Treasury's War Read online

  The “Zarate-Zubkov” reports would lay out concrete steps that the United States and Russia were taking together to counter terrorist financing and money laundering. There was an important convergence of interests on these topics and on bringing Russia’s banking system into the camp of legitimate financial systems. Importantly, with Zubkov, we would map out that engagement, which included Russia’s eventual inclusion in the FATF, with real reforms and enforcement of anti-money-laundering laws. Russia would also be given a feather in its cap by leading the establishment of an FATF-style regional body, called the Eurasia Group, which would include Belarus, China, Kazakhstan, Kyrgyzstan, and Tajikistan. This would be an important way for Russia to demonstrate that, along with China, it was leading the anti-money-laundering reforms in Central Asia. Zubkov presided over the inauguration of the Eurasia Group in Moscow in October 2004.

  Zubkov would continue to press for reforms—with frequent trips to meet with FATF evaluation teams. The Russian central bank would also continue to target the illegal practices of unlicensed banks; it revoked many licenses and enforced new anti-money-laundering controls. In September 2006, two gunmen shot and killed the first deputy chairman of the Bank of Russia, Andrei Kozlov, on the grounds of the Moscow Spartak football club. Kozlov, who had returned to the central bank in 2002, was leading the charge to revoke licenses and investigate banks engaged in money laundering. The week before his death, Kozlov advocated for stiffer criminal penalties for bankers convicted of money laundering.

  At the Berlin Plenary meeting of the FATF in June 2003, Russia would be voted into the exclusive FATF membership. This was a major achievement for Greenberg, who had shepherded the Russians through the process and led US engagement, as well as for the German FATF president presiding over this important moment. This was a signature achievement for Viktor Zubkov, who led Russia’s delegation to the FATF, and for Putin, who had removed the financial scarlet letter from Russia’s reputation and been accepted into the elite anti-money-laundering club in one fell swoop. In September 2007, Putin named Zubkov Russia’s prime minister in a “technocratic” pick that surprised much of the world. For those of us who knew Zubkov and the importance of the work he had done for Russia and President Putin, it was an understandable choice. Zubkov remains close to Putin and serves now as his first deputy prime minister.

  The work of bringing China into the FATF club was equally important, but delayed. Although the Chinese worked closely with the Russians in the East Asia FATF-style regional body, they were less aggressive in working with the FATF to join the body than the Russians had been. The Chinese had often been reluctant to work with the FATF and its Asia/Pacific Group because of the presence of Taiwan in that body. Hong Kong was a member jurisdiction in the FATF, but China proper remained on the outside. The FATF sent delegations to work with Beijing on passing anti-money-laundering laws and bringing the Chinese banking system up to international standards. For the Chinese and the FATF, the most important group then became the mutual evaluation team of experts, which would pore over Chinese laws, interviewing dozens of Chinese regulators, prosecutors, and officials in order to understand the status of the Chinese system and compare it to the international anti-money-laundering standards. The most important member of that team was Paul DerGarabedian from the US Treasury, who spoke not just for the United States but for the international technical experts sitting in judgment of the Chinese anti-money-laundering system.

  On June 28, 2007, the FATF accepted China as a member after years of engagement in a financial diplomatic dance that included Chinese adoption of new laws and practices. For China, this was an important moment. China was joining the ranks of those who stood at the center of the legitimate financial world. As it turned out, it did so on the eve of a financial crisis that would put it even closer to the center of that world. It would also put China at the table as the FATF developed counter-proliferation-financing standards that would impact its companies and banks directly.

  We were also trying to expand the FATF standards and writ into the Middle East and North Africa. Through the FATF and close partners such as the French and British, we worked to establish a Middle East and North Africa (MENA) FATF-style body. This was critical, because we needed the countries in this region to take ownership over the regulation of their financial systems and to find indigenous ways to do it effectively—especially to address terrorist financing risks. We had often heard the complaint that the standards being foisted onto the region were not sensitive to cultural practices or to modes of doing business that were not well adapted to Western models of regulation. This was a way of allowing the region itself to determine how the global anti-money-laundering and counter-terrorist-financing systems could be applied in the region. This was important when trying to decipher how best to interpret sharia law and how its practices dovetailed or diverged from common international anti-money-laundering and counter-terrorist-financing standards. This related not just to the field of Islamic finance but also the application of criminal law for terrorist financing and accounting principles and practices.

  Glaser and I traveled to Manama, Bahrain, at the end of November 2004 to attend the inaugural meeting of the MENA FATF. Bahrain, which styles itself as a center of Islamic financing, was pleased to host the meeting and to serve as the headquarters for the new organization. Bahraini Finance Minister Abdullah Saif welcomed the observer countries, including the United States, the United Kingdom, and France, as well as the fourteen member countries: Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, and Yemen. Glaser and I would use the occasion for diplomatic bilaterals with most of the delegations, including the Syrians, as we continued to raise the concerns we had laid out earlier over Section 311. The first MENA FATF president was Dr. Muhammad Baasiri, the head of the Lebanese Financial Intelligence Unit, and the vice president was Mahmoud Abdel Latif of Egypt. The executive secretary was a Saudi official.

  The reach of the FATF universe was now established, with regional-style bodies in every corner of the globe—and the two missing global players, Russia and China, in the fold. Only India, which was delaying making improvements in its financial regulatory system and still unwilling to submit to FATF standards and reviews, remained outside the system. In June 2010, India finally joined FATF as its thirty-fourth jurisdiction and took a seat as a rule-maker and judge of international anti-money-laundering, counter-terrorist-financing, and counterproliferation standards.

  The expansion of our efforts was not limited to governments. On the contrary, we knew the effectiveness of Treasury tools depended first and foremost on the ability of the private sector—most importantly, the banks—to serve as the gatekeepers of the financial system. It was not enough for American or Western European banks to have compliance systems and enhanced due diligence procedures in place to ensure the identity of their clients and the legality of the funds coursing through the system. We needed to expand the reach of good corporate citizenship to encompass more regions and more banks—widening the domain of the legitimate financial world and the actors willing to protect the system. We decided to expand the “Buddy Bank” system, which would involve creating a series of “private-sector dialogues” in key regions. The Buddy Bank Initiative involved a mentoring system among banks that would facilitate information sharing, collaboration, and private-sector capacity building between more sophisticated banks and those that required some assistance.

  I assigned this task to Ryan Wallerstein, the second person I had hired into EOTF/FC to serve as an executive assistant and a jack-of-all-trades. Wallerstein was a twenty-something graduate of Columbia University’s Graduate School of International and Public Affairs who had already completed a successful stint as a marketing professional in New York City. He had no government experience, but he was a hard charger who walked and talked with supreme confidence and was willing to take on any task on a moment’s notice. Our office didn’t lack confidence,
but the mission I gave him to expand the Buddy Bank system required his style of braggadocio and marketing skill.

  A major challenge was finding a way of convincing foreign financial institutions, especially those in high-risk jurisdictions, to adopt similar anti-money-laundering standards and practices in their day-to-day transactions and business. The dialogue provided a platform to further shape the global financial ecology. The dialogues were established between US financial institutions and those from MENA, South America, and Eastern Europe. Meetings and conferences between select institutions allowed foreign banks to develop new relationships with potential correspondent partners in the United States. It also allowed the US institutions to teach their foreign counterparts about the requirements they had to meet in order to become trusted correspondent partners. The banks were allowed to talk to each other about the standards to be applied to justify the risk of doing business, especially with banks that touched at-risk jurisdictions in the Middle East or South Asia.

  Of course, with the “light footprint” of the US Treasury’s oversight of the mentoring relationships, the unspoken implication was that learning and practicing good financial behavior would help the foreign banks avoid the regulatory steps and sanctions that had begun to sting banks around the world. The Latin American banking organization FELEBAN (Federación Latinoamericano de Bancos), which had an interest in shoring up remittance accounts and access to the American markets, was the first to take on the notion of creating partner banks. In November 2004, I traveled to Guatemala City for its annual conference and delivered a speech that laid out the basic framework for the Buddy Bank Initiative. The FELEBAN leadership liked this idea and decided to try to implement it.

  Meanwhile, the notion of a private-sector dialogue took off in the Middle East, with banks worried about their vulnerabilities and a set of banking officials willing to run with the idea.

  Soon, the Buddy Bank Initiative began to evolve into regional private-sector dialogues. The US MENA Private Sector Development (PSD) program took on a life of its own, and a follow-up conference was held in 2006. Timothy Geithner, who was then the head of the New York Federal Reserve Bank, and Tom Baxter, the New York Federal Reserve’s general counsel, were the hosts. Under the guidance of Chip Poncy and Danny Glaser, Wallerstein took the MENA PSD model and planned private-sector dialogues in Latin America and Eastern Europe. The first Latin American PSD was held in Washington, DC, in 2006. The PSD in Eastern Europe was held in Riga, Latvia, that same year. The PSDs continue today as a mechanism for the US government and financial institutions to engage collectively with the private sector and regulators for key regions.

  With this initiative, we had achieved two important goals. We had begun to expand the set of actors who were tied to the legitimate financial system. More importantly, we moved the conversation further into the realm of the private sector, where the risk calculus needed to include the high risk of doing business with rogue and suspect actors. In so doing, we had conditioned the foreign financial sector to hearing directly from the US Treasury.

  For Treasury, this was the start of a new approach that promised to resurrect Treasury’s role as a national security player. We were defining legitimate financial activity and actors. And there was much still to come. Two of our candidates for Section 311 action would form the cornerstone of financial pressure campaigns larger than anything seen before. We were ready to target two bad banks that were financial conduits for the most dangerous rogue regimes in the world—Iran and North Korea.

  These would ultimately prove to be the most important and defining acts of financial warfare launched by the new Treasury.

  7

  “THE MOTHER OF ALL FINANCIAL INVESTIGATIONS”

  By the winter of 2003, war with Iraq appeared inevitable. Saddam Hussein seemed not to realize until the bitter end that the Americans were actually coming to Baghdad. It wasn’t until March, on the very eve of war, that he decided to move his money.

  US airstrikes on Baghdad were just hours away when Saddam dispatched a handwritten note to the governor of the Central Bank of Iraq. Personally delivered by Saddam’s son, Qusay Hussein, and Iraq’s finance minister, Hikmat Ibrahim, the message was succinct:

  Top Secret

  In the Name of Allah, the Compassionate, the Merciful

  His Excellency the Governor of the Central Bank of Iraq

  This letter gives authorisation to Mr. Qusay Hussein and Mr.

  Hikmat Ibrahim to receive the following cash amounts:

  1. Nine hundred and twenty million US dollars.

  2. Ninety million euros.

  This is to protect this money from American aggression. Please

  execute promptly.

  (signed) Saddam Hussein

  President

  March 19, 20031

  Bank employees scurried to gather the cash from the vaults. As they did so, they kept detailed records of the withdrawal, often by hand and in large ledgers. All told, the cash filled 236 boxes, each neatly packed, numbered, and marked with a banker’s note indicating its contents. Witnesses reported that three or four truckloads of cash were driven out of the central bank that day. Some of these boxes of cash were hidden throughout Baghdad and the rest of the country. Some were taken into Syria, where the money would support the fleeing Baathist elite and the insurgency to come. And similar withdrawals were taking place across the region on the eve of war, as Iraqi embassy officials realized what was happening and made withdrawals from the banks where their funds were held.

  In Washington, Pentagon planners had devised strategies for a possible cyber-attack to disrupt the financial infrastructure of the Iraqi state. The purpose would have been to erase the value of Iraqi holdings before the regime had the chance to hide its money. But these cyber-weapons were never used. Just as past treasury secretaries had balked at disruptive interference in the financial system, the Treasury feared that the consequences of disrupting electronic financial records would overwhelm any short-term benefit to capturing or destroying Saddam’s assets. If the United States took any action to undermine trust in the integrity of the financial system, the whole system might collapse.

  Instead, we launched a conventional asset recovery effort as the bombs fell on Baghdad. On March 19, 2003, the United States invaded Iraq. The next day, Secretary of the Treasury Snow announced that the US government would hunt Saddam’s assets and ensure they were preserved and returned to the Iraqi people for the reconstruction of their country. President Bush signed Executive Order 13315 authorizing the confiscation of nondiplomatic Iraqi government assets in the United States. At the same time, the United States vested $1.7 billion in Iraqi assets and placed them in a New York Federal Reserve account for reconstruction pursuant to the International Economic Emergency Powers Act.2 The international community began to act to freeze Iraqi assets. On April 3, 2003, the Bank of England revealed that it had frozen $648 million in Iraqi assets in British banks. It was time to find and recover the Hussein regime’s assets—hidden in Iraq and abroad.

  Despite over a decade of international sanctions, the Hussein regime had managed to accrue billions of dollars. The international community had sanctioned Iraq after its invasion of Kuwait in 1990, initially focusing on keeping Hussein from gaining access to Kuwait’s resources. The sanctions regime evolved over time. The international community put a strict blockade on trade with Iraq in the hopes of strangling the regime and preventing it from arming itself, whether with weapons of mass destruction or conventional weapons. But like most autocratic regimes facing embargo-like sanctions, the regime of Saddam Hussein found a way to game the system and survive as the ordinary people suffered.

  Oil was Iraq’s escape valve because it was a central income generator for the Iraqi people and important to the international economy. Beginning in the early 1990s, the Iraqi government entered into trading agreements with Jordan, Turkey, and Syria to sell Iraqi oil to each of these countries outside of the international sanctions that were
in place. The United Nations Security Council—including the United States and the United Kingdom—agreed to allow Iraq to trade with its neighbors, in part to alleviate the effects of the sanctions on those countries. The trade deals allowed Iraq to trade oil for up to $3 billion per year. But these trading relationships provided a way for Iraq to circumvent the sanctions.

  In each country, the proceeds of the oil sales were split between a trade account and a cash account. Most of the funds (60 to 75 percent) were placed in the trade accounts. Under the trade protocols, the Iraqi government was required to use the money in the trade accounts to purchase goods from vendors in the particular partner country. The money from the cash accounts (25 to 40 percent of oil sale proceeds) was transferred to bank accounts in Jordan and Lebanon—usually set up in the names of front companies or individuals to further disguise the movement of the funds. Eventually, this cash was deposited in bank accounts controlled by the Central Bank of Iraq, Rasheed Bank, or Rafidain Bank. After this, it was withdrawn in the form of cash and transported back to Iraq. When the money reached Baghdad, it was deposited into the vault at the Central Bank of Iraq.