The North Koreans sought new banks elsewhere, but Treasury followed them. Senior Treasury officials visited banks throughout Asia, warned their officers of the risks of doing business with North Korea, and stated that it was "almost impossible to distinguish between the North's legitimate and illegitimate dealings." Multiple banks quickly cut their ties with the North. Stephen Haggard and Marcus Noland, economists who study North Korea, estimated that Treasury sanctions and Japan's crackdown on remittances to North Korea badly hurt Pyongyang's capacity to launder the proceeds of its illicit activities, which accounted for approximately half of the North's income in the 1990s and still made up a significant share of Pyongyang's total earnings in 2005. As a result, the regime was forced to sell off some of its gold reserves. By January 2006, Kim Jong Il was so desperate that he reportedly told Chinese President Hu Jintao that he feared that the sanctions would cause his regime to collapse.
Rather than use this pressure to demand North Korea disarm, the Bush administration in 2007 pressured Treasury to cease its enforcement of the law, signed an agreement in which North Korean merely promised to disarm, and returned the money to North Korea. Predictably, North Korea stalled and withdrew from the agreement. A few months after Obama's inauguration, North Korea tested another nuclear weapon.
In the second Obama administration, the Treasury Department should resume its enforcement and declare the North Korean government to be what's formally known as a Primary Money Laundering Concern, a legal term for entities that fail to implement adequate safeguards against money laundering. This action would allow Treasury to require U.S. banks to take precautionary "special measures" limiting the access of foreign persons, banks, entities, and even entire governments linked to the sanctioned entity to the U.S. financial system. In addition to applying these measures to North Korean entities, Treasury could also apply them to the third-country business partners that finance the palace economy. (Treasury had taken similar actions against the governments of Nauru and Ukraine, forcing both to implement significant anti-money laundering controls, and comprehensive sanctions are proving to be effective at pressuring Iran.) Obama should also ask allied governments to apply corresponding measures to third-country banks, businesses, and nationals doing business with North Korea. This would almost instantly disconnect Pyongyang from the international financial system, and have a far more debilitating effect than the sanctions of 2005.
Obama could amplify this pressure through the more aggressive use of Executive Orders 13,382 and 13,551 to freeze the assets of Chinese and third-country entities suspected of helping North Korea's proliferation activities. And suspicions that North Korea continues to engage in money laundering and other illicit activities could be a basis for criminal prosecutions. These measures would deter banks and companies whose activities undermine international sanctions and abet the Kim regime.
Destabilizing North Korea raises legitimate concerns about loose nuclear weapons, but those worries are outweighed by the proliferation risk of a stable North Korean regime -- a regime whose state agencies already use the resources, organization, and privileges of sovereignty to proliferate nuclear technology to notorious sponsors of terrorism, such as Syria and Iran. The solutions we have tried for years have failed. Sustained financial pressure would give U.S. diplomats what they have always lacked -- a credible threat of devastating consequences if North Korea refuses to disarm. This pressure must continue until the regime caves, in one sense of the word or the other. North Korea and China will not negotiate in good faith until they conclude that the United States really is prepared to induce the collapse of North Korea's palace economy -- and with it, if necessary, the Kim regime.