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.