Juan C.

Zarate

Prologue
o This book tells the story of a new era of financial warfare, how Treasury
officials engineered it, and how it was made to became central to core
national security debates
o This book explains how and why this power has worked, and what must
be done to maintain it in the future
Introduction
o Money is a source of power for nations, companies, and people
o Money creates vulnerabilities.
o If you can cut off funding, you can restrict ability to operate and force
choices
o Financial warfareuses financial tools, pressure, and market forces to
isolate rogue actors from the international financial and commercial
system and gain leverage over enemies
o History
Megarian DegreeAthenian politicians proposed Athens
sanction Megara economically by excluding Megarian merchants
from ports and markets of the Delian League. Sparta reacted by
declaring war.
1500s, British used privateers. They acted under letters of
marquee, which authorized them to attack specific nations
ships
American Civil Warnaval blockades, privateering,
counterfeiting
Counterfeiting1/3 of US currency was fakethis prompts
President Lincoln to start the US Secret Service
League of Nations formalized economic sanctions as a tool for
avoiding conflict
Reparations
WWII
US sanctioned Japan--exports of aviation fuel, iron, and
steel; froze Japanese assets; imposed licensing restriction
on trade with Japan
Post WWII
US warned Israel/France/Britain not to annex the Suez
Canal by threatening to withhold US financial assistance
and oil supplies
Cuba
1960s US imposed a blockade against Cuba
1990s Clinton expanded trade embargoprivate
assistance to potential future Cuban governments, foreign
subsidiaries trading with Cuba
End of 20th Century

Apartheid South Africa, Iraq, Libya

Mid-1990s: Are Sanctions Counterproductive?
Solutions
o Target individualsasset freezes, shut out of US
financial system, get banks to stop doing business
with them
Slobodan Milosevic in Serbia
Narcotics in Latin America
Post 9/11
Expand anti-money laundering scheme
o Principles: Financial transparency, information
sharing, due diligence
Develop financial tools/intelligence dealing with national
security
New strategies based on international financial system,
transnational threats/issues, national security

Foundation
o A New Kind of War
Afghanistancountering Al Qaeda/Taliban financing (poppy
trade transmitted through banking sector, cash couriers, and
hawala network)
Pakistandismantle financial networks (charities, bank
accounts, couriers, funding routes)
Indiaglobal controls on illicit financing of terrorist groups,
hawala networks
What can Treasury do after 9/11?
Go after Al Qaedas moneycharitable donations, deeppocket donors, supportive allied groups, front companies
Go after means which Al Qaeda moved moneybanks,
couriers, wire transfers, hawalanders
Terrorist financingthe raising and movement of funds intended
for terrorist causes
Money launderinga financial scheme/transaction used to
make illegitimate funds appear legitimate
Reverse money launderingmoney derived from
legitimate sources diverted or used to support illegitimate
causes
Office of Foreign Assets Control
Powers
o Freeze assets and transactions
o Bar designated parties and those associated with
them from the US financial system
List of Specially Designated NationalsAmerican citizens,
businesses, other entities prohibited from interacting
commercially or financially with them; banks around the

world wanting to maintain presence in US hat to monitor

the list
EO 13224Treasury needed a new executive order to expand its
powers to go after Al Qaeda financial/support network
Powers
o Freeze assets
o Prohibit transactions
Criminal indictment/civil forfeiturewould need notice,
due process, intent/knowledge
Emergency administrative powerhere, mere suspicion is
enough
US PATRIOT Act
Title III deals with money laundering and terrorist finance
o Extend AML requirements to commercial/financial
actors
o Expand financial information sharing between
government/private sector
o Develop more powerful tools to enforce
policies/regulations
FATF, Eight Special Recommendations for countering terrorist
financing
Office of International AffairsJohn Taylor leads effort to
leverage G7, IMF, World Bank to focus attention on the need to
combat terrorist financing
Bill Murdentracked countries efforts
Tony Waynecoordinated Treasury/State Dept work
John Negroponteled effort to expand use of UN Security
Council Resolution 1267 (sanctions against Al Qaeda,
Taliban, and Osama bin Laden)
FBI establishes Financial Review Group to direct terrorist finance
investigations linked to 9/11later becomes Terrorist Financing
Operations Section (TFOS)
Dennis Lormel
Treasury
Jimmy GarulTreasury Dept Undersecretary for
Enforcementleverage Treasurys law enforcement
agencies to discover/disrupt suspect money trails
Green Questfocus on illicit and suspect money flows
o Treasury (Garul + Rob Bonner) + Michael Chertoff
Secretary ONeill
o Wanted Treasury to be aggressive in using new
authority
o 80/20 Ruleencourage workers make decisions
with 80 percent of information rather than spending
increasing time/energy to get additional 20 percent

Differences in standards
EU uses beyond a reasonable doubt
standard
US used reasonable basis to believe standard
reasonable basis to believe funding could
be headed into terrorists hands or for their
support
Problems
Al Barakaatremitters, money service
business, hawalanders
o US takes system down, OFAC
designates network, seizes $1.1
million
o 3 Somali Swedes petition to be
taken off the list; Sweden
petitions UN Security Council for
standard of evidence for future
terrorist financial designations
o Delisting
Administrative appeal
Right to challenge
designations in federal
court
National Security Council (NSC) created policy coordination
committee (PCC) for terrorist financing
Cofer Black (CIA Counterterrorist Center)wanted to protect
intelligence sources and operations that could be revealed with
a planned Treasury designation
Bin Ladens assets
Less connected to the international financial system
Pakistani bank account
Sheikh Said (aka Mustafa al-Yazid)Al Qaedas money
man (CFO)
o IC found and confirmed true name in 2004
o Zarate wants to make his name public
o IC wants to keep his name quietto protect
methods by which they had acquired the name
o Treasury designates him in 2010
Financial footprints
Need more than to expand designation powers, investigate
cases, deepen Treasurys global reach
Need to gather as much info as possible about Al Qaedas
financial backers and conduits
Helps direct intelligence collection and law enforcement
focus
o

Nose

Goal is to disrupt financing of terrorist operations and

infrastructure
Treasury
FININTacquire/analyze financial intelligence
o Financial intelligenceany bit of information that
reveals commercial or financial transactions and
money flows, asset and capital data, and the
financial and commercial relationships and interests
of individuals, networks, and organizations
Reporting requirements for banks
o US wanted access to database of Society for
Worldwide Interbank Financial Telecommunication
(SWIFT), after 9/11 SWIFT agrees
Hambali
FBI
Terrorist Financing Operations Sectiona terrorism
financing task force
Intelligence community
Cofer Black tracking Osama Bin Laden in Sudanhad
proposed methods to disrupt/monitor Al Qaedas financing
o Uncover money trails to terrorist networks; find and
disrupt
Bank of Credit and Commerce International (BCCI)all
purpose illicit financial hub (drug/arms trafficking, money
laundering)
Nuclear proliferation
Under the Tent
After 9/11 US Treasury discusses terrorist financing with Saudi
Arabia
Saudis built a network of donors, charities, sponsors to
spread Sunni Wahhabi Islam
o Was used to help Afghan mujahideenstill helping
violent jihadist causes
Saudi approach was monitoring
American approach was public notification
US wanted to shut down Al Haramain Foundation
platform for Al Qaeda in Bosnia and Indochina
2002 US and Saudi Arabia designated Bosnian and
Somalia branches of Al Haramain Foundation; later
designated other branches and Sheikh Aqeel Abdulaziz alAqil
Prince Muhammad bin Nayefs strategy
o Make example of those supporting Al Qaeda in the
Saudi court system (clerical establishment +
judiciary condemnation)

Killed, deterred, reconciled

Saudi rehabilitation programtheological
and social deprogramming and integration
o Financial chokepoints
US Treasury Dept had to find a way to deal with the movement
of money outside the formal financial system (i.e. hawalanders,
cash couriers), target + incapacitate financial chokepoints
Hawala
Needed to be regulated to point where transactions could
be monitored
Self regulation, isolation of rogue actors
Coopting them to police their own system [is this nave?]
Dealing with Couriers
Three pronged-strategy
o Establish importance of monitoring and checking
inflow/outflow of cash globally
o Help train and impel foreign law enforcement and
customs officials
o Make sure nothing would hinder efforts to have a
material impact on movement of illicit capital
A New Paradigm
o Blowfish
Italy starts to apply anti-Mafia tactics against Al-Qaeda and its
support networks in Italy and the EU
Department of Homeland Securityconsolidating border
agencies with intelligence to improve coordination
Carve deep and wide into existing government structures
to pull agencies/departments into a new configuration (if
it fit in Homeland Securitys mission, it would be moved
wholesale
Office of Enforcement at Treasurytalk that Enforcement
would be dismantled
o Treasury
Regulate
Sanction
determine access to the financial system
(freeze accounts, block wire transfers,
enforce regs)
suasionconvince and coerce behavior
based on what it says/does
Reorganization of Enforcement
o Keep: Danny Glaser, Chip Poncy. Nan Donnells,
Anne Wallwork, Paul DerGarabedian
o Enforcement becomes Executive Office of Terrorist
Financing and Financial Crimes (EOTF/FC)
o

Zarate and the gang need to show the relevance of

this office.

Bad Banks
Need to show why Treasury was indispensible to US
national security
Targeted bad banksbanks that engaged in fraudulent
and criminal activity, serving rogue regimes and terror
networks [access, concealing illicit financial activity, all
purpose banking]
o BCCI
Objective: prompt banks to cut off banking relationships,
isolate rogues from the international financial system
Post 9/11 banks more willing to scrutinize consumers;
dont want to get caught facilitating terrorist financing
PATRIOT ActDue diligence, AML
OCC and FinCEN fines Arab Bank, UBS fined, Riggs Bank,
The Mother of All Financial Investigations
Saddam Hussein issues orders to move his money (920
million USD, 90 million Euros)
Treasury had plans for a cyber-attack
US opted for conventional asset recovery effort [EO 13315
authorized gov to confiscate nondiplomatic Iraqi
govassets in the US]
International community froze Iraqi assets.
Asset recoveryUS wants to recover money and use it for
reconstruction and recovery [$30-$40 billion]
o Three assets
Cash
Iraqi state assets abroad and in Iraqi banks
Hidden/layered assets of Saddam outside of
Iraq
Threat finance cellstracking an enemys assets and use
them as a key vulnerability
o Track and arrest Taliban narcotics traffickers
o Exploit financial information and money/corruption
tied to opium trade to target Taliban/Al Qaeda
Resurrection
How should the team be organized?
o Address weaknesses inherent in the department
Treasury lacked intelligence capabilities
Aufhausers three prongs of a revitalized
function at Treasury
Empowered policy office
Financial crimes enforcement arm
New intelligence function

Treasury needed more firepower and funding

Congress creates Office of Intelligence and Analysis (OIA)
o Toolstargeted designations, pressure on banks,
law enforcement investigations, international
cooperation built on UN sanctions obligations,
development of international norms, capacity
building to isolate rogue financial behavior

Financial Furies
o Killing the chicken to scare the monkeys
Treasury wants to target North Korea
NK uses formal bankingVienna, Russia, Singapore, HK,
Beijing, Macau
How NK gets money
o Counterfeiting and smuggling
SupernoteUS $100 bill
o Office 39 raised funds abroad using diplomatic
posts and front companies to build business lines
and launder illicit proceeds
Strategytighten and close NKs access to banking
system
o NK has Tanchong Commercial Bank & Daedong
Credit Bank
o Treasury goes after Banco Delta Asiaan access
point for North Korea; designate the bank and
isolate it from international financial market
Strategylook into NK illicit financial activity
o Use enforcement to go after NK criminal networks
abroadmake it less about hurting NK and more
about enforcing the law, but effect going after
finances
Stages
Investigative and intelligence operations regarding NKs
criminal networks
Cutting off certain funding routes used by the regime
Explicit effort to hunt down NK leadership assets and shut
down illicit financing
o The Awakening
Treasury designates BDA under 311
US banks end relationships with BDA
Macau authorities shut down BDA and freeze $25 million
NK assets, depositors make run on the bank
BDA BOD abdicate responsibilities to Macau government,
they close all NK accounts
Singapore, HK, other banking hubs quickly do the same
Chinese banks close/scrutinize NK accounts/transactions

China can be moved to follow US and act against stated

foreign policy and political interests
Putting the Genie Back in the Bottle
Paulson sent to Beijing to resolve technical issues of BDA crisis
NK wont return to 6 party talks unless financial pressure eased
[nukes]
Sanctions
Problem: Russia/China wont go on board
This approach is going through the private sector
This was not a sanctionthis was designating a bank, US
prompted a market reaction, but did not control it.
US did not freeze anything
Accounts were not held officially by NK government
NK wants to signal that it is again okay to do business with NK
if assets returned in full that would suffice
After pressure from State Dept, US gets a Chinese bank to serve
as an intermediary to unwind the 311 designation [split US
delegationdivergence between financial pressure and
diplomacy]
Zarate thinks this was wrongshould have forced NK to
resolve issues with Macanese and Chinese authorities;
force them to celan up their act
Revelation
SWIFT program leaks
Program was designed to withstand legal/public scrutiny
Treasury wants to suppress the story
NYT, LA Times, WSJ run the story
EU is incensed
US/EU compromisesign agreement on transfer of data from
SWIFT
Requests to SWIFT should be tailored narrowly as possible
to minimize the amount of data requested
US request for data should be verified by Europol to
confirm targeted/justified nature
EU overseer
Unused data deletion requirement after 5 years
Redress procedure
Joint review of implementation/effects
US assistance for EU Terrorist Finance Tracking System
The Constriction Campaign
US needs leverage to affect Iran nuclear weapons decisions
Classical approach
Embargo
Sanctions
Iran is different from NK

Oil
Integration into the world financial markets
Control over Straits of Hormuz
Irans vulnerability is that oil trading occurs in USD
Strategy: squeeze Irans ability to access international financial
system [use Irans conduct: proliferation, terrorist support, lack
of AML controls, and secretive regime against Iran]
Bank SaderatIran/Hezbollah
Irans Islamic Revolutionary Guard Corpsargument is
that they work in the shadows; does a bank want to
assume the risk of doing business with these guys?
Treasury meets with private sector actors telling them
about Iranian transactions; banks [UBS, Credit Suisse,
ABN Amro, ING, Commerzbank] start to curtail business
with Iran
Treasury sets signals/guidepost to private sectoridentify
and target finance that supported terror/proliferation
o Bank Saderat
o Bank Sepah, Bank Sepah International
o Bank Mellat, Mellat Bank SB
o Persian Internaitional Bank
o First East Export Bank
o Bank Melli [Arian Bank, Bank Kargoshee, Bank Melli
Iran ZAO, Future Bank, Melli Bank PLC
o Banco Internacional de Desarollo
o Export Development Bank of Iran
o Islamic Republic of Iran Shipping Lanes
o Iran Defense Industries Organization
o IRCG, Irans Ministry of Defense and Armed Forces
Logistics
Treasury revokes authorization for U-turn transfers
involving Iran [cuts off Iran from dollar clearing
transactions for Iranian oil in NY]
o U-turn transfersallowed dollar oil transactions
through US banking without money ever sitting in
US bank or the bank serving as the
originator/destination financial institution
NY Manhattan DAinvestigates banks for lack of
compliance with US banking restrictions
Get FATF to pass judgment on Irans AML and counter
terrorist finance system
$2 billion Iranian assets in Citibank account held by Clear
Stream
o Victims of terrorism get assets frozen
Financial attack starts to hurt around 2010; US has leverage

US targets Irans central bankBank Markazi

US targets oil
Make it harder for Iran to find investors in oil fields
Make it more costly to obtain new equipment
Make it too difficult to ship oil in/out of the country
Dissuade refined petroleum exporters in Iran
Weaken Irans ability to sell oil for currency, credit, goods
needed to fund nuke program

Adaptation
o Dusting Off the Old Playbook
2008Obama wins election
Pause financial pressure on NK and Iran
NK
o NK conducts missile test, withdraws from six party
talks, sinks SK ROKS, bombards Yeonpyeong Island
o Administration gets Security Council Resolution
o NK diversified its financing channels, relying more
on Chinese
Iran
o US puts on hold financial pressure campaign
against Iran to get Iran to the negotiating table
Zaratethinks this is problematic; policy
makers see financial pressure as an
impediment; pressure forces people to the
table
o This doesnt work.
o US resumes pressure/diplomacy
o Target oil, shipping, insurance, and banking
Shippers will not do business without
insurance
Target Bank Markazi
Target banks that do business with Iran
o Congress gets involvedComprehensive Iran
Sanctions, Accountability, and Divestment Act
(CISADA)
Sanction foreign bank that transacts with
Irans central bank [make them pick: do
business with US or Iran, but not both]
Energy companies reduce ties to Iran [Total,
Shell, LUKOIL, BP, Royal Dutch Shell, ENI]
Investments in Iranian oil fields withdrawn
o EU pull plug on Iranian oil imports
o EU requires SWIFT to be turned off for Iranian banks
o India banned local companies from doing business
with Asian Clearing Union

o
o

o
o

Congress added more restrictions on third country

banks/companies that do business with Iran
Iranian currency falls, currency traders make it
worse
Inflation
This works
Other banks
Standard Chartered, HSCB

Libya
o Libya looks week, administration considers
imposing sanctions to speed up the collapse of the
Qaddafi regime
o Strategy
Asset freeze$37 billion by US; International
Community freezes another $50 billion
Comprehensive sanctions
Syria
o Strategy
Freeze assets
Restrict travel of Syrian officials and entities
o Three pronged strategy
Demonstrate danger of Syrian behavior
[proliferation, support for terror, corruption,
lack of AML controls]
Human rights abuses
Collusion between Syria and Iran
General Questions
o What was the US trying to achieve with financial
campaign against Iran
o How will US unwind financial pressure if theres a
diplomatic deal
o Can economic warfare and pressure slow the
nuclear program and change the regimes calculus?
Learning Curve
In face of financial pressure, enemy has adapted
Hezbollah
Money from Iran
Social/charitable networks
Manar cable station
Trading companies
Counterfeiting
Drug trade
Treasury designates Joumaa and members of his network as
terrorist financiers and drug MLs
Treasury and DEA target Lebanese Canadian Bank
Hezbollahs design arounds

SA drug networks
West African facilitators
Used-car dealers
Moneyman and banks
Al Qaeda
Al Qaeda is having trouble raising money and is relying
more heavily on its affiliates
o Al Qaeda in Iraqsiphoned oil, extorted businesses,
robbed banks
o Al Qaeda in Islamic Maghrebkidnapping, drug
smuggling
o Al Shabaabtaxes and checkpoint fees in
territories it controls
Tax on consumer goods in merchandise
stores
Tax on businesses by size/profitability
Tax on livestock and crops
Tax by acre
Tax on corporate profits
Ad hoc military contributions
Checkpoint revenues
o Donations
o Tuition from radicals getting militant training and
support
Treasury designates six Al Qaeda members operating in
Iran
New Technologies
Mobil devices/mechanisms
Online alternative currencies
Blending operationsterrorist groups/drug trafficking operations
Evasion
Iranian efforts
o Iranian central bank (Bank Markazi)
o Sympathetic banks (Venezuela, China) [Kunlun
Bank, Elaf Bank]
o Western Banks [Standard Chartered, UBS, HSBC]
NK
o State owned businesses
o Collaboration with Chinese firms
o Smuggling
Venezuela has access to US banking and acts as a middle
man
The Coming Financial Wars
Russia approaches China with the possibility of selling holdings
in Fannie Mae and Freddie Maccould force US to spend money

to keep FM and FM alive; undermine confidence in US financial

system, run on dollar, exacerbate financial crisis
China refused to go along with the plan
Chinese economy
State authoritarian capitalismstate policies subsidize
Chinese companies and state owned enterprises
Produces 93 percent of rare earth minerals
Willing to flex muscles for minor national security
interests
Aversion to sanctions
Control over market access to china
Vulnerabilities
o Internal politics, environment, demographic,
sustainability of economy, reaction to its growing
power,
Russia
Willing to us oil and natural gas supplies (Gazprom and
Ukraine, Georgia)
US companies reluctant to meld poli/eco interests directly
abroad
Sovereign wealth funds
Export finance
China undervalued renmenbi
o Buys US assets and increase account surpluses
China aggressive play vs. US passivity
Us fought the Iraq war, but oil contracts went to Russian,
Chinese, French, and Brits
Challenges to US
New currencies
o Bitcoin, Linden, Ven
Rogue actors circumventing and undermining US financial
pressure
o Bartering
US dollar as a target for competitors
IMFspecial drawing rights (SDR) defined in terms of weighted
average of dollar, euro, yen, and pound
Chinas move to become a reserve currency
Buys sovereign debt of other Asian nations forcing them
to buy Chinese debt to devalue their currencies against
Yuangreater international role for RMB
Allow select foreign financial institutions to invest RMB
deposit in Chinese equity/ond markets
US vulnerabilities
US dependency on foreign funders for fiscal survival
o Debt

o Oil, food, minerals, manufactured goods

o Virtual systems
Cyber financial wars
Gauss virus
Stuxnet and Flametarget nuke programs
Izz ad-Din al-Qassam Cyber Fightersdenial of service
attack against JP Morgan Chase, Citigroup, PNC, Wells
Fargo, US Bancorp, Bank of America
Cutting Sword of Justice; Shamoon virusdestroyed 30K
computers and wiped out hard drives, but did not disrupt
production/operations
Flash crash [not an attack, but this had effect]Trading
algorithm dumped 75K futures contracts in 20
minutesDOW falls 600 pts, erases $82 billion in equities
Preparing for Financial Wars
Define national economic security
Reaffirm Core US Principles
Viewing and Treating Geo-Economic Holistically
New means of Publi-Private Collaboration
New doctrines, Intl systems, Allicances

Epilogue
o Use of financial power and influence has become accepted
o Need to tend financial techniques carefully
o Use of financial power has revealed policy issues and new ways of
thinking
Financial intelligence reveals links and associations
Difficult/fundamental questions of national security importance
who to designate
Questions and tradeoff over cyber warfare
Opportunities of financial diplomacy
o Aligning private sector interests with American national security
imperatives