Appropriately enough, I met Chen Chiang Liu on Las Vegas Boulevard. But it wasn’t at one of the casinos on the Strip that he loved so well; it was in a different kind of building a few miles to the north—the Lloyd D. George U.S. District Courthouse. Peering through the heavy mesh screen in a holding cell, he was a very unhappy man. Understandably so. It was March 5, 2009, and later that morning, he was due to be sentenced. Liu had been convicted of conspiracy and fraud involving millions of dollars made not by the Bureau of Engraving and Printing but by counterfeiting presses in a foreign country, presumably North Korea. The quality of these “supernote” forgeries is so high that he’d managed to pass enormous quantities through the electronic detection devices with which every Vegas slot machine is supposed to be equipped. The prosecutor was asking the judge to give him close to 25 years, and in the end Liu would receive more than 12.
Liu’s crimes threatened not only the integrity of America’s currency but the very fabric of international peace. They were part of a vast criminal enterprise believed to be controlled by the North Korean state, set up and used to finance its nuclear-weapons and ballistic-missile programs. All of this, intelligence analysts say, is coordinated by a secret agency inside the North Korean government controlled directly by “the Dear Leader,” Kim Jong Il, himself. The agency is known as Office 39. (Given the opacity of anything inside North Korea, experts differ on whether “Office” should be “Bureau” or even “Room”—and they also suspect that the number itself may change.) Until a few years ago, American law enforcement had Office 39 squarely in its sights—probing its networks, disabling its enablers, and gradually shutting off the sources of illegal hard currency. And then, peremptorily, the Bush administration shut this law-enforcement effort down.
Liu, who was born in Taiwan in 1962, uses the first name Wilson. He owed his fate to the trips to Vegas that he and his wife, Min Li, used to make every weekend from their home in San Marino, a wealthy neighborhood of Los Angeles. “My two daughters like the swimming in the pools and all that, so the whole family come to go swimming, shopping, and eating,” Liu said wistfully. “We see the shows, like Celine Dion: oh, her songs touch my heart. And in the evenings, we play the slot machines.”
Before Liu was finally apprehended, at Caesars Palace in July 2007, he used the casinos to launder counterfeit “supernotes” with a nominal value of several millions of dollars. Most of the notes have ended up in general circulation.
On April 4, 2009, 30 days after Liu was sentenced, North Korea launched its new Taepodong-2 long-range ballistic missile, a vehicle that, if successful, may be capable of reaching parts of the United States. The test brought immediate condemnation by the United Nations and many governments. North Korea denounced this reaction as an “unbearable insult” and expelled inspectors from the International Atomic Energy Agency. It had already withdrawn from international talks on its nuclear-weapons program. On May 25, North Korea conducted an underground nuclear-weapon test, the detonation of a device said to be as powerful as the one that destroyed Hiroshima in 1945. Again ignoring international protests, North Korea the next day fired three short-range missiles. On July 4, North Korea was at it again, firing seven missiles into the Sea of Japan—thereby threatening the whole of Japan and South Korea.
The link between Wilson Liu’s counterfeit bills and North Korea’s missiles and nuclear weapons is umbilical. “More than 70 percent of the missiles’ components are imported from overseas,” says Syung Je Park, a director of the Asia Strategy Institute, a think tank affiliated with South Korea’s military, whom I met (at his insistence) at a safe house in London. Park has debriefed more than 1,000 North Korean defectors, including Hwang Jang Yop, once the regime’s chief ideologist and Kim Jong Il’s tutor. North Korea depends on international aid just to keep famine at bay. “They need money,” says Park. “Where else can they get it?” The answer, he and senior U.S. officials believe, is by means of organized crime: not only the production of counterfeit currency but also the manufacture and export of counterfeit cigarettes and pharmaceuticals, and the sale of drugs such as heroin and crystal methamphetamine.
As noted, at the center of this activity lies Office 39. And a question that remains to be answered is whether the Obama administration will revive the efforts against it that President Bush declined to pursue.
It was the South Korean movie star Choe Eun Hee, kidnapped on the orders of Kim Jong Il in 1978 and forced to spend nine years making propaganda films, who first reported after her escape that Kim Jong Il is a cinéaste, with a fondness for James Bond movies. Should Kim decide to produce a homegrown spin-off, his screenwriters might well find suitable material in the quadrangular building in the leafy Central Committee precinct of downtown Pyongyang that houses Office 39. North Korea remains one of the world’s most opaque countries, and teasing out details about Office 39 is not easy. Like conventional non-state Mafias, it enforces a code of silence through violence and fear. I glimpsed this firsthand in my jail-cell interview with Liu. When he spoke of the family he was about to lose through incarceration, his despair was palpable, and later, when Judge James Mahan allowed him to address the court, he broke down entirely. But when I asked Liu why he had not made a deal with the prosecutors, using his inside knowledge to secure a lighter sentence, his reply revealed a very different emotion: simple terror. “The North Koreans are my friends,” he said. “I have a good connection with them. I can make money easily with them. But you can’t betray them.”
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David Asher, who started watching North Korea at the Pentagon during the Clinton era, went on to serve from 2003 through 2005 as head of the State Department’s Illicit Activities Initiative, a wide-ranging investigation into Office 39 and its many-faceted activities. The program embraced the Treasury Department, the Drug Enforcement Administration, the Department of Defense, the Department of Justice, the C.I.A., and the F.B.I. “In one sense, Office 39 is like an investment bank,” says Asher. “It provides the money for the stuff Kim needs. Like any organized-crime syndicate, you’ve got a don, and you’ve got accountants, and it’s a very complicated business, keeping track of all this money and making sure the boss gets paid. But when members of the organization don’t deliver, they get killed.” According to Syung Je Park, Office 39’s elite headquarters staff, which numbers about 130, plans and supervises foreign operations (often leaving the execution to local criminals) and also runs large-scale facilities such as drug and cigarette factories and the printing presses that produce counterfeit banknotes. “Office 39 is central,” says Paul Janiczek, a former State Department analyst specializing in North Korea. “Everything I looked at came back to that entity.” Janiczek showed me a State Department chart that illustrates the Byzantine structures of North Korean power. It identifies the head of Office 39 as Kim Tong-un, who is said to be a former industrialist. Syung Je Park says that Office 39, one of whose jobs is to manage Kim Jong Il’s multi-billion-dollar personal bank accounts in Switzerland and other private banking havens around the world, works closely with other sections, such as Office 99, which raises funds by selling the missiles and other weapons whose development Office 39 makes possible, and Office 35, which focuses on trying to damage South Korea. But in North Korea’s labyrinthine hierarchy, Office 39 is paramount. Park says, “If Office 99 makes a profit, it all gets handed over to Office 39.
An aerial view of Office 39’s location.
Crime, in other words, has become an integral part of North Korea’s economy. “It not only pays,” says Asher, “it plays to their strategy of undermining Western interests.” American and South Korean intelligence officials had long been aware that North Korea was behind a great deal of underworld activity: over the years, there have been at least 50 documented incidents, many involving the arrest or detention of North Korean diplomats in a score of countries, and linking them to drug trafficking, counterfeit currency, or both. But just how big these underworld enterprises are did not become clear until 2002, when Asher, working with William Newcomb, a senior economic analyst with the Bureau of Intelligence and Research, took a closer look at annually calculated “mirror statistics”—an attempt to estimate the regime’s hard-currency resources based on data that its trading partners provide about their own imports from and exports to North Korea. “We knew their economy was in deep trouble,” Asher says. “What we couldn’t understand was why they didn’t seem bothered by sanctions, or want to cut a deal over their nuclear-weapons program. They should have been bankrupt, but they seemed to be surviving.”
Asher and Newcomb concluded that, since 1990, North Korea’s accumulated legitimate trade deficit was well over $10 billion, and was increasing by around $1.2 billion a year. Yet, though the country had been unable to borrow money on international markets since the 1970s, it was managing to acquire enough hard currency to import not only military components but also the goods that fuel the “palace economy” of Kim and his cronies. Their lifestyle, dependent on the importing of cars, cognac, high-end electronics, and other luxuries, bears no relation to the impoverished North Korean norm. (In 1991 the North Korean government launched a “Let’s eat only two meals a day” campaign—an injunction the regime’s leaders did not themselves follow.) The gap between North Korea’s hard-currency needs and its means is filled by Office 39, which is estimated to bring in between $500 million to $1 billion a year or more.
Compared with the amount of American currency in circulation around the world—at least half of all U.S. banknotes are physically in the hands of people outside the United States—the total quantity of supernotes, believed to be made by North Korea, to date is small. However, their extraordinary quality can have disproportionate consequences. In 2004, Taiwan’s central bank issued a warning that supernotes had been turning up on the island. This caused a panic, and the Taiwanese banks were overwhelmed by customers seeking to return $100 bills totaling hundreds of millions of dollars, most of them perfectly genuine. “It was effectively a run on the dollar,” says Asher. “No one knew if their money was real or fake.”
The Secret Service, the branch of the Treasury Department that takes the lead against counterfeit currency, has maintained a worldwide investigation into supernotes since 1989, when the first sample—cruder than those found today—was detected by a bank teller in the Philippines, apparently because it didn’t “feel” right to the touch. Since 1996, the U.S. has tried to outwit the supernote manufacturers by twice changing the design of $100 bills, but the counterfeiters have kept pace. The supernotes have been found in countries throughout Asia, Europe, and the Middle East. Now, as the Liu case suggests, substantial quantities of supernotes are starting to circulate inside the United States.
They are crafted with extraordinary care. Klaus Bender, an authority on banknote printing, writes in his book Moneymakers that unlike other forgeries, and unlike any other currency except real U.S. banknotes, these supernotes use paper with long, parallel fibers, manufactured by a machine called a Fourdrinier and composed of 75 percent American cotton and 25 percent linen. Like genuine bills, modern supernotes are printed using “optically variable ink,” which appears to change color from bronze green to black depending on the angle of the light. (Indeed, their quality is so superb that Bender suggests they aren’t made by North Korea at all, but somewhere in America by the C.I.A.—a claim for which there is no evidence.)
The print quality is exceptional. Again like genuine dollars, the supernotes are produced on a special intaglio press so that their intricate design is raised above their surface. The “microprinted” features, 1/42,000th of an inch high, found on real dollars are reproduced exactly on counterfeit ones. At Liu’s trial in Las Vegas, the prosecution blew up images of the supernotes to hundreds of times their normal size, and even then, says an F.B.I. agent who worked on the case, the differences between the supernotes and genuine bills were invisible to the naked eye: “Frankly, if I’d been the defense attorney, I would have asked the prosecution, ‘How can you prove these are counterfeit?’ He could have persuaded the jury they were real.” Lorelei Pagano, a Secret Service counterfeit specialist, told a private banknote-industry conference in 2003 that the makers of the supernotes had likely included their few tiny flaws on purpose, so that they and their customers could tell the difference between the counterfeits and the real thing. Otherwise, there would be nothing to stop criminals from ripping off their suppliers by purchasing supernotes—which typically cost around a third of their nominal value—with other supernotes.
Wilson Liu’s nemesis is a man named Bob Hamer, a now retired F.B.I. agent whose recent book The Last Undercover describes his 26 years with the bureau, working mostly covertly. Hamer’s three-year investigation—code-named Operation Smoking Dragon—began not with supernotes but with counterfeit cigarettes, which were being shipped by freight container from China into California ports by the millions. These, too, says Asher, originated in North Korea, and were the subject of a report by the Coalition of Tobacco Companies, one of whose investigators made an undercover visit, posing as a buyer, to North Korean factories in Pyongyang and the northeastern city of Rajin. These turn out fake Western brands, such as Marlboros, in such quantities that they generate as much as $720 million in gross revenue each year. Hamer set up a number of front operations to get inside the cigarette-smuggling business, and soon had many contacts who dealt with him as if he were a smuggler, too. In the spring of 2004, Hamer and his colleagues were asked by F.B.I. headquarters to see if they could acquire North Korean supernotes. One of Hamer’s best customers, Chao Tung “John” Wu, who eventually pleaded guilty to smuggling counterfeit currency, cigarettes, and narcotics, as well as conspiring to broker a deal for Chinese-made, shoulder-fired missiles, but died before he was sentenced, promised he could supply them with the help of a man who was a frequent visitor to North Korea—Wilson Liu. The notes were so good, Wu said at a secretly recorded meeting, “you can even go to Las Vegas and slide them into the machines—they take them right away.”
Within a few weeks, Wu brought Hamer a sample of an “old” supernote, but advised him that before ordering in bulk he should wait for the forgers to perfect their version of the new, 2003-edition $100 bill. This took months, but finally, in March 2005, Wu called Hamer and said he had two samples, which he eventually handed over at an undercover warehouse in Pomona, California. Hamer gave them to a Secret Service agent and asked him to have them tested. Hamer remembers, “The guy called me a few days later and said, ‘Why’d you give me these? They’re real!’ I said, ‘If these are real and I’m paying 30 cents on the dollar for them, I’m going to remortgage my house and spend the proceeds on these notes.’” Hamer suggested that the Secret Service send them to the central lab in Washington, D.C., which confirmed they were indeed counterfeit.
Retired F.B.I. agent Bob Hamer, undercover in search of supernotes.
Wu introduced Hamer to Wilson Liu at the Ritz-Carlton hotel in Pasadena. In the meeting, which was videotaped, Liu did not reveal exactly how he would obtain more supernotes, but boasted of his personal connections in North Korea. Wu urged Hamer to go ahead with a plan to have about a million supernote dollars shipped to the United States, saying he would guarantee the shipment, using a house Liu owned in Beijing as collateral. Wu also proposed building a crystal-methamphetamine plant inside North Korea as a means of penetrating drug-distribution networks in Asia. “We pushed this scheme hard,” Hamer recalls, “but the bureau wouldn’t allow us to invest in the manufacture of narcotics.”
Using funds generated from other undercover operations, Hamer wired $350,000 in two installments to the bank account of one of Liu’s contacts in Beijing. He made the first payment on April 6, 2005, and the next day received a FedEx package containing 15 supernotes and a computer memory stick with photos of multiple bundles of realistic-looking hundred-dollar bills. By the end of the month, a freight container laden with rolls of cloth was on its way to America, addressed to the Pomona warehouse. Among the bolts, Liu promised Hamer, would be supernotes with a nominal value of $700,000. He was as good as his word.
After further clandestine meetings and payments, Hamer went on to receive another $223,600. He held a final meeting with Liu at the Ritz-Carlton on August 17. Liu was late because he’d been delayed driving back from a trip to Vegas, telling Hamer he had become such a high roller that some of the Strip’s biggest casinos—the Mirage, the Mandalay Bay, and Caesars Palace—had awarded him “comp” status, entitling him to free food and lodging. He showed Hamer the bill of lading for another, pending container shipment. When it arrived, about a week later, the roll of cloth hid $983,500 in supernotes.
By then, Wu, Liu, and some of the cigarette smugglers were behind bars. Hamer had assembled the key players in Los Angeles for a fictitious “divorce party” at the Playboy Mansion that Hamer concocted for himself. Almost simultaneously, another F.B.I. operation, called Royal Charm, rolled up North Korean cigarette-and-supernote smugglers on the East Coast. (The suspects had all been invited to a “wedding” aboard an Atlantic City yacht.) Though under indictment, Liu managed to make bail and, while awaiting trial, continued to spend counterfeit bills in Vegas for close to another two years. He was caught a second time when the Secret Service, after receiving intelligence that supernotes were pouring into the casinos, installed sensitive detection equipment in the slots at Caesars Palace. Exactly how much Liu had managed to launder by this time remains unknown, but his MGM player’s-card account reveals that, in the MGM Mirage slots alone, he wagered more than $1.2 million in 2005, $1.8 million in 2006, and $574,000 in the first six months of 2007. From February 2006 until his second arrest, on July 30 the following year, he fed almost $2 million into the slots at Caesars Palace. Casino surveillance cameras eventually revealed his laundering technique. Again and again, Liu would appear to dispose of about a thousand supernote dollars, but would pull the lever to place a bet only a few times—so leaving a large unspent balance. Then he would press a button to get a ticket for the unspent amount and exchange it at the cashier for genuine dollars.
At Liu’s sentencing, last March, Assistant U.S. Attorney Tim Vasquez called the North Korean supernotes “a serious assault on the monetary system of the United States.” How significant might this assault be? For many years, U.S. agencies have claimed in public that the quantity of supernotes in worldwide circulation amounts to only about $50 million. By definition, any figure, especially one relating to forgeries of high quality, must be a guess. David Asher, in congressional testimony in 2006, suggested that the total might be in the hundreds of millions. But according to Syung Je Park, in 2007 North Korea bought a huge amount of the special Fourdrinier paper—“enough to print $2 billion.”
In his State of the Union address in January 2002, President Bush famously described North Korea as part of an “axis of evil,” together with Iraq and Iran. That stern rhetoric underpinned the efforts of the Illicit Activities Initiative. Aside from Smoking Dragon and Royal Charm, the initiative scored some notable successes. Some of them involved drugs. In response to U.S.-generated intelligence, the Australian Navy in 2003 boarded and seized the Pong Su, a North Korean vessel that had been carrying 150 kilograms of pure heroin. North Korea has been heavily involved in drug trafficking, both to its neighbors and farther afield, for many years. In 2003, U.S. defense officials said it had become the world’s third largest producer of opium, after Afghanistan and Burma. Unclassified Pentagon documents say this is converted to heroin at state-owned factories. China’s narcotics-control commission described North Korea as one of three “golden routes” for heroin supply, using a Chinese term—“Ku’mdallae”—which had a deliberate double meaning: the Chinese character “Ku’m” is also that used to represent the name Kim Jong Il. Office 39 also organizes the import of ephedrine, the main precursor chemical for making crystal methamphetamine, and the manufacture and export of the drug. Japanese police believe a high percentage of the meth sold on Japanese streets comes from North Korea. As Syung Je Park observes, “drug money and counterfeit money go to Office 39. Office 39’s money is directly controlled by Kim Jong Il. And Kim Jong Il’s first priority is to develop nuclear weapons and missiles.”
The Illicit Activities Initiative also went after banks. In June 2004, American pressure persuaded the government of Austria to shut down the Golden Star Bank in Vienna. Wholly owned by North Korea, Golden Star was suspected by Austrian intelligence of sponsoring the distribution of supernotes and also of attempting to buy fissionable material. Then, in September 2005, a month after the arrest of Wilson Liu and his associates in Los Angeles, the U.S. Treasury designated North Korea’s most important financial entrepôt, the Banco Delta Asia, in Macao, as an institution of “primary money-laundering concern,” in part because it was being used to distribute supernotes. The designation amounted to an American declaration that any entity that did business with the bank would itself be considered a pariah. “The Banco Delta was critically important to the regime,” says Juan Zarate, the senior official behind the Treasury Department’s action. (Zarate later became Bush’s deputy national-security adviser.) “Designating it compelled other institutions, especially Chinese ones, to realize that they risked jeopardizing their own business relationships with the U.S.” That, in turn, “gummed up North Korea’s ability to operate in the normal financial world—for example, to issue letters of credit in dollars to pay for what they were doing,” including arranging payment for parts for new missiles.
The Illicit Activities Initiative had a lot more planned. The final stage, which David Asher says President Bush had been fully briefed about, would have been the unsealing of criminal indictments. “We could have gone after the foreign personal bank accounts of the leadership because we could prove they were kingpins,” Asher says. “We were going to indict the ultimate perpetrators of a global criminal network.” “The world wanted evidence that North Korea is a criminal state, not a lot of hoo-ha,” says Suzanne Hayden, a former senior prosecutor at the Department of Justice who ran its part of the Illicit Activities Initiative. “The criminal cases would have provided the evidence. It would have been in the indictments. As with any money-laundering investigation, we would have identified the players and traced them back, from Macao to those who were behind it in North Korea.” Hayden spent several years attached to the International Criminal Tribunal for the former Yugoslavia, working on the case against the Serb leader Slobodan Milošević and his financial criminality. She sees close parallels between his activities and Kim Jong Il’s: “The most difficult thing is connecting evidence of criminality to a state’s leader, because there is so much deniability built in. But there isn’t a whole lot of activity in North Korea that isn’t sanctioned by the leadership, and the evidence we had already built up was very good. These cases were very doable.” The criminal cases, says Asher, were based on information from undercover agents, informants, and a vast surveillance operation. At the initiative’s outset, in June 2003, says Asher, his boss, former secretary of state Colin Powell, directed them “to use law enforcement, not intelligence, to prove beyond a doubt what they were doing,” noting, “I don’t want this to be like Iraq’s W.M.D.”—a lot of heated rhetoric with no smoking gun. The result, Asher says, was that “this was not an emperor-with-no-clothes scenario. We had video. We had audio. North Korean generals meeting with Chinese criminals, and with Secret Service and F.B.I. agents.”
Instead, the Bush administration suddenly decided not to proceed. What Asher describes as the “ultimate non-aggressive containment strategy” was unexpectedly curtailed. The reason: the administration believed that it risked provoking a permanent North Korean withdrawal from talks on its weapon and missile programs. Hayden says, “Suddenly, the rules had changed. The diplomatic piece of this came swooping in, and the imperative became ‘Let’s get them to the table,’ and that meant everything had to be ratcheted down.”
In fact, the program was not just halted but effectively thrown into reverse. Kim Jong Il made his continued participation in international talks contingent on having sanctions lifted, and in March 2007 the administration unfettered Banco Delta Asia and unfroze North Korean assets. Banks around the world that had shunned North Korean companies were now free to do business again. The North Korean heroin smugglers caught on the Pong Su were released and allowed to go home. Illicit activity was swiftly back to normal. Hayden says, “This is not going to go away. They’re not going to stop making supernotes and counterfeit cigarettes and drugs, because they’re desperate.” The most recent supernote seizure to come to court, unnoticed by the American news media, was in July 2008, when Mei Ling Chen had a parcel of what purported to be dried seafood mailed from Taiwan to a house she was visiting in Sunnyvale, California. Opened in a random search by Customs at San Francisco airport, it contained supernotes with a face value of $380,000. Secret Service agents inserted a tracking device, resealed the package, and let Chen receive it. When they arrested her, they learned she had already spent thousands of counterfeit dollars carried into the country a week earlier, on goods from Louis Vuitton, Footlocker, and other stores. The Secret Service believed that this may have been a way to launder the counterfeit money. (A common ploy, according to an affidavit by senior special agent William P. Bishop, is to return goods to stores and pocket a real-money cash refund.)
A statement from the U.S. Attorney’s office suggests that, in official circles, the importance of this case goes well beyond a scam against shopping-mall retailers: “The investigation into the [supernotes’] origin and distribution has been a top priority for the Secret Service. The Supernote investigation is an ongoing strategic case with national security implications.” The investigation has, the statement adds, “spanned the globe, involving more than 130 countries and resulting in more than 200 arrests.” Chen pleaded guilty, and on January 30, 2009, was sentenced to 33 months.
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Earlier supernote issues have turned up in large amounts in the Middle East, in places such as the Bekaa Valley, in Lebanon. Syung Je Park says that Office 39 is targeting this region again, partly because counterfeit U.S. currency is less likely to be detectable outside the United States. According to Park, Office 39 has recently diversified into a new field—re-insurance fraud. In the past year, the North Korean government’s life-insurance corporation has recouped about $100 million from European companies for payouts it claims to have made on life-insurance policies of people killed in unrelated train, ferry, and helicopter crashes. Park says the policies were bogus. A London attorney who contested one of them in the U.K. High Court agrees: “Unfortunately, we could not prove it to the court’s satisfaction. In the end we had no alternative but to settle.”
With North Korea’s missile and nuclear-weapons tests earlier this year, any optimism about Kim’s transient return to the bargaining table has evaporated. In what looks like a return to the financial strategy pursued by the Illicit Activities Initiative, the Obama administration sponsored a U.N. resolution that, besides allowing searches of ships suspected of carrying weapons and components to North Korea, would also once again freeze the country’s foreign-held assets, curbing its ability to do business with the outside world. Meanwhile, the cases against the North Korean principals remain stalled, and the fuller picture they contain about Office 39 and its networks remains under wraps. What cannot be in doubt is the scale of the challenge now confronting President Obama. “The thing about Kim Jong Il is that he isn’t some kind of spoilt, tyrannical playboy, but a very smart Mafia don,” says Asher. “He knows every trick in the diplomatic playbook. He is a world-class criminal, and a world-class dictator.”
David Rose is a Vanity Fair contributing editor.
