Kim's Bad Habit

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A confidential report compiled by investigators working for a coalition of major U.S., European and Japanese tobacco companies indicates that North Korea has developed a highly lucrative source of hard currency: counterfeit cigarettes. The 11-page document, a copy of which was obtained by TIME, outlines in unprecedented detail the inner workings of this illicit business and the extent to which it may have led North Korea's rogue regime to ally itself with crime syndicates from mainland China and Taiwan.

Based on information from undercover agents, informants and industry insiders, the report, which is dated June 29, 2005, offers a unique glimpse of the scale and sophistication of North Korea's illicit-cigarette industry, which has allegedly counterfeited a vast array of brands—from Marlboro to Davidoff. The report estimates that production from 10 to 12 North Korean factories in the counterfeiting business may total 41 billion cigarettes a year, generating annual revenues of $520 million to $720 million. It's not clear how much of this money flows to the regime of dictator Kim Jong Il, whether in duties or payments "for protection," but the report speculates that its share of the profits may amount to $80 million to $160 million a year. That would be quite a windfall at a time when the North's economy is reeling and the U.S. is trying to pressure Kim to abandon his nuclear-weapons program by cracking down on his regime's income from business exploits as diverse as trafficking drugs and counterfeiting $100 bills.

Pyongyang has consistently dismissed U.S. allegations that it's engaged in such illegal activities. But according to the report, some of these cigarette factories are directly owned by North Korea's military and the internal-security service, giving the state "total control" over these operations. In other cases, says the report, the North's contribution is primarily to provide a "safe haven" to factories run by overseas counterfeiting syndicates. Three of the factories that are said to be located in the Rajin area on the northeast coast of North Korea are allegedly run or financed by crime syndicates from Taiwan. One of these factories, equipped with second-hand equipment from China, has allegedly counterfeited such brands as Mild Seven, Dunhill and Benson & Hedges. According to the report, another factory in Rajin employed 120 people and was run by Chinese supervisors and technicians; North Korean officials were allegedly paid a "tax" on the factory's cigarettes, which were then exported in fishing vessels owned by a Taiwan crime syndicate. Indeed, the report claims that a chief attraction of running such a business in North Korea is that the "regime's willingness to allow dedicated, deep-sea smuggling vessels to use its ports provides the gangs with a secure delivery channel."

On occasion, such shipments have been intercepted in foreign waters. In 2004, says the report, customs officials in Vietnam, Taiwan and the Philippines were tipped off about three shipments from Rajin to the South Korean port of Pusan. As a result, the report notes, some factories in Rajin simply switched to shipping consignments via a port in Russia.

This adaptability could make it particularly difficult for the U.S. and its allies to stop the North's cigarette exports. But there are clear signs that pressure on Kim's regime is being ratcheted up as the U.S. targets the country's various sources of dubious income. Last September, for example, the U.S. Treasury Department designated Banco Delta Asia in Macau as a "primary money laundering concern" and alleged that it facilitated the North's criminal activities by circulating counterfeit currency (charges the bank denied). And a senior Treasury Department official called on the South Korean government last week to help the U.S. combat the North's alleged involvement in such businesses as counterfeiting U.S. banknotes and exporting drugs.

David L. Asher, a senior adviser to the U.S. State Department on issues involving North Korea, says the Bush Administration is hoping that hitting Kim financially will force him to embrace reform and trade his nuclear-weapons program for economic aid. On a rare visit to China in January, Kim spent hours inspecting malls and factories, suggesting that he may be contemplating the type of reforms that have transformed China into an economic powerhouse. "I very much doubt he would have done that unless he'd felt under pressure," says Asher. "Maybe he's realized the old game is up." Then again, Kim may also have realized that counterfeiting cigarettes is way too profitable a habit to kick.