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.

Heading into fall 2009, the United States has unambiguously recognized the threat of Iranian nuclear proliferation. President Obama, Secretary of State Clinton, and other high-level U.S. officials have stated that Iran’s development of a nuclear weapon is unacceptable and have deemed Iranian non-proliferation to be a high priority. For the past few years, however, much of the international community has been less critical than the U.S., and the United States’ near unilateral approach to diplomacy and economic sanctions has been futile. Now, with the true nature of Iran’s regime—an authoritarian regime—on view for the world to see after Iran’s disastrous and violent June 12th elections, more and more international players are realizing the dangers of a nuclear Iran, whose missile range already includes much of southern Europe. Sunni Arab states in the Middle East, too, have become fearful of the potential for Shia regional hegemony; though they have not publicly condemned Iran’s actions, some, like Saudi Arabia, have begun exploring nuclear programs of their own, which will likely spark a Middle Eastern arms race.

The Obama Administration must capitalize on Iran’s diminished international legitimacy by signing the economic sanctions bill to be passed by Congress, if and when upcoming Iranian negotiations fail. Economic sanctions would have a strong effect on the Iranian regime because of its current internal unrest and meaningful economic weaknesses. The administration should pursue multilateral sanctions even without the support of Russia and China, who have been reluctant to cooperate with the U.S. on the issue. Incomplete international cooperation on sanctions would still be sufficient to put significant pressure on the Iranian regime.

Internationally, the Iranian government has been delegitimized because of the seemingly fraudulent reelection of President Ahmadinejad and its bloody aftermath. The numerous accounts of unwarranted arrests, tortured prisoners, and coerced confessions have exposed Iran’s regime for what it truly is: authoritarian. Western countries, including many in Europe, who engaged eagerly with Iran previously have started sending lower-level officials to meet with Iranian leaders in place of typical high-level members of government, a tangible sign of Iran’s decreased standing in the international community. Also, for weeks after the fraudulent election, large groups of protesters decrying Iran’s government could be seen in cities around the world.

Although some nations may have previously been willing to accept a nuclear Iran, or at least concluded that thwarting Iran’s nuclear ambitions would come with too high of a cost, they have concluded differently after the June 12th elections. Britain especially has reason to fear Iran, as it has become the regime’s latest target of aggressive rhetoric. Canada, which is home to 120,000 Iranian-Canadians, has publicly condemned Iran’s violent post-election crackdowns and now sees Iran as an adversary. The post-election fallout over the summer has led nations such as France and Germany, who previously disagreed with the US over how to approach Iran, to jump on the multilateral sanctions bandwagon. As Iran condemns these and other nations that previously supported a soft-line strategy against Iranian nuclear ambitions, it will find itself with increasingly little international support.

Domestically, Iran is divided. Much of the Iranian public is upset over the corrupt elections and the subsequent violent crackdown. There is even disagreement within President Ahmadinejad’s conservative government over cabinet firings and appointments, suggesting that Ahmadinejad and Grand Ayatollah Khameni (who has ultimate sovereignty in the country) are becoming even weaker. For Iran, the combination of the loss of international legitimacy and internal weakness make new sanctions quite promising.

Fortunately, the US Congress will likely pass these proposed sanctions in the form of the Refined Petroleum Sanctions Act sometime this year. These sanctions prevent any company that exports refined petroleum to Iran from doing business with the United States. Although Iran is a well-known oil producer, it does not have sufficient capacity to refine all of its oil and thus imports 40% of the refined petroleum it consumes. The goal of the sanctions would be to prevent Iran from attaining much of its refined petroleum, which could substantially increase fuel and transportation prices in Iran, all of which would put severe pressure on the Iranian government to make concessions concerning its nuclear program.

First, however, it is important to address the critics who say that economic sanctions will not work because they harm the country’s civilians, not its government, and that civilians’ plight usually has no effect on an authoritarian regime. In Iran, dissatisfaction and anger would have a tremendous effect on the government. Iranian civilians already have shown a willingness to protest and put pressure on the regime when they feel harmed, as exhibited in the post-election protests. Although the government managed to crack down on the election unrest, cripplingly high fuel prices may serve as the proverbial “final straw” and cause an uproar in an even larger segment of the population.

For sanctions to work, it is important that the Iranian people be willing to give up their nuclear weapons program. Though a World Public Opinion poll from August 2008 found that around 90% of Iranians supported their country’s development of nuclear energy technology, only 51% wanted their country to obtain nuclear weapons. And about 70% of Iranian would favor giving up nuclear weapons ambitions in exchange for trade and/or technological development assistance. Though there is not recent polling data on the issue, the number of Iranians favoring weapons development has likely decreased following the election as Iranians have become dissatisfied with their government and come to see the nuclear program as a source of isolation, both diplomatic and economic.

Previous U.S. sanctions have had varying degrees of success. Some, such as the 1996 Iran Sanctions Act, forced refined petroleum companies to choose between doing business with Iran and doing business with the United States. Although some companies terminated business with Iran, others preferred to sacrifice their business with the US. For example, the French petroleum company Total chose, in ’96, to divest its US holdings and pursue its business with Iran. Strong multilateral sanctions, however, could force companies to make the opposite choice. Iran’s largest petroleum importers are Vitol, a Swiss firm, Trafigura (Swiss/Dutch), Total (French), Glencore (Swiss), British Petroleum, and Reliance (Indian). These firms all do a lot of business in Western Europe, so that multilateral sanctions including France, Germany, and the U.K. would put pressure on them to cut ties with Iran. Already, German companies are feeling the pressure of existing sanctions against Iran, and new, pan-European sanctions could cause them to sever business ties with Iran completely. And Total, who now does business with both the US and Iran (after President Clinton waved the ’96 sanctions), may choose to sever its ties with Iran this time around.

There is some hope that Russia and China may sign onto such sanctions, or, if not enforcing sanctions themselves, at least not undermine US and European sanctions. Russia’s defiant move last summer in vetoing a fourth set of United Nations sanctions was a result of tense US-Russian relations after the Georgian-Russian war. Now, however, as President Obama has labored to improve relations with Russia, the country seems more willing to cooperate with the US on Iran. Russia has already put an arms deal with Iran on hold, and analysts suggest that this might signal willingness to get on board with new multilateral sanctions. China, aiming to attain trade concessions from the U.S., may support sanctions if properly enticed.

But even if Russia and China do not sign onto sanctions, the decrease in refined petroleum providers will still put pressure on Iran. China and Russia may be markets for crude oil and a source of manufactured goods, but neither country has the technology or knowledge that Iran so desperately needs to expand its petroleum refining capabilities and natural gas production. Neither nation has the refining capacities to supply Iran with refined petroleum if it loses supply from multinational firms. Also, although Iran has the second largest natural gas reserves in the world, it is a net importer of natural gas, partially because the flow of technologies from the West to tap this gas has largely been shut off. Thus, sanctions that further cripple Iran’s access to refined petroleum and natural gas technologies will have significant effects regardless of China and Russia’s cooperation.

Perhaps the threat of these sanctions might force Iran to seriously engage in talks. The Iranian government, wary of a revolutionary unrest caused by a very high oil shortage, might be pressured to make concessions due to fears of being overthrown. Such an outcome is surely hoped for, but Iran’s track record suggests that is not likely. The Obama Administration’s best option going forward is to get members of the international community on board for sweeping economic sanctions, enter negotiations with Iran threatening these sanctions as the outcome for stalled and fruitless negotiations, and vigorously enact the sanctions—all the while implicitly courting the Iranian population as an ally. These steps have the potential to lead Iran to forgo its nuclear ambitions. In fact, that is just the outcome that NYU Professor Bruce Bueno de Mesquita forecasts in his game theory computer analysis, which has been known to successfully predict the outcome of international negotiations. Bueno de Mesquita’s program describes a scenario in which, due to pressure on the Iranian regime, it stops its development of a nuclear bomb in early 2010, when it is just “at the brink” of realizing a nuclear weapon.