The Tony Soprano of North Korea

In the heart of Pyongyang stands a gray, six-story concrete building that is not unlike thousands of others in the dreary communist capital, except that this one is protected around the clock by uniformed soldiers. The building is known as Bureau 39, and it is the headquarters of a worldwide criminal enterprise that is owned, overseen and operated by the government of North Korea.

Through a state-owned conglomerate called Daesong, Bureau 39 oversees export businesses owned and run by the North Korean government–mainly textile and other light-manufacturing factories and some mines. But Bureau 39 also houses another, shadowy directorate that oversees illicit enterprises ranging from drug trafficking to money laundering, claim a dozen current and former government officials in the U.S. and East Asia as well as academic researchers and private-sector investigators interviewed by TIME. Those illegal activities earn, by some estimates–including one by the State Department’s former point man on the issue–about $1 billion a year for the senior Pyongyang leadership. How important is that business to the regime? Consider that in 2005, all of North Korea’s legitimate exports totaled $1.7 billion, according to a CIA estimate.

Sheena Chestnut, a researcher at Harvard University and the author of a forthcoming article in International Security on what she calls the “Sopranos State,” says, “Although multiple entities within the North Korean system appear to participate in the organization and implementation of criminal activity, the coordination of the system–and financial control–appear to be exercised at the top by Bureau 39.” Chestnut and diplomatic and intelligence sources in East Asia say Bureau 39 houses the personal financial advisers of North Korean dictator Kim Jong Il and his top deputies. “Some rich people use Goldman Sachs or UBS to manage their money,” says a South Korean law-enforcement official. “Kim and his friends use Bureau 39.” (Like many other people interviewed for this story, he would speak only on condition of anonymity.)

A TIME investigation found that Kim’s criminal businesses not only stretch across Asia but also have managed to gain footholds in Russia, Europe and the U.S. Among the regime’s illicit activities are the production and trafficking of opium and heroin to dealers around the world, the manufacture and sale of billions of counterfeit cigarettes and the production of tens of millions of dollars in forged U.S. currency sophisticated enough to evade detection by U.S. banks. In many cases, the transactions are conducted not by rogue gangsters but by North Korean government officials, including members of the country’s diplomatic corps stationed overseas. (North Korean government officials did not respond to numerous requests for comment for this article.)

The U.S. has tried to thwart North Korea’s criminal activities for years. In 2005 Washington earned its biggest success when it managed to freeze $25 million of the regime’s funds in Banco Delta Asia, a bank in Chinese-controlled Macau, near Hong Kong. At least half that money had been generated from the North’s Mafia-style businesses. But one month ago, the U.S. returned the money to its account holders, a diplomatic chip in what the U.S. and its partners in the six-party negotiations with North Korea believe is a more important game: getting Kim to give up his country’s nuclear-weapons program. Shortly afterward, the North agreed to allow inspectors from the International Atomic Energy Agency to witness the shutdown of its plutonium reactor in Yongbyon. On June 21, U.S. diplomat Christopher Hill met with North Korean officials in Pyongyang–the highest-level visit to the North since 2000. The trip was a sign of the Bush Administration’s drive to strike a disarmament deal with the Kim regime, which President Bush once named a member of the “axis of evil.” The Administration is reportedly considering a formal end to the Korean War if the disarmament process succeeds. A former State Department official says Washington’s policy toward Pyongyang is “speak softly–and hope for the best.”

But even if Pyongyang agrees to disarm, there’s little reason to believe that the regime will abandon its nefarious business dealings. By keeping Kim’s top military and security officials happy, such lucrative enterprises help the dictator maintain his grip on power and resist pressure to open up the North’s broken, Stalinist economy. David Asher, who led the State Department’s delegation to the six-party talks from 2001 to 2005 and was the chief monitor of North Korea’s illicit activities, says, “Given that North Korea and its élite need hard currency, we can expect them to continue criminal activity to earn that money. The major problems associated with it will almost certainly continue.”

According to Asher, the big worry among U.S. and Asian intelligence officials is that “the [North]’s growing ties to organized-crime groups and illicit shipping networks could be used to facilitate weapons-of-mass-destruction shipments.” Later this year, the U.S. is expected to go to trial in New Jersey on a case targeting alleged members of a Chinese organized-crime gang accused of moving counterfeit currency, illegal narcotics and contraband cigarettes from North Korea into the U.S.–in addition to at least $1 million in illegal weapons such as pistols, machine guns and rocket launchers. The question that worries officials from Washington to Tokyo to Seoul is, Asher says, “What could be next?”

BELLFLOWERS IN BLOOM

FOR MOST OF THE YEAR, KIM IN-HO, 42, A defector from North Korea who now lives in Seoul, was an ordinary worker in a state-owned textile factory in Haesan City in Yangang province, not far from the border with China. Yet each summer, Kim and his colleagues left the looms and were sent to nearby farms to collect the year’s harvest. It wasn’t food they were gathering, he says, although North Korea has chronic food shortages, but “white bellflowers,” or poppies, the vital feedstock for opium and heroin processing. North Korean poppies are the starting point of an elaborate chain of production whose result ends up on the streets of Russia, China and beyond.

In most countries, the narcotics business is conducted by private organizations in the shadows as corrupt officials look the other way in return for payments. In North Korea, the opposite is true. “The government not only knows about it–it organizes it,” Kim says. “The money [from the sale of heroin abroad] goes to the government.”

According to several defectors who say they were involved in the narcotics trade, government trucks transport the opium harvested in North Hamgyong province to a factory outside Pyongyang run by Raemong Pharmaceuticals, a government-owned firm. A North Korean defector who claims he was a key middleman in the narcotics business alleges that Raemong is mainly a normal drug company. But, he says, it also converts opium into heroin headed abroad.

North Korea has used several methods to get its drugs to market. According to Asher and other diplomats, those methods include having its diplomats carry drugs like crystal meth in their luggage as they head for overseas posts. (Asher says North Korea requires that its missions abroad be self-financing, meaning they need to earn enough money to stay afloat without help from Pyongyang.) In the case of heroin, say sources in law enforcement and intelligence, more traditional methods are typically used. Ships flying international flags head for nearby ports–in particular, Vladivostok in Russia’s far east and Hong Kong–where organized-crime groups take over. A former senior law-enforcement source in Russia says the criminal groups “do business with agents of the North Korean government just as they would with any other criminal gang.”

The North’s neighbors are taking steps to root out the menace of North Korean drugs. In 2006 the Vice Minister for China’s Public Security Bureau, Meng Hongwei, held a rare press conference to announce his “fierce determination” to combat North Korean drug rings operating in Jilin province in northeastern China. The North’s drug dealings also extend to Japan, where in a four-year span, Japanese authorities seized 3,300 lbs. (1,500 kg) of crystal meth trafficked by North Korean gangs. And the Australian navy in 2003 boarded a North Korean vessel headed for the South Pacific and discovered it was packed with more than $45 million worth of high-grade heroin.

Despite such measures, there is little evidence that North Korea has been deterred from the drug business, particularly as demand rises in Russia and China. An East Asian intelligence source estimates that the trade is still worth “several hundred million dollars a year to the regime.”

SMOKES AND MIRRORS

DURING THE COLD WAR, SUBIC BAY IN THE Philippines was a critical strategic base of the U.S. Navy. The Navy is long gone (the base closed in 1992), and Subic Bay’s facilities are now used strictly for commercial purposes–including, according to a detailed private investigator’s report produced for the international cigarette industry in 2005, the smuggling of contraband cigarettes from North Korea.

North Korea is not the only player in the game. (Until recently, China was by far the biggest source of phony brand-name cigarettes, industry executives say.) The private investigator’s report for the cigarette industry found that 10 to 12 factories in North Korea produce a total of 41 billion contraband cigarettes a year, shipped out of the North on “deep-sea smuggling vessels.” They are then off-loaded at sea to smaller, high-speed vessels that deliver the cigarettes to traffickers in East Asia. That allows the deep-sea smuggling ships to remain in international waters, beyond the reach of any country’s law-enforcement authorities.

In late 2004, private investigators witnessed 6,000 master cases of cigarettes–each containing 10,000 smokes–being unloaded at Subic from a fishing vessel that routinely runs between Taiwan and North Korea. Since then, according to a North Korean defector intimately involved in the smuggling of phony cigarettes, “the business has only gotten bigger.” This source, who did not want his name used for fear of reprisal in North Korea, where his immediate family lives, says export routes for contraband cigarettes–carrying popular name brands such as Marlboro, Benson & Hedges and Mild Seven, among others–are now multiple and varied.

North Korea’s military- and internal-security services are “significant players” in the cigarette business, according to the source who used to be in the game. The North uses both homegrown and imported tobacco in these contraband businesses. A large source of phony cigarettes is the Dongyang Cigarette factory in Pyongyang, owned by a company called Kosanbong, which is controlled by North Korea’s internal-security bureau, according to the 2005 private report and a defector interviewed by TIME. The North Koreans have been able to import equipment from Taiwan and mainland China to produce the cigarettes. Overall, the trade generates $80 million to $160 million in profit for the regime every year, the study claims. That cash is then spread among Pyongyang’s élite to ensure loyalty to Kim, say multiple sources.

The illicit-cigarette business is a window into how North Korea arranges and moves its whole range of illegal products. The regime uses shipments of contraband cigarettes to export other goods, including narcotics and weapons. North Korea has successfully exported contraband cigarettes from its two major container ports using ships registered in other countries. Some of that material may have found its way to the U.S.–an indication of how easily weapons of mass destruction (WMD) from the North’s arsenal could be smuggled to other countries if Kim were tempted to put them up for sale.

THE CASE OF THE SUPERNOTES

IN LATE SUMMER OF 2005, FEDERAL AGENTS involved in two elaborate undercover operations in California and New Jersey–code-named Royal Charm and Smoking Dragon–arrested several alleged members of Chinese organized-crime gangs known as triads. In addition to narcotics, phony brand-name cigarettes and bogus pharmaceuticals, the investigators found $4 million worth of unusually well-produced counterfeit $100 bills. “There’s no way an ordinary bank teller in the United States, let alone overseas, is able to identify these notes [as forgeries],” says an American law-enforcement official. In the indictments that followed–the first trial is expected to start this summer–one of the people charged, Chao Tung Wu, a citizen of Taiwan, says the supernotes were produced by the “government of a country” identified in the indictment as “Country Two.” That, sources in the U.S. and East Asia say, is North Korea.

According to U.S. and South Korean intelligence reports, the North has been producing the counterfeit bills at least since 1994. The South Korean intelligence service two years ago said it could confirm production only until 1998, but at least twice in recent years, claim U.S. and South Korean sources, the U.S. has presented the South Korean government with supernotes said to have been produced in 2001 and 2003.

A 2006 State Department estimate puts the amount of counterfeit currency in circulation at $45 million to $48 million. Estimate is the key word. Of all the illicit businesses from which North Korea profits, counterfeiting is the one about which outsiders know the least. U.S. officials say they don’t believe the North Koreans produced the equipment to print such high-quality counterfeit bills. If that’s the case, where did they get it from? No U.S. agency interviewed for this story, including Treasury, State and the Secret Service, could say. U.S. sources also say they do not know where in North Korea the notes are produced.

It does seem likely, however, that Kim’s government is running the scam. Harvard researcher Chestnut says that since 1994, there have been at least 13 incidents in which North Korean officials, diplomats or employees of government-owned companies have been implicated in carrying counterfeit currency abroad, mostly to embassies in Europe and elsewhere in Asia, from which the bills are sold and slipped into local circulation. Pyongyang last year denied it had ever forged U.S. currency but said it would, in concert with other nations, continue its fight “against all sorts of illegal acts in the financial field.”

Hill, the U.S.’s top negotiator with North Korea, says, “I don’t think you can ask any government–not ours, not any other government–just to ignore these things and to pretend it’s not going on. So we did need to take action.” But it’s unclear how far the U.S. intends to go. After the release of the $25 million from the Macau bank, North Korea promised to use the money for humanitarian purposes. Now that it is back at the negotiating table, however, Pyongyang has less incentive to clean up its game–and every reason to bet that the world will tolerate its criminal enterprises in exchange for cooperation on the nuclear front. Skeptics of engagement with Kim say, given the nature of the regime, his commitment to any arms-control agreement is doubtful at best. “This is a government that has shown every willingness to sell anything to anybody,” says former Pentagon official Dan Blumenthal. “Ultimately our security is at stake in terms of their willingness to possibly sell WMD.”

So what can the U.S. and its allies do? As a start, Asher and others argue that Washington could lean more on China and South Korea to beef up their surveillance and interdiction of suspect ships coming out of North Korean ports–which over the long term could dissuade Kim & Co. from pursuing its Sopranos-state operations. But that would take time, and right now the U.S. appears focused on getting a nuclear deal out of Pyongyang, no matter what sort of activities it might have to overlook in the process. For Kim and his cronies in Bureau 39, that means business is only going to get better.