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North Korea: Witness to Transformation

The North Korean Restaurant Franchise

by | June 23rd, 2014 | 07:47 am

Every so often, stories appear in the Western press about the network of North Korean restaurants, mostly in Asia. In 2011, for example, Sebastian Strangio did a piece for the Atlantic which pretty much outlined the main elements of the story, and the genre. The restaurants are foreign-exchange earning cash cows organized by the regime that also engage in intelligence gathering and illicit activities. They play off North Korean kitsch and exoticism, but with labor practices that exploit—and confine—their attractive, Pyonyang hostesses. Recently, the BBC’s Ed Butler offers up a report from Phnom Penh, with another standard element: the effort of the intrepid reporter to get the waitresses to break form and reveal secrets.

But in poking around, we discovered a piece from last October by Bill Gertz at the Washington Free Beacon that had a bit more meat, in part because of interviews Gertz did with the US intel community. It is definitely worth reading.

Gertz’s informants have identified 60 such restaurants in Asia: 44 in China (including 11 in Beijing; six in Shanghai and six in Dandong), five each in Vietnam and Cambodia and one each in Bangladesh, Burma, Malaysia, Nepal, Indonesia, and Laos. A quick search also turned up one in Dubai. Operating in these permissive business environments is clearly easier than cracking the European market: a North Korean effort to open a restaurant in Amsterdam in 2012 ultimately closed over labor issues with its Dutch owner. (It reopened earlier this year.)

Labor issues are not the only barrier to moving beyond Asia. According to Gertz, the network is controlled either by the North Korean military’s General Reconnaissance Bureau, Bureau 39, or both. The motives are not limited to the foreign-exchange earning efforts of Bureau 39, but reflect an effort of the state to push foreign intelligence operations to finance themselves. All of the reports cited note the intelligence motives of the restaurants, which extend to commercial intelligence on South Korean businesses as well as other illicit activities such as money laundering and perhaps passing of counterfeit supernotes.

The big question is how much they generate. Gertz’s sources in the intel community think the restaurants may remit about $1.8 million in total–he cites a figure of $10,000-30,000 a year in payments to Pyongyang each. (We initially read Gertz to suggest the restaurants were remitting $1.8 million each, which was clearly implausible; thanks to James Cotton below). If true, this amount would be only a small fraction of total labor remittances, which Gertz’s sources estimate at about $100 million (again, thanks to James Cotton for catching this point).

Remittances of this size necessary raise the sanctions question. Currently there are few means to squeeze this lucrative source of foreign exchange—and other overseas services income—except by targeting the financial networks through which earnings pass. But these networks probably include couriers carrying cash, use of the immunity of the diplomatic pouch and other informal financial networks as well as banks. Nonetheless, financial sanctions would at least raise the issue of such service income, which is a non-trivial source of foreign exchange.