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  Although we could only directly affect bank activities in the United States, the intended effect would be global. Even though most bad banks had few or marginal dealings in the United States, Section 311 would immediately make them radioactive to reputation-conscious banks worldwide.

  The intent of this strategy was to drive the private sector’s isolation of these banks, placing the onus on banks to police their own system. It would also place added pressure on the criminals and rogue regimes that were relying on those banks to do business globally. Rather than directly imposing restrictions on these groups, this strategy was designed to cut off these bad actors from the financial system by making them financial pariahs. The banks they were using would be designated, but the activities they were facilitating and the actors involved would fall under the spotlight. Section 311 gave us a tactical tool against specific targets, but it also allowed us a broader mechanism to manage the banking environment by bringing what the Treasury was watching and worried about into the public light.

  By 2003, when we met to launch the Bad Bank Initiative, we had already used 311 twice against jurisdictions. The first targets were Ukraine and Nauru, an island nation in the South Pacific. We published the proposed rule to label both of these countries as primary money-laundering concerns on Christmas Day of 2002, responding to a call for “countermeasures” by the FATF, reports that neither financial system was well regulated, and suspicions that they were both deeply compromised by Russian organized crime. Frantic to remove the label, the Ukrainian Parliament, within a month, enacted new anti-money-laundering provisions. Nauruans responded even more quickly. The country moved within days to implement legislation responding to US concerns, and the offshore banks registered in Nauru began to close.

  When we took action against Nauru, to some, it seemed like we were merely swatting a fly. But importantly, the Treasury had proven the power of Section 311 to affect not just the designated jurisdiction but all the banks doing business in it. It was a domestic regulatory action with enormous international impact.

  I knew what needed to be done and the tool to be applied. Now our small team at Treasury simply had to implement the initiative.

  We decided to divide the world into regions and issues of concern in our effort to identify banks that were facilitating multiple types of illicit financing relevant to our national security. In other words, this was not a campaign designed around specific categories of illicit activity, but instead around nodal banks that were facilitating a range of illicit activities posing a risk to the national security—those helping transnational organized crime groups, terrorist organizations, drug traffickers, proliferation, sanctions evasion, counterfeiting, and/or other types of criminality. Some bad banks were already evident to us, but we had not yet dug in.

  The assignment I gave to my team was simple: find the key banks or networks of banks that should be targeted because they were important to transnational illicit financial activity of import to the United States. Whether it was Southeast Asian drug trafficking, Caribbean money laundering, Eurasian organized crime interests, or funding for terrorism, we would need to come up with targets that would have a demonstration effect on the banking world and against our enemies.

  This initiative had the elegant virtue of accomplishing multiple strategic goals at once—for the US government, the Treasury, and our office. In the first instance, it would allow us to highlight and isolate illicit financial behavior. The banks targeted and their nefarious customers would have trouble doing business efficiently once we hit them with a 311. A series of these actions would increase the pressure on banks to police the financial system and to guard against the kinds of activities we would be identifying. Banks would not want to touch the radioactive clients and their activities we targeted. We would be doing this with a unique Treasury tool in furtherance of a core Treasury goal—to protect the integrity and safety of the US and international financial system from illicit fund flows. By doing this strategically and with the right targets, we would inject Treasury into the heart of major national security debates, giving policymakers yet another tool around which to devise pressure campaigns and affect actors seemingly beyond US reach. With the strategic application of our unique new tool, we would prove the importance, value, and power of the new Treasury.

  The team branched out and began its work on this project—among the dozens of other tasks and trips I had continued to pile on their workloads. There was enthusiasm for the project, but some trepidation about what we were about to do. Soon after the team was unleashed, however, some targets emerged.

  DerGarabedian struck first, identifying two banks in Burma (Myanmar) controlled by a well-known drug-trafficking organization in the Golden Triangle called the United Wa State Army. These were targets with great value because they were banks controlled by a known drug-trafficking organization that were facilitating recognized illicit activity, namely, drug trafficking and money laundering. They were also operating in an under-regulated banking environment run by a military junta already under US sanction. This action could be leveraged as another pressure point against the regime.

  We moved quickly. On November 18, 2003, the Treasury Department designated Myanmar May Flower Bank and Asia Wealth Bank for facilitating drug trafficking in Southeast Asia. This 311 was not limited to just the banks—the treasury secretary also designated Burma as a primary money-laundering concern, since the country lacked a basic set of anti-money-laundering laws and regulations.

  The country’s first response was defiant. On November 21, 2003, the Burmese government issued a statement noting, “The US government has been criticizing and condemning almost every institution in existence in Myanmar, and now is the time and the turn for Myanmar financial institutions to be accused of wrong doing.” Even so, Burma responded to US actions by revoking the operating licenses of both designated banks. Then, just two weeks after Treasury’s proposed 311 rule was published, the Burmese government announced new money-laundering rules designed to respond to US and other international concerns. Officials made attempts to demonstrate the seriousness of their actions.

  The 311 actions had worked—and the Bad Bank Initiative was underway.

  Next up was the Commercial Bank of Syria (CBS). Traci Sanders had scoured the classified, law-enforcement, and open-source information to build a case against the Assad regime’s all-purpose bank. The timing worked well. The Bush administration was beginning to debate how to implement the Syrian Accountability Act, which President Bush had signed into law on December 12, 2002.

  The interagency debates were led by Elliott Abrams, who was in charge of Middle East policy and global democracy issues at the National Security Council, and Deputy Assistant Secretary of State Philo Dibble. I was invited to the meetings at the Eisenhower Executive Office Building as the senior Treasury representative. I sat quietly at first, listening to the debates, which focused on how aggressively to implement the provisions of the act. Much time was spent on what could be done to restrict exports and investments in Syria—with most of the discussion centered on the use of traditional tools to sanction those who were doing business there. One question was whether to restrict the shipment of spare aircraft parts to Syria—they were necessary for Syria’s commercial airline fleet but would also likely be used for a different purpose—retrofitting airlines that were being used to transport weapons and military equipment to and from Iran. The options for trying to influence Syrian behavior via this act seemed limited.

  I recognized the opportunity to inject 311 into the debate. After listening for some time, I suggested that we could put another tool on the table that would complement the steps required under the act. Section 311 could spotlight the illicit activity and money-laundering problems in the Syrian banking system—and add pressure, and perhaps costs, to their financial transactions. It was clear that most of the people around the table didn’t quite understand what 311 was or why it even mattered, but Abrams understood it immediately and wanted to
utilize this tool to help give whatever we announced some teeth. I had found an ally in Abrams. We proceeded with the preparation of the 311 package and got it ready for publication.

  On May 11, 2004, Treasury designated the Damascus-based Commercial Bank of Syria, along with its subsidiary in Beirut, the Syrian Lebanese Commercial Bank, as primary money-laundering concerns. FinCEN explained that the Commercial Bank of Syria was used by criminals to facilitate or promote money laundering and by the Assad regime to engage in sanctions evasion and terrorist financing. This was an all-purpose bad bank being used by a regime considered to be rogue by the US government. At the same time, President Bush signed an executive order authorizing the Treasury to block the property of certain persons and imposing a ban on exports to Syria.

  Shortly after President Bush’s announcement, Syrian Prime Minister Muhammad Naji al-Otari said sanctions would “not have any effect on Syria” and called on the United States to “reverse its decision and not provoke problems between the two countries.”1 Nevertheless, Syrian financial officials clearly understood the potential impact and seriousness of this action. Ghassan al-Rifai, the Syrian minister of economy and foreign trade, admitted that US actions would have a “negative impact” on Syria’s economy.2 In spite of their public protestations, the Syrian government wanted to get out from under the 311 action, and quickly. A Syrian delegation came to Treasury to lobby Danny Glaser and me personally, but the only way to undo the 311 would be for Syria to enact anti-money-laundering laws and stop evading sanctions and funding terror. Glaser would later visit Damascus to discuss the 311 action and Syria’s need to reform its anti-money-laundering system. With the withdrawal of US Ambassador Margaret Scobey from Damascus in February 2005, the Treasury interactions were some of the last diplomatic face-to-face meetings American officials had with the Assad regime under the Bush administration.

  In May 2005, Syria strengthened its existing Anti-Money Laundering Commission, but it wasn’t enough. Hawaladars remained unregulated, borders were porous, and corruption was still rampant. It was clear that the Syrian financial officials were handcuffed by the policies of the Assad regime. Despite some desire to cooperate, the Syrians were not prepared to do all that was necessary to lift the 311 rule. We would keep the 311 in place.

  We would target other banks as well. Jeff Ross next focused his attention on the First Merchant Bank of the Turkish Republic of Northern Cyprus, which was the subject of intense law-enforcement investigation for its role in facilitating Russian and Turkish organized criminal and narcotics-trafficking activity. On August 24, 2004, the Treasury designated this bank as a primary money-laundering concern under Section 311.

  On the same day, the Treasury designated InfoBank in Belarus as an institution of primary money-laundering concern. Anne Wallwork had found a bank that had helped the autocratic regime of Alexander Lukashenko launder money and game the international sanctions regime as well as the Iraqi Oil for Food program. InfoBank provided accounts and lines of credit for transactions with Saddam Hussein and his regime. As with the Burmese banks, this target proved strategically important because it not only exposed a bad bank facilitating a number of illicit activities, but also highlighted the use of the institution by a rogue, autocratic regime for its own profit. This would become part of an ongoing campaign with Europe to pressure and isolate the regime of Lukashenko, the last dictator of Europe. In 2012, the Treasury would use Section 311 against another Belarus-based financial institution—JSC CredexBank—as an institution of primary money-laundering concern.

  From 2003 to 2005, the Treasury targeted banks in Burma, Syria, Latvia, Cyprus, and Belarus. Each case demonstrated that designations could spotlight nefarious activities, leading the international financial system to ostracize those institutions. The 311 actions could also be withdrawn if the targeted banks and jurisdictions made necessary changes.3 These actions also raised the diplomatic stakes with each of the countries involved. The actions were not silver bullets, but they tempered the environment and created a sense in the banking community that something new was afoot.

  By 2003, our long-term strategy was becoming clear. For Treasury’s new powers to remain effective, we needed to draw clear lines between the legitimate financial world and the rogues who sat outside of it and tried to misuse or circumvent the financial system. This meant expanding the reach of anti-money-laundering and counter-terrorist-financing standards and practices around the world. There were three main elements to this strategy: bringing China and Russia into the anti-money-laundering fold; expanding the reach of anti-money-laundering rules and principles to new parts of the world that now mattered in an era of globalized finance; and empowering and building the capacity of the private sector as the gatekeeper of the financial system. This was the inclusionary complement to the exclusionary strategy of the Bad Bank Initiative.

  First, we needed to bring China and Russia into the fold of the leading financial centers to give them a stake in the legitimacy, transparency, and defense of the international financial system. This was already happening naturally as both economies grew and became entangled by commerce and financial arrangements with the rest of the world—including through their banks. This meant that we needed to incorporate both countries into the Financial Action Task Force system deliberately—and make sure that they felt they had a leadership role in maintaining international standards. This would be a difficult and delicate task, because we had to preserve the apolitical and technical nature of FATF’s work while giving China and Russia a sense that they were vital members of the club.

  With Russia, this was particularly problematic. Russia had been a center of money laundering and illicit financial activity for years, with a banking system unaccustomed to the anti-money-laundering strictures of most of the world. The Financial Action Task Force had blacklisted Russia in 1999 for its lack of anti-money-laundering laws and measures. Organized crime, the global arms trade, corruption at the highest levels, and a willingness to do business with rogue states made the Russian commercial and financial systems a problematic intersection of illicit financial flows.

  Russian President Vladimir Putin knew it was important for Russia to remove the money-laundering stain for the future of the Russian economy and for national prestige. This was a symbol of Russia’s exclusion from the legitimate financial world, and Putin wanted to return it to legitimacy and power. To deal with this issue, he assigned a close and trusted colleague of his from the early days of his political career in St. Petersburg, Viktor Zubkov. Zubkov was a friendly Russian official with a no-nonsense style and thick, well-groomed hair. He knew he had the backing of Russia’s most powerful man, but he also knew he had to deliver. The business of money was a serious and dangerous game in Russia, and it needed to be handled by someone with access and credibility. We knew we could work with Zubkov and that he had the power to make real changes if he determined they were important. We engaged with Russia and Zubkov on several levels, knowing this was an opportunity to bring Russia into the fold.

  Ted Greenberg, the garrulous former head of the Department of Justice’s anti-money-laundering section, took on the task of working with the Russians in a methodical way to reform their laws and systems to get off the FATF’s blacklist. His goal and ours—though it was opposed by some within the US government and the international community—was not only to help Russia rehabilitate itself but to have Russia enter the exclusive club of the key financial jurisdictions that had a responsibility for the anti-money-laundering system. This was an aggressive plan, but one that Greenberg took on with gusto, with frequent trips to Moscow to meet with Zubkov and other Russian officials. Greenberg soon became indispensable to Moscow’s entry into the FATF, acting as a veritable guide for Zubkov as well as someone with the cudgel to improve the Russian system. The Russians listened to Greenberg.

  When Presidents Bush and Putin ordered that both countries work closely together on counter-terrorist-financing and anti-money-laundering issues, I also sta
rted working with Zubkov. We were charged with reporting to both presidents on the steps we were taking to improve cooperation and work together. In 2004, in preparation for one of these reports, I led a US delegation to Moscow, accompanied by Danny Glaser, to meet with Zubkov and his team. We had started to see the Russian government exert more control over the banking sector and impose anti-money-laundering controls where none had existed previously.

  It was often hard to tell, however, if Russian law-enforcement raids and arrests were driven by political agendas and oligarchic power plays or were truly attempts to uphold the law. Prosecutions had been used to silence critics and to undercut challenges to power. This had been the history of the Putin era. Mafia-style killings were not infrequent, and organized crime maintained a major stake in being able to house and move money through Russian banks. Even so, it appeared to us that Zubkov and the Russian central bank were beginning to take our concerns seriously, particularly when it came to the money laundering that occurred in unlicensed banks, casinos, and organized crime’s financial deals. On the eve of our visit, the Bank of Russia revoked the licenses of two banks, Kredittrrust and Sodbiznesbank, with Russian authorities engaging in a vicious firefight when they raided Sodbiznesbank.

  When I met with Zubkov in his Moscow office, he struck me as a serious player who had real reforms in mind. No doubt, he knew that the raids and revoked licenses proved this point. He needed to be responsive to Putin, and I knew this meant he had to be responsive to our concerns. We would meet for all-day meetings—but the most productive sessions came at mealtime, when Zubkov was more comfortable conversing. Over lunch at his favorite Moscow restaurant between delegation meetings, he, Glaser, and I talked about what we could do together. Zubkov was a wonderful host—finding greater pleasure in the open banter of lunchtime—lubricated by several shots of Russian vodka—than in the formal conference room back at his office. I’m a lightweight when it comes to drinking, and after two vodka shots, with more obviously coming, I turned to Glaser to whisper, in some despair, “I can’t do this anymore. We have more meetings this afternoon.” Glaser whispered to me, “Just eat a lot of bread.” One more was my limit, and I stopped trying to match the Zubkov pace.