Treasury's War Page 23
After reflection, Levey took a leap of faith and decided to lead the new office at Treasury. The vanquisher of Green Quest would become the head of the new Treasury office. I was ecstatic to have him on board—as an ally and to provide needed senior help in the interagency and overseas work. We had done all we could with the small group we had assembled and had proven the value of the work that could be done from Treasury. We were all exhausted from fending off bureaucratic battles and were looking forward to having more firepower. Now it was time to grow the office, and Levey was ready to lead it. Later, Levey would kindly reflect that he was called upon to coach a group of all-stars who were already playing the game.
The stage had been set. It was time to replicate the paradigm we had established for a new brand of financial warfare.
TFI’s work would be shaped by the tactics we had used in the past to attack terrorist financing: targeted designations, pressure on banks, law-enforcement investigations, international cooperation built on UN sanctions obligations, and the development of international norms and capacity building to isolate rogue financial behavior. What made this approach effective was that it focused on illicit activity that could infect the international financial system. Our efforts to stop terrorist financing, isolate money laundering, and battle kleptocracy had revealed that the enemies of the United States used many of the same systems and networks to evade detection and move money around the world. With the tools and know-how we were developing, we could serve national security objectives while protecting the integrity of the international financial system from tainted capital.
On a long plane trip in 2003, I took out a scrap of paper and mapped out what I thought should be the framework for the paradigm. Along the top of my sketch I listed the various illicit financial activities tied to national security issues of concern: terrorist financing, rogue states, drug trafficking, organized crime, kleptocracy, and proliferation of weapons of mass destruction. These categories overlapped in a number of ways. Along the left side, I laid out our principal tools: targeted financial designations, information use and sharing mechanisms, UN Security Council resolutions and treaties, and Financial Action Task Force standards and regulatory focus. There were other tools—such as criminal statutes and prosecutions—that I did not include. I was delineating the various aspects of a financial warfare architecture—which I believed should not focus on classic country programs (like our sanctions often were), but on systems and networks. We could only impact these systems and networks by using the full array of Treasury tools and influence. The sketch was a mess, but it gave form for me to the new financial-warfare paradigm that had emerged and was to come. I saw this as a complement to what we were doing with the Bad Bank Initiative and a natural expansion of the work that we had done to establish new, more aggressive ways of attacking terrorist financing.
The chart was instructive. It was clear that proliferation and organized crime could be attacked financially far more aggressively than we were attacking them at that point, especially considering the outsized impact of both on national security and their reliance on illicit financing. Importantly, the issue of proliferation was a systemic way of addressing our deepest concerns and threats from rogue states—particularly Iran, North Korea, and Syria. We had to think big and build a new framework for addressing these problems.
The United States had not ignored proliferation financing. A sanctions program was in place, and President Bush had launched the Proliferation Security Initiative (PSI) in 2002 to improve coordination with our willing allies in the interdiction of suspect shipments. Much more could be done, however. The US government’s experience with proliferation—the most critical installment of which involved the network of Abdul Qadeer (AQ) Khan—had taught us that proliferation was driven by profit. Nationalist interests may well come into play, but money was ultimately the grease as well as the engine of the international weapons proliferation system—which gave TFI an opening to make a difference.
AQ Khan—known as the father of the Pakistani nuclear program—had fashioned the most expansive proliferation network we had ever seen, and he had done so to make money. He sold nuclear secrets and parts to rogue regimes like Libya, Syria, North Korea, and Iran. His proliferation business, which operated throughout the Middle East and Asia, relied on Swiss financial facilitators as well as manufacturing facilities in Malaysia and South Africa.
The financial network that supported AQ Khan helped to fuel both his operations and his capabilities. AQ Khan relied on the Swiss engineer Friedrich Tinner and his sons Urs Tinner and Marco Tinner to facilitate much of his global financial networking. Authorities were familiar with the Tinners. In the mid-1990s, UN inspectors had supplied documents to Swiss authorities alleging that Friedrich Tinner had sold Saddam Hussein parts for a bomb fuel production line. Tinner denied knowing where the parts had been sent, and the Swiss dropped the investigation. Another investigation found suspicious money transfers from a Dubai currency exchange used by the 9/11 hijackers to Marco Tinner’s Swiss bank accounts and companies. The Tinner family denied having any knowledge of a 9/11 connection. Swiss magistrate Andreas Müller, however, said in 2010 that she believed Marco should face money-laundering charges. The money in question, $12.5 million, came from Urs’s work for AQ Khan’s company, Scomi Precision Engineering (SCOPE), in Malaysia, and AQ Khan’s middleman, B.S.A. Tahir. Urs claimed he had stopped working for Tahir because he had not been paid for months.
The legal battle following their arrests in 2003 exposed the Tinners’ possible ties to the CIA. The family was ultimately suspected of assisting the CIA in tracking and disrupting AQ Khan’s network in return for millions of dollars. The Agency reportedly approached the Tinners in the 1990s to request that they supply information about AQ Khan and introduce flawed equipment into their shipments to him,3 even though Swiss law prohibits cooperation with foreign intelligence. In 2007, the Swiss Federal Council canceled the investigation into the Tinners’ CIA connections and destroyed evidence of their participation in AQ Khan’s network. Ostensibly, this was to prevent the theft or spread of sensitive nuclear technology. But a 2009 report by the Swiss parliament suggested that both decisions were the product of US pressure.
Investigation into the Tinners’ involvement with AQ Khan lasted from 2008 to 2010 and also exposed unspecified allegations of forgery, money laundering, and pornography.4 In 2011, the family agreed to plead guilty to charges of nuclear smuggling to expedite their legal proceedings and limit the publication of sensitive details; the deal limited their prison terms to five years. The Tinners were found guilty of supplying illicit materials and information to Libya’s nuclear program as part of the AQ Khan network in September 2012. They received suspended or shortened prison sentences because of their role in the US investigation, but had to pay substantial fines.
The 2003 interception of an AQ Khan shipment bound for Libya and the American invasion of Iraq prompted the Libyan government to disclose and renounce its nuclear weapons program. The AQ Khan network was exposed and dismantled, leading to revelations about the advancement of weapons of mass destruction programs in Libya, North Korea, Iran, and Syria. AQ Khan made a public confession about his illicit activities the following year and was placed under house arrest.5 AQ Khan later declared that this confession was coerced by the Pakistani government. The declaration by the Islamabad High Court in 2009 that AQ Khan was again free to move about the country was met with concern in the United States. That year, the US State Department sanctioned three private companies and thirteen individuals for their involvement in AQ Khan’s network, citing the need to “provide a warning to other would-be proliferators.”
The damage had been done, however, with a global proliferation network having spread nuclear know-how and technology to the worst regimes in the world. North Korea would continue to march toward nuclear capability, with its first test in 2006; Syria developed a nuclear power plant, based on North Korean designs and assistance, that was suspected of
having a military purpose (it was destroyed by Israeli fighters in 2007); and the Iranians continue their cat-and-mouse game with the international community while expanding their nuclear program. We are still dealing with the fallout of AQ Khan’s proliferation network.
Treasury needed to find a way of disrupting and deterring the financing of proliferation networks in the future. If we could disrupt proliferation networks, we could undermine rogue regimes. We would need to employ all the tools at our command and reshape the international financial landscape to reject proliferation financing.
We crafted an executive order intended to give the secretary of the treasury the power to identify and freeze the assets of anyone involved in or facilitating the proliferation of weapons of mass destruction—to include financial institutions—as well as of any entities owned or controlled by those involved. There was skepticism and little enthusiasm for this approach, at first even within the Treasury Department. But, critically, the new OFAC director, Bob Werner, a former Supreme Court law clerk and Treasury lawyer, was on board. He was a staunch supporter of the idea and established a unit to focus on proliferation financing. Werner understood exactly what we were trying to do with Treasury’s powers to isolate the front companies and banks facilitating proliferation of weapons and dangerous materiel. He would continue to serve as a chief ally in his role at OFAC and later as director of FinCEN. Stuart Levey made phone calls to the Silberman-Robb WMD Commission (officially the Commission on the Intelligence Capabilities of the United States Regarding Weapons of Mass Destruction) to ensure that this executive order and a new financial approach to proliferation were included in its recommendations.6 President Bush signed Executive Order 13382 on June 29, 2005. The key financial tool to go after proliferation finance had been created—and it would be the cornerstone of our financial campaigns directed at those engaged in proliferation finance.
The State Department helped to shape the international environment with the passage of a new UN Security Council resolution, 1540, adopted in April 2004. The resolution obligates countries to prevent the support, financing, creation, and proliferation of weapons of mass destruction. At the same time, we launched an effort at the Financial Action Task Force, led by Chip Poncy, to make proliferation financing an area of focus for the world’s principal anti-money-laundering body. We wanted to build recognized standards of conduct for banks and other financial institutions to address the concerns surrounding proliferation. Poncy would lead that effort for years, doggedly building consensus and technical expertise in the international body.
By 2006, FATF was debating new standards and methodologies tied to countering proliferation finance and money laundering. We would amplify the impact of these efforts by pushing for UN recognition of the standards and findings of FATF. These efforts would soon be recognized and adopted by the United Nations Security Council, which referenced FATF’s work in its nonproliferation resolutions tied to Iran and North Korea. By the time the new anti-money-laundering standards were updated and adopted in Paris in February 2012, the FATF standards—the de facto requirements on the international system—were known as the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation.
As we worked to expand this initiative, I always kept my original sketch folded in a small stack of notecards in my shirt pocket. It would grow crumpled and frayed over time, but I held onto it anyway. The ideas that were embedded in the work to come had first come together on that piece of paper.
Before leaving the Treasury Department for the White House in 2005, I had thought about turning the chart into a memo for Secretary Snow—as a roadmap of sorts. I didn’t do so, in part out of respect for Stuart Levey, who was now running the Office of Terrorism and Financial Intelligence at Treasury. Also, I knew that from my new position on the National Security Council staff, I was well positioned to help Levey and the Treasury steer their efforts as needed. The new paradigm was already in motion. The memo I had once envisioned for Secretary Snow, I would write later that year for President Bush.
The Treasury had been resurrected. With the new Office of Terrorism and Financial Intelligence, it could now begin to use the paradigm that had been established in the terrorist financing campaign to full effect to attack rogue and enemy financial networks of concern. There was now a permanent address in the US government for the execution of all-out financial warfare.
Part III
FINANCIAL FURIES
9
“KILLING THE CHICKEN TO SCARE THE MONKEYS”
The Treasury had been training its financial sights on the ripest of rogue state targets: North Korea. The regime in Pyongyang was guilty of virtually all of the illicit activities we wanted the international financial system to reject. To generate funds, the Kim dynasty had become the quintessential criminal state. To access and move these funds, it relied on access to the international financial system. This was its vulnerability. We had only to determine how to exploit it.
In early 2003, while looking for vulnerable bad banks, we noticed a small bank in Macau that was facilitating a range of illicit financial activities, including transactions for the North Korean regime. I assigned an analyst detailed to the Treasury from the intelligence community to produce a detailed sketch of North Korea’s links to international finance based on the best intelligence and open-source information available. Within a few weeks, she came back to me with a map of North Korean financial links. As soon as I flattened out the big chart of North Korea’s financial infrastructure, I knew this would become our financial battle map.
Showing the banks most closely involved with North Korea and the countries where North Korea had significant financial links, the chart signaled national origin with flags next to each bank and institution. Chinese flags and links dominated the map, as might be expected. Still, I was surprised to see that even an isolated pariah state like North Korea maintained significant connections to major banks. To do business abroad, North Korea was using front companies and banks in places like Vienna, Russia, Singapore, Hong Kong, Beijing, and Macau. This meant it had international financial exposure that we could target and exploit. With this insight, our strategy to find Pyongyang’s financial Achilles’ heel began.
North Korea’s economy was already inherently vulnerable to the new brand of financial pressure we were wielding. Since the Korean War, the international community, led by the United States and its allies, had isolated North Korea with classic state-driven trade sanctions. Little trade or commercial activity existed between North Korea and the rest of the world. Sanctions blocked North Korea’s import of luxury goods and foreign currencies while channeling trade to specific and tightly controlled economic zones along the South Korean and Chinese border. China was North Korea’s most important economic lifeline—serving as its principal trading relationship—with China benefiting from access to North Korean mines and the influence the economic relationship gave it with Pyongyang.
North Korea’s economy was mismanaged into deep poverty in the 1990s and early 2000s, with little legitimate economic activity generated from within. Despite a short-lived warming of relations in the late 1990s between North and South Korea—and the United States—North Korea had remained isolated from the global market, running a trade deficit of more than $1 billion per year. This imbalance, combined with the scarcity of foreign currency in North Korea, further isolated the country’s fragile economy and stunted its economic growth. Cycles of devastating famine had taken a severe toll. Yet, even while the North Korean people continued to starve to death, the regime and the military remained well fed and funded.
The Kim dynasty constructed an economy built for regime survival. The egomaniacal leadership had maintained an appetite for luxury goods and required substantial capital to pay senior members of the government and other supporters to sustain their own control. The regime also needed funding to pay for its nuclear program and missile ambitions. The North Koreans relied heavily on trade with Ch
ina, along with remittances from South Korea and the “Chosen Soren,” a pocket of Korean immigrants in Japan.
To circumvent international restrictions and compensate for its failed economy, the North Korean rulers had constructed a criminal money-making machine. The government and its secretive military and intelligence units developed sophisticated counterfeiting and smuggling operations worldwide that were designed to transport fake products into global markets.1 Front companies and trade offices would become hubs of North Korea’s commercial relationships in places like Hong Kong and Macau. North Korea’s embassies, diplomats, state-sponsored companies, and intelligence services together constituted an elaborate illicit distribution network for counterfeit and illicit goods.
The regime of Kim Jong Il assigned “Office 39”—a special unit of the North Korean military and intelligence services—to raise funds abroad, using diplomatic posts and front companies to build business lines and launder illicit proceeds. The counterfeit products were sold to international organized crime groups, and the proceeds then funneled back to North Korea through shell corporations, formal diplomatic accounts and pouches, and the personal holdings of senior North Korean officials. It was estimated that the North Koreans had collected revenues of between $550 million and $700 million per year from the sale of counterfeit cigarettes and narcotics.2