Fighting Terrorism with Financial Artillery

Former Deputy National Security Advisor for Combating Terrorism Juan Zarate discussed his new book, Treasury’s War: The Unleashing of a New Era of Financial Warfare

Boston University School of Law welcomed Hon. Juan Zarate on Monday, March 2, 2015, to discuss his book, Treasury’s War: The Unleashing of a New Era of Financial Warfare. Zarate, a senior adviser at the Center for Strategic and International Studies (CSIS), the senior national security analyst for CBS News, and a visiting lecturer at Harvard Law School, explained how financial warfare grew out of the post-Sept. 11, 2001, efforts to confront terrorism.

BU Law Associate Dean for Student Affairs Geraldine Muir introduced Zarate, who previously served as the deputy assistant to the president and deputy national security advisor for combating terrorism, and as the first assistant secretary of the Treasury Department for terrorist financing and financial crimes. Muir praised Zarate’s narrative inTreasury’s War for how it “talked about how war has changed since 9/11,” especially President George W. Bush’s Executive Order 13224, which authorized Treasury to target financial backers of terrorism.

“This book details different success, opportunities and challenges that arose” out of that order, Muir said.

Zarate told students, faculty, and staff in attendance that his lecture would address the “convergence of financial power, economic influence, and national security,” and how that impacts “the law and lawyers.”

This is especially important for law students, he said, because it’s a “field of law that’s still in formation” and in the news practically every day, even 13 years later. For example debates around Iran’s nuclear program “revolve around the financial restriction program”—assessing its effectiveness, and how to unwind it. Relations with Russia and the Islamic State, among others, are also are shaped by these financial tools.

“It’s a real question of if we can restrict the resources that these organizations have,” Zarate said. Central to that debate is whether we can use financial power and influence to shape subsequent interactions, he said.

“We often think in binary terms, in terms of policy choices,” he said. Do we use “carrots and sticks” or “boots on the ground” Or do we look for another option?

“What lies in between is this open area of economic influence” and power, Zarate said.

He cited North Korea, Al Qaeda, and Russia as examples of effective use of financial pressure by the United States. Even Vladimir Putin admitted, Zarate said, that these measures put “real and dramatic impact on the ruble, on Russian growth, and on the Russian economy.”

A history of economic warfare

Stepping back, Zarate said that coercive diplomacy or economic warfare is not new—since the Peloponnesian War, factions have blocked ports, taken over shipping lanes, and otherwise affected each other’s economies. Fast forward a few hundred years, and in the founding of the League of Nations, economic measures were seen as “an alternative to war.”

However, “economic sanctions without question,” Zarate cautioned, can “bring us to the brink of war.” For instance, after the bombing of Pearl Harbor, he said, a Japanese official said his country was “forced to attack because of restrictions on their economy.”

Post-9/11, something different happened: “What emerged … was this new financial ecosystem,” he said. We saw “the use of all elements of national power” to prevent “another attack on the scale of 9/11,” Zarate said, and undermine terror groups’ “ability to raise and move money around the world.”

Financial intelligence, as a field, emerged “as a central way of understanding not just threats” but also opportunities around the world, he said. It helped us “to understand their relationships, but also to understand where they had vulnerabilities,” Zarate said.

Treasury began tracking suspected “terrorist transactions” to help identify where suspect individuals lived, he said. “Numerous plots … were pieced together because of that kind of data,” Zarate said. “All of that now is critical to understanding relationships, vulnerabilities, and threats.”

The executive order authorizing this tracking was the “cornerstone” of a shift at the Treasury, Zarate said, which expanded the tools used today to “lock individuals and entities out of the United States’ system.” Broadened tools led to broadened targets, he said. The Treasury looked, he said, “not just to the terrorists of the world … but also to the financial entities that supported these groups.”

Thus began the “opening of an aperture, a new set of tools targeted at a whole new set of actors,” who could be implicated “in terrorist support or terrorist financing,” Zarate said.

The sweeping review “also included new sectors of the financial system,” he said. “It’s not just banks that have to worry about these issues,” but also money systems like Western Union, insurance companies, and “brokers in precious metals and stones, even pawn brokers.”

The Secretary of the Treasury gained the authority to designate entities “as primary money laundering concerns,” effectively saying, “You cannot do business with them, or if you do business with them,” you have to be very careful and do due diligence, Zarate said. These actions had ripple effects into other countries, which have had to pass new regulations to comply with US standards.

A new form of financial diplomacy

“In this period,” Zarate said, “you also had a deepened and more sensitive, and frankly more acute, enforcement environment,” which put pressure on banks to make sure they were doing what was required under the law. The private sector had to step up to comply with Treasury rules.

The regulatory environment and investigations were “beginning to affect the bottom line risk calculus of these institutions,” Zarate said.

“You had a new form of financial diplomacy emerge” at the same time, he said, with new actors arising internationally, not just governments but also banks.

In addition to governments, “it was often more important … for these conversations to be had with the private sector,” Zarate said, because their decisions “had the impact of isolating rogue financial behavior … at its start.”

Ultimately, a new financial ecosystem was born, he said, and “there was an opportunity for a different strategy.” Sanctions “had always been with us,” but they had been aligned with diplomatic measures, he said. The new opportunity that arose post-9/11 “was subtle, but it was important,” Zarate said.

“Any of America’s enemies … that want to have existential impact on US security interests …. need to move money,” he said. The United States realized that “if you could unplug actors from the global financial order … you could then begin to strategically isolate the rogues and the enemies that you were trying to impact,” Zarate said.

This new approach focused on the “intersection between” our financial system and our security system, he said, and targeted underlying activities that were “illegal … or, per se, suspect.”

Actions were taken, not necessarily because we didn’t like a country, but because we were targeting an activity that was itself illicit, he said. “This was a more conduct-based approach to thinking about these tools,” Zarate said.

The shift helped us get around the “orthodoxies that have calcified around the use of sanctions,” he said. Those “orthodoxies,” he said, let Cuba “blame the American boogeyman” and did not keep Iraq’s Saddam Hussein from benefitting off the American oil for food program.”

During a difficult period for the Treasury, the financial downturn, it sought a way to demonstrate the department’s reach and abilities, as well as the importance of the dollar internationally. “Can we use that as a way of driving and building leverage?” Zarate said the Treasury asked.

The “bad bank” initiative

From there came the “bad bank initiative,” Zarate said, which identified banks “that were doing all sorts of illicit things, wittingly” and used the Treasury’s newfound tools to identify these banks as money launderers, risks to our financial system and to national security.

For example, it looked at North Korea. In addition to their politics, he said, “They’re also a criminal state.” North Korea, he said, engages in drug trafficking, cigarette counterfeiting and smuggling, and proliferation, and “they’re the best counterfeiters of $100 bills in the world.”

“To engage in proliferation they need lines of credit … to operate what is in essence a conglomerate,” Zarate said. North Korea had ties to banks around the world “precisely for these illicit activities,” he said. Treasury targeted a bank in Macau tied to a casino in September 2005. When it published notice of proposed rulemaking in 2005, he said, “what happened was a shock heard around the world.”

It was the 21st century version of a targeted strike, he said.

“For any bank that wants to be a player, … it has to have access to dollars. … That was gone” for the targeted bank, Zarate said. “The bank, in essence, imploded.”

Within a short period, the effects were clear. “Slowly but surely, North Korean bank accounts were closed” around the world, he said, and “the North Koreans were blocked out of the system.” For the first time in modern history, he said, North Korea called the US first. Every conversation for years afterward, Zarate said, “began and ended with, ‘We want our money back.’”

After years of less effective measures, he said, the North Koreans admitted, “You finally found a way to hurt us.”

Modern financial warfare

This first move began a strategy of unplugging others economically, Zarate said; now, these strategies are “also being used on organized crime groups that are seen as internationally significant.”

Today, “we’re really just in the first chapter of a new era of financial warfare,” he said.

However, Zarate cautioned that “we tend to overuse and over-rely on these measures now.” Further, “Congress sees this as something they can do—‘we don’t want to go to war, but we want something more than just diplomacy,’” he said. He also wondered whether the Treasury has “overburdened the private sector” and whether “tools of aggressive financial exclusion” may affect whether people in immigrant communities can send money back home.

“Are we affecting the attractiveness of American capital markets?” Zarate asked, or attracting people to currencies other than the dollar? “Are we taking into account the connections between criminal networks, drug trafficking networks, and terrorist groups?”

Internationally, he asked, “are we taking into account that others are learning from our strategies?”

Zarate concluded with a host of other unresolved questions: “Are we deputizing the private sector too much? … How do we think about financial inclusion and exclusion? … What’s the role of new technologies, like crypto-currencies, in this space? … How do we deal with this new period of financial and economic warfare?”

For the answers to Zarate’s questions, look to his new financial ecosystem.