Global Insurance Fraud By North Korea Outlined
Government Has Collected Millions Of Dollars on Large, Suspicious Claims
 What a defector says of Kim Jong II, above, is "complete nonsense," a lawyer for the North's firm says. (Knight Ridder/tribune News Service Via Associated Press) |
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Thursday, June 18, 2009
For Kim Jong Il's birthday, North Korean insurance managers prepared a special gift.
In Singapore, they stuffed $20 million in cash into two heavy-duty bags and sent them, via Beijing, to their leader in Pyongyang, said Kim Kwang Jin, who worked as a manager for Korea National Insurance Corp., a state-owned monopoly.
Kim said he helped arrange the shipment and watched in February 2003 as the cash was packed. After the money arrived, Kim Jong Il sent a letter of thanks to the managers and arranged for some of them to receive gifts that included oranges, apples, DVD players and blankets, Kim said.
"It was a great celebration," he said.
The $20 million birthday present and the gratitude of its recipient, who is known as the Dear Leader, were annual highlights of a sophisticated global insurance fraud that North Korea has concocted to provide its communist leadership with hard currency, said Kim, who spent five years as an executive of the state insurance company in Pyongyang and worked for a year at its banking subsidiary in Singapore before defecting to South Korea.
"This money helps keep Kim Jong Il in power at a time he is engaged in nuclear brinksmanship," said David L. Asher, who supervised a State Department unit that attempted to track various illegal activities by North Korea during the Bush administration. "This is the gift that keeps on giving. It has become one of the North's largest illicit revenue generators."
In interviews and court documents, Western insurers, U.S. officials and defectors such as Kim said the impoverished and isolated North Korean government has collected hundreds of millions of dollars from some of the world's largest insurance companies on large and suspicious claims for transportation accidents, factory fires, flood damage and other alleged disasters. Still, recent attempts by international insurers to overturn North Korea's claims have failed in British courts.
For years, the U.S. government and law enforcement agencies around the world have documented what they describe as state-sponsored criminality in North Korea. They have linked the North to illegal manufacturing and trafficking of drugs ranging from heroin to Viagra, as well as to expert counterfeiting of $100 bills and the production of high-quality counterfeit cigarettes.
Much less has been disclosed about North Korea's international insurance claims, in part because they have been cloaked in legal settlements by firms with no interest in highlighting their losses.
"The exact scale of the fraud is hard to determine . . . because the insurance industry has been so gullible," Asher said. North Korean insurance fraud "was absolutely something I should have been looking into more when I was running the [State Department's] illicit activities initiative," he added.
Some details emerged in London last year when lawyers for German insurance giant Allianz Global Investors, Lloyd's of London and several other reinsurers disputed a North Korean reinsurance claim for the 2005 crash of a helicopter into a government-owned warehouse in Pyongyang. According to court documents, the companies alleged that the helicopter crash had been staged, that a North Korean court's decision to uphold the claim had been rigged and that the North Korean government routinely used insurance fraud to raise money for the personal use of Kim Jong Il.
A British appeals court allowed the case to go forward, but as it went to trial in December, the insurance companies agreed to a settlement that amounted to a nearly complete victory for the North Koreans: The insurers retracted all allegations of fraud against Korea National Insurance Corp. (KNIC) and paid out about $58 million, or 95 percent of the North Korean claim for the crash.
Attorneys for the reinsurance companies declined to say why they settled. An analysis of the settlement published by Law-Now, a London-based legal information service, said the reinsurers had a weak case because they had contractually agreed to be bound by North Korean law.
An attorney for the North Korean company said the reinsurers settled "because their case was hopeless."
"There wasn't a shred of credible evidence to support their allegations of fraud," said Tim Akeroyd of the London firm Elborne Mitchell. "Anything you say suggesting that the North Koreans have been guilty of reinsurance fraud would be staggeringly unfair."
Akeroyd also challenged the credibility of Kim Kwang Jin, who was listed as a possible witness for the reinsurance companies against North Korea in the London trial on the helicopter crash. "It is in his interest to tell horrible stories about North Korea," the lawyer said. "What he says is utter and complete nonsense."
Kim is working this year for a Washington-based human rights group that often criticizes the North Korean government, and his 12-month stipend is funded by reinsurance companies. As with many claims and counterclaims involving the shuttered world of North Korea, it was not possible to independently verify Kim's version of the insurance operation. But specialists on North Korea describe him as a unique and credible informant.
"His story hangs together," said Marcus Noland, a Washington-based expert on food, famine and economic policy in North Korea. Kongdan Oh Hassig, a Korean scholar at the Institute for Defense Analyses, said Kim has "rare expertise" and "is a member of the core, blue-blood elite that was considered loyal and faithful to the regime."
Several North Korean defectors who are afraid to speak publicly have provided South Korean authorities with accounts of Pyongyang's insurance fraud that are similar to Kim's, said Park Syung-je, a director at the Seoul-based Asia Strategy Institute, which is affiliated with the South Korean Defense Ministry. Park, who has debriefed Kim and other defectors with firsthand information about the insurance operation, said the South Korean government is well aware of the fraud but does not want to speak about it publicly for fear of exacerbating tensions with the North's government.
In addition to the helicopter crash, North Korea filed claims in 2006 for three other disasters: two train crashes and a ferry sinking. Those claims came when the North appeared to be facing a hard currency squeeze. In 2005, assets from North Korean companies linked to counterfeiting were frozen in Banco Delta Asia in Macau, as the U.S. Treasury accused the bank of being a party to money laundering. The claims also followed an article in a North Korean economic journal, Kyongje Yongu, that said "the pursuit of more active external insurance transactions" would help support "the requirements of the military-first era."
A crackdown in recent years by international law enforcement agencies on North Korea's drug and counterfeiting rackets has increased the relative importance of the insurance operation as a way for the government to earn hard currency, said Park, the analyst. He said several North Korean government officials who supervise the state insurance monopoly have received promotions from Kim Jong Il in the past year.
A Lesson
Reinsurance is a multibillion-dollar industry that passes on part of the risk assumed by one insurance company, which in North Korea is always the state-owned KNIC, to a number of companies across the world. In the case of the helicopter crash, the reinsurers included companies in Europe, India and Egypt.
Global publicity generated by the London case has alerted many reinsurers and their brokers to avoid dealing with North Korea, according to industry experts in Europe and Asia.
Akeroyd, the attorney for KNIC, said the allegations have "obviously harmed" North Korea's ability to find reinsurance.
"All these companies learned a lesson," said an expert on the British insurance industry who is familiar with the helicopter case. "Never agree to have disputes decided in a North Korea court and never reinsure KNIC."
While working for North Korea's insurance monopoly, Kim Kwang Jin said, he and other managers had a tightly focused mission: to find reinsurance companies and brokers in different parts of the world who would accept high premiums to reinsure KNIC's policies.
Those policies, he said, usually covered losses from common North Korean disasters such as mining accidents, industrial fires, transportation crashes and crop losses due to floods.
"The major point of the reinsurance operation is that they are banking on disaster," he said. "Whenever there is a disaster, it becomes a source of hard currency."
According to Kim, KNIC would target a different potential disaster and a different reinsurance company each year. "We pass it around," he said. "One year, it might be Lloyd's; the next year, it might be Swiss Re; and the next, Munich Re."
In London, the expert on the insurance industry familiar with the helicopter case echoed Kim's assessment of how KNIC operated. He spoke on the condition of anonymity because he was not authorized by reinsurers to talk about the case.
"They pay good premiums, and they are very sophisticated, very clever," he said. "They would divvy business up into very small bites and use different brokers in different places. The division of losses was such that it would never be apparent to a prospective reinsurer just how bad the business was."
The North Koreans were known in the reinsurance industry for their capacity to prepare meticulously documented claims, speed them through puppet courts in Pyongyang and demand quick payment from international reinsurers. The North sometimes restricts the ability of reinsurers to dispatch investigators to verify claims.
The North Korean insurance monopoly sometimes took advantage of the geographical and political ignorance of brokers and reinsurers, according to the London-based insurance expert. Some brokers and companies, he said, thought they were dealing with a company from South Korea, while others were unaware that North Korea is a secretive totalitarian state with one of the world's worst human rights records.
Bureau 39
After his defection in 2003, Kim moved to Seoul, where his insider expertise on the upper reaches of the North Korean government helped him become a senior fellow at the Institute for National Security Strategy, a government-funded think tank that focuses on intelligence matters.
This year, Kim, who speaks fluent English, moved with his wife and child to the Washington area, where he has a one-year contract as a consultant to the U.S. Committee for Human Rights in North Korea, a nonprofit group that focuses attention on concentration camps and other human rights abuses in the North.
Its executive director, Chuck Downs, said that after Kim was identified in the London court as a possible witness against North Korea, the committee felt he would be at risk of retaliation by North Korean agents if he continued living in Seoul. High-value defectors often receive police protection in South Korea as a precaution against kidnapping and assassination.
Downs said he approached the reinsurance companies that had listed Kim as a possible witness and told them: "You have endangered this man. If you give us the money, we will bring him into our organization in Washington, and he can help us argue about what North Korea is doing internationally."
In January, the reinsurers agreed to sponsor Kim's work in Washington for the human rights group.
When he worked at KNIC, Kim said, annual revenue from North Korea's reinsurance claims was about $50 million to $60 million. Most of that money, he said, was used to scout out potential disasters inside North Korea, to buy more reinsurance on the global market and to pay premiums.
"The remaining hard currency should have been used to help people recover from disasters and accidents, but it was not used that way," Kim said. "It is just going into the pocket of Kim Jong Il."
He said cash shipments of $20 million arrived yearly in Pyongyang, usually in the week before Feb. 16, which is Kim Jong Il's birthday and a national holiday. In his six years at KNIC, Kim said, bags of cash arrived in Pyongyang from Singapore, Switzerland, France and Austria.
The money, he added, was delivered to an entity called Bureau 39 of the Korean Workers' Party Central Committee. It was created by Kim Jong Il in the 1970s to collect hard currency and give him an independent power base, according to defectors, Seoul-based analysts and published reports. These sources agree that Bureau 39 spends foreign currency on luxury goods for the North Korean elite, components for missiles and other weapons programs.
With Bureau 39 skimming off hard-currency earnings returned to North Korea by KNIC's global operation, Kim said, claims to disaster victims had to be paid in won, North Korea's currency.
"That money is nearly worthless at present, because the economy has collapsed," he said. "This means that little is done to help people recover from fires or whatever."
But Kim Jong Il has been pleased with the state insurance company, Kim said.
"It brings him large amounts of hard currency," Kim said. "Working in insurance is one of the best professions in North Korea. Many people want to do it."
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