Treasury's War Read online

  Amid the deepening economic warfare loomed three fundamental questions that have been left unanswered.

  First is the question of what we are trying to achieve with the financial campaign against Iran. Secretary of Defense Gates and Secretary of State Clinton stated that the goal of sanctions and financial pressure against Iran was to force the regime to make a calculated judgment. Is the nuclear program worth the costs and economic pain of financial and commercial isolation? The effects of this campaign were unprecedented and were putting pressure internally on the leadership. The movement toward a maximalist economic strangulation policy shifted the focus of the campaign from constricting Iran’s ability to do business with the world to making the economic pain bad enough to force the abandonment of the nuclear program. This then shifts the focus to the economic pain of the Iranian people, and it assumes that the regime leadership will either splinter or be forced by its people to modify their position on developing a nuclear power capability.

  The problem with this theory is that there is no evidence that the regime is willing to give up the nationalist and nearly sacred goal of gaining nuclear power to avoid further economic pain. There is also no evidence that the opposition in Iran would be willing to give up the nuclear program. Regardless, the regime has already crushed internal dissent without external objection, and regime leaders understand in the wake of the Arab uprisings that brute force and media and Internet blackouts can forestall revolution. Its assistance to the Assad regime in Damascus in crushing the Syrian uprising is yet another testing ground for this approach. The maximalist mode assumes that there will be a broader economic effect on Iran in which the pressure campaign follows an embargo model and relies on internal dissent and turmoil to force a regime decision.

  Second is the question of how the United States will unwind the financial pressure if that becomes part of the diplomatic deal for Iran. As of the writing of this book, the hopes for a diplomatic breakthrough with Iran have fizzled. Talks in Istanbul, Baghdad, and Vienna have resulted in no real progress, and the International Atomic Energy Agency continues to issue reports warning of the unanswered questions and suspicious activities surrounding the Iranian nuclear program. Even so, if lifting the economic pressures becomes part of a package deal, what will this deal look like in practice? The Iranians begin any discussion about a deal with the demand to lift the economic pressure—often asking for an end to the SWIFT ban on dealing with sanctioned Iranian banks. With the type of financial pressure campaign Treasury devised, unwinding the sanctions—as seen in the North Korean case—is a complicated matter, and not subject to an on-off switch.

  Unwinding the sanctions means much more than just convincing a foreign bank to unfreeze accounts, or withdrawing a designation or regulation. The financial argument at the heart of Iran’s isolation has been that Iran is engaged in a host of nefarious and illegal activities that have been facilitated by its interactions with the international financial system. It is the threat to the international financial system of the illicit and suspect flows of money that is the baseline for Iran’s isolation. No doubt, the deeper political measures and embargoes put in place in recent months—especially the European oil-import ban—have bitten hard into the Iranian economy. But Iran will not regain its access to the international financial system until it addresses the underlying concerns that drove its isolation in the first place—proliferation, support for terrorism, and development of weaponry and programs of concern controlled by the IRGC. These concerns will likely remain even if a nuclear deal is reached; therefore, the attempts to roll back the financial measures will be limited—without American cheerleading for reentry of the Iranians into the legitimate financial order. I don’t think anyone has yet contemplated this problem or imagines that it will happen. If that is the case, can the easing of financial pressure as expected by Tehran really be put on the table?

  Third, the fundamental question remains whether any of this economic warfare and pressure can slow the nuclear program and ultimately change the regime’s calculus. Is there an economic silver bullet, and what would the last financial measure be that we could use before it was too late? On January 21, 2011, the Federation of American Scientists reported that Iran had increased centrifuge operations at Natanz by 60 percent over the past year. As Ivanka Barzashka, a researcher who studies nuclear weapons proliferation and international security policy, has put it, “Iran clearly does not appear to be slowing down its nuclear drive.”38 Director of National Intelligence James Clapper has noted that recent US sanctions “almost certainly have not altered Iran’s long-term foreign policy goals.”39 An IAEA report published in the summer of 2012 again confirmed that the Iranians are continuing to expand their nuclear capabilities, with increasing numbers of centrifuges and facilities that have opened and expanded to handle nuclear research.40

  Despite unprecedented financial pressure, Iran’s nuclear march continues. Timing in this equation matters, and financial pressure and sabotage have certainly slowed Iran’s ability to develop a nuclear program. Israeli Prime Minister Netanyahu has called for red lines for Iran’s program before the Iranians reach a “zone of immunity” in which their nuclear capabilities allow them to develop a nuclear weapon at will—beyond the reach of airstrikes and disruption, likely underground or carved into mountains. The United States has stated that it will not allow Iran to obtain a nuclear weapon. The timing on when Iran may reach nuclear capability is in dispute, but at play is the idea that financial pressure and sanctions need more time to work. There are no indications, though, that the regime has changed its nuclear trajectory as a result of the economic pressure exerted thus far.

  It is not clear that economic pressure can alter the calculus of a regime committed to nuclear capability as a central element of national power and international influence. As a result, it is best to assume that financial measures alone will not be able to change the calculus. Instead, it is critical that the financial pressure campaign be viewed as part of a series of actions and policies to change the regime’s trajectory or the regime itself. The US government has to be clear about what it is trying to achieve in order for the strategies and measures to be directed with desired impact. Just as a missile has to be aimed, the financial measures used in the twenty-first century to isolate rogues need to be tailored to the strategic end state desired. This is even more important now that most of the key steps that can be taken to constrict the Iranian economy have been taken.

  This is the fundamental question for the US government as it wields its economic power more aggressively in the service of its national security. Can this new brand of economic warfare stop the bombs and bullets of tyrants? In Syria, this has been the hope. There has been little desire from the Obama administration to intervene militarily to topple President Assad or to assist the revolutionaries and militants fighting the Syrian regime. Instead, the muscular, public alternative has been to pressure the regime with the use of financial pressure. Instead of issuing military orders, the president has signed executive orders to freeze the assets and restrict the travel of Syrian officials and entities.

  Against Syria, this campaign has taken three main forms. First, the administration has wanted to demonstrate the underlying danger of Syrian behavior that touches the international financial system—proliferation, support to terrorism, corruption, and lack of money-laundering controls. In many ways, this approach leveraged the Section 311 action against the Commercial Bank of Syria in 2004 and the designation, in 2008, of Rami Makhlouf, Assad’s corrupt relative who runs Syria’s largest businesses. Those actions were salvos in an attempt to undermine the Syrian regime’s economic resources and to signal a desire to peel away elements of Assad’s coalition by going after corrupt figures tied to his regime. On August 17, 2011, President Obama issued Executive Order 13582, providing authority to “block” the property of the government of Syria (“blocking” generally means that transactions between US persons or entities and the entity in question, such
as, in this case, the Syrian government, are prohibited), banning the export of US services to Syria as well as new investment in Syria, and banning the importation of Syrian-origin petroleum and petroleum products into the United States. Treasury identified five state-owned oil companies in Syria that are subject to the blocking.

  Second is an effort to underscore the human rights abuses of a regime that has been waging a slow-motion massacre against its own people. The moral opprobrium of the Assad regime and the perception in the West that there are few good alternatives have caused the United States and Europe to lock arms to target Syrian officials and institutions in the financial realm. On April 29, 2011, President Obama issued Executive Order 13572, providing authority to block the property of, among others, persons determined to be responsible for human rights abuses in Syria, including those related to repression. On May 18, 2011, he issued Executive Order 13573, blocking the property of senior officials of the Syrian government, including President Bashar al-Assad. On April 22, 2012, he issued Executive Order 13606, providing authority to block the property and suspend entry into the United States of certain persons determined to have operated, or to have directed the operation of, information and communications technology facilitating computer or network disruption, monitoring, or tracking that could assist in or enable human rights abuses by or on behalf of the government of Syria. These executive orders have served as the United States’ major public response to the Syrian abuses and atrocities.

  Finally, the Obama administration has tried to tie the taint of Iranian and Syrian activity together. The Iranian and Syrian governments collaborate to support terrorism, proliferate weapons, and now to crack down on political opposition and protesters. On June 29, 2011, the Treasury Department designated Ismail Ahmadi Moghadam and Ahmad-Reza Radan, heads of the Iranian Law Enforcement Forces, for providing expertise to aid Syria’s crackdown on civilians. The European Union followed on August 24, 2011, by designating the Qods Force for supporting Syrian security services to repress civilians. On October 12, 2011, the Treasury designated Mahan Air for helping the Qods Force to ship weaponry—especially to Syria. With the Iranians admitting IRGC support to the Syrians and Hezbollah admitting its support for Assad, these types of actions in the West will likely accelerate, with the United States and European governments attempting to underscore the atrocities undertaken by the Syrians and Iranians in concert.

  These efforts have begun to be supported by Arab states that oppose Assad and want to accelerate his fall. The growing willingness of the Arab League to engage abroad and intervene—as seen with Qatari and UAE military forces assisting the Libyan rebels against Qaddafi—is now translating slowly into the financial battlefield. The Treasury and the Qatari central bank in fact collaborated to take a concrete step together against Syria. On May 30, 2012, Treasury designated Syria International Islamic Bank (SIIB), pursuant to Executive Order 13382, for acting for or on behalf of the Commercial Bank of Syria and providing services to the Syrian Lebanese Commercial Bank, both of which have been subject to US and international sanctions. The Qatari government acted with the United States and took steps to isolate SIIB from the Qatari financial system. Countries like the UAE and Saudi Arabia have quietly assisted in the isolation of these entities as well. This may become a more aggressive arena for action against the Syrians and Iranians.

  The goals in taking these steps are to reduce Assad’s power and quicken his fall. These measures are also intended to weaken Assad’s coalition and to peel away supporters. Even so, the Obama administration has relied on the United Nations, in general, to legitimate US actions, and Russian and Chinese reluctance to support stronger measures and sanctions that bite has constrained the financial pressure campaign. The Obama administration has also been reluctant to take steps that might inadvertently fracture the Syrian political and social system in a way that makes the situation worse. This posture has made little sense as Syria devolves into civil war and sectarian camps prepare to fight to the death. The lack of US leadership and a consolidated international response has muted and hamstrung the responses of countries in the Arab League, and, most importantly, Turkey. The frustration of watching Assad slaughter his own people and destroy his own cities has been accompanied by hedging in countries unwilling to step ahead of the herd against the regime. With Russia and Iran supporting the Assad regime, and without a more creative and aggressive approach, it seems unlikely that further executive orders and designations will help.

  This playbook is now well understood by our enemies and adversaries. New plays and strategies are needed to ensure that the tools of financial warfare remain sharp and effective. In Iran and Syria, the United States should launch preemptive asset hunts for the key leaders and selected proxies and allies. Traditionally—as with Sani Abacha in Nigeria and Saddam Hussein in Iraq—governments and banks have waited for the regime to fall before going after their looted assets. Preemptively launching asset recovery efforts would have the virtue of energizing the international financial community and activating all the tools of asset recovery before the regime falls. The threat of such preemptive efforts would also be a means of incentivizing regime allies to defect and to make deals.

  We need to focus more attention on the convergence of financial networks of interest that are being leveraged by our enemies to raise and move money around the world. We also need to use the interest of the Arab states and legitimate financial centers to create positive incentives for the isolation of rogue actors—and rewards for those willing to act with legitimacy and transparency. Finally, we need to find ways of wrapping financial actors such as China and India into the legitimate financial order, putting these issues on their plate as policies of concern to them and not just the United States and the European Union.

  Unless we have new plays in the playbook, our enemies and adversaries will work around and weaken America’s financial power and tools. The financial battlespace is constantly evolving, with dirty money finding ways around the systems we have built to prevent the flows of illicit financial capital. Our enemies are smart and will continue to adapt, taking advantage of the growing complexity and sophistication of international financial systems. We, too, must adapt, or else dirty money will find new ways to flow and to threaten.

  15

  LEARNING CURVE

  We had found new ways of using financial intelligence, tools, and campaigns to isolate rogue actors from the formal financial system. These efforts had yielded real-world results, and our enemies had felt the effects of financial warfare that they had not anticipated. The financial pressure we had put on terrorist, proliferation, and illicit networks had taken its toll on the funding mechanisms of those targeted. It was now harder, costlier, and riskier for them to raise and move money around the world.

  This approach, however, is not a silver bullet. In the face of this pressure, the enemy has adapted, and illicit capital still moves. Where there is money to be made and moved, it will find a channel and agents to facilitate that movement. The networks have adapted by finding alternate ways to raise and move money, creating new tools of their own to avoid the pressure leveled by the formal financial system and the US Treasury. These adaptations and evasions form part of this new financial landscape—one with which the United States must constantly contend.

  The huge used-car lots on the coast of West Africa seemed out of place. The images from space showed the car lots beginning to carve out acres and acres of coastline. The business of moving used cars from the United States into West Africa was growing fast. And so was the size of the lots. What had been created was a bustling trade zone in used cars that remains in business to this day. Though seemingly innocuous, the cars formed the centerpiece of an elaborate trade-based money-laundering enterprise run by the terrorist organization Hezbollah in concert with South American drug traffickers.

  Hezbollah, the Lebanese-based terrorist group and political party, had always had a diversified balance sheet. It received hundreds of millions
of dollars from Iran every year. Hezbollah used its social and charitable networks—along with media campaigns on its Al Manar cable station—to generate millions more. It also relied on trade-based money-laundering and business operations through sympathetic Lebanese and Syrian diaspora members around the world. Assad Ahmad Barakat, Hezbollah’s South American treasurer, had embedded his trading companies and counterfeiting operations in the commercial hub of the Tri-Border Area to finance Hezbollah. In West Africa, a bustling Lebanese commercial class traded in everything from diamonds to furniture.

  Hezbollah had always found ways to make money through trade, including through the drug trade. With the increased pressure on Iranian budgets and new scrutiny over banks that were being used to help finance Lebanese Hezbollah, such as Bank Saderat, Hezbollah’s moneymen needed to fill a budget gap. The war with Israel in 2006, which destroyed much of Hezbollah’s infrastructure and neighborhoods in southern Lebanon, also put stress on the group’s bottom line. The Hezbollah leadership had passed out cash to those affected and promised to rebuild homes, hospitals, and schools. But Hezbollah required massive amounts of funding to support its extensive military apparatus and missile purchases, its patronage system and political program, and its expansive social and charitable network. Criminal activity was a lucrative and appealing option for increasing revenues. Drug trafficking and related money laundering was an avenue for raising and moving hundreds of millions of dollars. Hezbollah knew how to make and move money around the world, and understood how to make the drug-trafficking networks in South America and West Africa a principal source of revenue. The drug money was attractive, and it made for unusual bedfellows.

  Ayman Joumaa, a designated and indicted narco-trafficker, ran a global cocaine distribution network that suited Hezbollah nicely. Joumaa was an all-purpose narcotics trafficker and money launderer. He would negotiate the sale and movement of multi-ton bulk shipments of cocaine from trafficking organizations in South America. He also knew how to launder the proceeds—upward of $200 million a month—using an intricate global money-laundering network he controlled. Joumaa used bulk cash smugglers to deposit drug proceeds into Lebanese money-exchange houses that he owned or controlled. The exchange houses had established accounts in the Lebanese Canadian Bank (LCB), with sympathetic members of the network in key bank branches. The money was deposited in the money-exchange house’s LCB accounts to allow it to settle without having to be laundered further.