Getting to grips with law and business in high-risk North Korea

At the epicenter of economically thriving Northeast Asia squats a black hole for commerce: North Korea. Globally vilified, massively sanctioned, poorly understood, it is Asia’s last true frontier market.

Mike Hay, 57, probably knows more about business in North Korea than any non-native. A member of the New York bar, the Anglo-French native of Stirling in Scotland, ran a consultancy and law firm in central Pyongyang for 12 years.

Only in late 2016, pummeled by sanctions, did he suspend operations. In November this year, he joined a Seoul law firm, HMP Law, to head their North Korea practice.

In fact, Hay – drawn by the surging dragon that was then South Korea  – started legal work south of the demilitarized zone (DMZ), joining a Seoul law firm in 1990. In 1998, when Seoul was cautiously beginning its “Sunshine Policy” of engagement with North Korea, he joined a European Union Chamber of Commerce reconnaissance to the then-nascent Rajin-Sonbong Special Economic Zone (SEZ) in North Korea’s tri-border area adjacent to China and Russia.

He was impressed. “I saw the future of North Korea – it was going places,” he said. “Rajin was not in good shape – people were sitting around doing nothing – but the keyword was determination: a palpable, collective determination.” He was converted. “In the same way I had made the move to South Korea, it became a natural extension of my career ambition to do something up North.”

Hay dubbed his ambition “Project Tiger.” “People thought I was crazy – but not the North Koreans, not at all! They were interested,” he said. “They saw the benefit: Plant the meat in the form of a credible law firm and that would comfort the ‘tiger’ – foreign investors.”

Following the first inter-Korean summit in 2000, he established a consulting practice in Pyongyang in 2001, then expanded into law. He then formed a relationships with government lawyers. “I stayed with people who spoke my own language: lawyers,” he said, adding that he worked inside the Ministry of Foreign Trade (MFT).

Hay’s firm, Hay, Kalb and Associates, was founded as the only foreign law firm in Pyongyang. “Kalb” stood for ‘Korea Advisers on Law and Business;”  its “associates” were government lawyers from a sub- section of the MFT.

“They were excellent English speakers, all graduates of Kim Il Sung University College of Law, with considerable experience of interacting with foreign entities and companies,” Hay said. At any given time, 3-4 MFT staff were working in Hay’s office in central Pyongyang, to whom he paid salaries.

The fact that laws even exist in North Korea astonishes some, Hay said. “I get this question all the time,” he added. “Including from diplomats on the ground – they did not know there are laws!” And he recalled a transportation deal where the client had received a detailed opinion letter prepared by a global bluechip law firm – “but the entire opinion letter given to the client was based on South Korean law!”

Still, Hay’s previous experience in South Korea was valuable: Both Koreas inherited their legal systems – codified civil law – from colonial Japan.

Like all lawyers, Hay cites client confidentiality when discussing business; like all Pyongyang pros, he is tight-lipped and often evades specifics; and he uses the official acronym for North Korea (DPRK – Democratic People’s Republic of Korea) when speaking.

His clients were large and small and included NGOs. “The clients do not want exposure to their shareholders or the media – they were under the radar,” Hay said. “Not illegally operating – but low profile.”

The sectors he was involved with included the arts, aviation and aviation financing, energy (including renewables), food and drink, IT, mining, insurance, rail transport, textiles, trading and tourism.

The majority were Asian, notably Southeast Asia, followed by Europeans and a handful of North Americans. Clients included Chinese, North Korea’s leading trade and investment partners – “though, the overwhelming majority of Chinese companies do not retain legal counsel [in the DPRK],” he said.

Many clients were referred by overseas law firms in jurisdictions ranging from London to Moscow. His work covered negotiation assistance; finding appropriate partners; opinion letters and dispute resolution.

Though he consulted on local laws with North Korean officials and traveled with them to China, France, Russia, Singapore, Ukraine and the UK – Asia Times has seen photos of these trips – he did not represent local clients.

“I made a conscious choice that, given the nature of North Korea’s system, representing the interests of DPRK entities in formal legal proceedings or in projects would deny me the air of independence that I viewed as essential to giving a sufficient level of comfort to foreign investors,” he said. “This was accepted and understood by the North Koreans without objection.”

While Hay’s legal work “offered the recognizable face of a law firm,” his business consulting involved lobbying, seeking fast-tracking of procedures, and exemptions from guidelines. “I was persuading the North – ‘Give these guys a break and speed it up,’” he said. “A bit like South Korea 30 years ago.” He claims a 100% success rate of visa issuances, both for himself and his clients (no mean feat in North Korea).

Mike Hay, center, hard at work in central Pyongyang. Photo courtesy Mike Hay.

Negotiations tend to be more straightforward than in the South, Hay opined. “Not necessarily ‘easier’, as they are more than capable of standing firm on their position,” he said. “The North Korean version of the language is more direct and straightforward, and this is reflected in overall behavior.”

A key player in all deals is the North Korean guide or “protocol officer” assigned to incoming foreigners, Hay advised. He recalled when a chief negotiator insisting on a last-minute new condition to be incorporated in the contract, “I immediately turned to the counterpart’s protocol officer and stared intently at him, communicating that he was needed,” Hay recalled.

“We broke off the meeting, and I stated, ‘Get your boss to back down on this or the deal is off, there is no signing ceremony tonight.’”  The matter was resolved and the project successfully concluded. Protocol officers will also make clear who the most important persons are – which is not always immediately clear, given that business cards are not ubiquitous.

With Pyongyang having established foreign investment zones nationwide – including an IT hub in Pyongyang; the currently defunct Kaesong Industrial Complex near the DMZ; and the Rajin-Sonbong port in the Northeast, which has received Chinese and Russian investment in its wharves – foreign investment laws are “surprisingly advanced,” Hay said.

There are over 100 laws and regulations and though English translations are “perhaps not as ideal as they could be,” Pyongyang has put “extensive work into investment laws – and more importantly, into revising investment laws to keep up to date with economic and technological developments,” he emphasized.

Despite its reputation for hyper-nationalism, North Korea has “fully grasped” the importance of fair dispute resolution Hay said.

He pointed out that he defended foreign firms, usually in breach-of-contract disputes involving failures to pay or to provide materials according to spec. He claims wins or “partial victories” in around 70% of cases.

Ideally, cases would be solved before going to arbitration, but “there is a “highly developed arbitration system” in North Korea, he said. Many arbiters trained in Germany and Sweden and the “quality and legal rigor of written arbitration awards was equal to, or surpassing that I had experienced in the South,” Hay said.

He recalls one “very combative arbitration against a major DPRK company, supported by three key ministries,” where the local counsel vigorously objected to Hay’s presence. “The North Korean arbitrator, in exasperation, finally stood up in the arbitral chamber and stated that if North Korean counsel persisted he would close the hearing immediately, and postpone the proceedings until counsel had presented its case,” Hay said. The hearing concluded that day.

North Korea boasts natural resources, including coal, copper, rare earths, seafood and mountain vegetables, but is only home to one manufactured brand with overseas exposure: Taedonggang beer, which retails in parts of China at the same price as Dutch competitor Heineken. HR is a core asset: Chinese and European firms have leveraged the excellence of North Korean work in such labor-intensive areas as textile needlework, software writing and data entry.

Hay cites a Western European energy deal, a Mongolian copper mine, a European pharmaceutical company and various trading ventures as enterprises which have succeeded in North Korea. But despite the rosy picture he paints, there are few major success stories.

North Korea’s highest-profile foreign investor, Egypt’s Orascom, which established the nation’s Koryolink mobile service, was infamously unable to repatriate its earnings in 2015. “Orascom were not [my] client, but the word is they took a country risk and this was all due to currency changes,” Hay said. “That is a risk you take. Look at Venezuela, look at countries where you can be nationalized.”

The “good times” for business in North Korea were the early 2000s, Hay said. But as North Korea’s strategic weapons programs advanced, so did the sanctions regime. However, he maintains sanctions are not impacting North Korea.

“The DPRK does not give a rat’s ass about sanctions, and the current state of play seems to bear that up,” he said. “The economic development – the construction, the gorgeous restaurants, the emerging middle class, the money available – is all working with sanctions.”

Hay was still getting interest from foreign clients as late as 2015, but by 2016, North Korea was the most heavily sanctioned nation on earth. Chinese investment froze – though trade continued. Other overseas business dried up, partly due to fear of US Treasury Department secondary sanctions and blacklists.

“Sanctions had produced such a climate of fear worldwide on the part of legitimate foreign businesses that they ran for the hills,” Hay said. “It was no longer viable to stay in a country where incoming business had reached such a low level.”

Exhausted and in despair, Hay suspended his business at the end of 2016.