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  This work of conditioning the environment also included bringing the full weight of the Financial Action Task Force—the global anti-money-laundering standard-setting and evaluation body—to bear on Iran. If Iran was to be isolated financially, the FATF had to be engaged to pass judgment on Iran’s anti-money-laundering and counter-terrorist-financing system. Danny Glaser and Chip Poncy, who had become two of the most well-respected financial diplomats and money-laundering experts in the world, took charge of the effort for the United States to restart the old FATF process to blacklist problematic countries—which had proven effective in the past to spotlight money-laundering havens around the world. Even so, that process had raised criticisms of an unfair process targeting easily identifiable and politically vulnerable states. Glaser and Poncy set out to create a credible process within the FATF system that scrutinized the Iranian regime—using not just the anti-money-laundering standards but also the counterproliferation and counter-terrorist-financing standards that Treasury had pushed in the FATF after 9/11.

  If the Iranians were found to be outside the bounds of the legitimate financial system or failing to cooperate or comply with accepted international standards, then there could be consequences. In the past, those consequences took the form of “countermeasures” that the FATF would declare necessary to protect against the systemic failings of the jurisdiction being evaluated. In the post-9/11 era, the notion of countermeasures took on added significance, because the United States and other countries had developed tools to isolate an offending jurisdiction from the legitimate financial system and make investment and business in that jurisdiction suspect.

  Poncy and Glaser knew their efforts would take time, as it required building consensus among thirty-three jurisdictions that now included Russia and China. FATF also needed time to engage directly with the Iranian government. A methodical process would have to be followed, but it was a process that would bring the relevant financial and regulatory actors into line with the broader themes that the United States was echoing in the conference rooms of the big banks. Iran represented a systemic risk to the integrity of the financial system. Iran’s secretive and reluctant nature made this process look like an enveloping trap for the Iranians. With each letter from the FATF seeking answers, the Iranians would fail to respond, or respond flatly without substance, just as they did with the UN nuclear watchdog, the IAEA. The lack of full cooperation engendered more suspicion and questions. Iran was sowing its own financial isolation.

  Amid this campaign to put increasingly greater financial pressure on Iran, there emerged an unexpected opportunity to hit Iran hard and directly. In 2008, lawyers and others searching for Iranian assets became aware of what appeared to be more than $2 billion in Iranian assets in a Citibank account held by Clearstream. Clearstream Banking is a clearinghouse for financial trades and provides comprehensive international securities services. It was formed by the 2000 merger of Cedel International and Deutsche Börse Clearing. It is now a subsidiary of Deutsche Börse and acts as a clearinghouse and depository for bonds, securities, and equities. The institution has around 2,500 customers in 110 countries and completes more than 250,000 transactions daily. It holds an annual average of 11.1 trillion EUR in assets.11 Acting in accordance with US and EU sanctions, Clearstream had closed or blocked all of its Iranian customer accounts by November 2007.12 It was not clear in this case why these particular assets had gone unnoticed or unmoved, but with the additional scrutiny over Iranian assets, they emerged. The $2 billion was sitting undisturbed in an account.

  Importantly, the assets belonged to the Iranian central bank, so successfully freezing or attaching them in some manner would affect Iranian reserves. Aside from the $12 billion in Iranian assets that had been frozen in 1979, this would be the largest freezing of Iranian assets in history. Capturing these assets, however, might undermine Clearstream and destabilize the international financial system at a moment of growing fragility. Actions taken too aggressively in the financial system might also send a signal that the United States was becoming a hostile environment in which to invest and nest capital. In the words of Secretary Paulson, the US government needs to respect the “magnificent glass house” of the financial system. Any perceived misuse of American financial prominence and power could destabilize and destroy the fragile system while making the United States a less attractive environment in which to invest.

  In the end, the assets would be frozen, but not by the Treasury. Instead, lawyers for victims of terrorism who had previously brought actions against Iran as a state sponsor of terror acted on the information. In June 2008, a judge in the US District Court for the Southern District of New York used the information to freeze over $2.25 billion in Clearstream assets held in a Citibank account. Citibank denied having had any knowledge that the funds could be Iranian. Clearstream likewise denied that the funds were the Iranian government’s and immediately began to engage in legal battles to release the money, successfully regaining $250 million within one month.

  To Deputy Secretary of the Treasury Robert M. Kimmitt, this was an important event. Kimmitt was a veteran national security professional and powerful Washington lawyer—having served in the Reagan administration’s National Security Council as the executive secretary and general counsel, and later as a senior policy official at the State Department and ambassador to Germany. He had deep experience in the sanctions and export control world—and knew that the most effective financial sanctions were multilateral in nature. Without an international framework for action, Kimmitt knew the United States would end up disputing with its friends and allies instead of hitting rogue regimes with sanctions. As deputy to Secretary Paulson, Kimmitt was a perfect national security and Washington complement to Paulson’s Wall Street credentials.

  Kimmitt was pleased the Iranian assets had not escaped. He had seen such assets get away from the United States in the past. In January 1986, the United States had placed sanctions on the Qaddafi regime in Libya but did not construct an immediate asset freeze mechanism as part of the sanctions. At the time, Kimmitt and other officials had watched as Libyan assets in New York—almost $3 billion worth—were transferred from Manufacturers Hanover and Chemical Bank and Bankers Trust to London. Eventually, the British courts allowed the funds to be released—in the minds of many, cynically preserving London’s role as an Arab banking capital. The United States had let the money slip through its hands then. Kimmitt and others in the US government were satisfied to see the Iranian Central Bank’s assets frozen by the courts this time.

  The legal battles over these assets are still playing out. In February 2012, Iran’s central bank—Bank Markazi—asked a New York judge to dismiss the pending suit freezing the assets and enforcing collection by the victims of the $2.7 billion. The bank claimed that such actions were unlawful under the US Foreign Sovereign Immunities Act. There is also legislation pending in Congress to allow the victims to access the frozen Iranian assets. As of the writing of this book, the litigation continues and the legislation remains under consideration. Regardless, a significant amount of assets were caught in the US legal system. The Iranian assets were not lost, and another financial pressure point had been pushed.

  Iran’s isolation was growing. By the end of the Bush administration, the Iranians were feeling the pressure and knew they were facing a financial assault unlike anything they had seen before. As of 2008, Iranian leaders were already issuing public statements decrying the sanctions as ineffectual. But there was no doubt that the measures were starting to squeeze in unexpected ways—with Iran finding it difficult to access the international financial and commercial system. Something was different.

  On September 14, 2010, former Iranian president Akbar Hashemi Rafsanjani urged the Iranian Assembly of Experts to recognize how painful the sanctions were. He said, “Throughout the revolution, we never had so many sanctions [imposed on Iran] and I am calling on you and all officials to take the sanctions seriously and not as jokes. . . . Over the past 30
years we had a war and military threats, but never have we seen such arrogance to plan a calculated assault against us.”13

  In the midst of the pressure, the Iranians realized they were under a financial attack of a new kind—and they noted that there was now a Treasury official dedicated to the financial assault on Iran. Levey’s name was becoming synonymous with the isolation of Iran—making him a household name in the banks and finance ministries of the world. The Iranian government followed his every movement and would often shadow his meetings and follow him into the capitals and financial centers he had just visited. They were trying to contain the damage, but they were losing. Iran was growing more isolated financially in the legitimate financial system. Within the government, Levey was seen as the creative financial warrior whose engagement was helping to give the United States a tool it had not had in many years with Iran. The United States now had the leverage it had previously lacked.

  The core question that remained was what the endgame of this campaign would be. Would there be a limit to the ability to use this kind of financial pressure to isolate the Iranian regime and its economy? Was the real goal of this campaign complete strangulation of the Iranian economy—moving it from a gradualist and targeted constriction campaign into a maximalist, traditional embargo by effect? Was there a final bullet in this financial arsenal?

  The final bullet in the targeted financial campaign was the central bank of Iran itself. We had designed the financial pressure to lead to the isolation of the Iranian banking system and the central bank. Targeting Iran’s central bank would be the last—and most extreme—step we could take against the banking system. Given the importance of the central bank system to the functioning of the international financial system, isolating Bank Markazi would have dramatic effects. Though it operated as a traditional central bank, holding currency reserves, it also acted as a commercial bank, picking up the slack for those banks that had begun to be excised from the international financial system. Over time, we knew that the central bank was opening accounts for designated Iranian companies and serving as a correspondent bank and pass-through for the Iranian banks that had been designated. Bank Markazi was the financial conduit of last resort for the Iranian financial system.

  One additional weapon we held in reserve was targeting the oil sector. Commercially, oil was the final point of access to capital and the international markets. The question remained how to best attack Iran’s oil markets to weaken Iran’s ability to use it as a sword and shield against the financial pressure. Part of the answer was to make it harder for Iran to find investors in its oil fields, more costly for it to obtain new equipment, and too difficult for it to ship oil in and out of the country. Another answer was to dissuade those who were exporting refined petroleum to Iran to end those relationships and to sell elsewhere. This would leave Iran with a one-way oil market, given its dependence on refined oil imports. At the end of the day, though, the major challenge was to weaken Iran’s ability to sell its oil for the currency, credit, and goods it needed to develop its nuclear weapons program. These steps were yet to come.

  In this regard, the question remained how far the United States was willing to go to isolate the Iranian economy globally. There was a fragile balance that tempered and counseled against a financial blitzkrieg, but Iran’s nuclear clock was ticking, and it was growing more and more isolated. But before we could take any final steps, there was a change of US administrations, which brought with it a possible shift in strategies.

  President Bush would later note that he was particularly disappointed to have left the Iranian problem unresolved before the end of his tenure. Even so, his administration had set in motion a financial constriction of Iran unlike any other. Bush left office having created an international environment that was successfully isolating Iranian financial and commercial activity. The Treasury had saved the last bullet in the financial pressure campaign, and the administration handed over the constriction playbook. The Obama administration gladly assumed the playbook and elected to keep the same Treasury team in place that was prepared to continue the same campaign. The campaign would continue—but it would be delayed.

  Part IV

  ADAPTATION

  14

  DUSTING OFF THE PLAYBOOK

  The 2008 election returns had been decisive. Barack Obama had won a historic election and was riding a wave of domestic and international popularity. In the final months of the year, Bush administration officials busied themselves with tying up loose ends and crafting transition documents in anticipation of leaving the government. President-elect Obama’s transition team was preparing to govern and determining how to fill the senior seats in the executive branch. Then Stuart Levey received a call he was not expecting.

  The call came in December from Tim Geithner, representing President-elect Obama’s transition team. Geithner, the governor of the Federal Reserve Bank of New York, was tagged as the likely secretary of the treasury and was already expected to become an indispensable member of the Obama administration. Geithner and Levey had met when Levey had first joined the Treasury Department in 2004, and they had developed a respectful working relationship. Even so, he certainly wasn’t expecting Geithner to make a pitch to keep him on board.

  Geithner was polite but cut to the chase. He told Levey that the Obama team was impressed with Treasury’s work to pressure rogue actors—especially Iran. The president-elect wanted him to stay on board to continue what he was doing. Though it was understood that the Obama team would want to keep continuity in certain positions, this call was a surprise. Levey had served in the government for both Bush terms—first at the Justice Department and then at Treasury. Levey asked Geithner for some time to reflect and to talk to his wife.

  The Obama team did not wait long. The next day, Rahm Emanuel, who was close to the president-elect and understood to be in line to be White House chief of staff, called Levey and told him again that the president-elect wanted him to stay on board. Emanuel noted that it was important for the country to continue the good work at Treasury that everyone on both sides of the aisle respected.

  Levey had one principal concern and demand for Emanuel. If he stayed in his position, he did not want to be treated as a political pariah in an administration that had made no secret of its disdain for the Bush team it was replacing. Levey knew that to be effective, he needed access to the White House in addition to support from his secretary. He was assured he would get all the support and access he needed—and that his work and voice would not be muted. After some conversations with family and close colleagues, Levey called Emanuel back within forty-eight hours. He accepted the president’s offer.

  For Levey, this was a validation of the work he and his team had done. For Treasury, it was an assurance that the Office of Terrorism and Financial Intelligence and the work that had been done for eight years would survive the transition. For those around the world who knew what Treasury had become and could do, this was a signal that America’s policies would not shift radically and that Treasury could be expected to use its powers for national interests. With Levey remaining in his position, the Treasury would remain at war, and its functions would become an ensconced part of the US government’s approach to national security. Next to Secretary of Defense Robert Gates, Levey, as Treasury’s undersecretary for terrorism and financial intelligence, would be the highest-level Bush political appointee to transition to the new administration.

  Considering the acrimony between the Obama and Bush administrations, it is notable that the post-9/11 policies of financial pressure and sanctions had not fallen prey to the usual games of political football in Washington. Treasury’s work had been supported and extolled—in part because it tended to bring little controversy compared to other national security issues and seemed to most to be effective. The US government’s work on terrorist financing, for example, was the only activity given an “A” or “A–” rating in 2005 by Thomas Kean and Lee Hamilton, co-chairs of the 9/11 Commission. In Janua
ry 2009, in a letter to the Senate Foreign Relations Committee, Geithner wrote, “I agree wholeheartedly that the Department of the Treasury has done outstanding work in ratcheting up the pressure on Iran, both by vigorously enforcing our sanctions against Iran and by sharing information with key financial actors around the world.”1

  In fact, the kind of power that Treasury wielded was precisely the type of “smart” approach the new administration and its foreign policy advisers had been arguing for as a refreshed approach to foreign policy. Ever since 2004, prominent think tanks had trumpeted the concept of “smart power” as a way of promoting US interests softly in concert with other countries and institutions.2 The mantra emerging was that the United States needed to be less unilateral in its use of force and in its promotion of its national security interests. There were other tools and multilateral means by which to achieve America’s foreign policy goals.

  The subtle, smart financial measures Treasury was already using fit neatly into this model of “smart power,” though its use was often unilateral and coercive in its intent. The experts assessing what Treasury had been doing already marked this approach as a new brand of coercive diplomacy.3 The playbook on the use of smart financial power had bipartisan support.

  As the new president took over the White House, a core foreign policy question for the administration was how to apply pressure against America’s adversaries while also abiding by Obama’s campaign pledge to reach out with an open hand to the regimes in Pyongyang and Tehran. This idealistic rhetoric quickly collided with difficult realities. Governing is different from campaigning, and designing a foreign policy to meet the realities of the threats and the conditions of the world is the job of a president. With the financial pressure campaigns against both North Korea and Iran—and with sanctions on other countries like Burma, Sudan, and Cuba—there was a desire to reevaluate their effectiveness and consider whether a more aggressive and open diplomatic outreach could shift the landscape. The assumption from the White House seemed to be that a change in tone and diction—and the very person of the president—might create a diplomatic breakthrough. To give this approach time to work, the White House decided from the beginning of the new administration to pause the financial pressure campaigns on North Korea and Iran.