In mid-September, the Obama administration announced that it would abandon plans developed under former President Bush to place a radar system in the Czech Republic and missile interceptors in Poland. As an alternative, the administration announced new missile defense measures designed to be implemented quickly and counter threats in the immediate future. The introduction of these new measures is commendable. But Obama’s abandonment of the original missile defense plan has weakened the American diplomatic position in Europe and provided a political victory for Russia.

In announcing the cancellation of the Eastern European missile defense installations, the Obama administration emphasized that it was not abandoning European missile defense entirely, but was instead pursuing an alternative strategy to more effectively address current threats. Long-range missile interceptors are unreliable and frequently ineffective, and neither Iran nor North Korea appears to be close to developing the long-range missiles the cancelled system would have been designed to intercept. Iran instead possesses short- and medium-range missiles that could pose a threat to Israel and parts of Europe, while North Korea’s current technology poses no threat to Europe. To protect Europe and Israel from any potential strikes by short- and medium-range Iranian missiles, the Obama administration’s new plan will use ship-based missile interceptors and an installation of small ground-to-air missiles in Poland.

If the diplomatic ramifications of abandoning the Bush-era missile defense plans are ignored, the administration’s new strategy is logically sound. New installations in Europe are not necessary for improving and testing the currently unreliable technology for intercepting long-range missiles. In addition, constructing, maintaining, and manning the missile defense sites in Europe would impose a financial burden on the United States for the sake of providing unreliable protection against a threat that does not currently exist. Building missile defense sites now would ensure that the United States would be ready if and when North Korea and Iran develop long-range missiles, but intelligence reports should give the United States enough advance warning to prepare for such an occurrence. The canceled long-range interceptor sites also failed to address the danger of the technology that Iran currently possesses, so the addition of new capabilities to the missile defense system is commendable.

In spite of these pragmatic arguments for an adjustment in European missile defense strategy, the United States’ new strategy is short-sighted and ignores the broader diplomatic implications of canceling the planned installations. Poland and the Czech Republic, NATO allies of the U.S., hoped that American military installations in their nations would deter Russian aggression in the region. Their desire to secure a material American commitment beyond a treaty obligation is reasonable, particularly in light of the Russian military occupation of territory in Georgia little more than a year ago. Although a Russian attack on a NATO member seems very unlikely in the foreseeable future, Poland and the Czech Republic are rightly concerned with checking the expansion of Russian influence in the region.

Conversely, one might argue that cancelling the missile defense sites reduces the need for Russia to pursue an aggressive foreign policy, thereby giving Poland and the Czech Republic less reason to fear Russian encroachment in Eastern Europe. This analysis assumes that Russia is seeking a fixed amount of influence with which it will be satisfied attaining—a thesis with little supporting evidence. Russia’s recent foreign policy has been characterized by an aggressive pursuit of power; actions such as gas shutoffs to Ukraine and the armed incursion into Georgia give no indication that Russian leaders will be content with some particular amount of regional influence.

More broadly, the Obama administration’s new missile defense strategy raises questions about the credibility of American commitments in Europe and around the globe. It signals to other nations the United States’ willingness to change policy in pursuit of its own interests, and indicates that American commitments may weaken with changes in administration. While the Obama plan to include smaller interceptors in Poland may assuage Polish concerns to some degree, it remains to be seen if the shift in missile defense policy will make other nations more skeptical of American commitments and less likely to enter into defense agreements.

One could argue that revising missile defense policy presented an opportunity for the United States to improve diplomatic relations with Russia and increase the odds of Russian cooperation on other issues, such as sanctions against Iran or supply lines into Afghanistan. But the Obama administration has repeatedly insisted that its missile defense decision was completely unrelated to U.S.-Russian relations, and there is no evidence that the United States has received any concessions from Russia in return. Clearly, an open agreement between America and Russia on abandoning missile defense in exchange for Russian concessions would have carried high diplomatic penalties for both states. Alternatively, it would have been naïve of the administration to change its missile defense strategy and simply hope for a future Russian concession in return. Russian President Dmitri Medvedev did say, “if our partners hear some of our concerns, we will, of course, be more attentive to theirs.” This supposed attention to American concerns is unlikely to produce actual policy results, however, given Russia’s aggressive foreign policy stance. Simply put, there is no evidence that realigning missile defense policy has motivated Russia to change its positions on issues important to the United States.

From a purely military standpoint, the decision to immediately implement missile defenses against short and medium-range missiles is a good strategic outcome. Unfortunately, the decision to simultaneously abandon slower-developing plans for long-range missile defenses was a diplomatic misstep. Abandoning the originally planned sites in Poland and the Czech Republic has not only harmed relations with these NATO allies, but may also make other nations skeptical of American commitments and hesitant to reach agreements with the United States. Moreover, the realignment may reduce the number of complaints from the Kremlin, but is unlikely to help secure any real diplomatic concessions from Russia. Ultimately, the Obama administration’s decision to discontinue the Bush administration’s missile defense program damaged American diplomatic credibility without producing any benefits for the United States.

Recent North Korean missile tests indicate that North Korea is actively pursuing the development of long-range nuclear weapons. Given Kim Jong Il’s bellicosity and the ineffectiveness of UN measures such as Security Council Resolutions 1695, 1718, and 1874, the international community should identify and exploit any weaknesses that could bring North Korea to the negotiating table. In particular, the international community should take steps to police North Korean reinsurance fraud, which has become the regime’s second largest source of foreign currency. Damming this source of hard currency is a viable way of bringing the North Korean leadership to the table that has a number of advantages over the strategies previously employed.

Reinsurance is just what it sounds like—insurance companies such as Lloyd’s of London, Munich Re, and Swiss Re buy the risk held by other insurance companies. There are several aspects of reinsurance that allow North Korea to commit fraud so easily. First, unlike with the usual kind of insurance, with reinsurance the investigation of the original claim is not carried out by the company that ultimately pays. KNIC, for instance, insures a North Korean helicopter. When it crashes, KNIC investigates the claim, puts together the paperwork showing that the claim is legitimate, and then simply passes on the paperwork to its reinsurer, say Lloyd’s of London, and waits. Lloyd’s itself cannot do any investigation unless North Korea allows it to do so, which it often does not. Further, if a claim is made on something that is reinsured, it is in KNIC’s best interest not to deny the claim, because they do not in fact have to pay it and can siphon money off the top when it is paid. A third key point is that KNIC is a state-owned insurance company, and reinsurers such as Lloyd’s generally agree to be bound by North Korean law in administering KNIC’s claims. This is a clear conflict of interest. The same people who are making the laws under which North Korean reinsurance is administered are the people buying and using that reinsurance.

According to Kim Kwang Jin, who left North Korea in 2003 after working as a manager at KNIC for six years, North Korea has made between $50 and $60 million a year from reinsurance fraud – 5% of the regime’s annual revenue. The money is used, says Kim, ‘to scout out potential disasters in North Korea, to buy more reinsurance on the global market, and to pay premiums.’ The money left over after this, about $20 million dollars, is delivered yearly near Kim Jong Il’s birthday as a “present.”

Next to weapon sales, reinsurance fraud is the regime’s second largest source of hard currency revenue. Since North Korea relies so heavily on this source of funding, measures taken to diminish this supply would be highly effective in encouraging the regime to toe the line. Such measures would not only threaten North Korea’s capacity to build weapons, but would also remove the possibility for North Korea to respond, as it has historically, with more bellicosity. The beauty of tightening insurance fraud laws is that North Korea cannot say anything in response—for to do so would be to admit to the fraud. At worst, North Korea might respond with some criticism of new insurance laws as unduly restrictive, or as opposed to a free-market economy. Given their 3000% inflation, their concern will be easy to ignore.

Critics might argue that North Korea will simply switch to other types of financial fraud. But this is a negligible objection. First, nothing prevents North Korea from doing these unspecified other types of fraud in the first place (in fact, North Korea already counterfeits US currency on a noticeable scale). Therefore, presumably if these other frauds were lucrative, North Korea would already be doing them, or doing them to a greater extent than it is. Even supposing North Korea could simply increase its other kinds of fraud and make the same money it now makes, this switch would take several years and a re-tooling of the regime’s expertise in fraud. These several years could buy the US and like-minded countries valuable time in bringing North Korea’s nuclear program to heel.

A further advantage of stemming the flow of reinsurance fraud revenue is that doing so is unlikely to hurt the average North Korean. Cutting off food aid might do so, but since the regime is using the money from fraud to buy itself big guns and fast cars anyway, the North Korean people have little to lose. Lastly, new approaches are needed because UN resolutions have simply not been effective in the past. Although SCR 1718 (2006), which froze assets relating to weapons programs, is often cited as a successful measure, it was not ultimately sufficient to stall North Korea’s nuclear weapons program, as a nuclear device was tested soon after. Overall, UN resolutions are cast in the form of rebukes after North Korea tests a weapon and seem to be more “crying over spilled milk” than impeding North Korea’s aggressive aims.

A measure which forced US banks to cut off all transactions with Banco Delta Asia, a bank which does substantial business with North Korea, illustrates how effective an approach aimed at cutting off North Korea’s supply of foreign currency can be. Kim Kwang Jin called the case “frightening” to the regime, and it was soon after this that North Korea returned to multilateral talks. But tightening reinsurance fraud laws is even better. Whereas North Korea could plausibly argue that US actions in the BDA case were highly prejudicial to its interests, and that the US was demonstrating its typical bullying behavior as the “bad guy,” such arguments do not hold much water for reinsurance. Here, the US can easily claim it is just interested in making sure the reinsurance industry runs as efficiently as possible, and that these new laws are not directed at any one country. This would leave North Korea with little negotiating leverage.

How might this strategy be implemented? First, reinsurance corporations need to learn to better detect fraud and avoid it. So far, insurance companies have been remarkably poor at detecting North Korean reinsurance fraud because the North Koreans split their reinsurance up into many small packages to diminish suspicion. For instance, in a 2005 judgment in London, Lloyd’s lost $58 million on a case that was likely fraudulent. North Korea also operates under front companies to conceal the country where the risk originates and moves from country to country, much like a con man moving from town to town before the populace of each town catches on. Governments can play a role in disseminating the information. An international information clearinghouse on reinsurance fraud might be established, so that reinsurers could immediately find out which companies have had large and questionable claims on a regular basis in the past and avoid them. This clearinghouse might also have an arm to investigate currently operating companies and pin down how they are interconnected. This would remedy the fact that the North Koreans often operate using shell companies that appear to be based in other countries.

Second, governments should consider requiring reinsurance companies to administer claims only under the laws of the country where the reinsurance company is based. This would prevent claims being decided under North Korean law, which is a sure-loss situation for any reinsurance company. Another piece of legislation might demand that any reinsurance claim be considered void unless it could be investigated by the reinsurer, which would prevent North Korea from fudging paperwork and then barring investigation by those paying. Finally, reinsurance companies that do choose to work with North Korea should be legally compelled to pay North Korean claims in North Korea won rather than in a hard currency.

In closing, the international community should use tightened reinsurance laws as part of its broad strategy to pressure the North Korean regime. Its current tactics of UN condemnations and broad based sanctions are too clumsy and reactive to handle the dynamic and difficult challenge of containing North Korea’s nuclear program. Reinsurance reform is a more sensible and subtle economic alternative.