Off the Shelf: In ‘Treasury’s War,’ Missiles for a Financial Battlefield

THE 21st century has ushered in new kinds of warfare that don’t involve soldiers wielding weapons. One type, cyberwarfare, seems to have drawn the most commentary and analysis. A less publicized type of attack, financial warfare, is covered in “Treasury’s War,” a useful new book by one of this strategy’s architects, Juan C. Zarate, a former assistant Treasury secretary.

Mr. Zarate, now a senior adviser at the Center for Strategic and International Studies, makes a persuasive case that a series of financial weapons developed after 9/11, and used mostly by the Treasury Department, have given the United States opportunities to weaken terrorists and rogue states as never before. He develops that argument by tracing Treasury’s aggressive actions against various American foes over the last decade, whether Al Qaeda, North Korea, Iran, Libya or Saddam Hussein’s Iraq.

For those of us who start feeling drowsy at the very mention of the words “Treasury Department,” this book is an eye-opener. Under Mr. Zarate, and his successors, Treasury quietly built new capabilities that owe less to junk bonds than to James Bond.

“Treasury’s War” chronicles an array of the department’s enforcement efforts, from corralling informal Middle Eastern money-transfer networks useful to Al Qaeda to tracking Saddam’s missing millions. But the heart of the book is the emergence and evolution of Section 311 of the Patriot Act, which allows the Treasury Department to designate any bank in the world as a “primary money-laundering concern” and prevent it from doing business with any American bank.

In today’s financial world, where every bank wants to do business with every other bank, and where New York and the United States dollar remain of paramount importance, “hitting” a bank with a Section 311 order has the effect of transforming it into an overnight pariah. Mr. Zarate cites example after example in which 311’s have all but destroyed rogue banks that had been important conduits for money flows involving, for example, Al Qaeda or Iran.

The genius of Section 311 is that Treasury doesn’t do anything other than apply a financial “scarlet letter.” The actual damage is done by the bank’s peers, which typically refuse to do business with it out of fear that they, too, will be cut off from the financial system. Just the threat of a 311, Mr. Zarate writes, has caused nations as powerful as Russia, and as recalcitrant as Myanmar, to change their money-laundering laws, forcing their banks to conform to international standards. A handful of well-placed 311’s, he says, has put much newfound pressure on governments including North Korea and Iran.

“Geopolitics is now a game best played with financial and commercial weapons,” Mr. Zarate writes. “The new geoeconomic game may be more efficient and subtle than past geopolitical competitions, but it is no less ruthless and destructive.”

The centerpiece of the book, and probably the best example of Section 311’s uses and limitations, is the story of Treasury’s assault, beginning in 2005, on North Korea, which American officials said was involved in activities like counterfeiting and drug trafficking. Mr. Zarate describes how the United States hit one of the banks it linked to North Korea, Banco Delta Asia in Macau, with a 311.

Practically overnight, banks throughout the region, even in China, began turning away or throwing out North Korean government business. By this one simple act, Mr. Zarate writes, “the United States set powerful shock waves into motion across the banking world, isolating Pyongyang from the international financial system to an unprecedented degree.” He adds: “The North Koreans didn’t know what hit them.”

As the depth of its plight sank in, North Korea appeared to panic. First, it fired off a missile into the Pacific, a move that had the additional benefit of freaking out the State Department, which demanded to know what Treasury was up to. Then, Mr. Zarate writes, a North Korean representative contacted the United States, seeking relief from the 311. At the State Department’s insistence, negotiations began in Beijing, and appeared to end when a Chinese bank volunteered to handle a measly $25 million of North Korean money the authorities in Macau had frozen.

Mr. Zarate writes that “the amount of money wasn’t the issue” and that the North Koreans “wanted the frozen assets returned so as to remove the scarlet letter from their reputation.”

Then, he says, something amazing happened. Despite its government’s support of North Korea, the Chinese central bank refused to approve this solution, indicating that it, too, wanted nothing to do with a bank hit by a 311. “Perhaps the most important lesson was that the Chinese could in fact be moved to follow the U.S. Treasury’s lead and act against their own stated foreign policy and political interests,” he writes. “The predominance of American market dominance had leapfrogged traditional notions of financial sanctions.”

Eventually, however, Treasury’s pressure on Pyongyang had to be lifted at the insistence of the State Department, which was far more worried about North Korea’s missiles than its bank accounts. Mr. Zarate deplores the move. “The North Koreans had expertly turned the tables” on the United States, he says. “We were outmaneuvered at the height of international pressure and gave up our leverage.”

Fascinating stuff, I grant you, but not quite a fascinating book. Alas, some decent scene-setting aside, the author often writes like a government bureaucrat. In places, the book reads like a white paper. It also lavishes much praise on just about every official he has dealt with — his bosses and peers are described as “brilliant,” “hard-charging” and “legendary.”

Those quibbles aside, “Treasury’s War” does a fine job of shedding light on a new and significant aspect of international relations that many of us may not be aware of, and that is likely to gain in importance in the years to come. The risk, Mr. Zarate concludes, is that other nations are now learning Treasury’s new tricks, and may eventually find ways to use them against us.

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