North Korean House of Cards

for acquisition. Normally, these requirements were tied to technology and human
capital that could be procured through the private sector, allowing Offices 38 and 39
to leverage their numerous ties to the quasi-legal Chosen Soren business operations
throughout Japan. 413 It is unclear whether Offices 38 and 39 conducted similar
acquisition operations in other countries, although this is unlikely. The operations in
Japan appear to have been tied to special circumstances.
At its high point in the late 1990s and early 2000s, illicit weapons sales
accounted for nearly $1 billion in the Royal Economy. 414, 415, 416 But as the international
community began to clamp down on proliferation operations through enhanced
sanctions and monitoring of smuggling routes, the ties between the Royal Economy
and the sales and acquisitions part of the defense-industrial complex began to weaken.
The freezing of North Korean accounts in Banco Delta Asia in 2005 reportedly led
Kim Jong-il to the realization that these ties threatened his own funding streams.
In response, he ordered that firewalls be erected to essentially remove the Royal
Economy from direct involvement in weapons proliferation. From that point on,
the Royal Economy could provide funds to critical defense programs but not utilize
its apparatus in support of them (i.e., procurement or sales). As a consequence, the
parts of the Royal Economy closely tied to defense sales and acquisition were
removed. Control of the Changgwang Credit Bank, for example, was transferred
413 Acquisition agencies tied to the SEC also operated in Japan and were likely responsible for
procuring more sensitive technologies that could not be secured through commercial channels.
414 This figure is only an approximation of the amount of hard currency that the Royal Economy
siphoned off of weapons sale proceeds. The time period for this estimate is not clear, somewhere between
1995 and 2005. It is based on interviews with sources who study North Korea’s illicit arms trade.
415 Lee Beom-Jin, “Torpedo that Attacked Cheonan was Export Weapon of North Korea’s Green
Pine Association,” op. cit. In 2010, U.S. and international authorities estimated that North Korea’s illegal
weapons transactions totaled between $100-500 million. Following the institution of the U.S.-led Proliferation
Security Initiative, which became operational in 2003, North Korean profits plummeted, reaching
a low of $49.6 million in 2007. By 2009, North Korea’s profits reached $150 million. The annual profit
clearly falls far short of what it was in the early 2000s.
Stephan Haggard and Marcus Noland argue that the slump may have begun much earlier.
They note that the U.S. State Department’s publication World Military Expenditures and Arms Transfers
and the Stockholm International Peace Research Institute (SIPRI), show steadily declining North Korean
sales over time. These sources suggest that the upper-end estimates that are sometimes reported—such as
the statement by a U.S. official that North Korea earned $560 million from missile sales in 2001—are
probably exaggerated. See Stephan Haggard and Marcus Noland, “Follow the Money: North Korea’s
External Resources and Constraints,” 2008 Korea’s Economy, Korea Economic Institute (2008).
416 In the 1980s, during the Iran-Iraq War, the Defense Intelligence Agency estimates that North
Korea earned an estimated $4 billion from arms sales with Iran. How much of that $4 billion was paid
into the Royal Economy coffers is not known. North Korea: The Foundations for Military Strength. Defense
Intelligence Agency (October 1991).
Ken E. Gause
193