Treasury's War Page 31
The financial campaign would squeeze Iran’s ability to access the international financial system in stages—actually feeding off of Iran’s attempts to evade the program’s heightened scrutiny. This would take some time, patience, and coordination within the US government and with allies—but, if staged properly, it could work. Diplomacy, while a necessary component, would not be the leading mechanism for Iran’s financial isolation. The driving principle would be the same as what had been justifying the isolation of illicit financial activity since 9/11—the protection of the integrity of the international financial system. This would unfold in stages, and the international environment would need to be conditioned to reject doing business with Iran. It would not be a financial shock-and-awe campaign. Instead, it would take time, using a series of coordinated steps. If anything, this campaign would look more like a financial insurgency than a traditional sanctions program.
We would target Iran’s banks by using Iran’s own conduct—its proliferation activity, support for terrorist groups and Shia militias, and lack of anti-money-laundering controls, as well as the secretive nature of the regime itself—as the cornerstone of our campaign. Iran’s suite of suspect activities and attempts to avoid international scrutiny would spur the private sector to stop doing business with Iran. No reputable bank would want to be caught facilitating Iran’s nuclear program or helping it make payments to Hezbollah terrorist cells around the world.
What Levey was proposing was a virtuous cycle of isolation that would reduce Iranian access to the international financial system more and more over time. The more the Iranians tried to hide their identities or evade sanctions, the more suspect their transactions would appear and the riskier it would become for banks and other financial institutions to deal with them. Gradually, bank accounts, lines of credit, and correspondent accounts would be shut down. Like prey caught in a boa constrictor’s lethal embrace, Iran’s own actions to avoid scrutiny and obfuscate transactions would lead to greater financial constriction.
Already the Iranians were unwittingly deepening their greatest vulnerability. They were blending legitimate business transactions with illicit ones by funneling them through similar conduits. The Iranian regime often tried to hide the nature of its transactions and the identities of the Iranian government entities involved. They used front companies, cut-outs, and businessmen to acquire items and goods abroad that were hard to acquire, that were sanctioned, or that were tied to their nuclear ambitions or their weapons programs. At the same time, the Iranian military was taking greater control of the nation’s economy. Importantly, the predominant economic player was Iran’s Islamic Revolutionary Guard Corps (IRGC), the elite military and security unit founded in 1979. The IRGC had gained more power and influence over time as the protector and exporter of the revolution and reported directly to the Supreme Leader, Ayatollah Ali Khamenei.
The IRGC—with its vast network—had embedded itself into more industries within Iran, ultimately building what has been called a veritable business empire.1 Its control of “charitable” foundations—known as bonyads—with access to billions of dollars of assets in the form of mortgages and business interests for veterans of the Iranian military—served as the baseline of its economic power, along with its ability to construct infrastructure through a corps of engineers. The reach of the IRGC’s economic empire now extends to majority stakes in infrastructure companies, shipping and transport, beverage companies, and food and agriculture companies.2 In 2006, the corps took over the Iranian telecommunications sector, and it has also begun to oversee more elements of the nation’s energy sector, including the development of pipelines and the valuable South Pars oil field. Some estimates note that the IRGC controls between 25 and 40 percent of Iran’s gross domestic product (GDP).3 The IRGC is deeply involved in building Iran’s infrastructure, pursuing projects such as deep-water ports and underground facilities important to Iran’s defense and economy. These projects and industries give the IRGC political power and access to profits and capital.
The IRGC is an economic juggernaut, with responsibilities relating to the development of weapons of mass destruction, missile systems, and overseas operations. It is deeply involved in the Iranian nuclear program, and its international arm, the Qods Force (IRGC-QF), is responsible for providing support to terrorist proxies and exporting the Iranian Revolution. Between them, the IRGC and its Qods Force are responsible for all the activities—weapons proliferation, terrorist support, and militant activity—for which Iran has been sanctioned in the past.
From Treasury’s perspective, this blend of activities created the ultimate vulnerability, particularly the blurred lines between legitimate industry and support for Iran’s nuclear program and terrorist groups. The nefarious nature of the activities, tied with the IRGC’s attempts to hide its hand in many of its economic dealings and operations, made Iran’s financial activity inherently suspect. Iran was making itself a prime target for the kind of financial isolation that fed off of the suspect conduct of rogue individuals, companies, and countries.
The financial campaign Levey envisioned would focus not on squeezing the trade and economy of the populace, but instead on the financial infrastructure of the IRGC and the regime’s profits. The actions were not intended to punish the Iranian people, and this was not an embargo intended to punish Iran for political delicts. The financial campaign targeted suspect Iranian financial and commercial activity in order to protect the international financial system from Iran’s illicit financial activity. The system had to be inoculated from the Iranian virus.
An argument would be made directly to banks and companies around the world that it was too risky to do business with Iran, since no one really knew who was lurking behind corporate veils, pulling the strings, and accessing bank accounts and funding in Tehran. Would a bank be willing to risk its reputation by doing business, even inadvertently, with the IRGC or the Qods Force? Could their compliance officers guarantee that they knew who was behind their Iranian customers and transactions? Was trade with Iran worth the risk of access to American markets and banks?
Rice liked Levey’s plan. Having noted the success of the BDA action, she and Treasury Secretary Snow and then later Secretary Paulson, along with National Security Adviser Steve Hadley, had been discussing how to increase the financial pressure on Iran. Levey’s plan had the virtue of not relying on the consent of the United Nations. The campaign offered a new avenue for leverage against the Iranian regime. Rice asked Levey what he needed from her to get this done. Levey, stung in his fierce battles with Chris Hill during the BDA episode, spoke plainly: “I need your direct support, and I need to do this in concert with the State Department.” She agreed, and with that Levey prepared to launch an all-out assault against the Iranian regime.
Levey would later brief President Bush in the Oval Office about the details of the campaign. Steve Hadley had kept the president apprised of the ideas behind the campaign and had been working hand-in-hand with Paulson and Rice to ensure close cooperation among the members of the president’s cabinet. Treasury Secretary Paulson was a major advocate for the campaign. The former Goldman Sachs CEO was willing to use his deep credibility with his former colleagues in the financial world, in addition to his access to finance ministry and central bank officials around the world. In many ways, Paulson had the ideal background for the job. The former Wall Street executive could convincingly make a case to fellow bankers about the danger of doing business with Iran. When Paulson talked, financial leaders around the world listened.
When Levey and Paulson came to the Oval Office, there was no question about the president’s support. Bush wanted the financial pressure campaign to impede Iranian progress toward a nuclear capability and to increase the fissures within the Iranian system. The ultimate goal was to force the question within Tehran as to whether proceeding with a nuclear program was worth the economic costs and isolation. The president gave the effort his blessing. Paulson, Rice, and Hadley would keep the pr
esident updated on the stages of the plan.
In 2006, the campaign would be launched as a dual-track program combining diplomacy and financial pressure. Secretary Rice turned to Undersecretary of State R. Nicholas Burns to drive diplomatic pressure against the Iranians via the United Nations and engagement with Iran through our European partners. By early 2006, the administration had decided to seek negotiations with Iran along with the Permanent 5 members of the United Nations plus Germany (“P5 plus one”). The United States created that negotiating group in January 2006, in hopes of using diplomacy and negotiations as a way to end the Iran nuclear threat while keeping the use of financial pressure and measures in play.
Pressuring the Iranians to answer serious, lingering questions about their nuclear ambitions was a major goal. Burns’s job was to align the international community with American interests in order to pressure and isolate the Iranians diplomatically—with the ultimate aim of seeking a negotiated agreement on the nuclear program. The United States and its partners made a public offer to Iran to negotiate on June 1, 2006, in Vienna at a meeting of the foreign ministers of the group. When it became clear that Iran would not accept that offer, the United States turned to the use of an all-out financial pressure campaign.
Treasury—led by Levey—would launch the financial pressure campaign marshaling and driving the private-sector isolation of Iranian financial and commercial activity. Levey’s job was to stage the financial assault on Iran’s banks and its financial system—in large part by demonstrating to CEOs and compliance officers around the world that the risk of doing business with Iran was too high. Iranian obfuscation was too ubiquitous to be handled through normal compliance efforts. Trade with Iran was valuable, but it was far outweighed by the importance of access to American markets, companies, and technologies. It was better to stop doing business with Iran altogether than to risk facilitating Iran’s support for terror or its development of a nuclear program. Levey and Burns became a dynamic duo on the Iranian account.
Burns would lay out a diplomatic choreography to get international buy-in for sanctions, with a growing level of pressure on different sectors of Iran’s economy over time. He would rely on our European partners but wanted to leverage the United Nations as well. Burns began negotiations for a UN Security Council resolution to sanction Iran for its suspect and unexplained nuclear activity. Many doubted whether a sanctions resolution could be passed at all. The negotiations bogged down, with China and Russia, both traditionally averse to applying sanctions, wearing down the other members of the Security Council and watering down the sanctions. What Burns expected to take a few weeks to negotiate took months to get through the Security Council. A first set of sanctions against Iran passed unanimously—but painfully—in December 2006. They did not include everything the United States wanted, but they were an important start to set the stage for further diplomatic isolation of Iran. In total, Burns and Rice would negotiate three sanctions resolutions with more and more diplomatic and financial bite from 2006 to 2008 as Iran demonstrated an unwillingness to deal openly with the international community.
The initial meager results taught Burns an important lesson. The United States could not rely exclusively on the United Nations to pressure Iran. With the Chinese and Russians blocking tough sanctions, and the delay likely to accompany any follow-on sanctions rounds, he began to look more and more to Levey to provide the leverage and diplomatic ammunition he needed to pressure the Iranians.
Early on, Burns asked Levey to explain the financial pressure strategy to his foreign ministry counterparts. By May 2006, it was clear to the United States that the diplomatic outreach and offers to Iran were not being met in good faith from the Iranian side. The Russians and Europeans, with US blessing, had offered to assist Iran with the development of a civilian nuclear program with the enrichment of uranium handled outside of the country. Those offers, along with pledges of economic and diplomatic integration, were spurned by Iran. It was time to pressure the Iranians in earnest with a new financial and diplomatic campaign of isolation.
Burns would visit capital after capital—often bringing Levey with him to meet his foreign ministry counterparts. It was important for foreign ministry officials to understand the United States’ thinking about using financial suasion and financial tools to isolate the Iranians. This would require diplomatic coordination, and it would be most effective if there was international cooperation at every level. The diplomats could help by formulating appropriate sanctions and actions to match what the United States was doing—through the European Union and domestically—and could reinforce the quiet message being sent to their banking communities. Ideally, the dual tracks would reinforce each other, with Iranian isolation deepening both diplomatically and financially.
Getting the French on board would be critical. Meanwhile, the British were sympathetic, and the Germans seemed like they would follow begrudgingly, depending on what other countries decided. Burns invited Levey to join him in Paris on May 2, 2006, to meet with European counterparts engaged on the Iran issue. This would begin a diplomatic offensive with the three European powers that were engaged with Iran. We wanted to make sure they understood the path the United States was taking with its financial pressure. It was also a way of demonstrating the importance of the Treasury campaign to the United States and the close coordination between the Treasury and the State Department. There had been divisions over North Korea, but there would be no daylight between the State and Treasury departments on Iran.
Still, laying the groundwork and choreographing the steps were not easy tasks. Deputy National Security Adviser James Jeffrey coordinated the two tracks among a small deputies group from the State Department, Treasury, the Department of Defense, the intelligence community, and the National Security Council staff. In weekly meetings in the White House Situation Room—often twice a week—the players would lay out the steps being taken to pressure the Iranians and discuss what to do next. Jeffrey, a former Marine and a highly regarded, no-nonsense career diplomat who had already served as US ambassador to Albania and would later be named ambassador to Turkey and then Iraq, would manage the meetings with tough-minded pragmatism. The two tracks would sometimes diverge or come into tension, with the pace of financial pressure often slowed by negotiations for UN Security Council resolutions and the reluctance of close partners to shut down commercial and financial relationships with long-standing Iranian clients and customers. Questions would often arise over whether the United States should drive the actions or attempt to build a crescendo of coordinated international actions. The campaign turned out to be a mix of both—with Burns managing the international engagements—but the reality was that the United States would need to force the debate and drive the financial isolation of Iran. No other country had the means, the clout, or the political will to take the difficult first steps to drive the private-sector isolation of Iran.
And that’s what Levey brought to the table. Levey began his meetings with bank officials around the world with a briefing on Iranian illicit activity and how it coursed through the international financial system. He would take this argument from board room to board room, often meeting with bank CEOs before and after meeting with foreign government counterparts. Steve Hadley called it the “whisper campaign,” because the mission entailed meeting quietly with bank executives to explain the risks of doing business with Iran. At the heart of these meetings was a presentation on what Iran was doing with front companies and layered financial transactions to facilitate activity that was considered either illegal or risky.
Levey had perfected a similar pitch while he and Danny Glaser were chasing North Korean assets after the Section 311 action against Banco Delta Asia. These stops—in countries such as Vietnam and Mongolia—had convinced government and banking officials alike that maintaining or establishing banking relationships with the North Koreans was a dangerous business.
Levey now began an Iranian financial roadshow—but with a broader mandate and
a global scope. His new assistant secretary, Pat O’Brien, a no-nonsense former Department of Justice official, added his voice to the chorus internationally. Secretary Paulson had argued in favor of going straight to the banks with the pitch and helped to open many doors to bank chairmen and CEOs. He also made a point of putting the issue of Iran’s suspect financial activity on the agenda of his meetings with foreign government officials and banking friends with whom he met. In 2007, Paulson set up a special meeting with his G20 finance-minister counterparts to discuss Iran. With usual Paulson candor and in his halting cadence, Paulson laid out his concerns at this meeting about Iran’s illicit activity. One would expect such talk from the director of the CIA or FBI, but to hear this coming from the former CEO of Goldman Sachs and the treasury secretary caused officials to take notice. The treasury secretary was speaking a new language of national security that resonated with the CEOs of the world’s biggest banks and businesses.
Levey would meet over one hundred times with bank officials around the world. At each stop, he made the case that doing business with Iran was too risky—because the banks could not be sure they knew who they were doing business with. Levey insisted on meeting directly with each bank’s CEO, knowing that the CEO would have little awareness of the risks in play and ultimately would be the one to make the costly decision to close accounts and unplug Iranian clients.
For each country and institution, the Treasury team would provide specific tidbits of data about Iranian transactions through a bank. The briefing packets would have general information about the Iranian economy, structure, and financial system. The packets would contain information about how the Iranian government and the IRGC used front companies and obfuscation to finance and acquire what they needed for their military and nuclear apparatus. The briefing would conclude with an explanation of what was happening in the bank and how the Iranians were hiding their activity. This would inevitably be a surprise to any bank CEO, though some banks would be caught later trying to hide transactions with Iran. These meetings not intended to be an accusation of complicity, however, but a wake-up call to lift the veil of Iranian financial activity and raise suspicions.