America has been engaging its enemies not only in military combat, but in a new form of economic warfare since the early 2000s, according to Juan Zarate who spoke to the American Bar Association’s Committee on Law and National Security. Zarate, a senior adviser at the Center for Strategic and International Studies (CSIS) and former deputy assistant to the president, recently published Treasury’s War: The Unleashing of a New Era of Financial Warfare detailing the United States’ use of economic warfare to subdue its enemies since 9-11.

“And in the post 9-11 environment, what you have is wholesale revolution driven by the need to go after al Qaeda to find its sources of funding, to disrupt its plots and activities, and to deter long-term funding…the tools that had existed in the pre-9-11 era were put on steroids and new tools put in place.”

The tools Zarate is referring to originated in Executive Order 13224 signed by President George W. Bush on September 24, 2001, as the first official action of the federal government against al Qaeda after the events of September 11. The order declared a “national emergency” and granted numerous powers to the Secretary of Treasury and the Secretary of State to go after the finances of terrorist groups in ways never before used, including expanding the scope of potential targets for executive order action from terrorists to the financial facilitators and instruments of the financial infrastructure associated with them.

It also gave the Secretary of Treasury and the Secretary of State the power to “cooperate and coordinate with other countries” through technical assistance and through bilateral and multilateral agreements to achieve the objectives of the order. If other nation-states did not cooperate, the order also gave them the power to prevent and suppress “acts of terrorism, the denial of financing and financial services to terrorists and terrorist organizations, and the sharing of intelligence about funding activities in support of terrorism.”

Furthermore, the order expressly listed the names of people and organizations that were immediately impacted by the executive order, including al Qaeda/Islamic Army, Osama bin Laden, and 26 other individuals and organizations designated as terrorist threats to the United States in 2001, giving “a political muscle and momentum to the Secretary of the Treasury” to use its new powers aggressively, Zarate said.

Further cementing those powers is Title 3 of the Patriot Act, which expanded and broadened the anti-money laundering system and created “additional obligations on banks and non-bank financial institutions to know your customer, to engage in customer due diligence” and created new powers, Zarate explained. One of those new powers was the ability of the Secretary of the Treasury to designate primary money laundering concerns around the world. “Basically, to put the scarlet letter on financial institutions, jurisdictions, or classes of transactions, in a way that would exclude those actors, not just from the U.S. financial system, but ultimately internationally,” Zarate said.

Also known as the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, Title 3 required the financial service industry to report potential money laundering transactions to the authorities, to identify ownership of transactions and those receiving the transaction, the source of the funds within an account at the institution, information sharing guidelines between nation-states about money laundering and suspicious activity, and created a “new form of financial diplomacy,” Zarate emphasized, which included not just the global anti-money laundering system, the incorporation of central banks, finance ministries, and banks and institutions themselves into the discussion as to how handle the problem of illicit capital moving around the world.

“It was in that context, in that diplomacy, that you had a realization that the private sector itself was not just an ancillary player, not just a player or a sector to be regulated, but actually a protagonist in the ability to guard the gates of the financial system because at the heart of these changes was a realization that not only could we use these powers to go after al Qaeda, but that any enemy of the United States that wanted global reach and impact…had to have access to the financial system,” he said. “They need the reach of the global financial and commercial systems that allow them to be not just thugs in a locality, but actual threats on a global basis.” 

These new tools weren’t fully realized by the administration, Zarate said, until they were brought into play with North Korea in 2005. The United States has had sanctions in place against North Korea, limiting trade with the country since the Korean War. Despite the sanctions, however, North Korea wasn’t isolated financially from the rest of the world because it was doing business through the Banco Delta Asia in Macau and that bank was doing business with other banks, which was concerning for the United States as North Korea engages in money laundering, counterfeiting, and drug trafficking.

To attempt to curb the bank’s business and North Korea’s actions, the United States engaged in six party talk negotiations from 2003 to 2005 with the country, but was unsuccessful. In response, the Treasury Department issued a proposed rule 3.11, similar to an indictment on Banco Delta Asia, for lack of money laundering controls. This “not only blacklisted the bank and shut it out of the U.S. financial system, and not only shut it out of the international financially system, but it indicted the North Koreans and the underlying activity as well,” Zarate explained. The proposed rule caused a “ripple effect” in the private sector where no bank wanted to do business with Banco Delta Asia and no bank, including the Bank of China, wanted to be caught with North Korean accounts, transactions, or activities because of the fear that the United States would propose a 3.11 rule on them. This effectively shut the North Koreans out of the global financial system and they were forced to reopen talks with Washington three weeks later.

The new tools of the Secretary of the Treasury have helped the United States go after terrorists financial systems enormously, allowing the Treasury Department to declare almost any bank in the world a “primary money laundering concern,” casting suspicion on the financial activities of the bank to the point where the global market will not conduct business with it anymore.

This designation greatly hindered al Qaeda’s efforts to raise funds for its activities to the point that it was considering kidnapping individuals and holding them for ransom, skipping financial institutions entirely, Zarate said. It also “gave birth” to the conscription campaign against Iran “With the notion that we could slowly but surely isolate Iran because of the illicit conduct it was engaged in; we could unplug its banks from the financial system, and at the end of the day, affect Iran in a much more dramatic and strategic way then we had over the past three decades with traditional trade sanctions,” Zarate says. The United States was able to do this because of concerns that the Revolutionary Guard was taking over too much of the financial market and that funds in the Iranian system were going towards its nuclear program and terrorist activities. Zarate theorizes that because of this, the Iranians have called “first and foremost” in their negotiations with the United States to have re-entry into the global financial system and gain access to short-term and long-term facilities the banking commercial world provides.

However, one thing that wasn’t thoroughly thought out before the financial sanctions went into place in North Korea and Iran was how the United States removes them. “These aren’t on-off switch sanctions. These aren’t the trade sanctions of old where we can now allow HP printers to be shipped in or Wrigley chewing gum to be sold on the streets of Tehran,” Zarate explained. “This is about reputation. It’s about having unplugged (Iran) from the system and fundamentally why the banks and the insurance companies and the transport companies stopped doing business with Iran,” he said, explaining that until the suspicion about Iran’s financial activity is removed, it will have limited business with the outside world.

In his presentation to the American Bar Association, Zarate also raised concern that by cutting out institutions and nations that the United States believes are conducting illicit activities, it could be opening the door to a less savory banker. America could potentially reach a “tipping point” where credible institutions with the ability to raise the bar for the financial sector choose not to engage with risky clients. 

“Who’s going to do business in risky jurisdictions that are opening up for business, like Burma?” Zarate asked. “Is that going to be left to the Russian or Chinese or Belarus banks that may not worry about compliance and may not be willing to file suspicious activity reports and may not really care if their bank’s being used by kleptocrats or terrorists or organized criminals?”

Instead, Zarate proposed that the government needs greater understanding of how this type of economic warfare can have negative impacts on the United States and global financial network. “There is a fundamental question long term as to whether or not we do damage to the overall sense of inclusion of the financial system by being overly aggressive in the exclusion strategy."