"Treasury's War: The Unleashing of a New Era of Financial Warfare," by Juan Zarate

Published by PublicAffairs (2013)

Reviewed by Alan Rozenshtein

This is a boom time in new ways to wage war. Drones and cyber get most of the attention, but if you’re committed to bringing a country to its knees, cut it off from international financial markets. This reality, along with dissatisfaction with traditional sanctions, led U.S. policymakers to develop a new way to bring economic power to bear in the service of foreign policy and national security after 9/11: using the private sector’s own aversion to financial crime to isolate bad actors from global financial markets. In Treasury's War: The Unleashing of a New Era of Financial Warfare---a combination of memoir and history of the Treasury Department’s national-security activities in the first decade after 9/11---Juan Zarate describes the development and initial implementation of this new “brand of financial warfare.” Zarate’s account raises questions about the limits of these tactics, and it remains an open question whether they will ever fulfill his vision to become a central component in America’s national-security and foreign-policy toolkit.

Zarate (currently at the Center for Strategic and International Studies) joined Treasury only a few weeks before 9/11. Before leaving for the White House in 2005, he served as Treasury’s first-ever assistant secretary for terrorist financing and financial crimes. Impressively turning what could have been a mind-numbing account of bureaucratic reshuffling into high drama, Zarate describes Treasury’s post-9/11 transformation. Driven by a mandate to combat terrorist financing, stung by the loss of many of Treasury’s traditional law-enforcement functions to the newly created Department of Homeland Security, and wanting to stay relevant at a time when national security dominated agendas throughout Washington, Zarate and his colleagues helped reinvent Treasury as the federal government’s primary instrument for projecting financial power abroad for national-security purposes.

One element of this transformation was informational: tracking the financial activities of America’s enemies. The most famous example is the controversial Terrorist Finance Tracking Program (TFTP), by which Treasury obtained information on terrorist financial flows from the international-financial-transactions clearinghouse known as SWIFT. The TFTP remains arguably Treasury’s biggest (at least publicly known) contribution to American counterterrorism. Zarate is proud of the program—not only for its results, but also for how it was regulated. He describes in painstaking detail the negotiations between Treasury and SWIFT officials that led to the TFTP’s creation as well as the robust oversight system Treasury put in place to assuage SWIFT officials’ concerns over American snooping on international financial transactions.

The TFTP remained secret until its existence was controversially disclosed by the New York Times in 2006, despite warnings from the U.S. government that disclosure would cause serious damage to American national security. Zarate excoriates both the Times and its then-editor Bill Keller for the disclosure, whom he accuses of being motivated primarily by political opposition to the Bush administration. Here, Zarate’s faith in the TFTP’s safeguards and anger over its exposure leads him to potentially understate the legitimate concerns over the TFTP’s scope and its incompatibility with certain countries’ data-privacy laws, especially in Europe. Ultimately, Zarate’s account of how the TFTP attempted to balance national-security imperatives against privacy interests is unlikely to convince civil libertarians already skeptical of American surveillance, especially in today’s polarized environment. Nevertheless, the TFTP remains operationally useful and robustly regulated. It’s a safe bet that the government uses it as a model for other surveillance programs, and so Zarate’s description of the TFTP’s development and use is a valuable one, including for those who might object to it or to other surveillance programs.

The other dimension to Treasury’s post-9/11 brief was offensive: excluding foreign bad actors, especially unfriendly nations, from the global financial system. Arguably the most important of “Treasury’s wars”—and the heart of the book—were its campaigns against North Korean and Iranian banks in the international financial system. Treasury’s activities were integral contributions to the U.S. government’s offensives against those countries’ nuclear ambitions. Put simply, it’s hard for a country to buy or sell things across national borders if it doesn’t have access to the global payment systems that intermediate payments for goods and services across borders and in different currencies.

Given the intricacies of the global financial system, the details of how this relatively straightforward idea plays out in practice are intimidatingly complex. For that reason, the biggest contribution of Zarate’s book is its clear, granular description of how this new tactic of financial isolation has worked in practice and how it has evolved over time. Whereas traditional sanctions required Treasury to identify and freeze particular assets or restrict certain categories of imports and exports, financial exclusion took advantage of the private financial system’s aversion to dealing with those who were publicly known as engaging in financial crime or supporting abhorrent activities like international terrorism, drug trafficking, or nuclear proliferation. The reputational costs of facilitating criminal behavior or being known as the Kim-family banker were such that, once Treasury’s identified a financial entity as a “money laundering concern” under Section 311 of the PATRIOT Act (31 U.S.C. § 5318A)—often using information from the SWIFT network—that entity would quickly find itself cut off from the mainstream global financial system.

Moreover, because bad actors tended to already be isolated and thus had only a limited number of bridge institutions to the global financial system, they could easily lose access to global financial flows, without which their operations would rapidly grind to a halt. The global financial system’s ability to self-police relieved Treasury of the burden of directly administering a more-traditional sanctions effort. And as an added bonus, Treasury could plausibly justify its actions on apolitical grounds: helping preserve the integrity of the global financial system.

Zarate observes that the tactic of financial isolation is the “smart sanctions” regime of the 1990s “on steroids.” And not without justification, since Section 311 designations have had some impressive results. For example, it’s likely that Treasury’s years-long assault on Iran’s financial system contributed to its recent willingness to slow the development of its nuclear program in exchange for relief from sanctions, including those on its banking system. Yet the successes of financial isolation have not come without speed bumps, the nature of which threaten to sharply limit its utility to American foreign policy and, ultimately, the frequency of its use.

The very same feature that makes financial isolation so powerful—its self-administering nature once Treasury triggers a Section 311 designation—leaves it ill-suited to any foreign-policy campaign that requires short-term flexibility. For example, although Treasury’s designation of North Korea–linked banks helped get that country’s attention, it severely hampered the State Department’s ability to get North Korea to agree to nuclear-weapons negotiations. North Korea wanted the United States to “undesignate” its banks as a precondition to talks. Unfortunately, this put Treasury officials in the unenviable position of having to explain to the State Department (at one point resulting in a literal screaming match) why its negotiators could not give North Korea what it wanted.

Although Treasury had issued the Section 311 notices, it wasn’t the one actually excluding the North Korea–linked banks from the global financial system; the global financial system was doing that all by itself. Unlike with traditional sanctions or asset freezes, Treasury could not credibly rescind its Section 311 designation unless the identified banks actually stopped engaging in criminal behavior, which of course was not going to happen. Either the global financial system would simply ignore Treasury’s new-found faith in the integrity of North Korea’s financial institutions as unbelievable, or Treasury’s reputation for issuing Section 311 designations based on apolitical and credible accusations of financial crime rather than American realpolitik would be tarnished. Zarate skillfully describes these scenes of interagency conflict—some of the most powerful of the book—as only an insider could. There is no doubt that all sides acted in good faith and in the service of what they sincerely believed was in the best interest of U.S. foreign policy. But that doesn’t change the fact that many of these conflicts come down to reality that one person’s feature is often another person’s bug. And while Treasury and State did a better job of coordinating when Treasury launched a similar financial-isolation campaign against Iran a few years later, the same tensions between short-term carrots and long-term sticks emerged when the White House chose to pursue a more conciliatory strategy at the beginning of the Obama administration.

To get a clearer understanding of the limitations of financial isolation, it’s helpful to ask whether and how the tactic could be used in a contemporary foreign-policy crisis—for example, Russia’s annexation of Crimea and potential encroachment into eastern Ukraine. The White House has already frozen the assets of top Russian official as well as a Russian bank that is closely linked to them. But if the United States were truly committed to putting pressure on Russia, Zarate’s account would suggest that it should designate core Russian banks under Section 311 and accuse them of any number of offenses that might spook financial markets: money laundering, human-rights violations, etc.

Such an approach would have several obvious problems, however. First, it’s far from clear that the major Russian banks are engaging in the sort of conduct that made North Korean and Iranian financial institutions vulnerable to isolation. Second, in a fast-moving and constantly developing crisis like this one, it might not be in America’s interest to impose long-term financial isolation on Russia that it could not credibly reverse in exchange for Russian concessions. Finally, and perhaps most importantly, Russia’s economy is so large and intertwined with the world’s one that any disruption to Russia’s access to global markets could cause economic havoc around the world. This is entirely apart from Russia’s own ability to retaliate, chiefly by halting gas exports to Europe. And it’s worth remembering that, historically, Russia has routinely beat its Western rivals simply by being willing to endure more suffering.

In describing the problems that Treasury has had in getting buy-in from the rest of the government for its financial-isolation campaigns, Zarate’s sympathies clearly lie with Treasury. In both the North Korean and Iranian examples, he criticizes negotiators for misunderstanding how the Treasury designations operated and for elevating what Zarate considers their desperate and single-minded attempts to bring rogue nations to the negotiating table over credible and long-term shows of American financial power. But even he wonders whether financial isolation is up to the job of convincing nations to permanently give up their nuclear ambitions, an oddly pessimistic position given Zarate’s general faith throughout his book in the power of financial exclusion.

More problematic, however, is Zarate’s failure to clarify where inside the executive branch lies the responsibility for choosing, rather than merely implementing, the tactics of U.S. foreign policy. If the sole purpose of financial isolation is to protect the integrity of the global financial system, then it makes sense for Treasury to have a relatively free hand when it comes to Section 311 designations. But if financial isolation is a tool in the service of broader foreign-policy campaigns (something Zarate seems to argue for), Treasury must ultimately be subordinate in both tactics and strategy to those parties that are chiefly responsible for American foreign policy, be they the State Department, Pentagon, White House, or someone else. And if the tool Treasury offers cannot satisfy its clients’ foreign-policy needs, the problem is with the tool, not the user.

None of this is to say that financial isolation is an ineffective tactic across the board or that Zarate is equipped with only the proverbial hammer, and thus someone for whom everything is a nail. But it does raise larger questions about whether Treasury will be able to convincingly demonstrate that Section 311–driven financial isolation is a broadly effective tactic when it comes to twenty-first century international conflict. If policy makers are to effectively use financial isolation in the years to come, they will need a well-developed account of its tactical limitations and its compatibility with American grand strategy.

Here, there are any number of interesting theoretical questions to be asked: What relevance, if any, do older analytical tools like Mutually Assured Destruction have where the weapons are financial rather than nuclear but the effects are still devastating? What ethical obligations do governments imposing financial isolation have to third-party economies and innocent civilians affected by financial disruption? How and in what ways might other leading players in the international financial system—America’s friends and, for lack of a better term, “frenemies”—demand a say in the terms and targets of financial isolation? Will they resist or refuse to cooperate if they perceive the tactics of financial exclusion as simply a tool of U.S. national interest rather than a safeguard of the integrity of global financial markets?

Zarate grapples with some of these questions near the end of the book. Many of his diagnoses—the decentralization of financial power away from the United States, America’s reliance on debt held by competitors like China, its vulnerability to cyberattacks—make for compelling, if uncomfortable, reading. Unfortunately, Zarate’s broader prescriptions for “preparing for the coming financial wars” are mostly described at a very high level of abstraction and in a frequently opaque bureaucratese. He urges, for instance, a “holistic articulation of national economic security” and wants the government to “frame new systems and alliances in this intertwined geo-economic landscape.” This lapse into think-tank jargon is surprising, given the blunt clarity of his earlier descriptions.

Nevertheless, Zarate explains in plain terms what’s at stake for financial warfare—a necessary first step for policy makers and analysts if they are to think through the manifold complexities of a set of tactics that are unlikely to go anyway any time soon. Treasury’s War doesn’t answer all the contentious questions about twenty-first century financial warfare, but Zarate’s book is a terrific start.

(Alan Rozenshtein is a 2013 graduate of Harvard Law School and a former Lawfare contributor.)