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  The pause did not last long for the North Koreans. The regime quickly rebuffed any attempts at outreach and met American diplomatic messages—sent secretly from President Obama to Kim Jong Il—with bellicosity and belligerence. On April 5, 2009, North Korea launched a three-stage Unha-2 missile over the Sea of Japan, triggering a cascade of diplomatic crises, to include condemnation by the UN Security Council and North Korea’s withdrawal from the six-party talks that had been scheduled for April 13 and 14. Tensions only worsened when North Korea tested its second nuclear device on May 25, 2009.4 The region continued on a near-war footing as the crisis continued to boil. In March 2010, a North Korean submarine sank the South Korean ROKS Cheonan. Alarmingly, the crisis escalated later that year when North Korean artillery units bombarded Yeonpyeong Island in the Yellow Sea. North Korean recalcitrance clarified matters: the administration had no choice but to resort to the economic pressure playbook.

  The administration worked with counterparts to obtain Security Council Resolution 1874. Passed on June 12, 2009, the resolution tightened sanctions on North Korea; called on member states not to provide financial assistance to North Korea, except for humanitarian purposes; and authorized increased scrutiny of North Korean shipping, among other things. The administration’s envoy for sanctions, Jim Steinberg—filling a new role at the State Department—began to work the diplomacy of the six-party talks and sanctions. He paid visits to Tokyo and Seoul to coordinate on next steps, even as the North Koreans refused to rejoin the talks. Steinberg helped to synchronize the actions of the United States, Japan, and South Korea amid the rolling crises triggered by the North Korean nuclear test and military provocations. Steinberg and Levey would travel together to Beijing, Seoul, and Tokyo to talk about sanctions on North Korea. Levey meanwhile was also trying to take the temperature of our allies on their willingness to cut ties with Iran. The Treasury would steadily increase the financial pressure on North Korea, designating companies and banks supporting its ongoing illicit activities.

  Still, the North Koreans had learned the lessons of the BDA action and had begun to diversify their channels of financing. They were relying more heavily on the Chinese for cover. There would likely never be another opportunity to isolate the North Koreans from the banking system the way BDA had. We had let that moment pass, allowing the financial noose around North Korea to loosen. The lack of additional steps to target North Korean nodes, along with the final deal with North Korea, which included lifting the “state sponsor of terrorism” label, had taken the air out of our tires. It was hard to fill them up again.

  China had learned its lessons, too, and had taken steps to avoid being cornered financially again. Traditionally it had been an economic outlet for North Korea. Now China had begun to increase its trade and commercial activity—especially in the mining sector—with North Korea, giving Pyongyang access to more goods, financing, and an outlet for economic activity, even as other international activity was squeezed.

  With Iran, the Obama administration still held out hope that outreach and offers of direct talks could shift the balance and allow for a breakthrough. Diplomatic messages were sent to Tehran about the United States’ willingness to negotiate. The president sent letters directly to Supreme Leader Khamenei to offer negotiations.5

  As part of this strategy, the financial pressure campaign that had been launched in 2006, and that had gained steam in the following years, was put on hold. Levey was instructed to hold his powder dry while the administration attempted to reach out to the regime in Tehran. Meetings with bankers, designations of Iranian entities, and enlistment of partners to isolate Iranian financial activity stopped. Iran’s central bank remained an ultimate target, but Iranian shipping lines, front companies, and agents continued to operate. Without being squeezed harder, Iranian money continued to flow.

  There had been a natural momentum to the constriction campaign, but to continue to work, the environment had to be constantly tended. Levey knew that the strategy had been working and would later reflect that the campaign had built “momentum” that was lost in this period. But the new team in the White House did not want to upset the apple cart if there was a diplomatic deal to be had. Those trying to make a deal with another rogue regime once again saw the financial pressure as an impediment to diplomacy instead of its complement and enabler.

  Problems quickly emerged with the new approach—starting with an all-too-flippant dismissal of the recent history of negotiations with Iran. The new American outreach seemed to ignore European views on the state of negotiations and diplomacy with Iran. From the French, British, and German points of view, European countries had been engaged in intense, good faith negotiations with the Iranians for years. They had had direct talks with the Iranian negotiators and had put concrete deals on the table along with the United States that would allow the Iranians to pursue a peaceful, civilian nuclear program—to no avail.

  This approach also disregarded the diplomatic environment in January 2009. The Iranians had traditionally responded positively to negotiations and concessions only when pressured to do so by the circumstances. The negotiated end of the Iran-Iraq War, for example, came only after a decade of pain, enormous loss, and obvious stalemate. The experience of the 1979 revolution had instilled a belief among the clerical regime that it was best to project strength in the face of pressure and take advantage of any sign of weakness from its enemies. The US attempt to engage in outreach at a moment of increasing international pressure was seen as a sign of weakness by the Iranian side and a moment to buy time.

  Another problem was that the reset and outreach by the United States seemed to shift the burden of persuasion back to the West at a time when the burden of proof was on the Iranians to explain their nuclear ambitions. A series of Security Council resolutions had decisively placed responsibility for the stalemate on the Iranians, but the new administration seemed to now be saying that the United States had been to blame for lack of progress diplomatically—even though the offer for assistance with a civilian nuclear program had been explicitly on the table. This was an unfortunate and costly diplomatic shift. The United States had to demonstrate that it was reaching out in good faith at a moment when it was well aware that the Iranians were continuing to expand their secret nuclear capabilities.

  In the administration, there was an all-too-familiar assumption that the financial pressure could simply be turned on or off like a light switch. Unfortunately, the kind of global constriction campaign launched against the Iranians needed to be maintained and managed—like a garden infested with weeds. What was needed was a commitment to taking continual action against an evolving set of financial and commercial targets to keep the Iranians from finding a way to access the international financial system even as they attempted to adjust to the changing rules of the game.

  This diplomatic respite also undermined the credibility of the stated reason for the financial isolation—to protect the international financial system against Iran’s illicit financial activities. Suspension of financial pressure appeared to be an admission by the US government that the financial measures against Iran were really just driven by geopolitics. This made the financial pressure campaign seem much less urgent to bankers and CEOs around the world. They would be less willing to listen and more able to throw up barriers to action, because they would believe the actions were just political machinations from Washington.

  Most observers have rationalized that this attempt at outreach was a necessary step, because it demonstrated the new administration’s seriousness to engage and showed that the United States was not the impediment to a deal. They also argue that European cooperation could not be reached without such overt diplomatic steps taking place and that a lessening of the pressure was therefore inevitable. This view discounts the fact that the Europeans were already cooperating aggressively. They were following the US lead on imposing sanctions and pushing for tougher resolutions at the United Nations.6

  This view also too easily dism
isses the power of the new president. President Obama had just been awarded the Nobel Peace Prize, and he came into office on a wave of unprecedented popularity and expectation. He could have articulated and recast the reality and nature of the diplomatic environment—asserting that the West had offered Iran real and concrete offers in the past and would continue to keep those offers open—without damaging the perception that he was reaching out to Iran, without dismissing past diplomatic efforts, and without forgoing the advantages of the diplomatic environment in 2009. His articulation of the reality of the situation with Iran could have set the record straight and maintained the parameters of the relationship in our favor.

  Finally, those who justify this approach completely overlook what the administration could have accomplished if it had continued to increase the financial pressure on Iran. The financial campaign did not have to be suspended while President Obama stretched out his hand to the regime in Tehran. The Obama administration had framed its engagement with Iran as a step-by-step diplomatic dance, with an ascending scale of confrontation. Sanctions and financial pressure came in the middle of that dance—after engagement and before other options (presumably military). Aside from giving Iran more time, by dismissing the diplomatic engagement that had occurred before January 2009, this framework precluded the new administration from thinking about financial pressure as one part of a broader campaign to build leverage against the regime, with elements of that campaign working simultaneously and in conjunction with each other to create mounting pressure against Tehran. Using multiple strategies simultaneously could have helped at the negotiating table, or could have even led to regime change in Iran. But the mullahs knew the steps to this dance. They had watched the West’s efforts to make a deal with North Korea for years, and they knew they could use this stage of diplomatic maneuvering to buy more time. The strategic ambiguity of “all options on the table” had therefore been undermined by the tactical predictability of the Obama administration strategy.7

  Most troubling, the administration had seen a potential dialogue with the regime as a goal in and of itself. This way of thinking foreclosed opportunities to build multiple sources of leverage. The administration’s muted response to the Green Movement opposing the fraudulent 2009 election was a case in point. On June 12, 2009, elections were held in Iran, and Iranian President Mahmoud Ahmadinejad was pronounced the winner, with 62 percent of the votes cast. But the election process was riddled with irregularities, and street protests and a vocal opposition to the regime emerged, lasting for months. The clerical regime cracked down viciously, arresting and torturing protesters and movement leaders, terrorizing family members, and using the Internet to engender suspicion.

  Internal dissent and a call for real democracy within Iran had emerged at last in a tangible way, but the United States was absent. When it became clear that US support was not forthcoming, many of the protesters chanted, “Obama, Obama, are you with us or them?”8 Though there was an obvious desire not to inject America into the middle of domestic Iranian protests, the administration misread the moment. There was no answer from the new president to an emerging Persian Spring, and this temporizing made it all too clear that President Obama saw the movement in Iran as a complication to outreach, rather than a strategic opportunity. At the moment of greatest fragility for the regime, we were not only silent, but failed to pressure Iran financially.

  Meanwhile, the administration’s outstretched hand was being met with a slap. The Obama team’s patience had run thin. The diplomatic messages went unanswered, and the Iranians continued to develop their nuclear program. By the time the United States and its partners revealed the secret nuclear facility at Qom on September 26, 2009, there was no question that the diplomatic entreaties were not working. This was the final straw for the administration, which now had no choice but to go into pressure mode again. President Obama made the pivot clear: “We have offered Iran a clear path toward greater international integration if it lives up to its obligations, and that offer stands . . . but the Iranian government must now demonstrate through deeds its peaceful intentions or be held accountable to international standards and international law.”9

  At the end of the day, more financial breathing space meant the Iranians had more time to manage the pressure and develop its nuclear program. Reflecting on the pause in financial pressure on Iran, Stuart Levey conceded that it took longer to restart the pressure, once Treasury was given the green light to do so, than even he thought would be the case.10

  To restart the campaign, the Obama administration dusted off the playbook and followed the two-track program of using both pressure and diplomacy that had been set out in 2005 and launched in 2006. Those of us who knew the plays and understood what could be done to further increase the pressure on the Iranian regime were calling for Levey to be unleashed. Levey was waiting.

  In the Situation Room in the fall of 2009, President Obama hosted a meeting to discuss Iran policy. Levey was there to provide a briefing on options for restarting the financial pressure campaign. He was prepared to lay out for the president the sectors of the Iranian economy that could be squeezed and what could be done to squeeze them. The main areas of Iranian economic vulnerability were well known and had already been targeted—the oil, shipping, insurance, and banking sectors. There had been much discussion and debate over the utility of focusing on Iran’s refined oil imports. Levey explained his skepticism of this view. Pressure on refined oil imports would not be a harsh blow to the Iranians, in part because they were building new refineries to replace lost imports. The insurance and shipping sectors would be more important pressure points. Targeting these areas could cripple Iran’s ability to engage in international commerce. But Levey emphasized that the most crucial target would continue to be the banking sector.

  Levey explained that there were still a handful of significant banks doing business with the Iranians—and these banks were actually increasing their exposure to Iranian companies and accounts. Located in friendly countries in Europe and Asia, these banks could be targeted and convinced to end their business with Iran. If the United States did this, it would accelerate the Iranian regime’s isolation from the international financial and commercial systems. The banks were the connective tissue for that system. Without banks to accept Iranian business, the Iranian economy would begin to suffocate. Without insurance, it would be hard for Iranian ships to trade. This was a financial pressure campaign premised on attacking the enablers of Iran’s connectivity to the rest of the world.

  Levey argued that these steps could be taken right away. Each line of pressure would reinforce the next. If a company stopped investing in Iran, or an insurance company stopped insuring Iranian oil exports and shipping, then banks would be more reluctant to keep doing business with Iran. Shuttered bank accounts, suspended lines of credit, and canceled investment contracts would follow, signaling that the private sector was trying to protect itself from risk. With all lines of pressure working together to restrict Iranian access to legitimate channels of commerce and finance, a virtuous circle of increasing pressure could once again begin. Iran would feel the effects, and its economy would suffer significantly. Levey and the Treasury Department were ready to launch at any time.

  Susan Rice, US ambassador to the United Nations, objected to launching the program right away without UN action. She noted that it would be better and more likely to obtain cooperation with our partners if we had another UN Security Council resolution mandating tougher sanctions on Iran. The old orthodoxy that declared the need for multilateral steps at all points, and UN support from the start, reared its head again. She and others did not realize that much of Iran’s financial isolation had come not on the heels of government decisions but as a result of the reputational risk and calculus made by the private sector.

  Though the financial isolation Levey was describing resulted more from private-sector risk calculations than from multilateral agreement among nations, there was no question that another UN
resolution with some teeth would help. Many countries could not act to freeze assets or seize suspect shipments without the international legal authority provided by such resolutions. A resolution would also give added weight to the message of Iran’s isolation from the world—which certainly would echo in the boardrooms of the major banks and insurance companies. But Ambassador Rice seemed to forget the lessons from the Iran sanctions resolution negotiations that had already occurred during the Bush administration. The negotiations would take much longer than planned, and they would be watered down over time. She was confident that she could get this done in a few weeks. Instead, it would take several months.

  The president commented that he liked Levey’s presentation—especially the idea of finding a way to excise the Iranians from the remaining banks doing business with them. Levey grinned. But the president wanted to get a UN resolution and then move to the Treasury plan. This was not an unreasonable approach, but it meant delay. To make this approach most effective, the president also needed the Europeans to follow the UN resolution up with tougher measures on implementing financial and trade restrictions between the European Union and Iran. President Obama made sure Secretary of State Hillary Clinton understood that this was a priority.