North Korea Financial Sanctions: Same Sh*t Different Decade

[Updated Jan. 17 & Jan. 20, 2015--CH]

A couple days ago I was interviewed by The Real News on the current round of sanctions against North Korea.  Link here.

I talked about a few things that I’ve covered in China Matters and on my twitter feed, not all of which made it into the report: the whiff of bogosity in the North Korean attribution in the Sony case, and the apparent need for a rapid-response, evidence be damned attribution process in the case of cybercrimes.  I speculate that a more immediate explanation for the quick sanctions slapdown was that Kim Jung Un had compounded his diplomatic crime of trying to split and circumvent the Six Party Talks united front through unilateral outreach by dealing with the Monster of the Century (actually monster of three weeks ago & I expect soon to resume the crown) Vladimir Putin.  Kim’s first overseas trip as head of state will be Russia, not the PRC, and I unpack the historically fraught and unfriendly relationship between the DPRK & PRC and the shift of the center of PRC--Korea economic and strategic gravity to the southern half of the Peninsula.  The PRC and the US, in fact, have a joint interest using the Six Party Talks to neutralize independent North Korean diplomacy and keep the initiative out of the hands of the DPRK and, for that matter, South Korea, Japan, and the Russian Federation.

The PRC, I think, wants to maintain North Korea as an impotent buffer state under its thumb and the United States wants to quarantine North Korea as a nettlesome nuclear power (and, perhaps, an important non-Chinese justification for the enormous U.S. North Asia military presence).  Neither superpower, in other words, places a high priority on seeing North Korean diplomacy evolve beyond the current futility.

I also made the point that US-DPRK diplomacy is, for the time being, hopeless--the term of art is "strategic patience"--since Obama is the “gotta get rid of your nukes” Nobel Peace Prize winner, and also “the guy who greenlit the overthrow and murder of Muammar Gaddafi, the guy who got rid of his nukes at US insistence.”

Just to recapitulate for readers who may have forgotten, after Desert Storm Gaddafi worried that he was next.  In one of the few victories for George W. Bush coercive diplomacy, Gaddafi revealed and decommissioned his nuclear and chemical WMD programs under international inspection, acceded to the Chemical Weapons Convention, re-opened Libya’s oil industry to foreign investment, and ponied up over US$1 billion in compensation for the Lockerbie bombing (if, as some suspect, Iran engineered Lockerbie as retaliation for the U.S. shootdown of Iran Air 655, the mullahs of Tehran must be grateful indeed).  In return, Libya got normalized relations, a U.S. shield from terrorism lawsuits, visits from Condoleezza Rice and Tony Blair, and the pleasure of receiving, incarcerating, and abusing repatriated anti-Gaddafi dissidents.  The “Libya model” was actually touted as a precedent for bringing North Korea in from the cold.

All that evaporated, together with Gaddafi and for that matter much of civilized Libya, as President Obama yielded to the urgings of the “we must not be on the wrong side of Arab Spring history” crowd and agreed to drop the hammer on the Gaddafi regime.

That definitely put the USA on the wrong side of the DPRK, which understandably cited the Libyan precedent as justification for why it could never, ever surrender its nuclear weapons.

And as for why President Obama is dealing with a publicly-demonstrated, full-fledged North Korean nuclear deterrent--instead of dealing with the discrete and selective displays of their nuclear capabilities at Yongbyon and elsewhere that the North Koreans used to put on for Siegfried Hecker--a trip in the Wayback Machine is in order.

For me, the anti-North Korea financial sanctions announced this week--and the concurrent hearing conducted by the House Foreign Relations Committee--were an exercise in nostalgia in the matter of policies, rhetoric, and even actors, and also a bitter reminder of two lost years of US DPRK policy, and the bomb they helped birth.

North Korean financial sanctions is truly a matter of Same Sh*t Different Decade, recapitulating and hopefully improving on one of the biggest and at the same time unreported fiascos of American foreign policy: the 2005 attempt to achieve regime change on the cheap against North Korea through covert financial sanctions.  The 2005 circus also featured a pair of principals in the January 13, 2015 congressional testimony: Congressman Ed Royce, a leader of the “something must be done about North Korea” caucus and Treasury’s Daniel Glaser, Assistant Secretary for Terrorist Financing, who is in charge of OTFI, the Office of Terrorism and Financial Intelligence a.k.a. sanctions central.

Since the miraculous efficacy of financial sanctions is now an article of faith thanks to the apparent success of Iran sanctions, I think it's a good time to lift up the curtain and look at what happened, what didn't happen, and what was misreported the first time America took a financial swing at North Korea.

I made my rattly bones blogging the sanctions story non-stop in 2007.  Long story short, the Bush administration, which had lost its multi-lateral mojo thanks to the Iraq f*ck up, decided it would further beef up America’s unilateral muscles by “weaponizing” financial enforcement. 

The U.S. Treasury Department’s FinCEN (Financial Crimes Enforcement Network) operation had done a bang-up job on its original, apolitical mission: tracking and blocking drug cartels’ ongoing struggle to launder the immense ocean of cash sloshing out of their operations.  Come 2001, FinCEN was, of course, recruited into the GWOT with the creation of the OTFI operation, but was of limited utility: the amount of money that actually needed to change hands through the international financial system to execute a terrorist attack is vanishingly small.  Under Bush, Section 311 of the Patriot Act was generously reinterpreted to exploit its coercive potential by employing FinCEN money laundering investigations against disliked state actors like North Korea.  Somebody coined the term "financial waterboarding" to describe the borderline legality and extremity of the tactic.

In 2005, after Bush’s re-election, Colin Powell was gone and the Cheney gang of f*ck-you unilateralists were enjoying a brief ascendancy in the foreign policy apparatus.  Aggressive North Korea regime change policies moved to the top of the agenda  and somebody, a.k.a. probably John Bolton, got the brainwave that the resources and legislation enabling FinCEN, coupled with the central U.S. position in the world financial system—which meant that U.S. unilateral actions against any foreign bank would cut it off from the world financial system--could be used to destabilize North Korea.

Ground Zero for the initiative was a small Macau bank, Banco Delta Asia, which had allowed North Korean entities to open some 50 accounts.  I suspect the proximate impetus for going medieval on BDA was that in 2000 South Korea under the engagement-minded Kim Dae Jung had funneled $500 million to North Korea in return for a summit (and, subsequently, a Nobel Peace Prize) through some Macanese banking channel, thereby making a mockery of US attempts to isolate, defund, and pressure North Korea.

The U.S. Treasury Department, under OTFI jefe Stuart Levey, designated BDA as an institution “of primary money-laundering concern” under Section 311, averring that it was suspected of laundering the infamous North Korean “supernotes”—a miraculous counterfeit of the US hundred-dollar note that was virtually indistinguishable from the real thing.  To “protect the U.S. financial system”, U.S. financial institutions were instructed not to have dealings with BDA.  Result: a run on the bank, and BDA went into receivership in the hands of the Macau financial authorities.

Mission accomplished, one might think.  Without any due process (the designation was merely the beginning point of an 18-month investigatory process, not a conclusion), the US government had successfully torpedoed a foreign bank.  And about $25 million in North Korea-related accounts was frozen and out of Pyongyang's reach!  Pow!  Power!!

By the lights of the Bush administration, the fact that this power could be exercised unilaterally, pre-emptively, without any checks and balances (the case, when investigated, is a completely internal US government star-chamberesque proceeding, without any opportunity for the targeted institution to confront its accusers, demand discovery, etc.) no doubt added to its intoxicating allure. 

In order to further accentuate the measure’s unilateral dark and mighty awesomeness a la Cheney (and shield the actions from any trace of international accountability or consultation), at first the Bush administration even peddled the myth that the BDA designation was just a plain vanilla Treasury enforcement action against a Macau bank with shoddy controls and had nothing to do with North Korea (even as Treasury conducted a secret global campaign of harassment  against any bank that dared to do business with the DPRK and also dished out the same treatment to Cuba).  

As a matter of evidentiary rigor, the Bush administration f*ked up royally.  It turned out that BDA routinely sent all its cash deposits over to Hong Kong & Shanghai Bank in Hong Kong for vetting, and the single time counterfeit currency had been detected—one decade before!-- the U.S. Treasury had been promptly informed.  But that did not deter the Treasury Department, which ground on with the apparently bogus case.  I assume that the flimsiness of the case was perhaps considered as not a bug, but a feature, a sign that U.S. financial might, diplomatic determination, and unilateralist ambitions would prevail under the most adverse circumstances.

The U.S. government’s determination to prevail had a lot to do, I suspect, with the fact that the real target of the BDA procedure was not BDA or even North Korea; it was the People’s Republic of China.

The PRC is the 800-pound gorilla in the room when it comes to Iran as well as North Korea sanctions.  If the PRC is unenthusiastic, the sanctions simply don’t work.  When Treasury officials talk about “cutting of North Korea from the world financial system” they’re really talking about the PRC.

The architect of the 2005 campaign, David Asher, came out and said it in congressional testimony in 2007.

“Banco Delta was a symbolic target. We were trying to kill the chicken to scare the monkeys. And the monkeys were big Chinese banks doing business in North Korea...and we’re not talking about tens of millions, we’re talking hundreds of millions.”

BDA’s chairman, Stanley Au, had been a delegate to the China People’s Consultative Congress, a prestigious “united front” talking shop that showcased pro-PRC overseas Chinese.  The BDA designation was a demonstration project, meant to show the PRC what could happen to its friends--and its banks--if the US line was not satisfactorily toed.

Since these kinds of activities allow the United States to throw its weight around without dropping bombs, IR types find the exercise of financial sanctions “soft power” incredibly beguiling, even though it ignores all the checks/balances/due process/proportionality stuff that is supposed to give “soft power” its moral and diplomatic strength.

As a result, I have seen reporters peddle the myth that the BDA designation “worked”.  

This is what “worked” looks like:

September 2005 U.S. Treasury Department announces designation of Banco Delta Asia as a bank of “primary money laundering concern”

April 2006 Six Party nuclear talks halt since US refuses to discuss North Korea’s frozen accounts.

October 2006 North Korea conducts its first successful nuclear test.

That’s not what success looks like.  

Even for the Bush administration, whose attitude toward foreign policy fiascos was usually one of callous insouciance, it was a Defcon 1 disaster.

In an undignified scramble, the Cheney hardliners, including regime change fire-eater in chief Bob Joseph, were pushed out of the way and Condoleezza Rice took over.  Various deals were cut in January-February 2007 and in March 2007 U.S. Assistant Secretary of State Christopher Hill announced the Norks would be getting their money (a whopping $25 million, half of which, by the way, was the property of hapless joint ventures in North Korea like British American Tobacco, not even Kim Jung Il’s) out of BDA.

In what is I think perhaps the most under-reported story of the Bush administration, hardliners in the U.S. government worked indefatigably to sabotage the deal negotiated by Christopher Hill.  In February 2007, as the statutory eighteen month investigatory period expired and the State Department was struggling to cobble together a deal, Treasury announced a scorched earth final rule against BDA citing Patriot Act Section 311.  

Using the patently false statement that the rule could not be revoked, Treasury then declared that any bank that was involved in repatriating the North Koreans’ $25 million out of BDA would be sanctioned.  The State Department frantically roamed the financial world looking for somebody who would dare handle the transaction.  After a futile four months’ quest for a commercial bank willing to handle the deal—the Chinese banks all demurred either out of fear or from a desire to watch the US twist painfully in the wind--in June 2007, the State Department finally cobbled together a channel using the New York Fed and the Russian central bank to get the cash back to the Norks.

Turning to the current actors, in 2007 representative Ed Royce also pitched in at the time, cosigning a letter with other anti-Nork heavyweights that raised the specter of prosecuting Christopher Hill for money laundering for his efforts in trying to arrange the repatriation.

And for that matter, I suspect Daniel Glaser may have wandered off the res and delivered some back-channel threats in Macau to try to derail the repatriation, and he was subsequently, I speculated at the time, dispatched to “eat crow in Beijing.”

 

Even the designated existential menace of 2005, the frickin’ Supernote canard, gets an occasional shoutout in current coverage.  Kevin Hall of McClatchy conducted a thoroughgoing investigation of the counterfeiting boondoggle and I did my share of the debunking.

I’m assuming the hardliners obstructing the repatriation of funds were getting their marching orders and political backing from a furious Dick Cheney.  To my mind, it is the most remarkable example of open insubordination within the U.S. executive branch that I can think of.  Hopefully, some insider will write it up some day.

The Obama administration was also entranced by the potential of the financial sanctions weapon.  Stuart Levey was the highest-ranking holdover from outgoing Bush administration other than Secretary of Defense Gates.

In his signature style, President Obama was more cerebral, patient, and multilateral in his planning.  The pretense of independent Treasury proceedings to “protect the US financial system” were dropped in favor of overtly legislating and applying sanctions in the context of multi-lateral diplomacy.

To my mind the biggest genuine achievement in US-PRC coordination under President Obama was Beijing’s decision to throw Iran under the bus and support UNSC sanctions in 2010.  The threat of US financial sanctions was a recurring a headache for the PRC and had changed its behavior in 2005 (though I suspect that financial channels between Beijing and Pyongyang were kept open even as China’s big banks dropped North Korea transactions) and I presume some combination of financial threats and political inducements prompted the PRC’s move against Iran.  Again, the inside story remains to be told.

Given the virtually total separation of the US and DPRK economies, Treasury measures that hit North Korea indirectly--by, effectively, sanctioning foreign financial institutions that do business with the DPRK, not the DPRK itself--quickly rose to the top of the agenda when it was time to "do something" about the Sony hack.

In his testimony before the House Committee on Foreign Affairs on January 13, Daniel Glaser advised that the Obama administration had crossed a Rubicon of sorts by openly deploying unilateral Treasury sanctions as a "because we can" tool of coercive diplomacy divorced from the financial violations they were originally designed to counter.  The "weaponization" of US financial regulation, in other words, is pretty much complete (and the inconvenience of trying to justify Treasury sanctions using boondoggles like the Supernote canard is pretty much circumvented):

E.O. 13687 [signed by President Obama on Jan. 2, 2015; gives Treasury the authority to sanction the DPRK government and Workers' Party of Korea for the Sony hack and "other egregious acts"--ed.] represents a significant broadening of Treasury’s authority to increase financial pressure on the Government of the DPRK and to further isolate the DPRK from the international financial system. With the issuance of E.O. 13687, Treasury, for the first time, has the authority to designate individuals and entities based solely on their status as officials, agencies,instrumentalities, or controlled entities of the Government of the DPRK or the WPK. Treasury also now has the authority to designate those acting on their behalf or providing them with material support.

In his written statement, Royce identified the Executive Order as enabling a full-spectrum financial jihad against banks of any jurisdiction doing business with North Korea.

[T]he significance of this new Executive Order may come from the broad power it gives the President to target anyone who is a part of the North Korean government or is assisting them in any way for anything. That is, if the Administration chooses to use it to its full advantage.

 We need to step up and target those financial institutions in Asia and beyond...

In his verbal opening remarks, Royce referred to the BDA sanctions as a success, a characterization I hope that readers of this post will take with a grain of salt.

Financial sanctions against the DPRK, of course, brings the unwelcome issue of the People's Republic of China back to to the fore.

In the matter of North Korea, despite Kim Jung Un's  geostrategic footsie with Park, Abe, & Putin, the foreign relationship, now as in back in 2005, that still matters most is the People’s Republic of China.  Glaser, in his testimony, described the PRC as still "taking the lion's share" in terms of providing North Korea's international financial facilities.  With a lot of American levers against the PRC losing their effectiveness, I suspect President Obama is loath to surrender the nuclear option: the threat that Chinese banks can be blocked from the global financial system.  When the financial sanctions weapon is trotted out, it is a signal that the PRC is supposed to take heed and “do something.”

But actively and aggressively wielding that weapon is another matter.

Sanctions that cut PRC institutions from the US-controlled international financial system is a wasting asset (though not evaporating quickly enough to satisfy RMB triumphalists, perhaps) as the PRC has prioritized its international forex/financial policy to wean the PRC both incrementally from the US dollar and from the need to clear transactions through the US and its allies.

I also suspect that the PRC believes that in 2015 the Obama administration is not going to risk accelerating this process of disintermediation over the case of a hack against a Japanese entertainment company that North Korea may or may not have committed.

It's worth noting that the testimony of Song Kim, the Obama administration's special representative for North Korea policy, was markedly short of fire-eating and notably larded with "doors open" verbiage, which leads me to believe that the Obama administration is actually more interested in fostering a Burma-type strategic realignment by North Korea toward the US tolerated by the PRC in a spirit of forbearance, and not really that enthusiastic about a regime change/collapse scenario that might please Ed Royce but also trigger a Chinese intervention.

So I suspect the current posturing on financial sanctions is more an exercise in political kabuki before the new Republican-controlled Congress than a genuine attempt to relive the dubious glories of 2005.

By the way, despite the US Treasury final rule, Banco Delta Asia is still in business. Thanks to its local retail operations and, perhaps, a generous helping of F*ck You, OTFI, sub rosa support from Beijing, it seems to be doing fine.

So Long, Stuart Levey

To commemorate Stuart Levey’s resignation from Treasury, I send him off into the sunset with an affectionate slap on the rump in the Asia Times article, Good-bye Mr Insubordination.

I’ve been an interested observer of Mr. Levey’s activities as Assistant Secretary of State for the Office of Terrorism and Financial Intelligence ever since the OTFI’s designation of Macau’s Banco Delta Asia as an institution “of money laundering concern” froze $25 million in North Korean deposits in 2005.

After the North Koreans detonated their atomic bomb in October 2006, the U.S. State Department said it would “resolve” the issue so the denuclearization talks could resume.

After Secretary of State Rice and Under Secretary Christopher Hill announced the agreement in February 2007, there was a concerted effort to sabotage the unfreezing of the BDA funds by John Bolton and hard-liners in the House of Representatives.

Amazingly, the effort was abetted by Stuart Levey’s office, which found myriad reasons not to “git ‘er done”.  It took four months (instead of the promised thirty days) and a Rube Goldberg arrangement involving the Fed, the Russian central bank, and a Russian commercial bank to return North Korea’s ill-gotten gains to Pyongyang.

Literally, ill-gotten.  Something I don’t get to in the article is the fact that half of the money were deposits of irreproachable provenance belonging to North Korean joint ventures of British American Tobacco and a European banking operation that had nothing to do with Kim Jung Il and his alleged forex shenanigans and shouldn’t have ended up in the DPRK’s coffers.

Unless you read China Matters at the time, you were probably unaware of this, since the general reporting on the issue was pretty craptacular.

The Asia Times piece provides a neat and persuasive summary of the whole fiasco.

One thing that always puzzled me was that there was no reckoning for Stuart Levey.  Nobody called him out for defying the State Department; he not only kept his job under Bush, he continued to do the same job under Obama.

Which leads me to believe that there was more going on in sabotaging the BDA transaction than a last ditch effort to torpedo engagement with North Korea by unrepentant hardliners (many of whom had left the Bush administration by 2007) acting under the aegis of Vice President Cheney as part of his war against the Condoleezza Rice’s State Department.

(Dick Cheney, it is probably forgotten, was at the time trolling through Asia at the time trying undercut State Department diplomacy by cobbling together an anti-China united front out of Australia, India, and Japan; I reproduce a post on the issue below as a matter of historical interest.)

However, for the BDA travesty to drag on as long as it did, thereby revealing President Bush’s favorite cabinet officer, Secretary Rice, as a powerless cipher, I would have to think that President Bush acquiesced to Vice President Cheney’s insistence that the humiliating BDA agreement wither and, if possible, die, taking the restart of the Six Party Talks with it.

There would be persuasive geopolitical reasons for doing so.

The left-leaning regime of President Roh was an unwilling partner to American diplomacy, especially of the confrontational type traditionally espoused by the Bush administration.

It was very likely that the conservative and actively pro-US Grand National Party would be in the saddle come December 2007.

So killing or at the very least slowwalking the BDA affair pending a re-set in 2008 might have enjoyed the tacit approval and back channel encouragement of a broad range of executive and national security opinion in the Bush administration.

And Stuart Levey, instead of being Mr Insubordination was actually Mr Virtuous Conspirator, working with the informal network of Bush era foreign policy enthusiasts that trampled over the chain of command and institutional checks and balances to execute policies whose success they considered to be of paramount importance—at least more important than the niceties of fact-based decision-making or consideration of the possibly catastrophic consequences of reckless adventurism.

As to why President Obama decided to keep Mr. Levey on, he had ample reasons starting with the Obama administration’s fondness for smart power and the strong support Mr. Levey enjoyed in hardline constituencies on North Korea and Iran.

Perhaps it was also thought that Mr. Levey’s demonstrated independence of State Department diplomacy contributed to the intimidating aura of OTFI’s activities.

I am rather skeptical of Mr. Levey’s achievements. 

It seems to me that the sanctions campaign against North Korea, beyond denying Western energy and fuel aid to North Korea that might be exploited by its army (or possibly find its way to North Korea’s citizens), and driving Pyongyong into Beijing’s arms, has little to show after five years of effort.

As Lee Myung-bak enters the last years of his term, it appears that China, North Korea, and factions within South Korea itself are positioning themselves for a shift to a policy with a bigger dose of engagement and less emphasis on sanctions.

So, as I say in the article, this might be the best time for Mr. Levey to depart with his legend intact.




Sunday, March 18, 2007

Circular Gratification: Vice President Cheney’s Most Recent Effort to Contain China

Vice President Cheney recently visited Asia to lend his prestige and power—two increasingly devalued commodities--to two faithful and embattled allies in his global campaign of confrontation and containment, Japan and Australia.

Japan, in particular, needed bucking up, since the Abe regime is reeling from the perfunctory US abandonment of the abductee issue in the rush to conclude the Six Party Agreement on North Korea.

The abductee issue was at the core of Abe’s North Korea policy and, indeed, Abe’s entire political identity as a principled and valued core member of the US effort to assert its interests and agendas in North Asia through confrontation-based diplomacy.

With realists in ascendance at the State Department and negotiation, conciliation, and compromise at the heart of U.S. Asia policy, Vice President Cheney brought with him a rather contrarian and dubious gift—an effort to singlehandedly will into existence another coalition of the willing, centered on Japan, Australia, and India, to take on the unenviable and almost impossible task of presenting an effective, united front against China.

The Marmot’s Hole looks at a proposal for an anti-Chinese alliance midwifed by Dick Cheney and sees an iron ring of democracies containing China.

I look at the vision of an American, Japanese, Australian, and Indian security quadrilateral and see a regional circle j**k characterized by shared press conferences, private fantasies, and shamefacedly selfish gratification.

Australia is blundering through its self-made neocolonial quagmires in Papua New Guinea, the Solomon Islands, Tonga, and Fiji. It can’t even handle its back yard (where China is cautiously but productively fishing), let alone contribute effectively to the Ant-Chinese Superhero League that’s supposed to take the fight to the Yellow Peril.

All India wants is to play off the United States, China, and Russia against each other and reap concessions and aid from each while it concentrates on its economic development and energy security.

Indeed, Mr. Cheney's hasty initiatives in ad hoc coalition building are probably a direct response to a conspicuous piece of footsie between New Delhi and America's strategic competitors: the Russian/Chinese/Indian mini-summit in Delhi in February.

Which leaves the United States and Japan...well, maybe just Japan.

The money grafs in the story in the Australian:

The Japanese Government and US Vice-President Dick Cheney are keen to include the growing economic and military power of India in the already enhanced "trilateral" security arrangements, locking together the three most powerful democracies of the Asia-Pacific region.

Mr Cheney gave the Japanese proposal new life on his recent visit to Japan and Australia after sections of the Bush administration rebuffed the plan.

Ah, yes...emphasis added.

With the neocons in retreat on Washington and on the North Korean issue, it seems that Japan provides the vital function to Dick Cheney of providing political cover and scope for strategic initiatives that are foreclosed at home.

In this context, I am tempted to describe Japan as our “Israel in the Pacific”, exploiting relationships inside the US government to develop foreign and domestic policitical synergies that go beyond US official policy, in a manner similar to Tel Aviv's.

Now more than ever, Israel is openly and unapologetically working with elements in the Bush administration to advance a particular policy toward the Middle East—and elements within the US national security establishment are utilizing allies within the Israeli government to assist them in promoting their preferred agenda in the policy battles inside the U.S. government.

The estimable Laura Rozen, in profiling Secretary Condileezza Rice’s yearlong struggle to gain control over the Bush administration’s Iran policy, related a similar kind of back-channel initiative that, if it didn’t involve the politically sacrosanct state of Israel, might be unkindly regarded as colluding with a foreign power against the policy of the United States:

Rice knows how the system works. In February, she traveled to Jerusalem to attempt to restart the Middle East peace process. But while she was en route the neoconservative NSC adviser Elliott Abrams was, according to news reports, using contacts in the office of Israeli Prime Minister Ehud Olmert to arrange a phone call between Olmert and Bush. After the call, Olmert announced that Israel would not recognize the Palestinian unity government as a legitimate negotiating partner—an essential precondition for productive talks—and that Bush supported Israel’s stance. Her position fatally undercut, Rice returned to Washington empty-handed.

It’s one thing for a small-time erstwhile felon like Elliott Abrams to use a foreign government to promote his virtuous conspiracy against the Palestinian peace process.

But when Big Time, America’s shadow president, has to outsource his anti-China agenda to Japan and two weak and/or unenthusiastic partners in South Asia and rely on them to whipsaw the State Department, that’s a sure sign that it’s going nowhere.

Or better yet, in circles.

China Hand Article on Iran Sanctions Up at Japan Focus...

...and Bonus OTFI Anecdote for China Matters Readers

I have an article up on Japan Focus concerning the U.S. financial sanctions campaign against Iran and the resultant shift of Iran’s financial, economic, and diplomatic focus toward Asia and, in particular, China.

There’s a lot of information on the resistance and evasion the sanctions inspire, both in Asia and Europe, and I think it provides a healthy corrective to the one-sided America-centric “noose is tightening” narrative in the U.S. media.

It invites the reader to consider the iron law of unintended consequences, which in this case dictates that our adoption of a short-term tactic with a dubious track record and a dim prospects for success is causing not only a shift of tens of billions of dollars of trade toward Asia but also a fundamental and perhaps irreversible Iranian realignment toward China.

The piece is entitled US Sanctions Send Iran Into the Arms of Asia

I thank the editors of Japan Focus for the opportunity to contribute, and for their assistance in whipping the article into shape.

Because of the august character of the publication, and limitations of theme and space, I passed up several opportunities to snark on Stuart Levey and the Treasury Department’s Office of Terrorism and Financial Intelligence.

But here, with no limits on topic, length, or the patience of my readers, I feel I can enlarge on the topic of OTFI’s questionable effectiveness as a projector of American “soft power” and illustrate my point with an unintentionally amusing anecdote from Stuart Levey concerning the Iranian outrage he exposed simply by opening his morning paper.

Certainly, Treasury is doing the Lord’s work in cracking down on international money laundering, particularly with respect to the oceans of cash that drug dealers attempt to move through the system.

But, as a March 24 article by Josh Meyer in the Los Angeles Times entitled Terrorism Money Still Flowing pointed out--as a column left front page story! and, to my mind, the first instance of less than adulatory coverage for Stuart Levey and OTFI in big media-- --OTFI has not demonstrated its ability to effectively interdict the relatively insignificant sums needed to mount a terrorist operation.

In my mind, the situation is even more dismal when considering the use (or abuse) of OTFI as a tool of American anti-diplomacy i.e. applying tools developed for the multi-lateral perfection of anti-money laundering measures to pressure foreign governments and international banks to promote U.S. financial embargos that they don’t necessarily support.

Wrong doctrine, wrong organization, wrong mission, in my view.

When it comes to the matter of breaking North Korea and Iran’s back with sanctions, OTFI is long on frequent traveler miles and short on accomplishments.

OTFI’s Stuart Levey is routinely lionized in the financial press as the suave, implacable Harvard lawyer who criss-crosses the globe (he’s visited 74 countries!) putting righteous fear of the United States Treasury into bad banks and nefarious regulators.

However, when he touts one of his signature achievements, the impression is less than overwhelming.

From Levey’s March 6 remarks to the ABA:

Let me give you an example I sometimes share to illustrate how the Iranian government will deceive and abuse banks that do business with them.

An affiliate of the Atomic Energy Organization of Iran – an entity that was designated by the UN Security Council in Resolution 1737 – placed an ad in the International Herald Tribune requesting bids to build two nuclear power plants in Iran.

It is hard to imagine a transaction with bigger and brighter red flags for a financial institution. Bidders were asked to deposit a non-refundable fee in an account at a particular bank.

I have spared that bank, which is a well-established, high-quality bank, the embarrassment of identification here.

When I saw the ad, I called them, and they told me that this account had been opened at the request of the Iranian Foreign Ministry to support Iranian diplomats accredited to the International Atomic Energy Agency in Vienna. They said they were dismayed when they saw the ad and learned that the Iranians were attempting to use their bank for this purpose.

The picture of Levey unfolding his IHT and spitting out his morning coffee in outrage at Iranian presumption is amusing.

Especially when one considers that, even though we spend about $90 million per year on the Financial Crimes Enforcement Network—of which OTFI is an important part—it’s also somewhat disturbing to think that this dastardly ploy might have escaped our notice if the boss man had hurried through his morning cruller and skipped straight to the comics.

But I suspect we had some help from our loyal allies as well.

What probably happened is that Israel’s Ehud Olmert spit out his morning coffee when he unfolded his copy of Ha’aretz—with the local edition of the International Herald Tribune containing the offending ad--neatly wrapped inside.

The Jerusalem Post and other Israeli outlets gave conspicuous and indignant play to the story.

One outlet reproduced the ad, permitting the curious to frustrate Stuart Levey’s efforts to shield the offending but ultimately undoubtedly contrite bank from international obloquy.

Courtesy of Aratz Sheva here it is:


Austria Bank—Creditanstalt

Deal with it!

Levey’s pride in his stunt is questionable on so many levels.

First of all, on the merits of the case, it appears Iran has a right to pursue nuclear power for electrical generation using light-water technology, even through a sanctioned organization.

The UN Security Council Resolution 1737 designating the Iranian Atomic Energy Agency, which Levey cites, states:

“13. Decides that the measures imposed by paragraph 12 above do not apply to funds, other financial assets or economic resources that have been determined by relevant States:
...

(d) to be necessary for activities directly related to the items specified in subparagraphs 3 (b) (i) and (ii) and have been notified by the relevant States to the Committee

What’s listed under 3 (b) (ii), you might ask.

Exemptions for “the supply, sale or transfer of:
(i) equipment covered by B.1 when such equipment is for light water reactors;

(ii) low-enriched uranium covered by A.1.2 when it is incorporated in assembled nuclear fuel elements for such reactors.”

In other words, it seems all Iranian organizations, including those designated in the UN sanctions, are still free to engage in business relating to light water reactors using low-enriched uranium.

Of course, the intended beneficiary of this exemption was undoubtedly Russia, which is in the midst of executing the Bushehr contract and would not condone sanctions that would entail mandated non-payment for the millions of dollars of equipment Russia has shipped and is shipping to the site.

But the Iranian Atomic Energy Agency is allowed to engage in light water reactor-related activities, and that’s what we want to encourage, isn’t it?

Second, as a matter of geopolitics, some strategists might consider the fact that the Iranian government was willing to open competition for subsequent reactors at Bushehr to international bidding to be an interesting opportunity to wean Iran away from Russia and increase Iranian transparency and engagement with the West on nuclear issues.

Third, Levey by his own account saw fit to put the kibosh on this Iranian gambit at his own initiative. Consulting with State Department moderates and even NSC hawks was apparently unnecessary.

And there, in my mind, you have the OTFI problem in a nutshell.

Prone to error, answerable to no one, ill-suited to self-reflection, apparently oblivious to its own misjudgments.