Q+A - How North Korea earns money from arms sales

SEOUL (Reuters) - North Korea fired seven ballistic missiles on Saturday, South Korea's defense ministry said, in an act of defiance against the United States as Washington cracks down on the secretive state's weapons proliferation.

Following North Korea's May 25 nuclear test, the U.N. Security Council imposed new sanctions to halt the North's missiles sales, a vital source of cash for the destitute state.

Here are some questions and answers about the North's suspected proliferation activities:

HOW MUCH DOES NORTH KOREA MAKE FROM ARMS SALES?

The U.S.-based Institute for Foreign Policy Analysis estimates that North Korea, with an annual GDP others estimate of about $17 billion, earns some $1.5 billion a year from missile sales. Other studies said the figure may be in the hundreds of millions of dollars, with prior U.N. sanctions and other restrictions cutting into exports.

The United States suspects the North has also sold nuclear know-how, but there are no figures readily available on income.

WHO ARE THE CUSTOMERS?

Since the 1980s North Korea has sold missile systems to Iran, Pakistan, Egypt, Libya, Syria and Yemen, the International Crisis Group said in a report last month. Experts said these include the North's variants of the Scud missile and its mid-range Rodong ballistic missile.

The ICG report also said there is strong evidence that North Korea was cooperating with Syria in an attempt to build a reactor that could be used in a plutonium-based weapons programme. The suspected Syrian facility was destroyed by the Israeli air force about two years ago.

WILL U.N. SANCTIONS WORK?

Sanctions from the United Nations and others have made it more difficult for the North to sell arms abroad, experts say, but Pyongyang has almost nothing else to export and is likely to search for ways to bust the sanctions.

The key to enforcing sanctions is global cooperation, with the North's neighbor and biggest benefactor China playing a major role. Fearful of moves that could lead to a collapse of the North Korean government and chaos on its border, China has expressed caution in the enforcement of sanctions.

The U.S. Treasury brought North Korea's international finances to a virtual halt in 2005 by cracking down on a Macau bank suspected of aiding the North's illicit financial activities. Other banks, worried about being snared by U.S. financial authorities, steered clear of the North's money.

HOW ELSE IS THE NORTH EARNING FOREIGN CURRENCY?

The U.S. government has accused North Korea of trafficking in narcotics, counterfeiting U.S. currency and producing fake cigarettes. Intelligence sources say the North also earns foreign currency through insurance fraud while its overseas missions have also developed various minor schemes to boost Pyongyang's coffers.

WHERE DOES THE MONEY GO?

The North uses foreign currency to buy goods overseas that reward the ruling elite. The funds enrich leader Kim Jong-il and his family and they are also used to buy materials for its arms and nuclear programmes.

(Additional reporting by Christine Kim; Editing by Valerie Lee)