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  Finally, these are groups that could influence governments, but given their connections to various regimes, they can also be co-opted and used by governments and leaders or their allies and sympathizers. The lineage of some of the organized crime members—for example, Russian organized crime’s links to the old KGB, and Los Zetas’ with former Mexican special operations troops—gives them unique insights, relationships, and influence within their home countries. The organizations—with their deep pockets, logistics networks, and ability to access specialized personnel, including computer hackers—give countries that are willing to deal with such groups an upper hand in the global marketplace. This arrangement allows for a group of nonstate networks that, if enlisted, can act as a proxy against the state’s enemies.

  We had focused on the nexus between organized criminal activity and terrorism for years. The arrests of the international arms brokers Manzar al-Kassar and Viktor Bout, along with the arrest of a series of Taliban narco-traffickers, demonstrated our willingness to use the reach of American law to prosecute international scofflaws who served as an operational nexus for terrorist and rogue networks. In 2008, US Attorney General Michael Mukasey announced a refocus on the new threats from international organized crime, noting networks’ infiltration of strategic energy and minerals markets and exploitation of US and international financial systems. “Some of the most significant international organized criminals,” Mukasey warned, “are also infiltrating our own strategic industries, and those of our allies, are providing logistical support to terrorist organizations and foreign intelligence agencies, and are capable of creating havoc in our economic infrastructure.” He further noted that modern organized crime touched all elements of the economy and presented a host of threats, including “manipulation of securities markets; corrupting public officials globally; and using violence as a basis for power.” He added, “These are the hallmarks of international organized crime in the 21st century.”45

  The November 2008 meeting in the Oval Office was about using the president’s wartime economic powers to freeze the assets of organized crime figures around the world. Deputy Attorney General Mark Filip had been a champion of using these powers and Treasury tools to go after organized crime, and I was trying to do everything I could to help him. Ironically, the Treasury Department was less enamored with the idea of the president signing a new executive order targeting organized crime’s financial networks. We had used these powers, delegated to the secretaries of treasury and state, for years against drug traffickers, terrorists, proliferators, and those engaged in corruption and human rights abuses. Should we now expand the power and program to target known organized crime groups and their business networks? In the Oval Office with the president was Attorney General Mukasey, Director of National Intelligence Mike McConnell, Secretary of the Treasury Paulson, Secretary of State Rice, National Security Adviser Hadley, Deputy National Security Adviser for International Economic Affairs Dan Price, and me.

  The discussion was in-depth and respectful, with the attorney general arguing for the need to use these new financial tools to attack the financial infrastructure of organized crime groups. In many ways, as Filip and I had been arguing for weeks, this was the ideal tool to use against criminal organizations, which thrived on access to the international financial and commercial systems. We had seen the dramatic effect this isolation could have on drug cartels, which needed to launder their funds and operate businesses to gain the reach and impunity to operate at will. The tools had worked against terrorists and rogue regimes that were looking to access the financial system for profit and political goals. As these criminal groups grow more interconnected in ways that transcend national boundaries, such networks are gaining influence in strategically vital markets that could impact the accessibility to and stability of these markets. In addition, the ability of such groups to provide their infrastructure and expertise to others (including terrorists)—whether access to fraudulent travel documents or nuclear material—raises the specter of alliances of convenience and profit aligned dangerously against the United States.46

  The reach of the Russia-based organized crime network of Semion Mogilevich is a stark example of this point. In the late 1990s, Mogilevich gained control of a set of companies, including YBM Magnex in Philadelphia, that produced industrial magnets in Hungary and engaged in extensive securities fraud and money laundering. As a senior administration official told the New York Times, this represented the “first public demonstration of the manipulation and infiltration of world financial markets by Russian organized crime.”47 In a 2005 speech, FBI Director Mueller described Mogilevich’s network as “engaged in drug and weapons trafficking, prostitution, and money laundering, and organized stock fraud in the United States and Canada in which investors lost over 150 million dollars,” all from his headquarters in Budapest.48

  These were organizations that had begun to embed themselves in the global marketplace, even in the United States. The same reason the financial tools would be so important to use against such networks made the prospect of a new executive order targeting organized crime potentially problematic. Those opposing issuing the executive order noted that it would be very hard to confine the scope of the order, and legitimate businesses could unknowingly and inadvertently get caught in the wartime executive powers. The Treasury Department was also worried that this new executive order would add uncertainty to the marketplace at the height of the growing financial crisis, while dissuading investment in the United States.

  President Bush recognized the conundrum immediately—we needed to attack the financial underpinnings of the creeping reach of international organized crime, but we needed to do it carefully and thoughtfully. He also astutely realized that we needed a broader, more strategic approach to the problem. The president turned to us and directed that we draft a broader strategy—into which the executive order would fit—instead of handling the issue piecemeal. He was also worried about publishing anything this important in the tail end of the administration, potentially handcuffing the new Obama administration. He directed us to draft the skeletal strategy and hand it over to the Obama team. That’s what we did over the holidays. When I met with John Brennan, who would assume the role of both deputy national security adviser and homeland security adviser for President Obama, I handed over the draft strategy in a red folder. Brennan took the folder and the issue seriously.

  On July 25, 2011, the Obama administration issued its version of the transnational organized crime (TOC) strategy.49 President Obama noted: “This Strategy is organized around a single, unifying principle: to build, balance, and integrate the tools of American power to combat transnational organized crime and related threats to our national security—and to urge our partners to do the same. . . . While this Strategy is intended to assist the United States Government in combating transnational crime, it also serves as an invitation for enhanced international cooperation.”50 The strategy set out to break the economic power of transnational criminal networks and protect strategic markets and the US financial system from organized crime penetration and abuse. The principal goal was to defeat transnational criminal networks that posed the greatest threat to national security by targeting their infrastructures, depriving them of their enabling means, and preventing the criminal facilitation of terrorist activities.

  At the same time, President Obama signed the executive order giving the secretary of the treasury the power to freeze the assets of organized crime groups and their financial facilitation networks. The order established a new sanctions program to block the property of significant transnational criminal organizations that threatened the national security, foreign policy, or economy of the United States. It also named the first groups to be subject to the financial isolation and scrutiny of this program: the Brothers’ Circle from Eurasia, the Yakuza in Japan, the Camorra from Italy, and Los Zetas, the ruthless Mexican drug cartel. These groups are engaged in everything from drug trafficking and human exploitation to pirating
commercial goods, enterprises worth billions of dollars in proceeds and business. The global and business diversity of these groups underscored the importance of using this financial tool against their economic interests.

  The administration also proposed new legislative measures, including one to increase the visibility of financial assets and transactions to reveal beneficial ownership. This proposal, long championed by Chip Poncy at the Treasury Department, was in response to the problem of hidden criminal assets vested in the United States, without an ability to know who or what was invested in the country. Criminal assets could be housed or layered in front companies based in the United States, and US banks and regulators would be blind to the origins of the funds or the real owners of the assets. This financial regulatory loophole made the United States a vulnerable haven for smart criminals who knew how to hide their operations.

  The globalization of trade and finance has altered the financial battlespace. The United States has used its global financial influence and power to isolate rogue actors. At the same time, those impacted by US financial pressure are adapting—using globalization and new technologies to their advantage. They evade pressure, and they profit from illicit trade and the opportunities to collaborate in commercial and financial marriages of convenience. These networks not only seek profit, however, but are attempting to circumvent and undermine US power and influence. This is how they can stay in business and make money. This is also what makes them a threat.

  The use of these tools is not now confined to the United States. State and nonstate actors have learned from the financial campaigns we have unleashed over the past decade. They have seen how to use financial influence for national advantage, and they are beginning to use the same tools and techniques to extend their own influence. But these other actors in the international system may not be as restrained as the United States in protecting the international financial system. In fact, some of America’s enemies and emerging competitors may have the United States and its vulnerabilities directly in their financial crosshairs.

  16

  THE COMING FINANCIAL WARS

  In the summer of 2008, at the height of the financial crisis, Russian officials approached their Chinese counterparts with an intriguing proposal. The countries could band together to sell their holdings in US housing finance giants Fannie Mae and Freddie Mac. These government-sponsored enterprises (GSEs) owned or guaranteed over $5 trillion in residential mortgages and mortgage-backed securities, approximately 50 percent of the total mortgage market. The GSEs had accumulated approximately $1.7 trillion in debt, hundreds of billions of which were owned by the Chinese government alone. With the United States still reeling from the financial crisis already underway, a coordinated Russian-Chinese sale of GSE holdings could force the US government to use its emergency authorities and spend massive sums to keep Fannie Mae and Freddie Mac alive. Such a move would likely exacerbate the global economic crisis, causing an even deeper crisis in confidence in the US financial system and potentially a run on the dollar.1

  Secretary of the Treasury Hank Paulson was informed of the proposal after the Chinese refused to go along with the plan. It was a harbinger of the increasing willingness of countries to use financial weapons to strike the United States. This and other uses of economic power and influence offer a glimpse into a new age of geo-economic competition emerging in the wake of the Great Recession of 2008.

  The 2008 financial crisis was a major blow to American power. It caused a fundamental loss of confidence in the American financial system and capital model, shaking the foundations and perceptions of American economic power. In its wake, many countries and investors questioned whether dependence on New York and the US dollar should dictate their well-being and national fortunes. This sense of America’s lost economic predominance has grown as the G7 has quickly given way to the G20 as the club of key economic actors. Meanwhile, countries such as China, Qatar, and Turkey have survived the crisis relatively well, invested widely, and prospered, while the US economy continues to limp along. The 2012 credit downgrade of the United States by Standard & Poor’s is yet another signal that there was a loss of confidence in America’s ability to address its most important fiscal challenges. The perception of economic predominance has been shattered.

  This loss of perceived power has now been met with an increased willingness to use economic influence for national interests. We have entered a new era of financial influence where financial and economic tools have taken pride of place as instruments of national security. The conflicts of this age are likely to be fought with markets, not just militaries, and in boardrooms, not just battlefields. Geopolitics is now a game best played with financial and commercial weapons.

  The new geo-economic game may be more efficient and subtle than past geopolitical competitions, but it is no less ruthless and destructive. Major and minor state powers, along with super-empowered individuals and networks, can harness economic interdependence to increase their global power status at the expense of their geopolitical rivals. So far, the United States has been at the cutting edge of this competition. But the fact that it was first to develop innovative and powerful financial tools to pursue its interests is no guarantee of continued success. Indeed, there is the potential for greater US vulnerability and decreased financial and economic leverage. Although the United States has had a near monopoly on the use of targeted financial pressure over the past ten years, this edge is likely to erode, leaving the United States both more vulnerable to external financial pressure and less able to use financial suasion as a lever of foreign policy.

  The irony of the Russian proposal was that it echoed the methods the United States had been using against rogues. In the past ten years, the United States had demonstrated to the world—and to its competitors, in particular—that it was willing to leverage economic and market powers to influence international security. China and other countries have resented the use of this influence to affect their economic interests and influence. The powerful financial tools that the US Treasury has honed over this decade are now proliferating, particularly to major competitors. They have been and will continue to be used against the United States and its allies in the future, not only because of an increased foreign understanding of the means of financial pressure, but also because of a decreased reliance on the dollar and on American banks and the US financial system.

  Importantly, the states and nonstate actors that the United States has targeted are inventing new means of avoiding sanctions. The United States has little influence over the separate financial and monetary systems that are emerging, particularly in the cyber-realm. Further, there are increasing efforts, including by some US allies, to limit the United States’ unilateral leverage in the financial sphere.

  These trends are weakening the ability of the United States to use its financial power to promote US national security interests. The evolving geo-economic environment has raised the stakes of international competition and new forms of financial warfare. The coming financial wars will reveal complicated and novel risks—both macrolevel challenges and microlevel threats—that the United States is not prepared to address. Nondemocratic state competitors capable of exercising full and complete control of their global capital activity and leveraging nonstate proxies have recognized the changing landscape and have adjusted their pursuit of national security accordingly. In order to catch up and regain its relative power position, the United States must redefine national security along economic lines and rebuild its foreign policy toolkit accordingly.

  Glimmers of Financial War

  As allies and enemies continue to question the shelf life of US economic predominance and the utility of an American-led capitalist system, challenger states with alternative political models and values are aggressively capitalizing on America’s struggles. This moment has accelerated the challenges to US economic power, with countries like China becoming less willing to take a backseat to American financial dictates. The use of financial pow
er in the twenty-first century is no longer just an American endeavor.

  In particular, China’s brand of state authoritarian capitalism appears to be an increasingly attractive alternative. Chinese strategists view economic influence as central to Chinese national security. Consequently, Chinese companies and state-owned enterprises (SOEs) benefit from state policies that subsidize their work and access to markets abroad. With this model, China has become the second largest economy, the world’s leader in greenhouse gas emissions, and the direct challenger to American economic and political hegemony.2

  China’s hold on major resources is a central part of its power projection. China already produces 93 percent of the world’s rare-earth minerals (and 99 percent of some of the most prized of such minerals), which are used in manufacturing numerous important products, including hybrid engines and solar-panel glass. As China solidifies and strengthens this near-monopoly market position, the incentives to use resource dominance as a political weapon will increase. China has sent signals that it is willing to flex its economic muscles for direct and relatively minor national security interests.3 In the wake of Japan’s 2010 seizure of a Chinese shipping trawler captain, and in light of increasing tensions over China’s claim of “indisputable sovereignty” over the South China Sea, for example, China banned the export of certain rare-earth minerals to Japan.4