Treasury's War Read online

  This problem was especially evident at one of the meetings that Ross and I attended around this time. Hosted by the National Security Council, the meeting was about drug trafficking abroad, and we wanted to offer some ideas about the strategy being discussed. We also wanted to be at the table because we knew the Treasury Department could offer important input on sanctions, financial intelligence, and financial investigatory work. I had anticipated some resistance to our attendance, and we got a frontal assault. The first hand up in the meeting was from the long-standing deputy assistant attorney general, Mary Lee Warren, who oversaw the Department of Justice’s anti-money-laundering, narcotics, and asset-forfeiture operations. Warren, a seasoned veteran who had been Ross’s boss at the Department of Justice, was a well-respected prosecutor and player in the interagency world of Washington. She politely asked the NSC chair of the meeting, without looking my way, why Treasury was in the meeting at all, since we had lost all our enforcement assets. I grinned—happy to accept an invitation to explain our relevance—and I did so with glee. Treasury had tools, authorities, and resources to bring to bear on this problem, as we had for decades and would continue to have in the future. We could isolate rogue actors—drug traffickers, terrorists, or proliferators—unlike any other entity in the government, and we could do it globally and systemically. The Treasury Department worried about the integrity of the financial system, and our tools allowed the US government to have reach beyond its shores to affect the bottom line of our enemies. We also had ideas and potential actions to put on the table. We weren’t going anywhere.

  By 2003, we had established who would be staying, where we would be sitting, and the chain of command. I would be reporting to the deputy secretary, but in the absence of someone in that role, I would report to David Aufhauser, the general counsel. Sam Bodman came on board as deputy secretary in early 2004. Jeff Ross insisted that we call the new office an “Executive Office” to connote its close connection to the secretary. He also hammered into me the need to inject the term “financial crime,” in addition to “terrorist financing,” to ensure that our broad mandate was clear on first blush. This produced the name “Executive Office of Terrorist Financing and Financial Crimes” (EOTF/FC). It was not an easy acronym to roll off the tongue, but it made it clear what we were about—and it wouldn’t be long before it would change again. Sam Bodman would often make fun of the name. O’Neill’s successor, Secretary John Snow, endorsed the office, and he announced its creation on March 3, 2003.

  In my mind, the clock was already ticking. We had limited time to demonstrate why we were relevant—within the Treasury, to the White House and Capitol Hill, and to the rest of the world. As Deputy Secretary Bodman would later say, “the Treasury Department is easy to explain. It’s all about money.” That’s what we were about, clearly and simply—except that we were all about stopping bad money from infecting the financial system and isolating those who would abuse the system to the detriment of the United States. This would become our guiding principle and our mission.

  We had to demonstrate quickly why Treasury was uniquely positioned to impact illicit flows of funds and to isolate rogue financial actors from the international financial system. My principal goal was to resurrect Treasury—not as a chief law-enforcement body, but as a pivotal national security player. I wanted to ensure that Treasury tools and powers were considered essential in any strategy of national security import. We would need to use all our tools, contacts, and suasion in concert to make this happen. It was necessary for the country, important for international security, and critical for the Treasury Department. The problem was that no one realized this except for a small group of us—those of us who had been left behind to rebuild Treasury.

  6

  BAD BANKS

  If our new office was going to survive, I knew that we had to push the envelope. We needed to amplify what the Treasury Department was already doing to isolate rogue financial behavior. We needed to demonstrate why Treasury was indispensable to US national security. And the clock was ticking for us to prove our relevance.

  In early 2003, after the dust from the creation of the Department of Homeland Security settled, I gathered our small team in a conference room near my office on the second floor of the Treasury building to discuss a new project—one that would define a new form of financial pressure and eventually reshape the Treasury’s role in US national security.

  Bad banks would be our target. There are always banks engaged in fraudulent and criminal activity someplace in the world—some evading local laws and defrauding customers and investors. More interesting, for our purposes, were the banks serving rogue regimes and terrorist networks. They not only provide criminals access to banking services, but also allow for illicit financial activity to be hidden from the view of regulators, law enforcement, and intelligence services. BCCI, as an all-purpose bank for criminals and suspected terrorists of all stripes, was one such bank that we had seen in the past.

  We knew there were banks around the world that were serving as nodes of illicit financing. At these banks, the dirty money of suspect actors mixed to access the international financial system. For any criminal or terrorist enterprise to have global and sustained reach, it must have a financial infrastructure to raise, hide, and move money to its operatives and operations. Banks are the most convenient and important of these nodes of the financial system and are critical to nefarious networks. Where there is a transnational network of concern, there is likely also a bank or family of banks serving as a facilitator of that activity. These bad banks would fall into our crosshairs, and the rest of the banking world would necessarily take notice.

  If anything fell under Treasury’s classic purview, it was the activities of banks like BCCI. If we could target and bring down bad banks, we not only would cripple the ability of criminal and international rogue actors to access the international financial system, but would be sending a clear message to others in the banking world that they would not be immune from our glare, especially if they did business with the same or similar nefarious actors. I decided to call our campaign the “Bad Bank Initiative.”

  And our focus on banks would pay off, largely thanks to a recent change in the culture of finance. Before 9/11, even though banks were subject to laws, regulations, and sanctions, they were mostly passive players. They were unlikely to scrutinize their customers and their possible criminality closely unless they were doing so to fulfill government mandates or investigations. When they were caught doing business with criminals or sanctioned regimes, they were subject to costly fines—but even so, this was at times viewed as a cost of doing business.

  After 9/11, this attitude shifted. Banks were no longer willing to get caught facilitating terrorist financing. They feared permitting even a whiff of illicit financial activity into their systems. Just a week after 9/11, with the acrid smell of burning steel still in the air, bank leaders and executives met with Treasury representatives, the FBI, and Justice Department officials in a skyscraper in downtown New York to pledge their support and offer any assistance necessary to respond to the 9/11 tragedy. This spirit of cooperation would pervade for months, manifesting itself in myriad ways.

  But there was more than patriotism at work. This response ultimately had to do with the banks’ bottom lines. Reputational risk was now a central part of a bank’s calculus. The CEOs of the major banks in the United States and the rest of the world saw a government investigation or sanction of a bank’s operations as detrimental to their ability to do business—especially if it had any hint of terrorism attached to it.

  New USA PATRIOT Act provisions required more due diligence about the funds coursing through financial institutions and greater scrutiny of customers opening new accounts or making cross-border transactions. Banks recalibrated their decision making, determined to head off damage to their reputations before it was too late. The industry ramped up compliance systems, hired new internal investigators, and spent hundreds of millions of dollars
ensuring that they were not doing business with terrorists or other types of suspect actors. This was a fundamental transformation of how bankers viewed their bottom lines. And they did this with good reason.

  President Bush’s terrorist financing executive order had opened the door for banks to be branded as terrorist financiers and for their assets to be frozen, even if they had no specific intent to provide material support to known terrorists or terrorist groups. Indeed, we had already targeted a few banks for such designation—and their names were permanently tarnished once they appeared on the sanctions list. Moreover, their operations were scrutinized, and their very existence threatened. Ultimately, banks ran the risk of not only being tarred by the US government but of having their licenses pulled by the US or New York banking authorities—a virtual death sentence. No bank wanted to run the risk of being cut off from the US banking system.

  Regulators and prosecutors began to train their eyes on banks and their anti-money-laundering and sanctions compliance. One after another, major banks were subjected to investigations and major fines, making headlines. The effects cascaded in the banking world. On May 10, 2004, the Swiss banking giant UBS agreed to pay a $100 million civil monetary penalty in agreement with the US Federal Reserve and Treasury’s Office of Foreign Assets Control for financial facilitation of transactions with Cuba, Libya, Iran, and Yugoslavia during the periods when those countries fell under strict US sanctions.

  On August 17, 2005, the Office of the Comptroller of the Currency (OCC) and the Financial Crimes Enforcement Network (FinCEN) announced a $24 million fine of Arab Bank PLC. Arab Bank was a major financial institution based in the Middle East with assets (as of the end of 2004) totaling $27 billion. The government alleged that Arab Bank was willfully blind to the suspicious nature of transactions connected to individuals and companies subject to asset freezes and with ties to terrorism—especially those tied to Palestinian groups. Transactions coursing through the bank’s New York operations were particularly thrown into question. The civil monetary fine was preceded by an OCC enforcement action requiring Arab Bank to shut down wire transfers through New York and forcing the bank to convert its New York branch to an uninsured agency office. Arab Bank’s ability to operate through the United States on its own was clipped, and it would be further hounded by lawsuits lodged by victims of terrorism.

  Other examples would follow, with growing fines against banks as the US Treasury, myriad banking regulators, and prosecutors grew less forgiving of lax anti-money-laundering practices and purposeful stripping of information on bank and wire transfers to hide the origins and destination of funds.

  One example in particular demonstrates the dynamics that would define the landscape for our Bad Bank Initiative. On May 13, 2004, the Treasury rocked the Washington banking establishment. That day, the OCC and FinCEN fined Riggs Banks in Washington, DC, $25 million for willful violations of suspicious activity and currency transaction reporting and for failing to establish an adequate anti-money-laundering system. Long a revered Washington institution, Riggs served a long list of distinguished clients, especially foreign diplomats and embassies. After 9/11, Riggs had come under the microscope in part because of its lax anti-money-laundering controls related to foreign embassy and diplomatic accounts—and, in particular, its banking relationship with Saudi Arabia and Equatorial Guinea. Riggs had built the premier banking business, catering to embassies and foreign diplomats and officials. In other times, the traditional winks and nods of private bankers with privileged customers would have been accepted as the norm. Unfortunately for Riggs, these were not normal times.

  Regulators found that the bank maintained inadequate controls and checks on high-risk accounts and transactions, had failed to file suspicious activity reports on $98 million worth of transactions, and had failed to detect and report suspicious cash, monetary instrument, and wire activity by the Saudi and Equatorial Guinean governments.

  The $25 million fine may have seemed small relative to Riggs’ assets, which at that time amounted to approximately $5.8 billion. Nevertheless, it destroyed the bank’s reputation and operations. Riggs was forced to close the accounts it held for most of the embassies in Washington. This triggered a crisis as embassies scrambled to find new banks to take their accounts.

  Some countries, such as Equatorial Guinea, Saudi Arabia, Sudan, and Angola—often oil rich and nondemocratic ones—struggled to find banks willing to take their business. It was a tense moment. Regardless of tight US sanctions, these countries argued that the Vienna Convention for Consular Affairs requires the United States to provide financial services to all embassies. As soon as the fine was announced and it became apparent that Riggs would be closing all of its embassy bank accounts, we began fielding concerned calls at the Treasury. From our conversations with banking compliance officers, we already knew that banks were not eager to take on these embassy accounts, especially given all the negative press and attention Riggs was receiving and the compliance risks and scrutiny now attendant to holding certain accounts.

  The embassies wanted us to order banks to open accounts for them, but the banks sought assurances that they would not be targeted if they took on the banking business of a former Riggs accountholder. Since the US government could neither force banks to take on this business nor guarantee that banks would not be given additional scrutiny, we were in a tight spot.

  A crisis was averted after the State Department and Secretary Snow made some reassuring calls to ambassadors and the CEOs of Citibank, JP Morgan Chase, and other big banks. Wary bank executives were reluctant, but ultimately willing, to take on the embassies’ business (at a premium, of course).

  As Riggs’ reputation crumbled, it was forced not only to shed its now-radioactive embassy banking business, but to sell its operations outright. A buyer emerged—PNC Bank out of Pittsburgh—and Riggs was no more. An established Washington institution had been destroyed because of its lax money-laundering controls, a deficiency that looked very suspicious under the post-9/11 regulatory and enforcement spotlight.

  The scramble that followed the Riggs fine was not an isolated problem, but a reflection of changes taking place in the banking community. We had realized in 2003 that a new banking ecosystem had emerged. This was now an environment in which banks were acutely sensitive to their reputations and the risks of doing business with suspect individuals and entities under the international regulatory and enforcement microscope. Banks were willing to cut financial and commercial relations with rogue regimes, criminals, and terrorists, given the right conditions. And they were willing to do it on their own.

  This new ecosystem also relied on a globalized financial infrastructure. The system connected all international actors—states and nonstates—with its leading node in the United States—New York. New York serves as the most important financial center in the world, and the dollar serves as the global reserve currency and dominant currency for international trade, including oil. The twenty-first-century financial and commercial environment had its own ecosystem that could be leveraged uniquely to American advantage. In this system, the banks were prime movers.

  Simple as it was, this strategic revelation was revolutionary. We understood that this shift had already occurred and that we could build strategies around it. We could prompt banks to make decisions to cut off banking relationships, isolating rogues from the international financial system—and we could rely on the business decisionmaking of the banks themselves to do the heavy lifting. The key to managing the ecosystem was to ensure that illicit and suspect financial behavior continued to be thought of as detrimental to the efficient workings of the international financial system. Rogue and criminal actors needed to be branded by their own illicit activities and isolated by those who wanted to be considered legitimate financial players. With the United States defining those parameters, we had the ability to lock rogue actors out of the system as never before. This would now be our driving paradigm and approach. And Congress had already provided us t
he ideal tool in Section 311 of the USA PATRIOT Act.

  When President Bush signed the Patriot Act on October 26, 2001, the provisions of Title III did not receive close scrutiny by the press. Almost without anyone noticing, it gave the secretary of the treasury, among other things, the ability to designate foreign jurisdictions, institutions, types of accounts, and classes of transactions as “primary money laundering concerns.” The Treasury was empowered to impose countermeasures against these primary money-laundering concerns and to compel US financial institutions to take certain specified steps to guard against the possibility of facilitating the financial activity of designated entities. These steps ranged from additional recordkeeping to outright closure of accounts. The secretary of the treasury was also permitted to impose conditions on foreign bank accounts in the United States.

  The Treasury did not lack for powerful tools, many of which we had already been utilizing to full effect. The power to freeze the assets of individuals and entities was the nuclear option in Treasury’s arsenal. Treasury also had the ability to notify banks and other institutions with public advisories and reports, putting the banking community on notice about specific risks or trends of concern. But Section 311 gave the secretary of the treasury a middle ground. Institutions could be identified as risky from an anti-money-laundering perspective—in essence, a threat to the integrity of the financial system. This definition was wide open, and there would be no need to prove criminal culpability. The broad parameters and relative ambiguity of Section 311 gave it enormous reach in the newly reputation-conscious banking world.

  Treasury was now armed with all the weaponry it needed to go to war. We had access to SWIFT data to gather financial intelligence; we had identified the unique contours of the new financial system that would be our battleground; and we now had our stealth financial weapon. With Section 311, we would be able to identify bad banks and label them as “primary money laundering” concerns. We would then apply countermeasures to signal to the banking community how these designated institutions should be treated. In all cases, the secretary of the treasury called for the closure of all correspondent accounts, thereby cutting off access to the US financial system. Where possible, we would coordinate such actions with international partners.