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  TREASURY’S WAR

  TREASURY’S WAR

  The Unleashing of a

  New Era of Financial Warfare

  JUAN C. ZARATE

  PublicAffairs New York

  Copyright © 2013 by Juan C. Zarate.

  Published in the United States by PublicAffairs™,

  a Member of the Perseus Books Group

  All rights reserved.

  No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. For information, address PublicAffairs, 250 West 57th Street, 15th Floor, New York, NY 10107.

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  Book design by Mark McGarry, Texas Type & Book Works Set in Meridien

  Library of Congress Cataloging-in-Publication Data

  Zarate, Juan Carlos.

  Treasury’s war : the unleashing of a new era of financial warfare / Juan C. Zarate.—First edition.

  pages cm.

  Includes bibliographical references and index.

  ISBN 9781610391160 (ebook)

  1. United States. Dept. of the Treasury. 2. Terrorism—Finance—Prevention. 3. Money laundering—Prevention. 4. Commercial crimes—Prevention. 5. Finance—Moral and ethical aspects—United States. 6. National security—United States. 7. Security, International. I. Title.

  HJ261.Z37 2013

  363.325’170973—dc23

  2012051582

  FIRST EDITION

  10 9 8 7 6 5 4 3 2 1

  To my father and mother, who came to this country believing in the American dream and who showed us with unconditional love how to live it. And to my wife, whose support and love made this story possible.

  CONTENTS

  Prologue: “The Hidden War”

  Introduction: The Modern Megarian Decree

  Part I: Foundation

  1.A New Kind of War

  2.Financial Footprints

  3.Nose Under the Tent

  4.Financial Chokepoints

  Part II: A New Paradigm

  5.Blowfish

  6.Bad Banks

  7.“The Mother of All Financial Investigations”

  8.Resurrection

  Part III: Financial Furies

  9.“Killing the Chicken to Scare the Monkeys”

  10.The Awakening

  11.Putting the Genie Back in the Bottle

  12.Revelation

  13.The Constriction Campaign

  Part IV: Adaptation

  14.Dusting Off the Playbook

  15.Learning Curve

  16.The Coming Financial Wars

  Epilogue: Lessons from the Use of Financial Power

  Acknowledgments

  Notes

  Selected Bibliography

  Index

  Photo Section

  PROLOGUE: “THE HIDDEN WAR”

  On October 8, 2012, Iranian President Mahmoud Ahmadinejad publicly bemoaned that the Iranian economy was under direct economic assault, with oil sales cut, bank transfers banned, and the value of the Iranian rial and foreign currency reserves plummeting. He admitted plainly, “The enemy has mobilized all its forces to enforce its decision, and so a hidden war is underway, on a very far-reaching global scale. . . . [W]e should realize that this is a kind of war through which the enemy assumes it can defeat the Iranian nation.”1

  He was right.

  Over the past decade, the United States has waged a new brand of financial warfare, unprecedented in its reach and effectiveness. This “hidden war” has often been underestimated or misunderstood, but it is no longer secret and has since become central to America’s national security doctrine. In a series of financial pressure campaigns, the United States has financially squeezed and isolated America’s principal enemies of this period—Al Qaeda, North Korea, Iran, Iraq, and Syria. Far from relying solely on the classic sanctions or trade embargoes of old, these campaigns have consisted of a novel set of financial strategies that harness the international financial and commercial systems to ostracize rogue actors and constrict their funding flows, inflicting real pain. America’s enemies have realized they have been hit with a new breed of financial power. And they have felt the painful effects.

  Al Qaeda has found it harder, costlier, and riskier to raise and move money around the world and has had to adapt to find new ways to raise capital for its movement. The documents found in Osama bin Laden’s compound in Abbottabad, Pakistan, reflect a terrorist leader and movement in search of new sources of money. This was not a new development—from 9/11 on, the movement struggled to maintain its core financing. In statement after statement—intended for donors and sometimes only for internal consumption—Al Qaeda has admitted that it has been choked financially. In a July 9, 2005, letter to Abu Mus’ab al-Zarqawi, leader of Al Qaeda in Iraq, Ayman al-Zawahiri, then Al Qaeda’s number two, asked for money, noting that “many of the lines [of financial assistance] have been cut off.”2

  The campaign against North Korea had direct and immediate impact. In the wake of financial pressure unlike any the regime had seen while under international sanctions, North Korea found its bank accounts and illicit financial activity in jeopardy. A North Korean deputy negotiator at the time quietly admitted to a senior White House official, “You finally found a way to hurt us.”

  The Iranians, too, have suffered the economic effects of a targeted financial assault. On September 14, 2010, former Iranian president Akbar Hashemi Rafsanjani urged the Iranian Assembly of Experts to take seriously the painful sanctions and financial pressure being imposed by the United States and the international community. “Throughout the revolution,” he said, “we never had so many sanctions [imposed on Iran] and I am calling on you and all officials to take the sanctions seriously and not as jokes. . . . Over the past 30 years we had a war and military threats, but never have we seen such arrogance to plan a calculated assault against us.” The journalist Moisés Naím has opined that the financial pressures on Iran “are biting, the sanctions are very, very powerful. They are the most sophisticated economic and financial sanctions imposed on a country ever.”3

  All of these assaults against America’s enemies derive from a blueprint for financial warfare developed years ago by the United States. This is warfare defined by the use of financial tools, pressure, and market forces to leverage the banking sector, private-sector interests, and foreign partners in order to isolate rogue actors from the international financial and commercial systems and eliminate their funding sources.

  This book tells the story of this new era of financial warfare. It began after 9/11, as the US government developed these techniques for use against terrorists, rogue regimes, and other illicit financial actors. These capabilities—which fall between diplomacy and kinetic warfare—would increasingly become the national security tools of choice for the hard international security issues facing the United States. Now, the United States can call upon these techniques to confront its most critical national security threats, from terrorist groups and international criminals to North Korea and Iran.

  This is also the story of the small group of officials from the Treasury Department and other government agencies who engineered this new brand of financial power. These strategies were designed under the radar, with the clear mission to revamp the way financial tools were used. They served also to resurrect a Treasury Department that was struggling to remain relevant to national security issues. From the bowels
of an emasculated Treasury Department, bureaucratic insurgents—guerrillas in gray suits—envisioned a new national security landscape in which the private sector could be prompted to isolate rogue actors in line with US interests. With the help of bankers and financial institutions, the Treasury Department led a campaign to protect rogues from the financial system. We envisioned a day when the Treasury Department would become central to core national security debates, and that’s exactly what happened.

  I was privileged to be a part of that Treasury team and to play a role in shaping and executing these strategies. Later, from my privileged perch as deputy national security adviser, I helped my Treasury colleagues deploy these powers, and together we witnessed the growth in Treasury’s role as its expertise and influence became increasingly important to national security.

  Finding the soft financial underbelly of our country’s enemies became our mission. These financial strategies became indispensable to targeting and isolating the North Korean, Syrian, and Iranian regimes and other rogue actors who threatened US national security and engaged in international criminal behavior. This approach remains central to our national security to this day. We redefined the way the US government engages in financial warfare and in the process fundamentally reshaped the role of the US Treasury itself.

  We successfully formulated and used these strategies during the administration of President George W. Bush, but since the changing of administrations, President Barack Obama and his team have continued to rely heavily on this brand of financial warfare. The world still faces challenges from rogue states, networks, and actors, but there now exists a well-developed international system to use financial information, power, and suasion to isolate rogues from the legitimate financial system. Though this type of warfare alone cannot solve issues of deepest national security concern, this private-sector-based paradigm gives the United States and its allies the tools and leverage they need to affect rogue actors and their interests in ways that historically would have been considered out of reach.

  The story of Treasury’s campaigns of financial warfare is not well known, even within the upper reaches of the US government. The role of Treasury, the scope of its powers, and the effectiveness of its strategies were often unseen amid the more visible signs of the global war on terror. When I left the Treasury Department in 2005 to join the National Security Council, I had a conversation with a senior Pentagon official who noted that Treasury should be engaged in the global fight—meeting with its foreign counterparts and urging concerted financial action against America’s enemies. I was surprised at the comments, knowing what Treasury had been doing. Treasury was already at war.

  But this was a new kind of war—not “shock and awe,” but more like a creeping financial insurgency. It was a “hidden war” intended to constrict our enemies’ financial lifeblood. And we were succeeding, under the radar.

  This book explains how and why this power has worked and what must be done to maintain it in the future. It also raises a wary eye to competitor states like China, or transnational networks, that might use the lessons of the past ten years to wage financial battles against the United States.

  The new era of financial warfare that began after 9/11 will continue to evolve into the foreseeable future. It came about because we were able to view the landscape differently than our predecessors. The era of globalization and the centrality of American financial power and influence allowed for a new approach. And, in this sense, Iranian President Ahmadinejad was not mistaken: there was indeed a hidden war striking at the heart of America’s enemies—a war that has been expanded and continues to this day on multiple fronts around the world. This is Treasury’s war.

  INTRODUCTION: THE MODERN MEGARIAN DECREE

  Money binds the world—now more than ever. It has always been a source of power for nations, companies, and people. It continues to be the lifeblood for terrorist organizations, criminal syndicates, and rogue regimes. Whether it’s North Korea producing the world’s best $100 counterfeit bills, Al Qaeda paying pensions to the families of its deceased operatives, or Mexican drug cartels in Ciudad Juárez dispensing bribes to gain access to lucrative plazas, or smuggling routes, into the United States, money is what fuels the operations of the world’s rogues. It pays salaries, buys influence and allegiance, and makes possible the fanciful imaginings of leaders. Budgets and cash flow give them access, capabilities, and global reach to build their organizations, expand their influence, and give life to their personal, political, and ideological ambitions.

  Money also creates vulnerabilities. The need for money to survive and operate in the twenty-first century—whether in local economies or globally—creates financial trails that do not lie and dependencies that are hard to hide. In a globalized economy, money flows across borders at a lightning pace and in staggering volumes. With the ease of a phone call or the touch of an app, billions of dollars move every day in myriad ways—via antiseptic wire transfers, the traditional practice of hawala, and satchels full of cash. Money is a common denominator that connects disparate groups and interests—often generating new networks of convenience aligned against the United States.

  Money is their enabler, but it’s also their Achilles’ heel.

  If you can cut off funding flows to rogue groups or states, you can restrict their ability to operate and force them to make choices—not only budget decisions, but also strategic choices. Al Qaeda’s budget, in addition to the payments to families of deceased operatives, covers training expenses for new recruits. Iran’s national budget includes a specific line item for its support of terrorist groups such as Hezbollah and Hamas. North Korea enriches its leadership with luxury goods and uses money to maintain both internal order and military and political allegiances. Organized crime groups around the world use their profits to buy influence and access at border crossings and in the halls of governments and to expand their business empires.

  Financial strategies are powerful tools that can constrict our enemies’ current activities and their strategic reach. Yes, one suicide bombing may cost a terrorist organization less than $1,000, but if that organization cannot pay for all the sophisticated training it would like, cannot adequately maintain its international alliances, and cannot develop all the programs and operations it imagines, then its ultimate impact will be limited. In maximalist terms, we can alter the enemy’s behavior by affecting its bottom line.

  A small group of us within the US Treasury Department and other areas of the US government recognized this strategic vulnerability of America’s enemies after 9/11. We viewed the global battlefield through the lens of dollars, euros, and rials, seeing money as our greatest asset and our enemies’ greatest vulnerability. Pursuing this idea, we began to devise means of using money as a weapon against terrorists, rogue regimes, and illicit financial actors. As a result, we are now living in a new era of financial warfare. The ability to undercut and disrupt the financial flows and networks of our enemies gave the United States a different kind of strategic leverage.

  This new warfare is defined by the use of financial tools, pressure, and market forces to isolate rogue actors from the international financial and commercial systems and gain leverage over our enemies. As this book will explore, the US government has innovated the use of financial power in the twenty-first century. That is not the end of the story—America’s enemies have adapted to the pressure, and our competitors have learned from our example. Financial warfare will continue to develop rapidly—now outside of the control of the United States—and has started to form a central part of international security strategies. This is why it is so important to understand how this type of financial power evolved and to ensure that we preserve the ability to wage financial warfare smartly.

  Our techniques, innovative as they are, build on a longer history. Financial power and economic influence have served as weapons since the dawn of warfare. The Greek city-states, the Roman Empire, and even the barbarians used sieges and economic deprivation to wea
ken their enemies. Eighteenth and nineteenth-century nations relied on blockades and trade warfare. By the late 1990s, broad, country-based trade embargoes and targeted sanctions were used to attempt to affect the behavior of international pariahs.

  Perhaps the oldest and best-known example of financial warfare dates back to the Peloponnesian War. In 432 B.C., Athens and Sparta were the two strongest city-states in Ancient Greece, each leading its own competing coalition of allied city-states. Athens was an economic power, influential thanks to its trading system and its advanced navy. Sparta maintained a large and well-trained army.

  Conflict erupted between the two over the city of Megara, which at that time was aligned with Sparta. The Athenian politician Pericles proposed that Athens sanction Megara economically. This policy—which became known as the “Megarian Decree”—excluded Megarian merchants from the ports and markets of the Athenian-allied Delian League. The Athenians wanted to avoid a direct military confrontation with Megara, but the Spartans saw the decree differently. Sparta sent word that the decree must be withdrawn, and when the Athenians refused, Sparta declared war—a war that would conclude with Sparta’s subjugation of Athens and the end of the Athenian Golden Age.

  Trade sanctions and blockades of city-states and key ports persisted for centuries. In the 1500s, the English and other naval and trading powers innovated the use of privateers—privately owned ships—to act as agents of the state under issued “letters of marque.” These letters authorized the vessels to attack specific nations’ ships in specific geographic zones. As privateering became an increasingly pernicious problem, England installed a standing navy in 1708 to defend its trade routes. This brand of outsourced financial warfare on the high seas was not legally abolished until 1856.