The story behind the sanctions

Ryan Wallerstein Contributor
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In the face of international opprobrium, Iran and North Korea march relentlessly towards joining the small club of nations capable of deploying and selling nuclear weapons. If allowed to succeed, their new status would irrevocably alter the global balance of power as we know it.

Left suddenly vulnerable to existential threat, countries from Saudi Arabia and Egypt to South Korea and Japan would almost certainly seek their own nuclear deterrents as the US, Russia and China ratcheted up their own nuclear systems. The world could consequently face a nuclear emergency more dangerous than the Cuban Missile Crisis.

Determined to stop Iran and North Korea, the US and multilateral organizations including the EU, UN and IAEA have for years engaged in an impotent diplomatic campaign, as Iran’s mullahs and North Korea’s apparatchiks employ one deceptive negotiation tactic after another, meant only to buy time.

Without an effective diplomatic solution, the US has turned to crippling financial sanctions to choke Iran and North Korea off from the international financial system. Although hugely effective, these sanctions are almost completely unknown outside a tight group of US government and international financial authorities. More importantly, the US has matched its sanctions regime with a game-changing moral suasion campaign that is finally forcing the hands of these rogue regimes in ways that diplomacy and the prospect of war never could.

Since 2004, a small team of US Treasury Department officials from an obscure bureau called the Office of Terrorism and Financial Intelligence (TFI) has been on an international road show to convince critical allies and adversaries alike to cease banking and trade relationships with Iran and North Korea. Against all odds, in a world where the US is allegedly losing credibility and its power to persuade, they have succeeded where traditional diplomatic efforts have fallen on their face. And through a slow bleed, Iran and North Korea have been morphed into international financial pariahs.

The impact of TFI’s work on US foreign policy has been far reaching. On November 8th, according to MSNBC, Secretary of Defense Robert Gates publicly disagreed with Israeli Prime Minister Benjamin Netanyahu’s contention that only a credible threat of military force would convince Iran to abandon its nuclear weapons program. Referring obliquely to TFI, Secretary Gates said, “We are prepared to do what is necessary. But at this point we continue to believe that the political, economic approach that we are taking is in fact having an impact in Iran.” Secretary Gates’ assertion was based not on diplomatic fluff, but on a new financial reality where rogue states are being isolated by innovative new US government powers.

For example, in the past few months alone, dozens of companies have publicly announced that they have curtailed or eliminated their business ties to Iran, including Toyota, Kia, Lukoil, Allianz, Lloyds, Shell, and many others.

In the scheme to turn the world against Iran and North Korea, TFI is led by two good cops — Under Secretary Stuart Levey, a hyper-intelligent Bush administration holdover, and Assistant Secretary David Cohen, who joined TFI with the advent of the Obama administration. The bad cop is played by the cantankerous Deputy Assistant Secretary Danny Glaser, who strikes fear in banks and financial ministries from Tehran to Pyongyang. One of Kim Jong Il’s cronies could probably take Danny in a fistfight, but across a negotiating table, forget about it.

Although TFI’s talking points are simple (doing business with Iran and North Korea is bad for your reputation), their much less subtle message tends to seize one’s attention (if you have a bad reputation, the US and its allies won’t to do business with you, and you will be cut off from virtually all international financial transactions). This works because the vast majority of global financial transactions are US dollar denominated and thereby pass through a bank in New York. If a designated party or state tries to engage in transactions that TFI determines are illicit, they can freeze the accounts indefinitely.

This past summer, TFI’s leadership crisscrossed the globe to persuade the international financial community to stop financial dealings with Iran and North Korea. Danny travelled to South Korea, Japan and China to discuss strangling North Korea’s financial lifeline, including Kim Jong Il’s counterfeiting US dollars (an internationally recognized act of war), drug dealing and illicit arms trafficking. Stuart jetted to the UAE to discuss how the Emiratis could help push Iran closer to economic oblivion.

A Treasury Department press release after the trip heralded TFI’s mission. “Treasury officials briefed regulators and members of the banking sector on the financial provisions of the Comprehensive Iran Sanctions and Divestment Act (CISADA) and outlined the potential for foreign financial institutions continuing to do business with individuals or entities designated by the United States to lose access to the U.S. financial system.”

An office that has become so important to US national security so quickly, TFI’s genesis is something out of spy novel. TFI and its predecessor, the Executive Office of Terrorist Financing and Financial Crime (EOTFFC), were the brainchild of then 33-year-old Juan Carlos Zarate, a precocious Justice Department lawyer who, among other things, tracked the terrorists who attacked the USS Cole in October 2000.

After initial successes in the terrorist financing war, Bush administration officials started taking notice, and in mid-2004, Congress approved a modest budget for the new and more powerful TFI, confirming Juan as its first assistant secretary. Such a rise in the US government national security apparatus is almost unheard of.

TFI derives its power from esoteric sections in Title III of the Patriot Act and an obscure Bush administration directive, Executive Order 13224, to attack terrorist financiers, public and private sector facilitators of financial crime, and WMD proliferators where they are most vulnerable. A deep dive into these groundbreaking financial powers can be found in Juan’s 2009 Washington Quarterly piece — “Unleashing the Financial Furies.”

In the beginning, Juan relied on an unlikely melting pot of fewer than fifteen Treasury Department officials, including Danny Glaser, Chip Poncy and Jeff Ross. Chip, Juan’s uber-gregarious Harvard roommate, served as Juan’s director of strategic policy, working eighteen-hour days building global counter-terrorist financing and anti-money laundering benchmarks with allies and adversaries around the world. Jeff, with his hypnotizing southern drawl, advised Juan on the myriad law enforcement issues related to TFI’s charge.

Since its inception six years ago, TFI’s effect on Iran and North Korea, not to mention terrorists and their supporters, has been devastating, as more and more countries cut them off from the international financial system. In September 2010, former Iranian president Akbar Hashemi Rafsanjani publicly warned Iran’s current leadership “to take the sanctions seriously and not as a joke. …We have never had such intensified sanctions and they are getting more intensified every day. Whenever we find a loophole, they [the Western powers] block it.”

It’s tougher to get a quote from the hermit kingdom, but Canada’s Examiner recently reported on its country’s October 2010 imposition of sanctions against North Korea, which speaks volumes about the sanctions’ bite when magnified by countless other countries and their private sectors. “The new sanctions rolled out against North Korea will reduce trade and investment in the country. More specifically, the sanctions ban trade and financial transactions with North Korea and prevent individuals [from] provid[ing] fresh investment in the nation. Technology transfers are also prohibited.”

One of the strangest results of TFI’s actions is that Russia and China, who look for virtually any chance to check US power at the UN, have largely supported America’s sanctions push against Iran and North Korea. This is hardly because they have seen the light and share America’s determination to punish the two rogue states, but because they too want to avoid or reverse TFI designations that punish them for facilitating financial crimes or weapons proliferation. It’s a shameless quid pro quo.

In May 2010, Reuters reported that “Russia expects the United States to lift bans on trade with four Russian companies if Moscow backs new sanctions against Iran, a senior Kremlin official said…”

With Iran and North Korea bloodied but not yet beaten, TFI’s influence in the US government’s national security community has continued to flourish under President Obama, who faces the real prospect of Iran and North Korea developing actionable nuclear weapons during his administration. With TFI’s quiver of targeted financial sanctions and moral suasion, he is continuing President Bush’s battle to compel enemies that previously wouldn’t budge. Faced with the prospect of insolvency, they have little choice but to negotiate. And without a shot fired.

Ryan Wallerstein served as Special Assistant to the Assistant Secretary in the U.S. Treasury Department’s Office of Terrorism and Financial Intelligence from 2004-2006. He holds a master’s degree in international security policy from Columbia University’s School of International and Public Affairs and a bachelor’s degree in East Asian studies from The George Washington University’s Elliott School of International Affairs.