Decision ‘08

How To Tackle Iran?

It’s clear to even the most blinkered multilateralists that Iran has no intention whatsoever of complying with the UN’s ‘mandate’ that it give up its nuclear weapons program - oh, I’m sorry, peaceful uranium enrichment program. What can we do about it, particulary with Russia throwing up roadblocks everywhere? Here’s David Ignatius in the Washington Post:

Everybody knows that economic sanctions don’t work. Just look at the decades of fruitless pressure on Cuba. But guess what? In the recent cases of North Korea and Iran, a new variety of U.S. Treasury sanctions is having a potent effect, suggesting that the conventional wisdom may be wrong.

These new, targeted financial measures are to traditional sanctions what Super Glue is to Elmer’s Glue-All. That is, they really stick. Deputy Treasury Secretary Robert Kimmitt doesn’t even like to call them sanctions, preferring the term “law enforcement measures.” Explains Stuart Levey, Treasury’s undersecretary for terrorism and financial intelligence: “Sanctions are scoffed at. They have a bad history.”

Authority for the new sanctions, as with so many other policy weapons, comes from the USA Patriot Act, which in Section 311 authorizes Treasury to designate foreign financial institutions that are of “primary money laundering concern.” Once a foreign bank is so designated, it is effectively cut off from the U.S. financial system. It can’t clear dollars; it can’t have transactions with U.S. financial institutions; it can’t have correspondent relationships with American banks.

The new measures work thanks to the hidden power of globalization: Because all the circuits of the global financial system are inter-wired, the U.S. quarantine effectively extends to all major banks around the world. As Levey observed in a recent speech, the impact of this little-noticed provision of the Patriot Act “has been more powerful than many thought possible.”

Treasury applied the new tools to North Korea in September 2005, when it put a bank in Macao called Banco Delta Asia on the blacklist. There was no legal proceeding — just a notice in the Federal Register summarizing the evidence: Banco Delta Asia had been providing illicit financial services to North Korean government agencies and front companies for more than 20 years, according to the Treasury notice. The little Macao bank had helped the North Koreans feed counterfeit $100 bills into circulation, had laundered money from drug deals and had financed cigarette smuggling. North Korea “pays a fee to Banco Delta Asia for financial access to the banking system with little oversight or control,” Treasury alleged.

Wham! The international payments window shut almost instantly on Pyongyang’s pet bank. Transactions with U.S. entities stopped, but the Treasury announcement also put other countries on notice to beware of Banco Delta Asia. The Macao banking authorities, realizing that they needed the oxygen of the international financial system to survive, took regulatory action on their own and froze the bank’s roughly $24 million in North Korean assets. And around Asia, banks began looking for possible links to North Korean front companies — and shutting them down.

Ignatius then goes on to outline how similar efforts are now being undertaken with Iran’s banking partners. Here’s what I like about it, though - it’s a unilateral measure (read: Russia can’t block it) with a ‘multilateral’ type effect (no military action necessary, either)! Pretty good…and a sign, also, that the passage of the much-maligned Patriot Act will perhaps be looked on historically as a major accomplishment in the War Against Terror….

One Response to “How To Tackle Iran?”

1 jpe Says:
March 1st, 2007 at 9:59 pm
The Patriot Act was a grab bag of measures; some bad, some good, some substantively good but procedurally bad. The next decades will be a pruning back of the Patriot Act, but this provision in the banking section will likely stay. It’s powerful without being an egregious overreach by the executive branch.