Lawmakers are pushing for tougher U.S. financial restrictions on North Korea even as the U.N. Security Council moves closer to a new resolution tightening international sanctions in response to Pyongyang's latest nuclear test.
The foreign affairs panels of both houses of Congress are considering this week the Obama administration's next policy options amid growing concern about the threat to the U.S. posed by North Korea's weapons development.
On Tuesday, the Republican-led House foreign affairs panel is examining how criminal activities support North Korea's authoritarian regime. That could buttress the case for leveraging the vast reach of the U.S. financial system to pressure international banks that deal with the North.
North Korea long has been believed to have derived hundreds of millions of dollars a year from criminal activities such as counterfeiting of cigarettes and U.S. currency, drug trafficking and insurance scams. Its sales of missiles and conventional weaponry are also outlawed under existing U.N. resolutions.
Targeted U.S. financial sanctions have been tried before and have had a significant impact but upset China, the North's main source of economic support and the country where it conducts most of its trade and financial transactions. The U.S. wants Beijing to exert more pressure on North Korea.
U.N. diplomats say that the U.S. and China have reached a tentative agreement on new resolution to tighten sanctions that will be discussed by the Security Council in New York on Tuesday. That shows Beijing's patience is wearing thin with its ally but it remains to be seen whether diplomatic action on more sanctions translates into their implementation on the ground.
There is deep frustration in Congress over the international diplomatic efforts aimed at persuading Pyongyang to end its nuclear weapons program in exchange for aid. The talks, hosted by China, have been stalled since 2009. A U.S. attempt to offer food aid in exchange for nuclear concessions last year fell flat.
New North Korean leader Kim Jong Un has adopted a confrontational approach toward Washington, although he did deign to meet last week with former professional basketball star Dennis Rodman.
In a sign of the tensions with the U.S., Pyongyang's military vowed Tuesday to cancel the 1953 Korean War cease-fire, saying Washington and others are going beyond mere economic sanctions and expanding into blunt aggression and military acts.
House Foreign Affairs Committee Chairman Ed Royce said that since the Bill Clinton administration, U.S. policy toward North Korea has been a "bipartisan failure" based on the hope that North Korea will negotiate away its nuclear program while it is intent on perfecting it — an approach he said has resulted in a more dangerous world.
The California Republican said he plans to introduce legislation after examining at Tuesday's hearing how best to pressure North Korea's ruling elite by systematically restricting their access to hard currency.
"It is important to realize we have more options other than to simply rely on Beijing to 'do more,'" Royce said.
Sung-Yoon Lee, professor of Korea studies at Tufts University, who was scheduled to testify, said the North's "shadowy palace economy" makes the Kim regime vulnerable to actions targeting money laundering. He suggests the Treasury Department require American banks to restrict their dealings with foreign individuals, banks, entities and even entire governments that are linked to North Korea's government.
"The Obama administration has apparently not decided on this approach, but the political climate is conducive to trying something like it," Lee said.
Marcus Noland, an expert on North Korea's economy at the Peterson Institute for International Economics, said the North's illicit activities continue, although their overall importance for the North's economy has declined as its international trade, particularly with China, has grown sharply. China accounts for 70 percent to 80 percent of North Korea's trade and totaled more than $7 billion in 2011.
In a rough estimate, Noland estimated that arms and illicit exports accounted for just under 10 percent of the merchandise the North traded in 2011, compared with more than 30 percent in 1999, when the economy was at a low point after years of famine. International interdiction efforts have also impeded the illicit trade, he said.
The North's improved financial standing could help explain its recent provocative behavior in conducting rocket and nuclear tests.
"If you are running a surplus and China is in your corner and won't implement U.N. embargos, then you can be provocative," Noland said. "But North Korea is heavily dependent on China, particularly for energy, and if China changes policy and literally cuts off the pipeline, then they're in real trouble."
In 2005, the U.S. Treasury sanctioned Banco Delta Asia, a bank in the Chinese territory of Macau which held about $25 million in North Korean funds. Treasury accused the bank of introducing counterfeit notes and laundering funds on behalf of North Korean enterprises linked to weapons of mass destruction programs.
The 2005 action caused a ripple effect among other banks worried about being closed out of the international financial system. Yet the sanction annoyed Beijing — as well as enraging Pyongyang — and proved complicated to undo when nuclear negotiations with North Korea finally got back on track.
Associated Press writer Edith Lederer at the United Nations contributed to this report.