Treasury puts the whammy on Axis of Evil

"The new sanctions are toxic because they effectively limit a country's access to the global ATM. In that sense, they impose -- at last -- a real price on countries such as North Korea and Iran that have blithely defied U.N. resolutions on proliferation."

The other day I clued readers that the Washington Post's David Ignatius is hot. He has brains, the empirical viewpoint, a huge backlog of reporting experience, and the all-important access; top officials in the USA and around the world don't mind chatting with him on the record. Yesterday Mr Ignatius continued his reporting on positive developments regarding economic sanctions used against the bad guys.

My question is whether EU banks that want to do business with Iran will stand for sanctions that actually work; if not, we should look for more protests against the Patriot Act from certain members of the US Congress. But for the moment, we have cause to be hopeful:

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.

A similar financial squeeze is being applied to Iran. Here again, the impact has come from the way private financial institutions have reacted to public pressure from Treasury. "As banks do their risk-reward analysis, they must now take into account the very serious risk of doing business in Iran, and what the risks would be if they were found to be part of a terrorist or proliferation transaction," says Kimmitt.

Treasury began squeezing Iran last September, when it accused Bank Saderat, one of the largest government-owned banks, of financing terrorism by funneling $50 million to Hezbollah and Hamas since 2001. The Treasury order cut the bank off from any access to the U.S financial system, direct or indirect. A similar ban was imposed in January on Bank Sepah, which Treasury alleged was a key intermediary for Iran's Aerospace Industries Organization, the agency that oversees the country's ballistic missile program.

Meanwhile, top Treasury officials began visiting with bankers and finance ministers around the world, warning them to be careful about their dealings with Iranian companies that might covertly be supporting terrorism or weapons proliferation. This whispering campaign was enough to convince most big foreign banks in Europe and Japan to back away from Iran.

The new sanctions are toxic because they effectively limit a country's access to the global ATM. In that sense, they impose -- at last -- a real price on countries such as North Korea and Iran that have blithely defied U.N. resolutions on proliferation.

"What's the goal?" asks Levey. "To create an internal debate about whether these policies [of defiance] make sense. And that's happening in Iran. People with business sense realize that this conduct makes it hard to continue normal business relationships."(1)

1) U.S. Sactions With Teeth by David Ignatius for The Washington Post.