Squeeze the Little Guy

Like thousands of other ethnic Koreans in Japan, Pak Il Ho once believed North Korea was a paradise on earth to which he might one day return. Giving money to support the cause seemed natural. Pak's trading company shipped everything from paper to computer chips to North Korea, and he didn't complain when Pyongyang neglected to pay. It's money for my country, he rationalized. And when a local credit union with ties to Pyongyang asked him in 1987 to put money into a special account for patriotic works, he didn't object. The credit union promised to invest the money, send the profits to North Korea and return the principal. But Pak never saw his money again. In a lawsuit he has filed in Japan against the credit union, he claims it filched $17 million from his account and wired the funds to Pyongyang. Says Pak: I'm angry and indignant. I believed in North Korea. Pak isn't the only one indignant about the credit unions these days. Several prominent North Koreans in Japan have publicly denounced the financial institutions and their tactics. Pak's lawsuit is the first of its kind, and he believes that others will follow if his case succeeds. Ostensibly set up to serve North Koreans in Japan (about a third of Japan's 650,000 ethnic Koreans are loyal to Pyongyang), the credit unions are suspected of helping North Korea tap the world's second-largest economy for cash. Earlier this year, 13 of them went bust, leaving almost $8 billion in outstanding loans. Some concerned Japanese lawmakers suspect Pyongyang siphoned off a big chunk of the funds.
Nobody knows exactly what happened to the money, but the lawmakers point to North Korea's expensive weapons program: even if the funds didn't go directly to support it, they freed other resources that could then be put into weapons. And since North Korea has bought some of the technology for the program in Japan--for which it has to pay in foreign currency, including yen--it's highly likely that the missing yen were used for that purpose. Says Hideshi Takesada, a North Korea expert at the National Institute for Defense Studies in Tokyo: Without money and technology from Japan, North Korea would collapse. Yuriko Koike, state secretary for economic planning, believes those funds constitute a major threat to Japanese security. They are using Japanese money and technology to build weapons that are aimed at us, she says.

But instead of investigating the collapse of the credit unions, the Japanese government plans to shell out billions of dollars in taxpayers' money to refloat them. Koike and other critics are alarmed at the prospect of these funds flowing into poorly regulated financial institutions that are essentially under North Korean control.

Tokyo's seeming lack of concern reflects the tangled history of the credit unions, first set up after the Korean War in the early 1950s. At the time, Koreans in Japan--many of whom had been used as forced labor when the Korean peninsula was a Japanese colony--faced widespread discrimination. Unable to get bank loans to run their businesses, they set up their own network of credit unions. Today, Japan's financial authorities say these unions have the same right to a taxpayer-financed bailout as any other Japanese lenders. But Tokyo has for decades turned a blind eye to reports of financial impropriety at the credit unions. That indulgence was driven by a vague sense of guilt toward the Korean community and fear of a backlash from Chongryun, the quasi-political association representing North Koreans in Japan. It hasn't hurt that Chongryun has cultivated close ties with the ruling Liberal Democratic Party.

Japan's Korean community has long been a vital source of hard currency for Pyongyang. After some 90,000 Koreans returned to the North starting in the late 1950s, their relatives in Japan began remitting money to them. Pyongyang kept the hard currency, handing out certificates for use in government stores. In the 1970s, Pyongyang started to tap Japan's Koreans more systematically, offering them--among other enticements--photo-ops with Great Leader Kim Il Sung at $20,000 a pop, according to Chang Ryong Un, a North Korean resident of Japan who once worked as an underground agent for Pyongyang. Anyone with enough revolutionary fervor to donate more than $1 million was rewarded with a special Kim medal.

The donations were strongly encouraged though not coerced: many Koreans in Japan still fervently believed North Korea was building a workers' paradise. But their ardor started to cool during the '80s and '90s as Chongryun, apparently under orders from Pyongyang, started to give quotas to Korean businesses for how much money they had to donate--particularly on occasions like Kim's birthday. It used the credit unions to collect. One common shakedown technique: Korean businessmen applying for loans were told to borrow 20-30% more than they needed--the extra money was skimmed off for Pyongyang. Chongryun denies it controls the credit unions or that any credit union money has been diverted to North Korea.

By the early 1990s, as much as $2 billion a year in remittances, cash gifts and investment was flowing from Japan to North Korea, says then-Foreign Minister Tsutomu Hata. The flow has fallen off sharply amid Japan's economic slump and growing disenchantment with Pyongyang. But with the well drying up, a bailout of the credit unions is one of North Korea's best chances to squeeze Japan for more cash, says Hataru Nomura, author of a recent book on the credit union problem. The bailout, which would refloat failed unions and merge other struggling ones, could cost Japanese taxpayers as much as $10 billion, Nomura estimates. The bailout money is one of Pyongyang's last hopes, he says.

How does credit union money make its way to Pyongyang? The institutions cloak themselves in secrecy, disclosing little about their operations to outsiders. But Pak's lawsuit has provided a rare behind-the-scenes look at some of the hardball tactics they are suspected of using. According to Pak, a senior executive at his credit union has admitted taking the money out of Pak's account and sending $2 million to North Korea (credit union officials insist he acted on his own). The executive says he did it to protect family members back home. That may be true: North Korea has been known to blackmail Koreans in Japan by arresting their relatives. Run by Pyongyang-approved chairmen, the credit unions would lend large sums of money to cover such donations, even when it was obvious the borrower couldn't repay.

Like Pak, Chang was a firm believer in North Korean communism. Doing Pyongyang's bidding in Japan, he hit up pachinko parlor owners and other well-off business people for donations. He figures he raked in as much as $60 million over the years. Chang gave presents to Kim Il Sung himself: wine, audio equipment, a marine chart of the Sea of Japan (also known as the East Sea), even underwear. But three years ago he broke publicly with North Korea, accusing Pyongyang of using fraud to extract money from Japan's North Koreans.

Chang now spends his time collecting evidence of what he calls Pyongyang's plunder of the Korean community. Brandishing an armload of title deeds, he shows a visitor how the credit unions regularly made massive loans far in excess of the collateral securing them. One example he cites is a school in central Japan; though worth less than $2 million, he says, it was put up as collateral for loans of more than $50 million. Says Chang: It's just crazy.

The Japanese government had a chance to see the problem first-hand two years ago when a big Korean credit union in Osaka went belly-up. It, too, was suspected of siphoning money to North Korea. But officials at the Financial Supervisory Agency, which oversees the banking industry, insist it's not their job to investigate such allegations. Yuriko Koike, who took the No.2 job at the Economic Planning Agency in October, says prefectural officials who looked over the institution's records after its collapse lacked both the skills and the mandate to trace the money trail. Defense and law enforcement officials say they are interested but don't have the authority to probe the problem because it is financial. A political decision will be needed to get around the catch-22, says Lee Young Hwa, assistant professor of economics at Kansai University, but the government is afraid of what an investigation might reveal. This is a Pandora's box, he says.

The bailout plan appeared to be in trouble earlier this year when Pyongyang was threatening to test-fire another missile, a more powerful version of the rocket it lofted over Japan last year. The first launch angered many Japanese--another one would have further hardened feelings toward Pyongyang. But the mood changed when North Korea suspended its latest missile test in September. In early November, Tokyo lifted a ban on charter flights to North Korea. Key figures among the Liberal Democrats, Social Democrats and other parties are traveling to Pyongyang this week in one of the highest-level visits by Japanese.

Many North Korea watchers say Pyongyang is duping Tokyo, playing its old game of pretending to be nice until it gets what it wants. Right now, what it wants is to keep its bankers in business in Japan. Pyongyang didn't want to risk launching a missile until this money was in the bag, says author Nomura. But once it is, he and other critics of Pyongyang wonder, will it be used against Japan?

With reporting by Stella Kim/Seoul