Treasury's War Read online

  As Glaser would note later, “It was one of the most embarrassing meetings I’ve ever endured, but it was also one of my proudest moments. While I was being scolded and lectured, I was thinking to myself, ‘Good for you guys.’” The Chinese were graduating into the legitimate financial world, and their disparagement of the US Treasury officials was a signal that they would not allow their financial system to be toyed with for political reasons—by Beijing or Washington.

  Glaser knew the saga was not over. Almost as soon as he landed in Washington, he received a call from Secretary Paulson. The Chinese central bank had put a stop to the deal, and there would be no Chinese bank involvement in the transfer of the frozen North Korean assets. President Bush was pressing and had asked Paulson, “Where is your team?” Paulson had said authoritatively, “They’re on the plane.” After the call, Paulson called Glaser and ordered, “Get on the plane!” Paulson insisted that the Treasury team needed to be on the next flight to Beijing regardless of whether they had visas. Meiners got a call too. Paulson was aware that Meiners had scheduled time to go wedding-dress shopping with her mother, who was flying into town that week. When he called her directly, he apologized for the imposition and thanked her for her work on behalf of the department and country. He underscored the historic nature of this work, as Meiners cried quietly on the other end of the line and prepared to travel again.

  The delegation was back in Beijing within seventy-two hours of having returned to Washington. This time, Paulson sent along his chief of staff, James R. Wilkinson, a veteran of the State Department who was trusted by Secretary Rice and known to Chris Hill. Wilkinson was there to keep the State Department honest and to be the eyes and ears of the secretary of the treasury.

  The frustrating negotiations with the North Koreans resumed once again. Wilkinson dealt on a daily basis with his North Korean counterpart, a man with gold front teeth who was named Mr. Chang. But the Treasury delegation was constrained in what it could offer. As a banking regulator itself, the Treasury did not want to be seen negotiating a deal for the transfer of the frozen assets. Furthermore, the Treasury representatives certainly did not want to signal that there would be automatic safe harbors against regulatory action for any jurisdiction or institution involved. No secretary of the treasury would be willing to promise this. As with the embassy banking crisis after the fall of Riggs Banks, it was up to the State Department to find banks willing to do risky business.

  Chris Hill spent weeks trying to find a bank that would help in the transfer of the assets. At the end of the day, it would need to involve an American institution. Involving an American institution to assist in the transfer of money back to North Korea was the only way institutions would agree to touch North Korean assets. It was also ideal for North Korea, since the United States would be directly validating a banking transaction with Pyongyang. At one point, Wachovia seemed to be a willing participant, but without assurances against future sanctions or regulatory actions, the bank declined to get involved. It wasn’t worth it.

  At last, in the late spring of 2007, the New York Federal Reserve Bank, accustomed to handling sensitive transactions and dealing with foreign sovereign counterparties, agreed to help. The New York Fed was the last and most important resort for an international transaction of this nature—and could transfer assets between central banks. Tom Baxter, the legendary general counsel who had started his career at the Fed by helping with the return of Iranian assets after the hostage crisis in 1979, was enlisted by Tim Geithner to fashion a mechanism for the transfer of the assets. The mechanics were crucial to this act of high-end technical financial diplomacy.

  The United States had found a Russian bank in Vladivostok, Far Eastern Bank, that held an account for the North Korean Foreign Trade Bank and was willing to help with the transfer of assets—but only if it was assured that it would not be sanctioned or targeted as a result. The Russians also needed a mechanism to receive the assets from Banco Delta Asia, since they did not have an established banking relationship with BDA. This meant that Russia’s central bank would need to be involved. American Ambassador William Burns—who would later become Secretary of State Hillary Clinton’s deputy—provided assurances to Russian government officials that the United States would not act against the private Russian bank or the central bank. President Bush and Russian President Vladimir Putin discussed the issue at the G8 summit in Germany and agreed to make this work. Baxter began designing a multistaged global transfer of toxic assets, with the Federal Reserve serving as the ultimate financial middleman.

  In June 2007, Banco Delta Asia transferred the $25 million to Macau’s central bank, the Macau Monetary Authority. Once these assets were transferred, the Macanese authorities sent the money to the Federal Reserve Bank of New York. Then the Fed sent the assets to the Russian central bank, which then transferred the assets to the Far Eastern Bank. Finally, the Far Eastern Bank transferred the $25 million into the account of the North Korean Foreign Trade Bank. The money was back in the North Korean regime’s hands. The transaction was done—unwinding one of the most significant asset freezes in modern history. The price for North Korea’s return to the six-party talks had been paid in full.

  The unwinding had been a hard-fought endeavor. But if the State Department’s hope had been to secure a deal with North Korea, there was a problem. We had prematurely given up the financial leverage that could have provided even more fundamental diplomatic leverage. It had been a unique moment where the United States had the opportunity to alter the overall dynamics with North Korea and China. Instead, we had tried to put the genie back the bottle, at the cost of American credibility and leverage.

  What’s worse, unwinding the BDA action undercut our own financial weapon. Section 311 worked as an expression of Treasury’s ability to protect the financial system. If the pressure could be lifted simply for diplomatic reasons, it would suggest that the decisions being made about the isolation of North Korean financial activity were simply political decisions. To use American credibility to give the North Koreans a pass on reforming their illicit financial behavior would deeply damage our ability to use the same tool to squeeze the North Koreans or others in the future.

  The better move at the time would have been to force the North Koreans to resolve the issues with the Macanese and Chinese authorities directly—which would have entailed a more elaborate process of cleaning up their illicit financial activity. It would have forced banks to review their accounts and reveal to regulators where the DPRK was nesting assets. The North Koreans would have had to respond to a chorus of actors—not just to the United States, but to the legitimate financial world. The United States could have stood back and acted as the defender of the global financial system—in the process making more specific demands, such as for the printers and plates used to counterfeit US $100 bills to be turned over.

  Instead, we allowed ourselves to be transformed into North Korea’s agent, resolving the problem they had created. We took what were quintessentially multilateral effects of a domestic regulatory action and turned it into a unilateral American problem to solve. The North Koreans had expertly turned the tables. We were outmaneuvered at the height of international pressure and gave up our leverage.

  This was not an act of bad faith. Chris Hill and Secretary Rice wanted to conclude a deal, and so they pushed for a resolution of the frozen assets and an unwinding of the pressure. The president agreed, reasoning that the North Koreans were on the ropes, and it was a good idea to return to the negotiating table while we were in a position of strength. This was not a faulty instinct—but it was premature. All along we had designed the financial pressure campaign to provide leverage for our diplomacy and to force the North Koreans to make some hard choices. We had not forced them to make all of those choices yet. We had given up the opportunity to force the Chinese to make some hard choices as well with respect to their financial dealings with North Korea. The pressure had been on Beijing, too, but we relieved it for them. We cashed
in on BDA too soon.

  As a result of this episode, many around the world began to perceive that our efforts to “protect the financial system” with our “conduct-based” financial pressure were just a Trojan horse for political and diplomatic interests. When convenient, we would abandon our concerns about the integrity of the financial system and the illicit financial activity by rogues. Tactics that had previously been effective because they were perceived not to be politically driven now fell prey to precisely that accusation.

  Allies who had supported our actions felt betrayed, as if they had had the rug pulled out from under them. Adversaries took note that they could maneuver their way out from financial pressure. In particular, the North Koreans learned a lesson about diversifying their holdings and access points to the international financial system. Over time, they would cultivate new banking and financial relationships, largely through new commercial relationships and mining deals with Chinese companies and merchants. They would find ways to enrich their regime and to continue to access the financial system. They would not be overreliant on a Golden Star Bank or Banco Delta Asia the way they had been in the past.

  The fixation on the release of the assets had also shifted the debate away from why the international financial community had clamped down on North Korean accounts to begin with. North Korea continued to engage in illicit financial activity—including counterfeiting of the US $100 bill—and this issue was not resolved. Instead, it was left to a technical working group led by the Treasury Department, which still meets to this day. There has been no transfer of the counterfeit plates or any indication that North Korea has stopped its illicit activity. Those issues remain unresolved.

  The BDA action was intended to be the start of a financial pressure campaign—not the end. The environment was set for the isolation of North Korean regime assets around the world—to include scrutiny over leadership assets and practices used to finance and prop up the DPRK government. Losing sight of this action as part of a broader campaign may have been the biggest opportunity cost of the unwinding of the BDA action. We let the North Koreans—and the Chinese—off the hook. This would be a lesson in forfeiting our financial leverage too early without guaranteed benefits.

  Even so, for the Treasury officials involved, this was a critical case study that demonstrated the power of American financial tools. “Our financial tools are sometimes the most powerful weapons our government has to help change behavior,” said Jim Wilkinson. “At the end of the day after this transaction, the diplomacy is moving forward and the world now sees just how powerful Treasury’s financial tools really are.”6 The quest for the “next BDA” would echo for years in every national security crisis of import in the White House Situation Room.

  In the future, Treasury officials, the State Department, and the White House would ensure that any financial pressure or coercive diplomatic campaign would not split the US delegation. Financial pressure and diplomacy can diverge dramatically if they are not managed carefully—especially if the parties don’t understand why and how the financial pressure works. The Treasury and State departments needed to be in lockstep if such a powerful campaign were to be launched again—and if an unwinding were to be managed properly. Stuart Levey learned this lesson well. He would apply it as he looked to the next large-scale initiative: the financial assault on Iran.

  12

  REVELATION

  Ever since Treasury’s press secretary, Tony Fratto, had been read into the classified and closely held SWIFT program, he had prepared for a leak. We had constructed the program to help track terrorist financing legally, effectively, and in secret. But we assumed all along that the program would see the light of day. Fratto knew the call would come. When it did, he was surprised it had taken so long.

  The Treasury Department and officials involved in Europe made a serious attempt to keep the program quiet and to limit those with knowledge of its operations. But we always knew that the program would be revealed. From the outset we designed the program to ensure that it would stand up to legal and public scrutiny. The mechanics of the program were far more open than those of a classic intelligence operation. More foreign officials—especially more of those who were not traditionally in the intelligence business—were aware of the program than had been the case with any other highly sensitive counterterrorism program. The backlash that had come in 2005, when the New York Times reported the existence of the White House’s highly secret Terrorist Surveillance Program (TSP), had been a searing experience. Not just the US government, but SWIFT executives, too, were nervous. The SWIFT officials feared their cooperation would be construed in the same critical light.

  This is what Fratto and the small group of public affairs professionals “read into” the program had prepared for since 2002. Fratto and his predecessors Michele Davis and Rob Nichols had crafted a communications plan that anticipated the inevitable leak—with detailed questions, designated phone trees, and anticipated lines of attack and counterarguments to use with reporters. The communicators held three tabletop exercises with SWIFT officials and Treasury’s European counterparts so that all of them would understand their roles and the various pitfalls of a poorly coordinated response. Fratto had made two trips to the historic SWIFT chateau in Brussels to work with the company’s senior officials on the communications plan until they felt comfortable with it and were ready to respond.

  In 2006, Fratto picked up a call from New York Times reporter Eric Lichtblau, and he knew the time had come. Lichtblau was coy, mentioning only that he was looking into a possible story about Treasury acquiring data from SWIFT. He made it sound like he didn’t know much, but alarm bells went off for Fratto. He understood that a call like this would not have happened unless Lichtblau, who had won a Pulitzer Prize for his TSP piece, already had a story in mind. Lichtblau had begun to dig around and was asking other people questions about SWIFT as well. SWIFT communicators called Treasury press representative Molly Millerwise Meiners to let her know that New York Times reporters were sniffing around a story. In the conversation with Lichtblau, Fratto was able to discern that the Times had its hooks into the story and would ride it to the end. From the tenor of the conversation he could also tell that the Times thought the Treasury was doing something illegal—perhaps even stealing the financial data. Fratto did not reveal anything about the program, but he agreed to talk with Lichtblau again, since the Times would not be publishing a story without first talking to the Treasury Department.

  Quickly, Fratto and the architects of the program put the response plan into motion—Fratto called Dan Bartlett, the communications director at the White House, while others called their counterparts throughout the US government. Fratto assembled a group that included Stuart Levey, Molly Millerwise Meiners, and Treasury lawyers to determine the course of action. The team believed that the story the New York Times was constructing was flat-out wrong—there was nothing illegal about the SWIFT program. They hoped to convince the Times that the program was legal, effective, and appropriate—this would be our one chance to kill the story.

  Josh Bolten, the president’s chief of staff, convened a meeting in his bright and spacious office just down the hall from the Oval Office. All of the administration’s key senior stakeholders on this issue were present, including Vice President Cheney, White House Counsel Harriet Miers, National Security Adviser Steve Hadley, and Treasury Secretary Snow. The options on the table were straightforward—try to shut the New York Times out by not cooperating at all with the story; work with Lichtblau and his editor to try to convince them to not publish the story; work with them but try to shape the story in a favorable light; or hand the story to another publication.

  Secretary Snow and the Treasury staff made the case for working with Lichtblau and the editors at the Times to try to convince them that they really didn’t have much of a story and the program they were investigating was legal, effective, and constrained in its application. Fratto did not want to be caught behind the story and kne
w that if it came out with inaccuracies and false assumptions, it would be a disaster for the Treasury, the administration, and SWIFT, jeopardizing the program itself. He also realized that the story could leak anyway, given the reporter’s ongoing inquiries to experts and officials in the United States and Europe about the program. I agreed wholeheartedly with Fratto and my former Treasury colleagues.

  At every opportunity and every meeting I attended, we argued that this was a program worth defending vigorously and publicly if necessary. If the New York Times decided to publish the story, we should demand that it defend its decision and its reporting. Yet at the same time we knew that we were likely fighting a losing battle. The senior leadership could already tell that Lichtblau and his fellow reporter James Risen, who was also working on the story, thought they had found another TSP-like program worthy of front-page revelation—and perhaps another Pulitzer Prize.

  Stuart Levey became the primary interlocutor with the reporters. In a back-and-forth dialogue, Levey focused on explaining the legal framework and the responsible handling and tracking of the SWIFT data accessed. He encouraged Lichtblau to consult an outside national security legal expert to test his proposition that the program was illegal. The Times reached out to David Kris, the well-respected national security lawyer who had run the Foreign Intelligence Surveillance Act (FISA) review process at the Department of Justice during the early years of the Bush administration. Kris, who would later become President Obama’s assistant attorney general for the National Security Division, reviewed the SWIFT program for the Times and determined that it was legal and that there were no inherent problems with its legitimacy. Levey, who knew Kris well from their days at the Department of Justice, knew what Kris had told the Times. The program as designed and implemented was legal—there was no story.