Treasury's War Read online

  The decision was made. The administration would begin the two-track pressure campaign. Levey and the Treasury were ready to use the power of designations, regulations, and outreach to banks to recondition the financial environment. They focused heavily on isolating the Iranian banking sector, but redoubled their efforts on the shipping and insurance sectors. They would launch the program after the resolution was passed.

  It took months of effort, but on June 9, 2010, the United Nations Security Council passed Resolution 1929, which built on the three earlier Iran sanctions resolutions and imposed new sanctions on Iran. Though this resolution was not unanimous, it was important, because it upped the pressure on the Islamic Revolutionary Guard Corps (IRGC), naming the IRGC as a threat, and heightened scrutiny of Iran’s shipping lines, air transport, banks, and companies. The administration had wanted this resolution to validate the additional pressure to come, which was viewed by many in Washington as “unilateral” without the cover of UN action, and it succeeded in doing that.

  With the new resolution in place, the Treasury Department again focused aggressively on the weak links of the Iranian regime. Treasury and the intelligence community had focused their collection and analysis on the key financial nodes and sectors for the Iranians. Starting that summer, Treasury began to unfurl a backlog of targets for the financial community and world to digest. The Office of Foreign Assets Control (OFAC) designated numerous entities as fronts for the IRGC and the government of Iran, putting the public spotlight again on Iran’s attempts to use the international financial system for illicit and nefarious goals.

  This focus included hitting those Iranian banks that continued to service the IRGC and the Iranian leadership and that had helped other Iranian banks, which had been designated earlier, to evade sanctions and scrutiny. On June 17, 2010, the Treasury designated the Post Bank of Iran for acting on behalf of the previously designated Bank Sepah. Part of the strategy entailed going after third-country banks that continued to do business with Iran. The Treasury had to make its perceived threats real on occasion—to give them credibility and to send clear messages as to what type of financial engagement with Iran would not be tolerated. In December 2009, it was announced that Credit Suisse would likely pay a fine of $536 million to settle accusations that it violated Iran sanctions. The US Treasury added the German-based European-Iranian Trade Bank AG to its blacklist in September 2010. In the summer of 2012, the British bank Standard Chartered paid a $340 million fine as a result of its hidden dealings with Iran.

  The strategy to squeeze the Iranian banking sector would climax with two elements. The first was isolating the central bank of Iran—Bank Markazi—from the international financial system by declaring it—along with the entire Iranian banking sector—a primary money-laundering concern under Section 311 of the Patriot Act. Bank Markazi was serving as the commercial outlet for the Iranian banks that were already isolated, and it needed to be plugged if Iranian illicit financial activity was to be stopped. This 311 action would signal that there were fundamental systemic concerns about Iran’s lack of controls and illicit financing in their banking system.

  After years of debate over the wisdom and timing of the 311 for Bank Markazi, the Treasury Department pulled the trigger. This was the first use of Section 311 since Banco Delta Asia in 2005, and the first time a central bank was targeted. Treasury had attacked the heart of the Iranian financial system. In a solemn press announcement on the seventh floor of the State Department on January 23, 2012, Secretary of State Clinton and Secretary of the Treasury Geithner announced the new economic measures against Iran. Secretary Geithner explained the “311” action against the central bank of Iran and the declaration of Iran as a primary money-laundering concern. He cited the findings of the Financial Action Task Force that Iran presented a real risk and remained unresponsive to the international community’s questions about its anti-money-laundering system. At the press conference in the State Department’s Treaty Room, Secretary Geithner said, “The policies Iran is pursuing are unacceptable, and until Iran’s leadership agrees to abandon this dangerous course, we will continue to use tough and innovative means to impose severe economic and financial consequences on Iran’s leadership.”11 Treasury had taken a final shot at Iran’s most important financial outlet—its central bank. The signal was clear. This was intended as a full financial strangulation.

  The final element of the financial pressure campaign was squeezing those banks that continued to do business with Iran. The Treasury maintained a list of the banks that maintained business relations and activities with Iranian banks and entities. That became a target list for quiet pressure and enforcement steps to convince banks to stop doing business with Iran. Levey, along with Danny Glaser and Levey’s new assistant secretary and former Treasury official in the Clinton administration, David Cohen, made it their mission to find those recalcitrant banks and cajole or convince them to reduce their exposure to Iranian business. The threat of the sanctions or regulatory measures that could destroy an institution’s reputation and access to the US financial system was always in their back pockets. The Iranians once again began to follow the delegation of Treasury officials as they visited banking centers such as London, Frankfurt, Dubai, Beirut, Hong Kong, and Singapore. The Treasury was deploying again.

  The Treasury continued its barrage of designations to shut off Iranian shipping and air traffic from the international system. Treasury analysts identified 5 IRISL front companies and 27 vessels and updated entries for 71 vessels related to Iran’s efforts to evade sanctions. In many ways, the designations appeared to be a game of whack-a-mole, because the Iranians often simply renamed their ships to evade scrutiny. The Iranian shipping line even tried to turn off radar tracking mechanisms to hide its ships.

  But ships could be tracked and identified much more easily than assets. Before ports could accept vessels anchoring in their harbors and relying on their facilities, they needed to verify the identity and insurance coverage of the vessels—and had to determine whether they were violating any local laws or international obligations. Legitimate operators in major ports such as those in Singapore, Hong Kong, and Rotterdam paid attention to the lists and those docking, offloading, and using their facilities. This was a significant area of vulnerability for the Iranians—in part because the shipping of weapons and proliferation-related items exposed their underlying activity. On March 17, 2011, Malaysia, South Korea, and Singapore conducted arms seizures of components deemed illegal under UN sanctions. On July 1, 2011, Maersk announced that it had decided to stop doing business with ships originating from the Iranian ports Bandar Abbas, Bandar Khomeini, and Asaluyeh, owing to the suspect ownership of the ports. In Hong Kong and Singapore, Iranian ships would be held in port or not allowed to offload because of lack of insurance and suspicions over their ownership and cargo. Writing in the Financial Times in August 2010, Levey argued that “some of Iran’s most dangerous cargo continues to come and go from Iran’s ports, so we must redouble our vigilance over both their domestic shipping lines, and attempts to use third-country shippers and freight forwarders for illicit cargo.”12

  This campaign simultaneously went after the insurance and reinsurance upon which Iran relied to engage in international commerce. Without insurance, the Iranians would find it hard to ship their oil and to dock their ships to trade. Lloyds of London announced it would stop insuring and reinsuring refined-petroleum shipments into Iran in February 2010. As European insurance giants Allianz, Munich Re, and Hannover Re committed to ending their business ties with Iran, it became clear that the insurance sector had declared its judgment on the risk of insuring the Iranians.

  At the same time, Treasury identified twenty-two companies determined to be owned or controlled by the government of Iran. On June 22, 2010, Levey remarked to a Senate Foreign Relations Committee that this round of sanctions marked an “inflection point.”13 Treasury’s war had been unleashed and was pressuring Iran on all fronts.

  The Trea
sury Department and the White House were no longer alone in wielding these tools. In 2009, Congress began to play a more active role in the debate. For the first time since 9/11, Congress injected itself directly into the strategic use of financial sanctions and power, with legislative mandates that began to overpower the Treasury’s program in strategy and approach. Many members of Congress had watched as Treasury’s powers were developed and had seen how effective they had proven to be. Impatient with a gradualist constriction campaign, Congress wanted in the game.

  Congress understood that the financial pressure had been successful because it had targeted the financial sector, but wanted to use that model to maximize the impact on Iran’s economy. Congress wanted to send a clear message to banks and countries that continued to do business with Iran—especially those engaged in oil transactions—that they would be subject to financial sanctions and attention.

  Despite the 311 action against Iran’s central bank, Congress knew that the Treasury Department had yet to order the freezing of Bank Markazi’s assets and did not prohibit foreign banks from doing business with Iran. The 311 was not good enough for Congress. Congress wanted more pressure, faster, and also wanted to squeeze the international oil markets that were feeding Iran’s budget. Congress was focused on using the potential for sanctions against third-country banks still facilitating oil deals with Iran’s central bank. It wanted to use financial isolation as a means of squeezing Iran’s oil sector and income.

  For the first time in nearly a decade, the Treasury Department found itself putting the brakes on congressional enthusiasm for the use of financial tools and sanctions against a rogue actor. Treasury was committed to a gradualist constriction campaign, but it wanted to avoid blunt steps that would upset the balance of the international financial system or cause allies in Europe and Asia to resist further cooperation because of perceived American threats or overreach. Japan and South Korea relied heavily on imports of Iranian oil. Yet even the hint of congressional action had its effect. As negotiations on the language and scope of the House and Senate bills proceeded, the mere threat of sanctions on countries, companies, and banks for doing business with Iran tenderized the international environment, leading oil companies and banks to abandon their investments and their business with Iran. Most foreign companies disliked having to respond to political machinations from the United States, but they could not afford to ignore the coming mandates from Congress that had global effect.

  On July 1, 2010, the Senate passed the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) by a vote of 95–0. CISADA became a defining element of the sanctions regime against Iran. The act required the sanctioning of any foreign bank that continued to conduct oil-related transactions with Iran’s central bank. That meant that a bank could not do business in the United States if it was transacting with Iran’s central bank. CISADA once again put the focus of the international community on the banking sector as the lynchpin for squeezing the Iranians. Congress was making explicit the same calculus that had been at play all along throughout the financial constriction campaign: If you want to do business in the United States, you must stop doing business with Iran.

  CISADA gave some wiggle room to countries with deep dependencies on Iranian oil by allowing the State Department to issue exemptions for countries that substantially dropped their imports of Iranian oil.14 Some of this dependency was relieved with the Saudis committing to the production of additional barrels of oil to help make up for the loss of Iranian crude on the markets. With these provisions, Congress created fear of secondary sanctions against non-American companies still doing business with Iran. On August 16, 2010, the Treasury issued the Iranian Financial Sanctions Regulations to implement CISADA.15 On September 29, 2010, the United States revoked authorization to import certain foodstuffs and carpets of Iranian origin, pursuant to Section 103 of CISADA. The pistachio and rug rapprochement from the late 1990s had ended.

  Quickly, the energy sector responded. On September 30, 2010, the State Department announced that multiple energy companies had reduced their ties to Iran, including the European oil giants Total, Royal Dutch Shell, LUKOIL, BP, Shell, and ENI. Investments in Iranian oil fields and sectors were withdrawn, with companies such as Reliance, Glencore, Trafigura, and Vitol ending deals planned in Iran. On October 15, 2010, Inpex announced that it was getting rid of its stake in the Azadegan development project. The State Department estimated that $50 billion to $60 billion in upstream energy-development projects (i.e., exploration and production) were terminated or put on hold.16 In July 2010, Iran’s gasoline imports were down 50 percent from May, according to the International Energy Agency, and according to Reuters they were down 90 percent in August from the previous year.17

  The Europeans were not absent from this debate—in fact, in many ways, they had already begun an even more aggressive approach. The Europeans had signaled that they planned to pull the plug on Iranian oil imports altogether—a critical step for a continent both dependent on Iranian oil and suffering severe economic setbacks and crisis. The political commitment across the European Union for such an important step—a step that would have real effects on Iran’s economy as well as potential backlash within Europe—was critical. The diplomatic and security environment was essential to this shift for the European Union. Their core members had been engaged in fruitless negotiations with the Iranians for years, and they had watched as the new president had been rebuffed when proposing additional talks. Meanwhile, the Iranians seemed to be playing for time while they marched toward nuclear capabilities outside the full gaze of the international community. Revelation of the Qom nuclear site in 2010 seemed to be the last straw.

  With each passing month without diplomatic progress, there was a growing dread of war on the horizon. The extremist talk of annihilation of the Israeli state by Iranian President Ahmadinejad, along with his repeated Holocaust denials, heightened sensitivities in Europe about the unstable and dangerous nature of the regime in Tehran. In addition, the talk of preemptive war by Israel—which began to impact the public debate within Israeli society and in Washington, DC—made clear that more aggressive steps were necessary to avert war. Speaking to the American Israel Public Affairs Committee (AIPAC) in Washington on March 5, 2012, Israeli Prime Minister Benjamin Netanyahu said, “Israel waited patiently for the international community to resolve this issue. We’ve waited for diplomacy to work. We’ve waited for sanctions to work. None of us can afford to wait much longer. As Prime Minister of Israel, I will never let my people live in the shadow of annihilation.”18 The Israeli strategy was clear—it would use saber rattling to impel greater international economic and financial pressure. The world was moving into maximalist financial pressure mode on Iran to avoid war. Financial constriction needed to move to economic strangulation.

  In April 2011, the European Union passed the mandate requiring an end to all Iranian oil imports by July 1, 2012. This was a clear line in the sand and a signal of European commitment. It also sent a ripple effect throughout the financial and commercial worlds. By 2012, Japanese oil imports from Iran had dropped by roughly 80 percent from the previous year.19

  The Europeans also made it clear that the SWIFT messaging service had to be turned off for sanctioned Iranian banks altogether. The EU mandate required SWIFT to prepare to unplug the Iranian banks from the international financial messaging system. The only Iranian banks left connected were those that were not sanctioned and that were largely dealing in the trade of food and medicines. The Europeans were serious, and the pressure on Iran would not cease until there was a resolution of the underlying diplomatic issues. On May 19, 2011, the European Union designated entities associated with Iranian proliferation, resulting in over one hundred firms being placed on the EU list. On April 9, 2012, Hong Kong insurers warned that they could not provide full coverage to tankers carrying Iranian oil once EU sanctions took hold in July.

  This isolation was also coming from jurisdictions that did not
ordinarily bend to Western financial pressure. Unable to ignore the financial and commercial environment, India’s central bank, in January 2011, banned local companies from doing business with the Asian Clearing Union (ACU), an exporter of Iranian oil. India had previously been Iran’s largest trading partner in the ACU. The Reserve Bank of India noted, “In view of the difficulties being experienced by importers/exporters in payments to/receipts from Iran, it has been decided that all eligible current account transactions including trade transactions with Iran should be settled in any permitted currency outside the ACU mechanism until further notice.”20

  The European and international steps and actions were being matched in the United States. Congress again got into the action in late 2011, adding more financial restrictions. This time Congress focused on third-country banks and companies that continued to do business with Iran. These companies would risk their ability to do business in the United States. On December 31, 2011, the president signed the National Defense Authorization Act (NDAA), which contained additional provisions. US firms also pulled their third-country subsidiaries from Iran. A Congressional Research Service report found that Huntsman, Halliburton, GE, Caterpillar, Ingersoll Rand, KPMG, PricewaterhouseCoopers, and Ernst and Young had terminated relationships inside Iran.21

  By July 2012, the combination of financial and commercial pressure on Iran was unprecedented. Its banks were isolated and largely unplugged from the global banking system; its oil exports to Europe were shut off; and the United States was putting enormous pressure on countries to end their commercial relationships with Iran. As a result, not only did the Iranians find it harder to bank or do business abroad, but their economy began to show serious effects as a result of shrinking investments and oil exports. Sanctions have reduced the amount of gasoline Iran imports by 75 percent.22 The central bank’s reserves have been depleted, with some reports suggesting that foreign currency reserves have fallen by as much as $110 billion.23 Meanwhile, Iran’s currency, the rial, has been battered, with confidence dropping at each turn of the screw. In September 2010, Iran’s rial fell by about 15 percent when the UAE restricted banking transactions with Iran.24 By the summer of 2012, the rial had fallen by 80 percent.25