The flag wasn’t there as a joke, however.

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What almost no visitors of the hostel knew is that their stay at City Hostel indirectly benefited the regime of Kim Jong Un, circumventing international sanctions against North Korea and turning tourists into involuntary financial supporters, according to accusations by Germany’s Foreign Ministry. The North Korean connection has been known for years but first made international headlines earlier this year.

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The property on which Berlin’s City Hostel was built belongs to the North Korean embassy compound in Berlin, located in former East Berlin’s diplomatic district and mostly constructed in the early 1970s. Although the Kim regime does not operate the hostel itself, it has received hundreds of thousands of dollars in rent since the early 2000s, according to estimates.

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Germany wants the hostel to finally shut down, but its owners are vowing to continue their operations despite mounting scrutiny over possible violations of international sanctions.

As part of a large-scale crackdown on companies believed to be associated with the North Korean regime in Europe, the German government has long pressured Pyongyang to terminate the rental agreement with the hostel. It stepped up pressure earlier this year after renewed threats by the Kim regime against the United States and other countries, and following a U.N. resolution, which bans North Korea from using diplomatic real estate as a revenue source.

As German officials pursued their efforts to close the low-budget hostel, they repeatedly emphasized that they suspected that the rental revenue may have been used to pay for North Korea’s efforts to advance its nuclear weapons capabilities.

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“It is particularly important that we dry out the sources of funding for the nuclear weapons program,” said Markus Ederer, the state secretary of Germany's Federal Foreign Office, in a statement earlier this year.

Pyongyang now appears to have given in to the demands in Berlin, according to a German Foreign Ministry representative. It terminated the rental agreement several weeks ago, the youth hostel owners also confirmed.

In a bizarre twist, with the termination notice, this small Berlin youth hostel is now taking on both the German government and the North Korean regime.

“The (North Korean) embassy was forced to issue a termination notice due to the German Foreign Ministry's pressure, but it is based on no legal facts and was accordingly refuted by our lawyers,” the hostel owners wrote in a statement, adding that the German Foreign Ministry had approved their original rental agreement with the North Korean embassy several years ago.

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For now, the owners say that they have frozen rental payments to the North Korean embassy, pending legal evaluation and apparently to prevent further violations of international sanctions. They are taking legal action against the termination of the rental agreement.

They argue that they can stay in the building until the expiration of the initial contract because the termination is invalid. Throwing them out would involve a court case that would require the participation of North Korea — something the reclusive state would likely not be very keen on.

“All guests of the Cityhostel Berlin should rest assured that they will continue to have a comfortable and cheap accommodation in Berlin for the next decade,” the owners wrote in a statement.

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However, a spokesman for Germany’s Foreign Ministry emphasized that authorities were still committed to completely shutting down what they called a “sanctions-violating situation.”