Treasury's War Read online

  This blend of purposes is seen most clearly in the conversion of terrorist groups into drug-trafficking organizations—such as the FARC in Colombia or the Taliban in Afghanistan. According to Michael Braun, the former head of the Drug Enforcement Agency’s Special Operations Division, the DEA has linked at least half of the Foreign Terrorist Organizations to the global drug trade.15 Braun described these growing links vividly:

  If you want to visualize ungoverned space or a permissive environment, I tell people to simply think of the bar scene in the first “Star Wars” movie. Operatives from FTOs [Foreign Terrorist Organizations] and DTOs [Drug Trafficking Organizations] are frequenting the same shady bars, the same seedy hotels and the same sweaty brothels in a growing number of areas around the world. And what else are they doing? Based on over 37 years in the law enforcement and security sectors, you can mark my word that they are most assuredly talking business and sharing lessons learned.16

  Ideology gives way to opportunity. The reason is money. Drug trafficking nets an estimated $320 billion annually, according to one source.17 In 2006, it was estimated that Mexican and Colombian drug-trafficking organizations generated between $8.3 billion and $24.9 billion in wholesale drug earnings in the United States annually.18 The FARC has raised $500 million to $600 million annually from its control of the cocaine trade out of Colombia and Venezuela,19 and the Taliban makes between $70 million and $400 million a year from the opium trade.20 Over time, the Taliban has increased its involvement in the heroin trade—it started by protecting opium fields, but is now also engaged in actual production and distribution. In 2008, the Taliban made as much as $50 million simply from opium harvesting and another $125 million from Afghan morphine base and heroin labs.21 The amounts have grown exponentially as the Taliban has controlled more and more of the drug trade out of Afghanistan. A Taliban leader’s drug ledgers recently revealed $170 million in heroin sales in less than one year.22 Other groups, such as the Kurdish terrorist organization PKK (also known as Kongra Gel), made between $50 million and $100 million annually, according to a NATO report, though the Turkish government claims that the network makes closer to $615 million or even possibly $770 million a year.23

  These connections allow groups to work together more broadly. The DEA, the FBI, and the intelligence community have focused more and more attention on the nexus between drugs and terror—with terrorist groups assuming the role of drug-trafficking organizations, and drug-trafficking organizations taking on the characteristics and violent methodologies of terrorist groups. The US Attorney for the Southern District of New York has merged its international drug and foreign terrorism sections because of the intimate link between the two.

  In the most dramatic example of the potential operational convergence of terror and narcotics organizations, the US government revealed the disruption of an Iranian assassination plot in 2011 against the Saudi ambassador in Washington, Adel al-Jubeir. According to US officials, an Iranian Quds Force member—directed by the Iranian leadership—hired a DEA source whom they believed to be a member of the vicious Mexican drug cartel Los Zetas. The Iranians wanted to enlist Mexican drug hitmen to kill the Saudi ambassador and others in Washington, DC. The nexus between state-sponsored terror and drug traffickers’ violence was nearly manifest in the nation’s capital. America’s enemies are finding each other—as a matter of convenience and opportunity.

  Unfortunately, there is always a means to adapt around financial pressure and strictures when there is money to be made. The magnitude of illicit transactions is staggering. A 2011 UN study found that “all criminal proceeds are likely to have amounted to some 3.6 per cent of GDP (2.3–5.5 per cent) or around $2.1 trillion in 2009.”24 In Afghanistan, for example, $4.6 billion was declared as exports from Kabul airport in 2011, roughly equivalent to the entire budget of the Afghan government.25 Crime can pay, making it an especially attractive avenue for fundraising for networks and groups with global ambitions. Where there is money to be made and moved, financial institutions will be implicated. Banks and financial intermediaries will continue to weigh the balance between making significant amounts of money while doing business with suspect customers and the need to apply the most stringent financial controls and standards on money flowing through their systems. We have seen this over and over with multinational banks, including, most recently, HSBC and Standard Chartered. There is little mercy for those targeted by regulatory authorities, investigators, and prosecutors. Institutions that attempt to evade sanctions and scrutiny in order to tap lucrative business lines or markets are taking huge risks—with their reputations and with their access to the US and global banking systems.

  Evasion from scrutiny can take many forms. The Iranians have gone to great lengths to avoid the international financial and commercial pressures they are now facing. They have adapted their evasion over time—initially relying on Iran’s central bank (Bank Markazi) to funnel the commercial banking deals and transactions not allowed through Iran’s other designated banks. With the central bank now scrutinized and isolated, money has been moving through sympathetic banks—with banks in places such as Venezuela or China often being used to move money in an attempt to avoid American and Western scrutiny. In July 2012, the Treasury Department designated Kunlun Bank in China and Elaf Bank in Iraq for their continued transactions with designated Iranian banks. Noor Islamic Bank, partially owned by the government of Dubai, has been found to be a primary conduit for evasion of international sanctions on Iranian oil proceeds. Iran has most recently attempted to purchase smaller banks. Iran has also been aided by trading partners unwilling to clamp down on Iranian commercial activity. Iraq has frustrated the Obama administration by providing an oil and trading outlet for the Iranians as the United States attempts to squeeze the Iranians.26

  But Western banks have not been able to resist the temptation of making money off of Iranian deals either—often oil or infrastructure deals. Such banks have hidden the origin and destination of the transactions, often stripping wire information from banking transactions. This has been a common transgression cited by regulators against banks such as Standard Chartered, UBS, and HSBC. Iran has also tried to establish bartering agreements with countries that need its oil and are willing to offer goods in return—leaving out any dollar-clearing transactions. Iran has tried to hide its oil and goods—reflagging its ships, attempting to turn off the tanker tracking devices, and moving money in hard currency and gold across borders to avoid the banking system.27

  The Iranians are not alone in the evasion game. The North Koreans continue their illicit activity to fund their regime, selling and moving arms, missile technology, and counterfeit goods, including tobacco and pharmaceuticals, to rogue states and criminal networks. To do so, North Korea runs multiple state-owned businesses, collaborates with Chinese firms that can evade sanctions, and smuggles materials through criminal networks and diplomatic channels. They have used procurement networks as money movers and constructed elaborate smuggling routes and alternate-front businesses to continue illicit activity despite international sanctions. North Korean commercial deals with Chinese companies, driven by mining interests and development projects, have been quite useful in this regard. The movement of goods between North Korea and China has allowed for a network of businesses and brokers to develop and to move money and goods outside the gaze of the international banks.28

  According to a 2009 UN report on the implementation of sanctions against the DPRK,

  while sanctions have clearly not stopped the Democratic People’s Republic of Korea’s nuclear programmes and trade in arms, they have made it more difficult and expensive for the country to pursue these. Nevertheless Member States continue to face numerous difficulties in implementing sanctions. The Panel has discovered loopholes and other vulnerabilities in shipping and transportation practices that the Democratic People’s Republic of Korea and others have exploited, and notes increasing sophistication on the part of the Democratic People’s Republic of Korea bot
h in the establishment of shell and front companies and offshore financial agents, and in the proliferation of affiliates, substitutes and aliases intended to mask already designated entities and individuals.29

  Evasion of international sanctions and financial restrictions—along with illicit trade—can evolve amid legitimate trading relationships. As North Korea’s most significant ally, China acts as a major trading partner and a key source of food, arms, fuel, and other aid for the largely isolated state. It also serves as an outlet for the North Korean regime. China has an interest in ensuring North Korean economic stability. Any economic collapse in North Korea could foment instability along its border and unleash waves of refugees as well as risk foreign intervention by powers such as South Korea or the United States. About half of Chinese foreign aid is provided to North Korea.30 Chinese arms sales to North Korea jumped to $4.32 million in 2009, the same year that China was the only exporter of small arms to North Korea.31 North Korea, mistrusting of China’s interest, must likewise continue to claim self-reliance while also engaging in something close to “normal” external relations.32 As such, the economic relationship between the two countries, based on trade, foreign investment, mining contracts, special economic zones, and other measures, creates a delicate and important balance.

  As such, China is the safety valve for the North Korean regime’s finances, and their economic and commercial relationship is growing. According to the World Bank, China has supplied the majority of North Korea’s food, and almost 90 percent of its energy imports, since the early 1990s.33 Bilateral trade in 2008 reached $2.79 billion (a 41.3 percent increase from 2007) and exemplified the large trade imbalance between the two states. Chinese imports were valued at $2.03 billion, and North Korea’s exports totaled $750 million in coal and iron ore.34

  China is the largest foreign direct investor in North Korea (excluding South Korea’s investment in the Kaesong Industrial Complex just across the border). China supplied $18.4 million of North Korea’s $67 million in 2007 FDI (foreign direct investment), and $41.2 million of the $44 million invested in 2008.35 China has reason to be attracted to North Korea’s resources. North Korea holds mineral deposits potentially worth 140 times the country’s 2008 GDP. Resources include coal, copper, graphite, iron ore, lead, limestone, magnesite, salt, tungsten, and zinc. Chinese and North Korean mining interests have developed a number of joint projects to develop iron ore, copper, gold, and coal to supply China with needed energy and raw materials while giving North Korea a source of committed capital, investments, and economic development. One report noted that “China Tonghua Iron and Steel Group (a state-owned but partially privatized enterprise) has invested 7 billion yuan (approximately $875 million) in developing the DPRK’s Musan Iron Mine, the largest open-cut iron mine in Asia, with verified iron-rich ore reserves reaching seven billion tons.”36 North Korea and China have also committed to developing infrastructure and investment projects in special economic zones (SEZ) to attract foreign investment.37

  Arrangements for evasion are not isolated to commercial deals or operations between two countries. Given the potential for lax enforcement of anti-money-laundering and transparency rules and principles in countries such as China, Malaysia, Russia, Qatar, and Venezuela (as well as the penchant of those countries’ governments to oppose Western policies and interests, especially those that directly concern the United States), these places could serve as international financial outlets for rogue regimes and illicit nonstate actors.

  In fact, the most interesting dimension of the threat comes in the development of alliances of financial rogues—those countries or entities targeted or isolated by the legitimate financial system but who work together to evade sanctions or access the financial system. These arrangements arise both by design and by happenstance, but they are an innovation and result of the intensified financial warfare waged by the United States.

  The attempts to build workarounds to avoid the legitimate financial system have already been seen. Those wary of SWIFT’s motivations after the decision to stop dealing with sanctioned Iranian banks have begun to develop online messaging alternatives among like-minded banks and financial institutions. Those wary of relying on dollar-clearing transactions have begun to establish bilateral or regional trading relationships that rely on local currencies or barter arrangements to bypass the traditional banking system. In addition, less rigorous financial centers and banks have been willing to pick up the business jettisoned by the legitimate banking world—risking the scrutiny of the US Treasury and others.

  There have also been natural alliances between the rogue states targeted for isolation by Western countries and banks—namely Iran, North Korea, Syria, and Belarus—to avoid and skirt international scrutiny. The financial and commercial connections take many forms—often with a sharing of know-how and a shared attempt to avoid scrutiny. These countries use front companies and sympathetic financial actors to operate. On June 30, 2009, the US Treasury Department designated Hong Kong Electronics, a North Korean company, as a proliferator of nuclear weapons and ballistic missiles. This company was based on Kish Island, Iran, and had been transferring millions of dollars connected to the proliferation network from Iran to North Korea.

  Venezuela, which has access to the American banking system and commercial ties to the United States, in particular via oil deals, has proven to be a problematic player among the rogues. Iran has been working with Venezuela to avoid sanctions, with frequent visits between the leaders of the two countries. Flights from Tehran to Damascus to Caracas have not been about meeting the burgeoning tourist traffic from Iran to Venezuela. These flights have symbolically tied these countries and allowed the movement of suspect individuals and goods. The late Venezuelan President Hugo Chávez reportedly sent diesel to Syria and worked with Iran to allow Iranian forces into Latin America.38 Iran and Venezuela have sought to deepen their political, military, and economic relationship through bilateral agreements, foreign investment, and support for anti-American initiatives in global diplomatic forums.39

  These ties are only likely to grow as countries under scrutiny or isolated by the legitimate financial system attempt to do business together outside the gaze of the United States and the strictures of the US dollar.

  The last policy meeting I attended in the Oval Office with President Bush, in November 2008, was not about terrorism, but about the threat of international organized crime. Starting in earnest in 2007, we had been debating for months within the US government how to address the growing reach of organized crime around the world and the threat to US national security that it represented.40

  Mafias and organized crime had always bedeviled law enforcement—from Al Capone to John Gotti. But the organized crime of the twenty-first century was a different breed. The age of globalized trade and investment had given well-funded criminal organizations the ability to access markets and embed in the legitimate commercial world like never before. It also gave them the ability to profit from the full range of illicit trade—from drugs and human trafficking to counterfeit Gucci bags and illegal logging.

  At my request, the intelligence community produced an updated National Intelligence Estimate on the threat to national security posed by transnational organized crime, which was ultimately published in 2010. The United Nations also issued a threat assessment in 2010, finding that “organized crime has diversified, gone global and reached macro-economic proportions: illicit goods are sourced from one continent, trafficked across another, and marketed in a third. Mafias are today truly a transnational problem: a threat to security, especially in poor and conflict-ridden countries. Crime is fuelling corruption, infiltrating business and politics, and hindering development. And it is undermining governance by empowering those who operate outside the law.”41

  The famed and feared Yakuza from Japan, the Brothers’ Circle from the former Soviet republics, La Familia in Mexico, the Asian triads throughout China and Taiwan, and the Sicilian Mafia have all profited and expanded the
ir reach. They aren’t alone. And they are ruthless. These groups are led by vicious businessmen who wield violent control over their extensive networks. They control more than just lines of business or swaths of territory. They often gain control of the governments they infiltrate or influence.

  We realized that the reach and power of these groups was beginning to present risks to national security. Some of this risk had to do with the willingness of organized crime networks to do business with all comers and to deal in anything that could bring a profit. Groups in Central Asia and Russia could gain access to nuclear material—and could make a deal with the highest bidder to sell the radiological material. We had seen smuggling of nuclear material across the Georgia border on a couple of occasions in 2003 and 2006, enough to raise concerns that these groups presented a real threat of proliferating weapons of mass destruction to anyone willing to pay the right price.42

  In addition, many of these groups had developed enough of a diversified capital base to wield control and influence over legitimate commercial ventures and industries. These were not just local mafiosos extorting small businesses. These were organizations running global enterprises, with companies controlling valuable markets, members of legitimate boards of directors, and a small army of lawyers and accountants ready to defend their interests. As stated by Treasury’s David Cohen, “There is a dark side to globalization. . . . As our global economy and financial systems have grown more sophisticated and interdependent, they also have become more vulnerable to criminal organizations and their illicit financial activities.”43

  International organized crime syndicates have expanded the money-laundering operations that have helped fuel their growth and financial reach globally—making them more layered and using a variety of investment vehicles.44 Such groups not only understand how to profit from the international system but also recognize that certain types of investments and influence can shield their activities and leadership from law enforcement and political pressure. Translated into a more aggressive posture, such groups and potential terrorist allies could see opportunities in controlling certain businesses or wielding influence over particular markets and states, distorting the political frameworks in which they operate through corruption, intimidation, and deepening influence.