The United States has accused the Democratic People's Republic of Korea (DPRK or North Korea) of counterfeiting U.S. $100 Federal Reserve notes (Supernotes) and passing them off in various countries. There is considerable doubt, however, that the DPRK is capable of creating Supernotes of the quality found. The existing evidence is considered to be "intelligence" and not disclosed. However, considerable overt links have been uncovered tying Pyongyang to the counterfeiting operation. It is thought that the alleged counterfeiting activity in the DPRK is government sponsored (not criminal activity). What has been confirmed is that the DPRK has passed off such bills in various countries and that the counterfeit bills circulate both within North Korea and around its border with China. In June 2009, press reports claimed that the DPRK produced counterfeit U.S. bills even after 2007. Even if counterfeit bill production has been halted, genuine Supernotes are expected to remain in circulation for the foreseeable future making it possible for the DPRK to continue to use any existing stocks of counterfeit Supernotes. The purpose of this report is to provide a summary of what is known from open sources on the DPRK's alleged counterfeiting of U.S. currency, examine North Korean motives and methods, and discuss U.S. interests and policy options. Although Pyongyang denies complicity in any counterfeiting operation, estimates are that at least $45 million in such Supernotes of North Korean origin are in circulation and that the country has earned from $15 to $25 million per year over several years from counterfeiting. South Korean intelligence has corroborated information on past production of forged currency—at least until 1998—and several U.S. court indictments indicate that certain individuals have been accused of distributing such forged currency. In 2009, the State Department reported that counterfeit $100 U.S. notes (Supernotes) continue to turn up in various countries, including in the United States, although it is not clear whether these notes are new or from existing stocks Counterfeiting is considered to be one of several illicit activities by the DPRK apparently done to generate foreign exchange that is used to support the ruling regime, purchase imports, and finance government activities abroad. For the United States the allegedly large-scale counterfeiting of U.S. currency by the DPRK is a direct challenge to U.S. interests. Any counterfeiting, whether done by North Korea or not, could undermine confidence in the U.S. dollar and, if done extensively enough, potentially damage the U.S. economy. It also is a direct attack on a protected asset of the United States and a violation of U.S. and other laws. If being done by the DPRK government, it violates accepted international norms and is a direct affront to the United States. It also could affect the willingness of financial institutions in certain areas to accept legitimate U.S. currency. Currency dealers in Asia already impose surcharges on suspected types of U.S. bank notes when exchanging them for other currencies. U.S. policy toward the alleged counterfeiting is split between law enforcement efforts and political and diplomatic pressures. On the law enforcement side, individuals have been indicted, and in September 2005, the U.S. Treasury named Banco Delta Asia (BDA), bank in the Chinese territory of Macao, as a primary money laundering concern under the Patriot Act, Section 311. This financial sanction was designed to curb the suspected counterfeiting by preventing the DPRK from laundering proceeds from its illicit activities through BDA. This triggered a financial chain reaction under which banks, not only from the United States but from other nations, declined to deal with even some legitimate North Korea traders. The BDA action froze $25 million in North Korean accounts and caused financial institutions in other countries also to close many of their North Korean accounts, even those for legitimate business. For the year following the financial restrictions, they were Pyongyang's main complaint and the reason it gave for boycotting the Six-Party Talks on denuclearization. Even after returning to the talks in December 2006, Pyongyang refused to discuss denuclearization officially until the Banco Delta financial sanctions were lifted. On February 13, 2007, as a sideline to a new Six-Party agreement, the United States assured North Korea that it would settle the BDA issue. It took until June, however, for the $25 million to be transferred through the New York Federal Reserve Bank to a bank in Russia. North Korea confirmed its receipt on June 25, 2007. At the time, Pyongyang promised that it would punish the counterfeiters and destroy their equipment. Following the BDA case, law enforcement efforts at the national level have become entwined with diplomatic efforts and pressures to resolve the issue of the North Korean nuclear weapons and potential ballistic missiles. After the DPRK's second nuclear test on May 25, 2009, and several firings of potential ballistic missiles, the United States reportedly has been considering using DPRK counterfeiting of U.S. currency as the basis for additional financial sanctions. The counterfeiting, to the extent that the DPRK government is involved, affects U.S. national security in a broader sense. North Korea is a Stalinist regime with serious human rights and other problems. It is led by a communist dictator with a taste for luxury imports and need to subsidize his inner circle of supporters and broader ranks of party cadres. Yet the North Korean economy scarcely produces enough to feed its population and incurs a billion-dollar trade deficit each year. Proceeds from counterfeiting could be used to maintain the regime's power or contribute to instability in East Asia. Because counterfeiting is a form of clandestine criminal activity, those involved attempt to keep it out of the public eye and undetected to the maximum extent possible. Hence, open source information on the scope and scale of DPRK counterfeiting and distribution operations is largely incomplete. Also, since the DPRK is a relatively closed society, information on any production of counterfeit U.S. currency there—other than that received from defectors—is likely to be the product of intelligence sources and methods. Hence, it is unlikely that such information would be made public for fear of compromising ongoing intelligence gathering operations. On the other hand, involvement of DPRK citizens and officials in the distribution of so called "Supernotes" is more readily demonstrated once criminal investigations have been completed, arrests have been made, indictments issued, and convictions and/or confessions obtained. Indeed, a number of such indictments have been issued, and presumably a number of ongoing investigations remain in the pipeline. U.S. officials appear to be increasingly sensitive to a need to support public allegations with the weight of de facto legal evidence. The DPRK government appears to have two major goals: to maintain the ruling regime and to be recognized as belonging to the club of nuclear, space, and newly industrializing economic countries. Both of these goals require funds. North Korea also needs to raise approximately $1 billion per year to finance its merchandise trade deficit. The DPRK imports more than it exports and must generate enough foreign exchange to cover the difference through some means—either legal or illegal. Legal means include borrowing, foreign investments, foreign aid, remittances from overseas Koreans, selling military equipment not reflected in trade data, and by selling services abroad. Illegal methods include the counterfeiting of hard currency, illegal sales of military equipment or technology, sales of illegal drugs or counterfeit cigarettes and pharmaceuticals, or by shipping illegal cargo between third countries. The country also can dip into its meager foreign exchange reserves. Allegations of counterfeiting by North Korea fits into a pattern of illicit activities linked to Pyongyang. These include production and trafficking in counterfeit cigarettes and counterfeit pharmaceuticals (for example "USA" manufactured Viagra). However, according to a 2009 report by the State Department, drug trafficking by the DPRK appears to be down considerably with no instances of drug trafficking suggestive of state-directed trafficking for six years, but there still is insufficient evidence to say for certain that state-sponsored trafficking has stopped. However, reports of non-narcotics-related acts of criminality suggest that DPRK tolerance of criminal behavior may exist on a larger, organized scale, even if no large-scale narcotics trafficking incidents involving the state itself have come to light. Reports continue from the press, industry, and law enforcement agencies of DPRK links to large-scale counterfeit cigarette trafficking in the North Korean Export Processing Zone at Rajiin. According to the State Department, however, it is unclear the extent to which DPRK authorities are complicit in this illegal activity, although it is all but certain that they are aware of it. The State Department also reported that counterfeit $100 U.S. notes (Supernotes) continue to turn up in various countries, including in the United States. There are reports, for example, of supernote seizures in San Francisco, and a very large supernote seizure in Pusan, South Korea. Supernotes are uniquely associated with the DPRK, but it is not clear if recent seizures are of notes which have been circulating for some time, or if they are recently issued new notes. According to the State Department, there also has been substantial evidence that North Korean governmental entities and officials have been involved in the laundering of the proceeds of narcotics trafficking and other illicit activities and that they have been engaged in other illegal activities, including activities related to counterfeiting, through a number of front companies. DPRK production and trafficking of "Supernotes" have been addressed in 2006 by National Intelligence Director John Negroponte in testimony before Congress.