify 
counterfeit currency. The third one that I mentioned earlier 
was, in fact, disruption, and we have through our foreign law 
enforcement community, through Interpol, as well, enacted what 
we call to be a disruptive part of our strategy.
    Interpol, on our behalf, enacted what we call the Orange 
Alert, which put on notification the 184 member countries of 
Interpol that North Korea was producing counterfeit U.S. 
currency and have encouraged the private industry all over the 
world, but mainly European, to refrain voluntarily from 
providing North Korea with printing supplies and printing 
equipment.
    Senator Coburn. Mr. Prahar, we had numerous testimonies 
from North Korean defectors that tell of slave labor factories 
and farms that are owned by the North Korean regime but located 
in places outside of North Korea, like Poland, the Czech 
Republic, Russia, Bulgaria, Saudi Arabia, and Angola. What is 
happening within the State Department in terms of our relations 
with these other countries to combat this form of human 
trafficking?
    Mr. Prahar. Senator, my office deals with law enforcement 
and narcotics matters exclusively. I will have to take the 
question and----
    Senator Coburn. OK. We will submit that for the record. We 
would appreciate it if you could pass that on up the line.
    Mr. Prahar. Yes.
    Senator Coburn. Senator Carper.
    Senator Carper. Thank you. This could be for either 
witness. Mr. Merritt, why don't you take the first shot at it, 
if you would. In your opinion, what has been the impact of U.S. 
efforts to target counterfeiting and drug trafficking, some of 
the illegal activity that Mr. Prahar was talking about earlier? 
What has been the impact on North Korean involvement in the Six 
Party Talks, to your knowledge? And is your work guided by or 
in concert with Six Party Talks negotiations?
    Mr. Merritt. Sir, I really wouldn't know whether the impact 
of our efforts to combat counterfeiting produced in North Korea 
have impacted the Six Party Talks. I think that is probably--I 
hate to pass it to you, but it is all yours. [Laughter.]
    Mr. Prahar. The matters we are discussing are law 
enforcement matters affecting the security of the United 
States, even global security. They are being handled as law 
enforcement matters in the United States by the U.S. 
Government. Investigations are undertaken and proceed at the 
pace that they proceed, and when they are ready, we bring them 
to the indictment stage and seek prosecution. Examples are, for 
example, the recent Royal Charm case, which has gotten a lot of 
press attention. It extended over many years and finally, with 
some extremely creative and even courageous activities by the 
FBI.
    This type of activity, we have made clear to the North 
Koreans, will continue. It is not negotiable. It is not tied in 
any way to the objectives of the Six Party Talks.
    Has it had an impact? Yes. As you are aware, the North 
Koreans are stating they will not return to the Six Party Talks 
until their money that was frozen in the Section 311 
designation action in Macau is returned. Again, we say to the 
North Koreans that is a law enforcement or regulatory matter. 
An investigation of that bank's activities is proceeding and 
the chips will fall where they may when they may.
    Since this is North Korean Freedom Week, perhaps I should 
mention that in these Six Party Talks, the United States and 
its partners have placed a very attractive offer on the table 
for the DPRK if it chooses to abandon its nuclear weapons 
program, illicit activities, and proliferation, including sales 
of missiles and missile technology. We are prepared to resume 
negotiations at any time the DPRK decides it wishes to begin 
implementing its commitments to denuclearize, which it 
undertook in the context of the September 19 joint statement, 
and to begin to receive the international economic, diplomatic, 
and security-related benefits to which it is entitled in 
exchange for denuclearization and cessation of reliance on 
proliferation and illicit activities. That is the position of 
the U.S. Government.
    Senator Carper. Maybe you said it and I missed it. To what 
extent when these Six Party Talks are going on do they talk 
about counterfeiting, do they talk about trademark 
infringements? To what extent do they talk about illicit drugs? 
And if they bring them up, what is the reaction of North Korea?
    Mr. Prahar. In the Six Party process, the United States and 
all of its partners in this process have made it clear to the 
North Koreans that if North Korea wishes to return to the 
community of nations, it must give up its illicit activities.
    Senator Carper. I am told that South Korea and China at 
various times have protested, or at the very least not 
supported the efforts of this government, our government, to 
stop illicit activity, and I would ask if that is true, why do 
you think they are taking those positions amongst the Chinese 
and the South Koreans? And I would like to ask if you think our 
efforts will have the potential to negatively impact legitimate 
business or the economy of that region.
    Mr. Prahar. OK. Well, the United States is working with all 
its Six Party partners, including South Korea, on this issue, 
and all of us agree that the DPRK must abandon illicit 
activities if it wishes to normalize its participation in the 
international state system.
    With regard to South Korea specifically, the South Korean 
Government vigorously investigates criminal activities within 
its own borders including those attributable to the DPRK and 
cooperates with U.S. law enforcement, for example, in a recent 
case involving counterfeit U.S. currency sourced to the DPRK 
and in another case involving DPRK sourced counterfeit 
cigarettes.
    With regard to China, again, they would agree with us that 
North Korea must cease its illicit activities if it wishes to 
rejoin the international community. The Chinese, to be 
perfectly honest, hold the position that economic reform, 
economic development and engagement are perhaps a better way to 
go about dealing with the problem of North Korea and illicit 
activities. However, our discussions with the Chinese on this 
subject continue with a view towards developing actionable 
intelligence regarding these activities. And, in fact, the 
Chinese do cooperate with us on at least a limited level. For 
example, in the investigation of the bank in Macau that was 
designated under Section 311, they have cooperated with us on 
that one. Senator, there is a divergence with the Chinese on 
this.
    Senator Carper. My time has expired. Mr. Chairman, I have 
some questions I would like to submit for the record if there 
is not another round here.
    Senator Coburn. I think for us to expedite our hearing, we 
will ask that you respond to questions that come from the 
Subcommittee within 2 weeks. We would very much appreciate you 
hanging around and hearing our other witnesses if you have the 
time to do so. Thank you both very much.
    I want to welcome our second panel. Let me introduce them 
to you. Mr. Kim Seong Min is a former writer for the North 
Korean military until he defected to South Korea in 1999. He 
has a Master's degree from Tumong University [ph.]. He 
currently is the Vice Chairman of the Exile Committee for North 
Korea Democracy, President of Free NK Radio, and President of 
the Association of North Korean Defectors.
    Dr. David Asher is currently an adjunct research staff at 
the Institute for Defense Analysis, previously served at the 
Department of State as the coordinator of the North Korean 
Working Group. He also served as the Director of the Illicit 
Activities Initiative to combat North Korean criminal activity. 
This group involved law enforcement officers, intelligence 
analysts, and policy makers among 14 U.S. Government 
departments and agencies as well as 15 foreign government 
partners.
    Chuck Downs' career in defense and national security issues 
spans three decades. He served as Deputy Director in the East 
Asia office of the Pentagon's International Security Affairs 
Division. Earlier, he held positions of Assistant Director in 
the Office of Foreign Military Rights Affairs and as Chief of 
Policy Analysis at the Department of the Interior's Territorial 
and International Affairs Office, both of which involved 
significant international negotiations.
    Next is Dr. Marcus Noland, who was educated at Swarthmore 
College and the Johns Hopkins University, from which he 
obtained a Ph.D. He is currently a senior fellow at the 
Institute for International Economics. He was senior economist 
at the Council of Economic Advisors in the Executive Office of 
the President of the United States and has held research and 
teaching positions at several U.S. and international 
universities.
    Mr. Kim, we would like to recognize you first. Please limit 
your time to 5 minutes.

 TESTIMONY OF SEONG MIN KIM,\1\ VICE CHAIRMAN, EXILE COMMITTEE 
 FOR NORTH KOREA DEMOCRACY, AND PRESIDENT OF FREE NORTH KOREA 
                             RADIO

    Mr. Kim. [through interpreter] A territory may belong to a 
state, but the state is not immune from the universal roles and 
values. Nevertheless, Kim Jong-Il's regime since his father's 
time continues to refuse to abide by such universal roles and 
values.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Kim appears in the Appendix on 
page 52.
---------------------------------------------------------------------------
    There has been much illicit activity carried out by Kim's 
regime. However, the whole truth has not been receiving much 
spotlight in the world community until recently. As a true 
dictatorship, Kim's regime has total control of the press. 
Attempts by international press, such as the U.N. and the 
Reporters Without Borders, to bring out the truth have been 
thwarted by the dictatorship.
    We have various organizations representing North Korean 
escapees. There are approximately 8,000 escapees in South Korea 
and about 200,000 in third countries, including China. From the 
escapees, the world is finally hearing the truth, the stark 
realities facing the people of North Korea.
    We now know the truth about the dictatorship. We are 
hearing about the human rights abuses, the drug trade, 
counterfeit production, and weapons of mass destruction, and 
all these are being carried out by the dictatorship in Kim's 
regime.
    There is a firsthand account of Song-Jong Kim, who had been 
forced to work in a reeducation camp for 10 years in North 
Korea. He tells of witnessing the death of over 1,000 inmates 
during that time. These were directly related and due to the 
harsh working conditions at the so-called reeducation camp.
    We have heard from Ms. Keum-Soon Choi during North Korea 
Human Rights Forum in November of year 2005. Keum-Soon Choi was 
incarcerated in a political prison for 10 years in North Korea. 
She was subjected to heavy labor on a daily basis. Her daily 
meal consisted of less than 100 seed count from maize, 
supplemented with salt soup, and during rice planting seasons 
in the province of Pyung-An Nam Do, she testified that she 
would work from 4 a.m. in the morning to 10 at night, and she 
testified that she had witnessed the death of 12 of her 
cellmates during this time period because of the harsh 
conditions.
    There are about 10 political prisons and about 20 
reeducation camps, and forced labor subjects, all men, women, 
young and old alike, and through this forced labor, North Korea 
manufactures bicycles, munitions, and other commodities.
    Cultivation of opium in North Korea is no exception. Kim's 
regime started a large-scale opium cultivation operation in the 
provinces of Hamhaebuk-do and Hamkyungbuk-do. All these started 
in 1983, and retired soldiers are forced into labor on these 
cultivation fields by the direct order of the Supreme 
Commander.
    It would not be possible to discuss all the atrocities 
taking place inside the iron veils of North Korea. That would 
take many days and nights. Even then, that would not be 
sufficient. Instead, I would like to conclude my remarks by 
telling you about a writing by a teenager escapee.
    The teenager was 13 years old when he was forced to work on 
a farm under the guise of farm support. The work on the farm 
was heavy for this youngster. The work would have been 
difficult even for a grownup. One day, the teenager found 
intestines to a goat in a trash dumpster. They were thrown away 
by soldiers. After washing the intestines 20 times or so, the 
stench became mild. After boiling the intestines three times, 
they were somewhat edible. He shared the intestines with his 
sister. He stated in his writing that the goat intestines were 
the most delicious things in the world. His writing made big 
news in South Korea. It also exposed the dark realities of 
North Korea.
    The North Korean regime forces young children to the fields 
under the guise of farm support. During the spring, children 
are sent to the fields for 40 days. During autumn, they are 
subjected to 30 days of forced labor. Children would be 
planting seeds for corn and rice stocks.
    In the provinces of Hamhaebuk-do and Hamkyungbuk-do, there 
are large-scale farms for growing opium. Students in nearby 
schools work on the fields to gather the opium extracts and to 
dry opium flowers and stocks. Those activities are carried out 
at the direction of their teachers and the state.
    It is a well-known secret that hard currency collected from 
the sales of opium produced with forced labor from children, 
gold is mined and collected from slave labor in the 
Czechoslovakia, Russia, and counterfeit monies which is 
laundered by diplomats is deposited in the banks in Macau and 
Switzerland. The money is a slush fund for Kim Jong-Il's 
personal use, and we have heard of these things from diplomats 
and other escapees from North Korea.
    Kim Jong-Il holds up that he has no money to buy corn for 
the starving people of North Korea. At the same time, he has 
money for catering to his personal needs. He has spent $900 
million worth of money to permanently conserve the deceased 
body of his father. He is spending astronomical amounts of 
money for his nuclear program. Yet he has no money for the 
people. Kim Jong-Il is no ordinary sinner that can be forgiven. 
He is the satan himself. He must not be forgiven.
    Once Kim Jong-Il is expunged and a new democratic 
government is established in North Korea, the problems of human 
rights abuse and other criminal activities that have been 
plaguing the world community will all be yesterday's use. There 
are various means for achieving unconditional surrender from 
Kim Jong-Il. One of those would be to freeze his slush funds 
resident in the Switzerland bank accounts. I implore the U.S. 
Congress to investigate Kim Jong-Il's accounts in Switzerland 
and freeze those accounts.
    I believe it is also possible to pressure Kim Jong-Il by 
acting quickly on the human rights acts which have been passed 
in the U.S. Congress already, and also allowing for safe 
passage of the North Korean escapees into third countries, 
including the United States.
    Senator Coburn. I want to limit your testimony. We have 
gone 12 minutes now, and to be fair to our other witnesses, we 
need to limit this, so I will give you 30 seconds to sum up.
    Mr. Kim. [through interpreter] In concluding, I would like 
to thank the people of the United States for taking an interest 
in the issues surrounding the North Korean people and also the 
Congress of the U.S. and also Ms. Suzanne Scholte of Defense 
Forum. Thank you.
    Senator Coburn. Thank you. Dr. Asher.

 TESTIMONY OF DAVID L. ASHER,\1\ INSTITUTE FOR DEFENSE ANALYSIS

    Mr. Asher. Mr. Chairman, thank you very much. Three years 
ago, Assistant Secretary Kelly and Deputy Secretary Armitage 
asked me to put together an initiative to counter North Korean 
illicit activities. The decision was born out of a 
comprehensive review of the North Korean economy that had been 
conducted over the previous year, a project that had identified 
an alarming build-up in transnational criminal dealings by the 
DPRK in the previous decade.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Asher appears in the Appendix on 
page 57.
---------------------------------------------------------------------------
    In March 2003, the State Department requested the 
Department of Justice to look into the issue of North Korean 
criminal violations of U.S. law. The DOJ appointed a highly 
capable senior prosecutor, Suzanne Hayden, who was charged with 
pursuing the evidence trail wherever it might lead.
    In April 2003, we launched an interagency effort under the 
auspice of the East Asia Principals Coordinating Committee. 
This became known as the Illicit Activities Initiative (IAI). 
To oversee the IAI and to provide policy support for the Six 
Party Talks, in the summer of 2003, the Department established 
what was called the North Korea Working Group under the Office 
of the Deputy Secretary. I was appointed as Special 
Coordinator, and William Newcomb, a senior Asia analyst in our 
intelligence bureau, was made my deputy. We operated out of the 
seventh floor and had the full authority of the State 
Department to represent it at meetings related to our work in 
the NSC, which eventually itself formed a special coordinating 
committee that I co-chaired.
    I want to underline that the Illicit Activities Initiative 
was never designed as a substitute for diplomacy. Assistant 
Secretary Kelly and I considered our work in the Six Party 
Talks, in which I participated as the delegation advisor, to be 
of paramount importance. We felt that the United States needed 
a strong two-track policy with both tracks directed toward 
creating the grounds for a normalized relationship with the 
DPRK.
    On track one, we needed an empowered negotiator equipped 
with a broad series of transformational incentives that could 
spur the denuclearization process forward in concert with the 
other parties. On track two, we needed a process that would 
hold the North Koreans to a normal standard of behavior in the 
international community by enforcing our laws, by also guarding 
our flank more effectively against the growing threat of 
weapons proliferation.
    The IAI, as you noted, sir, eventually came to involve 14 
different government agencies and departments as well as over 
100 policy officials, intelligence analysts, and enforcement 
officers. We had superb interagency cooperation and strong 
support from our leadership all the way up to President Bush, 
who I was pleased to serve. This was a major team effort. 
Although I may have been the quarterback, the coaches and 
players deserve most of the credit.
    Between the spring of 2003 and the summer of 2005, we 
briefed and enlisted the cooperation of around 15 different 
governments and international organizations. I have to say, we 
enjoyed extremely strong support internationally. We developed 
a range of sophisticated policy options and plans, including 
the careful use of the USA PATRIOT Act and other tools that cut 
off North Korea's access to its networks of illicit banking 
partners internationally.
    We instigated and coordinated the interdiction of 
contraband and helped to shut down front companies' illicit 
trading networks around the world. We also worked assiduously 
to provide support to our U.S. law enforcement brethren, some 
of whom are here today.
    As noted before, the IAI spawned a series of large-scale 
U.S. and international criminal investigations. These involved 
U.S. Secret Service, Federal Bureau of Investigations, DEA, 
ICE, ATF, and many other foreign partners working in tremendous 
teamwork. Results of these investigations, for the most part, 
have yet to see the light of day, but I am confident when they 
emerge, the allegations of state-led North Korean criminal 
activity will be more than fully borne out.
    Let me close with a review of implications for U.S. policy. 
First, law enforcement efforts and diplomatic outreach under 
the illicit activities need to be continued vigorously. Strong 
interagency coordination, calibration, and most importantly, 
leadership, are essential. Management structures for 
coordination need to be centralized, not dispersed, and those 
in charge need to be sufficiently highly placed and properly 
empowered to do their jobs effectively.
    Second, we all need to better guard our flanks against the 
DPRK proliferation threat, especially at a time when we are 
cracking down on their illicit activities and finances. I 
recommended on previous occasions we need to take more 
aggressive protective measures, including enhancing the 
Proliferation Security Initiative and expanding the Container 
Security Initiative to inspect North Korean containers being 
exported abroad to our partner relationships in countries such 
as China and the Republic of Korean (ROK).
    As I suggest in my prepared remarks, the threat of DPRK 
cooperation with Iran on nuclear weapons and missiles has to be 
taken extremely seriously, and especially at a time when both 
feel to a degree under seige, quite justifiably. In my mind, 
the United States has to take prudent measures against these 
major threats to our national security, but we need to 
understand that the more that we do, the more incentive they 
will have to collaborate.
    Third, law enforcement and counterproliferation are not 
antithetical to a diplomatic strategy. To the extent that the 
North Koreans can sup on a moonshine economy, they will have 
very little interest, I believe, in sunshine engagement, a 
process which I support.
    Fourth, change needs to begin in Pyongyang much more than 
Washington. It is in North Korea's objective interest to shift 
directions. As Secretary Powell used to tell us, they cannot 
eat nukes. The DPRK needs to engage what it calls on us to do, 
a bold switchover away from nukes, crime, and repression as the 
pillars of the regime buttressed by a bankrupt concept of self-
reliance, ``Juche,'' and an army-first state policy that is 
draining the economy dry. Instead, like China in the late 1970s 
and Vietnam in the late 1980s, at the very least, North Korea 
must turn toward denuclearization, demobilization of the army, 
and economic and gradual political opening. As part of this, 
they most certainly have to abandon their criminal activities 
and repression of their populace.
    Fifth and finally, the members of the Six Party Talks--
America included--need to offer help to North Korea for it to 
transform. I don't think we can be naive about the scale of 
transformation that is required in North Korea nor of the 
disruption to the surrounding states, the world, if North Korea 
were just to collapse spontaneously. I certainly do not support 
this regime in North Korea, but I think we have to be realistic 
about the implications of an aggressive regime change policy 
that some suggest.
    It is in North Korea's interest to open up and it is in our 
interest to help them, provided they are willing to play by 
international rules. As Secretary Rice has said, it is North 
Korea's choice to be isolated. If they stop engaging in hostile 
acts and start cooperating, they will reap the benefits of 
engagement.
    I am happy to answer any questions that you or any other 
Subcommittee Member have.
    Senator Coburn. Thank you, Dr. Asher. Mr. Downs.

  TESTIMONY OF CHUCK DOWNS,\1\ AUTHOR, ``OVER THE LINE: NORTH 
                 KOREA'S NEGOTIATING STRATEGY''

    Mr. Downs. Thank you very much, Mr. Chairman. I would like 
to thank the Subcommittee for inviting me to speak today and 
for its attention to this very important issue. I speak as a 
private citizen and author of a book on 50 years of how North 
Korea negotiated, not in my capacity as a member of the Board 
of the U.S. Committee for Human Rights in North Korea, of whose 
work I am extremely proud.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Downs appears in the Appendix on 
page 69.
---------------------------------------------------------------------------
    As other witnesses have said, North Korea is a criminal 
state, but it is more than that. It is actually an extra-legal 
state. It does not even abide by its own laws. Under the 
constitution of North Korea, the presidential authority is 
actually vested in a dead man, and this is the constitution 
that was put in place 4 years after Kim Il-Sung died. Kim Jong-
Il, who actually rules North Korea, rules from a position as 
deputy of the National Defense Commission, a ruse that gives 
him the opportunity to say he is not really in charge even 
though everyone knows that he is.
    Kim Jong-Il punishes those he finds threatening in mock 
judicial proceedings that defy North Korea's own laws. He 
orders executions in public that children are forced to attend, 
in defiance of international standards of human rights. And he 
incarcerates thousands of political prisoners, as we have heard 
Kim Seong Min say, in a gulag that he claims does not exist.
    It should not be surprising to us that a Nation that 
subverts its own laws also defies its international 
obligations, but I would like to focus on the questions that 
you and Ranking Member Carper, Senator Carper, asked about the 
effect of American enforcement activities on the talks that 
deal with important issues such as the nuclear issue.
    First, a word about how North Korea negotiates based on my 
research. North Korea understands that it has very little to 
bring to the negotiating table. Its economy is always in a 
shambles. It has very little in terms of natural resources. It 
has very little to offer the rest of the world. It believes 
that it can only gain power and attention by making threats and 
by creating aggravation. And it has learned over 50 years of 
negotiating experience that this approach actually works for 
them.
    They create crises that make other nations want to bring 
North Korea to the negotiating table. North Korea's own 
negotiating objectives are never to enter into an agreement. 
They are actually to avoid agreements, draw out the 
negotiations as long as possible to draw down the other side's 
negotiators and to win concessions during this tiring process. 
They like to demand concessions while yielding nothing in 
return, which may seem obvious for every country, but it really 
isn't. They like to get benefits. In fact, they demand benefits 
just for agreeing to attend negotiating sessions. And they like 
to block progress at the talks because they know that if they 
extend this, they have more opportunities to gain leverage.
    And when they are finally forced to sign onto agreements, 
they like to make sure that there are provisions in those 
agreements that make them unenforceable. Implementation is 
always deferred to some organization that has to be set up by 
mutual consent and they withhold their consent later on. This 
happened with very promising agreements in 1991 and 1992.
    But North Korea does benefit during this process of 
avoiding negotiations. What it means is that they have a topsy-
turvy approach to what we see as an attempt to actually get 
work done.
    So how can we deal with this, and I would suggest in 
response to the questions that you asked and the questions that 
Senator Carper asked about the impact of the enforcement 
activities on the negotiations that the enforcement activities 
are actually a better means of getting what we want done with 
North Korea, and specifically on the negotiations, taking 
adverse action against North Korea's and specifically Kim Jong-
Il's financial interests, we have produced the following 
benefits.
    We have advanced multilateral unity. No country--not China, 
not South Korea, not Japan, certainly--is interested in being 
seen as an advocate of counterfeiting. If you call North Korea 
to task for these activities, other nations will side with you. 
As Mr. Asher just said, we have had extremely strong support 
internationally on these efforts.
    Taking these actions like the Section 311 designation also 
gives North Korea the impression that its own leverage gained 
by making threats and creating these crises diminishes, and 
whether for the near term or the long term, they begin to feel 
uncomfortable with the strategy that Kim Jong-Il, who they see 
as a genius, has taken. It chastens the regime for its behavior 
and makes it act, at least temporarily, somewhat compliant, and 
it sends North Korea, these enforcement activities, a signal of 
American resolve that Kim Jong-Il, who rules by coercion, can 
understand.
    It can't help but make North Korea wonder whether--
particularly the ruling party--it can't help but make the inner 
circles of the very nervous ruling group wonder if Kim Jong-Il 
is the genius that they say he is. It gives them a little bit 
of information of what Kim Jong-Il does on the international 
scene. And when you are talking about, if I can use the term 
gravy train, when you are talking about benefits that are 
gained illegally, there are always other people who wonder if 
they aren't being cut out of the gravy train, if they are not 
somehow being disadvantaged.
    And even in a closed society like North Korea, if you task 
diplomats with trying to explain and defend North Korea's 
counterfeiting activity, some of those diplomats will get the 
word around and in the ruling circles in Pyongyang, people will 
begin to wonder about whether Kim Jong-Il is doing what he 
should be doing and whether his strategy is a good one. They 
will begin to feel insecure and this could have a very 
important impact on our dealings with the regime.
    So let me conclude. I know that there are other people who 
have very important things to say and I certainly want to give 
Kim Seong Min, who is a very heroic center of the defectors' 
efforts in South Korea today, more of a chance to talk, but let 
me just conclude that confronting North Korea on their 
lucrative illegal activities holds far more benefits than 
losses for regional security and international peace. And, in 
fact, it enhances the allied posture in the process of 
negotiation. Thank you.
    Senator Coburn. Thank you. Dr. Noland.

  TESTIMONY OF MARCUS NOLAND,\1\ SENIOR FELLOW, INSTITUTE FOR 
                    INTERNATIONAL ECONOMICS

    Mr. Noland. Chairman Coburn, Ranking Minority Member 
Carper, it is an honor to be here this afternoon. I feel as 
though we have reached that moment in the afternoon in which 
nearly everything has been said, just not said by me. So rather 
than repeat what previous witnesses have said, in some cases 
far more definitively than I could, I would like to emphasize a 
few points that may not have received appropriate attention.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Noland appears in the Appendix on 
page 75.
---------------------------------------------------------------------------
    First of all, the first one involves the role of illicit 
activities and state culpability. To understand North Korea 
today, you really have to go back 10 or 15 years to the famine 
period of the 1990s. Under the trauma of the famine, in some 
essential ways, the state failed and what came out of that 
state failure were two things. One was a bottom-up process of 
marketization of the economy and the second one was a loss of 
central control over the economic and political institutions of 
the country.
    Now, the relevance to that for our discussion today is that 
one can interpret in part the intensification of emphasis on 
illicit activities as a response to that economic failure, and 
at the same time, it suggests that while it is clear that the 
state is involved in these activities, the pervasive nature of 
the state within North Korea--virtually every economic asset is 
owned by the state in some form, most everyone works for the 
state in some way--means that--and combined with the 
decentralization that has occurred, that some of these 
activities may not be centrally directed, that they may reflect 
essentially decentralized gangsterish behavior.
    The second issue has to do with the role of U.S. policy. As 
we have heard from previous witnesses, U.S. attempts to impede 
this activity have met with some success. They have also 
negatively impacted legitimate commerce, as well. Basically, 
what has happened this spring in response to the financial 
pressures has been essentially financial disintermediation. 
Foreign financial institutions no longer want to deal with DPRK 
institutions. And some people who are doing legitimate business 
in North Korea are finding it more difficult to do so.
    Now, how one evaluates that depends on what one's goal is. 
If the goal is simply law enforcement, as we heard from the 
first panel, then impeding the illicit activities is good and 
the collateral damage on legitimate commerce is unfortunate. If 
the goal is to achieve diplomatic goals in the context of Six 
Party Talks, as Senator Carper raised, then one's response is 
ambiguous. It probably is going to require both carrots and 
sticks to achieve those goals, and so in that sense, one is not 
so worried about the negative impact on North Korea.
    But if one has a more ambitious goal of achieving regime 
change through some sort of financial pressure, then I think 
that this policy is unlikely to succeed, basically because 
China and South Korea fear instability far more than they fear 
the status quo and they would move to offset U.S. pressures.
    The third point addresses the labor issues that Senator 
Coburn raised in his remarks and in some questions, and here, I 
think there is potentially a specific Congressional legislative 
point of action rather than the broader oversight issues that 
we have been talking about today, and that could come up in the 
context of the free trade negotiations between the United 
States and South Korea that are scheduled to begin in June and 
the role of the Kaesong Industrial Complex in those 
negotiations.
    The Kaesong Industrial Complex is an industrial complex in 
North Korea established essentially by the South Korean 
Government, and in previous free trade negotiations, the South 
Korean Government has requested its partners to grant duty-free 
status to the products produced in Kaesong. Now, this 
immediately raises labor issues with respect to the United 
States. There will surely be a labor standard chapter in the 
FTA agreement, assuming that an agreement is reached, and 
including Kaesong in that agreement would raise two sorts of 
issues. The first is substantive and the second is procedural.
    Substantively, North Korea does not meet any core labor 
standards. The right to organize or associate to bargain 
collectively are absent entirely. The workers in Kaesong earn 
$57.50 a month as base pay for a 48-hour week, but the North 
Korean Government takes money out of that to pay for various 
things and so at the end of the day, the workers get about a 
dollar a day. But that dollar is translated into their wages at 
the official exchange rate into North Korean won, which is 
completely fictitious. If you use the black market exchange 
rate, which is a more realistic measure of what the North 
Korean won is really worth, those workers are making maybe $2 
to $3 a month. And the real problem which I want to underscore 
with North Korea is that as exploitative as those terms might 
be, they are probably much better than other jobs in North 
Korea or in the labor camps that you mentioned. As a 
consequence, there may be no shortage of workers willing to 
take those jobs.
    The second issue is procedural. South Korea has no way to 
enforce any commitments in a FTA agreement in Kaesong where 
North Korea is sovereign. Jay Lefkowitz, President Bush's 
Special Assistant for Human Rights in North Korea, has 
suggested involving a third party, such as the International 
Labor Organization, to monitor conditions, as was done in the 
Cambodian textiles case. The problem, of course, is that North 
Korea is not a member of the ILO and may not agree to that, and 
indeed, even this relatively minimal sort of proposal was 
recently criticized in some fairly intemperate terms by a 
spokesman for the South Korean Ministry of Unification.
    In conclusion, the controversy over Kaesong as well as some 
of the illicit activities that we have discussed this afternoon 
bring us back to, in some ways, the famine experience of 10 
years ago and raises the practical and ethical issues that 
outsiders have in dealing with North Korea in a situation where 
the North Korean people are completely victimized by a 
government over which they have no real control, and the 
problem of trying to do right by the North Korean people in a 
context in which some other major countries do not share our 
priorities in dealing with this country whose values are in 
very large part antithetical to our own.
    It has been an honor to be invited here and I would be 
happy to take any of your questions. Thank you.
    Senator Coburn. Thank you very much.
    Mr. Kim, are there any reliable reports from recent 
defectors that would substantiate a continued large number of 
hectares in poppy production?
    Mr. Kim. [through interpreter] We have escapees from the 
provinces of Hamkyungbuk-do and Hamhaebuk-do who are testifying 
that as of recent, there still are these fields containing 
opiums. Also, we hear from people that youngsters are forced 
into labor to collect the extracts from these opiums.
    Senator Coburn. What I am trying to get a handle on is are 
there any reports as to the actual number of hectares? In other 
words, the report is less than 100 hectares of poppy 
production, and yet if that is the case, then there would be a 
limited production for domestic use only. If it is above that, 
then there would have to be a question raised if, in fact, this 
is for illicit production. Can you give us an estimate of what 
people have told you about the size in terms of acreage or 
hectares of that production?
    Mr. Kim. [through interpreter] In the province of 
Hamkyungbuk-do, there is an area, a county called Yun-San Kun, 
and also in the area of Hamhaebuk-do, there are two counties 
called Bu-Pyung Kun and Chang-Jim Kun, and my understanding is 
that 70 percent of all fields that could be cultivated are 
being used for production of poppy seeds. As to the actual 
hectares, this would be, in Korean scale, 300,000 jung-bo--
correction, 30,000 jung-bo in Korean terms.
    Senator Coburn. Can you relate that to hectares?
    Mr. Kim. [through interpreter] That also equals to about 
30,000 hectares.
    Senator Coburn. OK. So a significant difference in what we 
can ascertain versus what we are hearing.
    Mr. Kim, one other question for you. Can you respond to Dr. 
Noland's suggestion that some of the activities that we may be 
seeing are decentralized, in other words, are part of non-
directed, non-controlled government behavior outside of Kim 
Jong-Il's control?
    Mr. Kim. [through interpreter] As to your earlier question, 
sir, I only know of those three different counties, and as to 
the exact numbers, I will assure you that I will get back to 
the Subcommittee with the correct numbers.
    And as to your second question, it is true that the central 
command has weakened quite a bit. We have seen that the people 
of North Korea are witnessing their neighbors dying right in 
front of their eyes, and just for their own survival, they are 
having to break the laws, and when they are breaking the laws 
to survive, it becomes hard for the central government to place 
more control on these people. It is also true at the same time, 
however, that the central government is trying to hang on to 
their control as much as possible.
    So what has increased in the recent years, as we have 
witnessed on the first day of March and second day of March of 
this year, there are more public executions that are taking 
place by firing squads.
    Senator Coburn. One last question, and this I am asking for 
your opinion. Is it your feeling that the government of South 
Korea makes it somewhat difficult for North Korean defectors to 
go public with their eyewitness accounts of atrocities 
committed by the Kim Jong-Il regime?
    Mr. Kim. [through interpreter] There is no public mandate 
from the South Korean Government that stops us from talking 
about or discussing the occurrences in North Korea. However, 
there seems to be a tacit agreement between the South Korean 
Government and Kim Jong-Il that there is some sort of a 
conciliation between the two regimes and that the South Korean 
Government makes it known that it is not happy when we do talk 
about North Korea in negative manners.
    However, the escapees whom I know and my comrades who I am 
working with, we are not afraid of these pressures coming from 
the government and we do our very best and we put our lives on 
it as we work towards a peaceful unification of the Korean 
peninsula.
    Senator Coburn. Thank you. Dr. Asher and Mr. Downs, after 
we have seen numbers of North Korean diplomats, well, not 
arrested, but interdicted and sent home, in your opinion, what 
is it going to take for us to bring an indictment against the 
North Korean Government for this illicit behavior? And will 
that hurt or help U.S. negotiations?
    Mr. Asher. This is something that we, of course, people 
have discussed. The Secret Service, the Department of Justice 
and the Secret Service investigation has indicted the North 
Korean Government, in effect, for counterfeiting the U.S. 
dollar. One could imagine that the leadership ultimately could 
be held accountable. But we also need to consider the fact that 
indicting the leadership of a foreign government, a government 
that we are committed to a diplomatic process with, would not 
be particularly constructive, obviously.
    We were able to work with Qaddafi and able to transform a 
relationship that seemed in sort of a pitiful and abjectly 
backward state. I think there is some precedent from that case 
that could be applied to North Korea. But we also have to 
approach North Korea open-minded and realistically. This is a 
government that has been correctly described as a criminal 
state. Some joke of it as sort of a ``Soprano'' state.
    We have to, I think, apply law enforcement pressure 
aggressively against the networks which are distributing 
contraband being produced in North Korea. The perpetrators, 
ultimate perpetrators of those crimes, of whom I am confident 
the North Korean leadership is tied into, need to understand 
that they should be under notice, and to the extent that they 
don't stop in a reasonable period of time, I think we have to 
consider more extraordinary measures. But we also need to 
understand that to take unilateral actions without the full 
support of the Chinese and the ROK, and indeed Russia and 
Japan, would not be particularly constructive.
    We have had success in unilateral financial actions, which 
have definitely crimped the ability of the North Koreans to 
illegally distribute merchandise, such as counterfeit 
cigarettes, counterfeit currency. I even brought some for you, 
not that anyone really needs to see it, but it is amazing, the 
quality of counterfeit cigarettes being produced in North 
Korea. Counterfeit Viagra is a major market.
    These items are providing income that goes right to the 
top. So mere law enforcement actions conducted effectively can 
have a significant impact on the bearing of the leadership and 
their attitudes. Again, as I said in my testimony, to the 
extent they cannot rely on moonshine, on economic moonshine, 
for their existence--and I should note that this money, again, 
goes to the top, they rely on it, it doesn't go to the people 
of North Korea, so it is a very targeted approach--their 
incentive to take sunshine seriously, engagement seriously, 
will certainly increase over time.
    Senator Coburn. So let me ask you a follow-up question. Are 
we continuing a very aggressive two-track strategy, in your 
opinion?
    Mr. Asher. Yes, I think we are continuing it. It perhaps is 
being approached with less centralized coordination than we had 
during my time.
    Senator Coburn. Why would that be?
    Mr. Asher. Well, I think it is strictly the way that the 
management of the Department, who I applaud, I am a tremendous 
fan of Secretary Rice and Assistant Secretary Hill, but they 
want to work this much more through standard operating 
procedures and bodies like the Korea Desk, which is full of 
some very outstanding diplomats, rather than having specially 
appointed people like myself, whose job was more or less to 
ride herd on the North Korean----
    Senator Coburn. Is there loss of coordination with that 
movement?
    Mr. Asher. I don't think there is a loss of coordination. 
It may be a loss of spit and vinegar determination. It is hard 
to be in charge of the Six Party Talks at the same time you are 
going after their bad side, undoubtedly. I was involved in the 
Six Party Talks intermittently, but that was as an advisor and 
as a planner, basically trying to come up with means of how we 
could get them out of these sorts of businesses and out of 
repression of other people toward something better as other 
Communist States which have transformed have shown to be 
possible. I don't think the North Koreans necessarily believe 
that, but it is our responsibility at the State Department to 
at least be prepared for that.
    At the same time, most of our time, we were devoted with a 
large degree of interagency support, literally well over 100 
people, you could say hundreds of people involved in pursuing 
their activities globally, and I am very proud to see that work 
continues.
    Senator Coburn. Mr. Downs, any comments?
    Mr. Downs. I don't have much that I would want to add to 
that except a point that may actually be overly obvious. When 
the U.S. Government takes action like the Section 311 
designation, there is immediately one bank, and maybe more, 
that is not providing what it used to provide to the regime to 
help the regime carry out its illegal activities. It also has a 
multiplier effect because other banks see what has happened to 
that one bank. In this case, it was Banco Delta Asia. They see 
what happened when the United States makes a determination like 
that on that bank's business, legitimate business, and they 
don't want to be in the same position, so they stop the funding 
flow for North Korea's activities.
    Eventually, much of what the regime does gets back to this 
illicit funding flow. They have to have, according to Nick 
Eberstadt's estimate, at least $1.2 billion that they cannot 
generate domestically in order to satisfy the elites, in order 
to keep the Mercedes running in the hands of the generals in 
Pyongyang.
    If you begin to cut back on these things, you are also 
cutting back on the faith they have in Kim Jong-Il. So the 
long-term impact of these kinds of activities can be very real 
and very constructive. That cannot be said for the negotiating 
process.
    Senator Coburn. Dr. Noland, you presented a very concise 
picture of kind of where we stand and the delicacy of collapse 
and what that might mean, and also the other interested 
parties, especially their two neighbors, in why they would not 
want anything to come near that. My question is, how do we 
continue this process and still be available to offer 
humanitarian aid to so many people out there who need it? Is 
there a way that we can do that without showing weakness and 
still offer a humanitarian hand that won't complicate the Six 
Party Talks, that won't complicate our interdiction, and at the 
same time help supply basic foodstuffs and necessities of life 
to those people who are the subject of this dictator?
    Mr. Noland. Historically, the United States has pursued a 
policy in which we, at least rhetorically, separate 
humanitarian aid and broader foreign policy concerns, though in 
reality we often mix the two.
    In the case of the humanitarian aid, the U.S. Government, I 
believe, particularly under the Bush Administration, which I 
have often criticized on other grounds, I think has done a very 
good job of attempting to deliver humanitarian aid in a way 
that is most effective in actually getting aid to the people 
who need it and has been a very strong supporter of that 
process multilaterally.
    Specifically what I mean, it basically has to do with three 
things. We know that geographically, the incidence of need is 
not uniform across North Korea either socially or 
geographically, and what the U.S. Government and U.S. AID has 
done is push the World Food Program, which is the major 
multilateral conduit of that aid, to provide the aid in forms 
that are not liked by the elite. So instead of rice, provide 
corn, barley, millet, things of that sort, and then push that 
food aid into the northeastern part of the country, which is 
the worst affected area, where the greatest need is. So send 
that into ports like Chongjin. I think that has been very 
effective.
    The second thing that the United States has supported, 
though less effectively, is to have a strong monitoring system. 
We have a situation which at its peak was well below the WFP 
program, was well below international standards. We had a 
situation in which the North Koreans did not allow Korean 
speakers, for example, to participate in that monitoring 
process, in which visits to these institutions that were being 
supported required pre-notification. And we only had 50 
monitors trying to monitor an area roughly as big as New York 
State or Louisiana.
    What we have seen in the last 6 months is a retrenchment 
that was alluded to by another one of the witnesses. The North 
Koreans have banned the trade in grain, private trade in grain, 
and have essentially tried to force people to go back to the 
old centrally planned and state-run public distribution system. 
At the same time, it has demanded that both the private NGOs 
and initially the World Food Program leave the country.
    My understanding is that in March, the Executive Board of 
the World Food Program approved a program that would greatly 
reduce both the volume of aid, but it would extremely reduce 
the quality of monitoring. The five regional sub-offices around 
the country would be shut down. There would be less than 10 
people in the program, all in Pyongyang and only allowed to 
leave the city of Pyongyang once every 3 months. That process 
has been supported by better than expected harvests for the 
North Koreans this past fall as well as large, relatively 
unconditioned aid flows from China and South Korea.
    The problem, of course, is that the North Koreans are 
playing a very reckless game with people's welfare and the 
situation they have set up--seizures of grain in the rural 
areas, banning private trade in grain, which was the mechanism 
by which most people got their food--sets up the possibility 
that the situation internally may worsen significantly later in 
the year, and indeed, there are already reports that the 
revived PDS is failing even in the city of Pyongyang.
    Senator Coburn. I have one final question, and I want to 
state that I am a great supporter of Secretary Rice. I think 
she is doing a phenomenal job for us. But I still am at a 
little bit of a loss to think that we have lost some of this 
coordinated two-track effort, and I am going to ask our 
panelists if they think if we had a--and I know we have a North 
Korean Desk and I know we have somebody for East Asia policy--
but would it be to our benefit to reinstitute what we had or 
have a czar that covers this area, that coordinates both the 
Six Party Talks, coordinates humanitarian relief, and also 
coordinates our interdiction, that one person, one responsible, 
one person that can be looked down the line, this is the person 
that is doing all that? Any comments on that?
    Mr. Asher. Well, I mean, most certainly, that was the goal 
of the Office of the North Korea Working Group Coordinator that 
I had reporting directly to the Deputy Secretary, and it was 
housed on the seventh floor, so it was very clear to people who 
was behind us.
    I think that, frankly, at least as far as proliferation 
illicit activities go, sort of the dark side of North Korea, it 
makes sense to have one person tasked to coordinate an 
interagency effort. I also think--and my colleagues know this--
that there is an unnecessary, not certainly helpful bifurcation 
between the Illicit Activities Initiative and the Proliferation 
Security Initiative as it is applied to North Korea. Perhaps 
for that reason, we have had some failures on the proliferation 
front, not that we were aware of them at the time, but there 
are some things that we could do better, undoubtedly. I think 
that there is an effort to do better at this time.
    But as I said, the relationship between the DPRK and Iran 
is undoubtedly evolving quite precipitously. The shipment of 
the BM-25 missile, which is the most powerful missile ever 
exported to another country, as far as I know, by the North 
Koreans apparently to the Iranians in the couple years has 
potentially very destabilizing impact on our European allies, 
on Israel, and ultimately on U.S. security interests. One, 
frankly, wonders why the Iranians would procure such a missile 
if they didn't have something to go inside it. Our official 
view, of course, as a government is that there isn't, a weapons 
program is far away in Iran, and I have no reason to doubt 
that. But it is interesting and somewhat curious.
    I think the more that we can centralize both the diplomatic 
efforts and empower the diplomats and empower the people who 
are engaged in policing the North Koreans, in effect, around 
the world, the more effective a basis for a policy, a sort of 
sunshine and the stick. The two can go together. I don't 
disagree with Mr. Downs that there is, despite the obvious 
upset of the North Koreans at being called out for 
counterfeiting the U.S. dollar, a Casus Belli Act under 
international law, an act of economic war--which we have not 
treated that way but undoubtedly could be classed that way--is 
indicative, frankly, of the extent to which the North Korean 
leadership has come to rely on these activities.
    They just have to stop, and if we have to force them to 
stop, well, that is fine. But at the same time, we have to open 
up a line of communication to them and our negotiator has to be 
empowered. Thank you.
    Senator Coburn. I just would make note that in relationship 
to Iran, we have Nicholas Burns who is a face and a name that 
handles all that. Again, I would just say, North Korea does not 
in terms of our State Department.
    I want to thank each of you for being here. We will leave 
the record open if you have additional things. We will have 
some additional questions for you. Your interest, knowledge, 
and effort to attend the Subcommittee is very much appreciated. 
I want to thank you for your time and your testimony and God 
bless you.
    The hearing is adjourned.
    [Whereupon, at 4:15 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              


                  PREPARED STATEMENT OF SENATOR LEVIN
    Let me join the Chairman in welcoming our witnesses. I would also 
like to thank the Chairman for holding a hearing on North Korea.
    For about 4 years a nuclear crisis has been building on the Korean 
peninsula. Regrettably, the Administration has been unable to manage 
this crisis. Indeed, it appears that over the last several years North 
Korea may have increased its nuclear weapons arsenal from one to two 
weapons to up to 12 nuclear weapons this year. The reactor the North 
Koreans restarted over a year ago continues to produce plutonium, and 
another reactor which had been under construction could produce 10-
times more plutonium than the existing one.
    Meanwhile, the six-party talks remain stalled over counterfeiting 
issues that the United States raised in the same month the last round 
of talks concluded. There is no diplomatic progress, and North Korea 
has not frozen its nuclear activities during the talks. North Korea 
continues to use the time to bolster its nuclear arsenal.
    The Administration has relied on a six-party talk constructed at 
the expense of making progress. While the North Koreans said they 
wanted bilateral talks, the Administration refused to meet unless it 
was in a multilateral setting. So we now appear dependent on China and 
on continued cooperation among the four countries working with us to 
bring North Korea to the negotiating table. Yet, our relations with 
South Korea, are at a low mark in recent history, with the South Korean 
Government reportedly fearful that this Administration may advocate 
using direct punitive action to force regime change, rather than 
negotiations to settle the nuclear crisis. And just last week Japan and 
South Korea averted a confrontation over a cluster of islands in the 
Sea of Japan, or East Sea.
    North Korea's illicit activities violate human rights, damage world 
trade, and undermine international financial systems. At the same time, 
we need to address these activities in a way that does not undermine 
our abiding national security interest in ensuring that nuclear weapons 
are eliminated from the Korean peninsula. I hope that our witnesses 
will give us their views on the relationship between the 
Administration's new policy on illicit activities and how to revive the 
program comes from illicit revenues? Will decreasing North Korea's 
illicit revenues make it more difficult for the country to support 
their nuclear program, or will they simply divert other income to the 
nuclear program? How can we clamp down on counterfeiting, money 
laundering, and other misconduct, while continuing to press for North 
Korea to eliminate its nuclear weapons and programs? I look forward to 
today's testimony.


                PREPARED STATEMENT OF SENATOR BROWNBACK
    Mr. Chairman, thank you for calling this timely hearing during 
North Korea Freedom Week, an important event to shed light on the 
horrific suffering in North Korea. This week, many will gather in a 
variety of forums to hear refugees and defectors from the North tell 
their stories about life under one of the most repressive regimes in 
all of history. People from across the country and Asia will be here to 
stand up for the suffering people of North Korea.
    Unfortunately, the state of affairs in North Korea is deteriorating 
further as the regime continues to misuse its resources and funnel 
profits from illegal activity toward malign ends. There are very few 
places in the world today that could compete with the level of 
corruption and terror imposed by this failed state.
    On May 20, 2003, Senator Peter Fitzgerald sponsored a similar 
hearing to the one being held today titled, ``Drugs, Counterfeiting, 
and Weapons Proliferation: The North Korea Connection.'' In that 
hearing, two North Korean defectors gave a detailed account on how the 
regime has made the export of narcotics and missiles a state-run 
business. It is also no secret that North Korea is suffering from one 
of the worst human rights situations in the world today. One of the 
reasons for that is because the regime, under Kim Jong-Il, has been 
able to bolster support with financial backing via illegal activities.
    All of the illicit activities North Korea have engaged in poses a 
threat not only to the people of North Korea, but also to the rest of 
the world. All of the evidence leads me to believe that the proceeds 
from counterfeiting are used to maintain the North Korean dictator's 
taste for luxury imports, the need to subsidize his inner circle of 
supporters, the production and sale of several missiles systems, and 
the expansion of North Korea's WMD programs. North Korea may even be 
favoring the cultivation of more drugs on land meant for agricultural 
purposes, despite the massive starvation that has overrun the destitute 
state.
    I would like to commend the Bush Administration for aggressively 
taking steps to isolate the North Korean regime through the 
Proliferation Security Initiative and the Illicit Activities 
Initiative. By imposing sanctions on financial institutions involved in 
laundering North Korea's counterfeit currency and the proceeds from 
narcotics and arms trafficking, the U.S. is influencing the power of 
the North Korean state to continue its misguided policies.
    The depressing facts about the state of affairs in North Korea 
underscore the need for more hearings like this one, and again I 
commend the Chairman for convening this hearing. Let me conclude by 
noting that the real victims of North Korean regime's illicit 
activities are the people of North Korea. The North Korean regime's 
power is sustained because of its successful involvement in illegal 
activity. The U.S. and the international community should do everything 
it can to stop North Korea from profiting from drugs, weapons, 
trafficking, and counterfeiting. Only with sustained pressure will this 
evil regime be forced to face up to its obligations to international 
law and the basic human rights that its citizens deserve.
    Thank you, Mr. Chairman.
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