Treasury's War Read online

  After months of debate in various nations, on June 28, 2010, rational arguments prevailed. The United States and the European Union signed an agreement on the transfer of data from the SWIFT program. The European Parliament had at last found a compromise. The main concession was that requests to SWIFT be “tailored as narrowly as possible in order to minimize the amount of data requested.” In an interview with Spiegel Online, EU Justice Commissioner Viviane Reding said, “It is unquestionably correct that EU and US authorities fight against terrorism together. . . . But we must finally speak the same language when it comes to data protection, as well.”15

  The agreement stipulated that any US request for data be verified by Europol to confirm its targeted and justified nature for tracking terrorist activities.16 The system also included provisions for an EU-appointed overseer, a requirement for unused data deletion after five years, and a redress procedure applicable to all people regardless of nationality. In addition, it provided for a joint review of its implementation and effects. The first such report from the EU delegation was released in March 2011 and confirmed the adequacy of data protection safeguards. Finally, the agreement promised US assistance for the construction of an equivalent EU Terrorist Finance Tracking System (TFTS).17

  Yet even with an agreement in place, the program remains fragile. Considering the intense scrutiny it is now under, it has to be managed carefully in financial and diplomatic circles. SWIFT could decide at any moment to stop sharing the data, and if it did so, US and global authorities would be blind to critical financial data.

  For those of us at Treasury, the whole ordeal was a regrettable, avoidable mess. The way the program was revealed—amid suspicious and false assumptions of vast and unlawful data mining—prevented the program from serving as a possible model for how governments should handle and use mass amounts of personally sensitive data in the future. Access to the information had been cooperative and collaborative, with the private-sector actor in control of the data. Straightforward and unambiguous legal tools were used to justify access to the data. Constraint on the information accessed and used was negotiated and strictly enforced. Perhaps to the disbelief of most, we had built the program in a way that purposely blinded us to possible links and significant suspect relationships—with increasing layers of restrictions over time. Outside auditors confirmed the limited scope of use, and the private-sector actor had authority to stop access to the data at any time if there was a concern that the negotiated parameters were being breached.

  We had found a way of tracking financial transactions in a creative and important way. We had gone in through the front door in a completely legal and careful way, with due respect for civil liberties and privacy protection. We opened the program up to outside scrutiny, and there had been no evidence of a breach of the agreements reached with SWIFT. Indeed, the US government’s Privacy and Civil Liberties Oversight Board (PCLOB) had been briefed on the program and was impressed with and supportive of the program and the model it established. Lanny Davis, the board’s lone Democrat, noted that although he had doubts about the program going in, he “was impressed with the lengths to which these people have gone to avoid infringing on people’s civil rights. . . . It was less of a concern than I expected.”18 He went on to say that, “based on what I’ve seen so far in both programs [banking and NSA], I think they have struck the right balance [between fighting terrorism and ensuring civil liberties].” The protocols we used could still be a model for how to limit the government’s use of data in a world where the need for data analysis for purposes of national security must be balanced with the maintenance of privacy protections and civil liberties. But if it is to become a model, the existing program needs to survive.

  For SWIFT, the revelation of the program brought unwanted scrutiny and attention, though Lenny Schrank and the rest of the SWIFT leadership always knew the program would eventually be revealed and their decisions likely questioned. SWIFT had always billed itself as an apolitical company whose messaging service provided a safe and secure communications backbone for the international banking system. With SWIFT reaching the front pages of the newspapers, this was all now at risk. This attention would land SWIFT in the heart of new debates as policymakers scanned the landscape for ways to isolate rogue financial actors. As pressure on Iran increased, European and American politicians would put access to SWIFT squarely into the debate about isolating Iranian banks. In 2012, for the first time ever, SWIFT unplugged designated Iranian banks from its system, in accordance with a European directive and under the threat of possible US legislation. The European Union agreed that “no specialized financial messaging shall be provided to those persons and entities subject to an asset freeze.” SWIFT complied with the regulations, but getting pulled into the policy debate about isolating rogue regimes and banks crossed a political Rubicon for the Brussels-based organization.

  Now, its bank members, including banks from China and Russia, are questioning whether SWIFT is merely a political tool of the West. Alternative networks—and the ease of Internet communications—challenge SWIFT’s hold on its position as the core global banking communications system. Already, the Iranians have resorted to using the Internet and faxes to send messages to brokers and banks as a means of replacing SWIFT messages. With SWIFT’s messaging format available for free, the system can be replicated outside the system that SWIFT manages. These imitations are not as efficient or secure as SWIFT’s system, but they are workarounds that will no doubt evolve and improve over time. They could represent the emergence of alternate financial networks and tools—tools that could organically create an alliance of financial rogues operating to evade the strictures of the formal financial system.

  And SWIFT officials worry that the threat of expulsion from the SWIFT system will become part of every international security debate. If forced banishment from the SWIFT system could be used in the Iranian context, why not use this same threat against Syria, North Korea, or any other state or financial institution that falls under the reproach of the major powers? Who should make these decisions on behalf of the international financial system? Now that financial exclusion is seen as a principal tool of coercion, SWIFT executives fear they will get pulled into such debates continually. They hope the Iranian case can be explained as an extreme, one-of-a-kind situation, and that this will be the last time they will be injected into the debate on international security concerns. But it may be too late.

  The potential for more exclusion raises the more fundamental question of whether inclusion in the international financial system—where established rules and monitoring can at least be applied—is better than blanket exclusion for rogue actors, where alternate means of communicating and financing will inevitably develop. Should exclusion from the financial system be the first instinct and policy step, or the most extreme of measures?

  For Treasury, there was a thin silver lining to the story. The revelation of the program gave context and detail to the idea of a Treasury Department with real intelligence value and relationships that were critical to national security. The arrangement with SWIFT could only have been arranged and managed by the Treasury Department. The program put Treasury at the center of a key national security program. At the highest levels of government, the Treasury Terrorist Finance Tracking Program was a point of pride. It was a program that had been run well, was effective, and could be defended without question publicly. President Bush would often speak of this program and the grave error the New York Times had made in revealing it. President Obama and his administration would fiercely defend it in the face of European criticism.

  For those in the bureaucracy who had questioned whether the Treasury Department had anything tangible to offer the intelligence community, this program was proof positive that it was an important and necessary player in the post-9/11 environment. For all the problems that attended its revelation, the program helped to explain precisely why the US government’s finance ministry housed an intelligence and analytic sho
p—the only one in the world.

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  THE CONSTRICTION CAMPAIGN

  Iran would be our next target. Treasury had demonstrated that its tools and the financial information at its command could be leveled against the most serious national security threats we faced. Like North Korea, Iran presented a significant challenge. It appeared to be marching toward a nuclear weapons capability. The United States needed leverage to affect Tehran’s calculus.

  For years, sanctions and trade embargoes had been the tools of choice to deal with the perceived threats from Iran, including state-sponsored terrorism and the proliferation of missile technology. Iran had been under American sanctions since the Iran hostage crisis of 1979. Over time, the sanctions had become more layered and restrictive—both to punish the regime and to isolate it. Soon after the hostage crisis, President Carter signed an executive order banning Iranian oil imports. The order also froze $12 billion in Iranian assets in US and overseas banks. There was a brief thaw in January 1981, when the United States and Iran signed the Algiers Accords releasing most of the frozen assets, lifting the trade embargo, and allowing for future resolution of asset-related disputes. But a variety of executive orders and legislation followed for the next two decades, from trade restrictions in the late 1980s on “dual-use” technologies, in response to Iran’s budding nuclear program, to prohibitions of American involvement with the Iranian petroleum industry, due to Iran’s sponsorship of terrorism.

  The sanctions had not proven successful in undermining the regime or halting the Iranian policies and practices that the United States was attempting to confront. But after 9/11 we entered a new period of financial warfare, and the Treasury Department had proven that a different kind of financial campaign could produce results. Stuart Levey wanted to use these tools to isolate Iran.

  For months, a group of us within the department debated the basic questions. Could the same tools that we had used to isolate Al Qaeda from the formal financial system and to shock the regime in Pyongyang be leveraged to attack the Iranian regime? Could the international financial environment be engineered and conditioned to reject Iranian commercial and financial behavior? Could the new brand of financial warfare be waged successfully against Tehran?

  Unlike North Korea, Iran was not a commercially isolated nation. Though it had been subject to US sanctions for years, the Iranian government and business sector had continued doing billions of dollars’ worth of business every year with the rest of the world. The sixth largest supplier of energy resources to the European Union in 2012, the country retained deep commercial and financial ties with economic powers such as Germany and South Korea and represented an important market for Europe and Asia. Neighboring countries, including the United Arab Emirates and Turkey, had even deeper commercial and financial ties with Iran. In spite of the sanctions, even US companies with foreign subsidiaries had no trouble selling American goods to Iran. Likewise, Iranian businessmen and companies did easy and open business in most parts of the world.

  Most important, Iran had oil. Oil provides instant access to markets and business relationships between companies and countries. The business of extracting, selling, and transporting oil brings with it an array of business relationships and financing needs. Oil also creates ties to an international market addicted to the flow of crude from the Middle East. Oil remained Iran’s trump card.

  In the face of economic pressure, Iran often threatens closure of the Straits of Hormuz—through which one-fifth of the world’s oil is transported—as a way of spooking the oil markets and fending off Western pressure. The mere threat of stopping oil production or shipments sends shudders throughout oil markets, especially for countries deeply dependent on Iranian oil. The world’s dependence on oil was Iran’s ultimate defense against financial pressure.

  Yet I was still convinced that Iran was inherently vulnerable. Although it was certainly a harder target than North Korea, which was more isolated and less sophisticated commercially than Iran—and didn’t have oil—Iran was dependent on its international connections in the global financial and commercial system. The same ties that gave Iranian businesses access to foreign markets created dependencies for them in the international financial system.

  What’s more, the Iranian oil market was not immune from international pressure. Global oil trading occurs in US dollars, and therefore, any deals for Iranian oil had to be priced and transacted in dollars. There had to be some dollar-clearing function—the ability to convert any transaction into dollars—in order for Iranian transactions with foreign counterparties to occur.

  Perhaps most important, when we carefully analyzed the Iranian banking sector and the movements of suspect financing, we saw a glaring vulnerability. The Iranian banks that were critical to Iran’s business operations abroad were also linked to the country’s illicit financial activity. Iranian banks such as Bank Saderat, Bank Melli, Bank Mellat, and Bank Sepah had a deep international presence in places like London, Frankfurt, Tokyo, Beirut, and Dubai. They were important for Iran’s business ties and relations, providing lines of credit, correspondent accounts, and account access around the world to Iranians and their customers. Yet these banks were also hubs for illicit financial activity, with each bank facilitating a different aspect of Iran’s overseas activity that fell under international scrutiny.

  Bank Saderat—and its branch in Beirut—was the central conduit for Iranian financing to Hezbollah in Lebanon. It was easy for the regime in Tehran to send tranches of financing to its proxies in Lebanon, because it could simply transfer money through the headquarters of Bank Saderat in Tehran to its Lebanese branch. Banks Melli, Mellat, and Sepah served as facilitators of proliferation deals for companies that could supply dual-use technologies and for countries, like North Korea, that were willing to sell parts and technology tied to missile and nuclear weapons systems. These banks had branches in the key banking centers in Europe, the Middle East, and Asia and were the preferred banks for doing business abroad with nuclear suppliers and proliferators, although unwitting companies dealing with Iranian front companies and cut-outs used them as well. Eventually, the central bank of Iran, known as Bank Markazi, would also begin to look like a commercial bank for Iranian interests, and it, too, was willing to serve as a banking hub for Iranian illicit activities. The Iranian regime was using Iran’s banks to move money for illicit and suspect purposes. Its reliance on the international financial system made it vulnerable to financial isolation—and Treasury could take full advantage of this vulnerability.

  In 2003, we identified Bank Saderat as a principal target in our Bad Bank Initiative. We had direct and convincing evidence that Bank Saderat was being used as the bank of choice for transactions taking place between Iran and Hezbollah, with the branch in Beirut serving as the central conduit for support to Hezbollah’s activities in Lebanon. We were not the only ones to focus on Bank Saderat—this was a bank that Israel would consider bombing during its war with Hezbollah in 2006, considering its central importance to Hezbollah’s financing. For our purposes, it was susceptible to being targeted surgically with Section 311 of the Patriot Act. The new tools we had under Section 311 raised the possibility of completely shutting down the bank. Such a move would hurt both Iran and Hezbollah, affecting both their financial operations and their international connectivity. It would serve as a shot across the bow to the Iranians—beginning the targeting of their financial sector—while also warning Beirut bankers to cease doing business with Hezbollah. The action would be a conditioning step to spark greater financial scrutiny globally against Iran, Hezbollah, and their banking allies.

  Before we could use this strategy, however, we needed to prove that it could work. When we first presented the idea to the Deputies Committee of the National Security Council in 2004, we had not yet used Section 311 against BDA or North Korea, and few outside the Treasury could imagine the effects. The NSC deputies were also concerned about inadvertently affecting global oil prices without gaining much in re
turn. The decision to target Bank Saderat and undertake a new kind of financial campaign against Iran would have to wait for another day. That day arrived in February 2006.

  In February 2006, Stuart Levey had hitched a ride on Secretary of State Condoleezza Rice’s plane, during another of her marathon trips to the Middle East, in the hopes of making the pitch for a new financial campaign against Iran. Rice had already been briefed on what Levey was going to present, but she wanted to hear it for herself. She called Levey to the front of her plane on the last leg of the trip. Levey had been waiting for this moment. With Secretary Rice were her closest advisers, including Department of State Counselor Philip Zelikow, Jim Wilkinson, and NSC Deputy National Security Adviser Elliott Abrams.

  Rice welcomed Levey into her cabin and gave him the floor. Levey explained the nature of this new form of financial pressure in the post-9/11 period, taking care to differentiate it from historical efforts to isolate Iran from the rest of the world. The campaign to constrict Iran’s banking system and economy would not be a classic trade embargo. It would not matter if Iranians could buy Wrigley chewing gum on the streets of Tehran. Instead, Treasury could mount a targeted financial campaign attacking Iran’s banks. The Iranians’ use of their financial and commercial system to advance their nuclear weapons program and to support their military and intelligence operations would be their Achilles’ heel.