The Perils of a Banker’s War on Iran

Treasury Undersecretary Levey checks in with Israel’s Olmert

The neocons are not going to get their war with Iran if it’s to be left to their traditional power centers in the Bush Administration to make the call: They’ve lost the Pentagon, and it’s abundantly clear that neither the uniformed brass nor Defense Secretary Gates have any interest in starting another catastrophic war. And the fact that they still have a solid ally in Vice President Cheney doesn’t mean much, because Cheney is far less influential five years into the Iraq debacle than he had been on its eve. Nor is there any significant support (outside of Israel) among U.S. allies for a confrontational path. Still, all is not lost for that merry little band of neocon bomb throwers who’ve spent the Bush tenure quite literally “setting the East ablaze.” There’s always the Treasury.

Well, its Financial Crimes Enforcement Network (FinCEN), dedicated to fighting the “war on terror” etc. via the international banking system. John McGlynn offers fascinating insights into a critical aspect of Bush Administration policy that has scarcely appeared on the radar of most mainstream media. In particular, he warns, FinCEN’s March 20 advisory warning the international banking community that doing business with any Iranian bank, or bank that does business with an Iranian bank, runs the risk of falling afoul of the U.S. Treasury’s expansive interpretation and enforcement of UN sanctions and of anti-terror money laundering regulations adopted under the post-9/11 USA Patriot Act.

The beauty of this approach, from a neocon point of view, is that it completely skirts all those troublesome international diplomatic forums where the U.S. and its closest allies have failed to convince others to apply meaningful sanctions against Iran — most of the international community is skeptical over the claims being made by the U.S. of an imminent Iranian threat (as, of course, is the U.S. intel community, as last year’s NIE showed) and even more skeptical of the value of sanctions in resolving the issue, rather than in preparing the way for confrontation.

But by using the centrality of the U.S. to the international banking and financial system, the U.S. is quite literally able to “privatize” sanctions by going over the heads of governments that might oppose such measures to lean on foreign banks. The U.S. doesn’t even need to prove its case against Iran; it simply warns foreign banks that by continuing to do business — any business — with Iran, they run falling afoul of U.S. regulatory authorities. And which international bank would want to risk being shut out of the most lucrative market of all?

AsTreasury Undersecretary for Terrorism and Financial Intelligence Stuart Levey told a Senate committee last month, private sector banks around the world had begun to comply, even when their own governments had not pressed them to act. “Avoiding (U.S.) government-identified risks is simply good business,” Levey told the Senators. “Banks need to manage risk in order to preserve their corporate reputations. Keeping a few customers that we have identified as terrorists or proliferators is not worth the risk of facing public scrutiny or a regulatory action that may impact on their ability to do business with the United States or the responsible international financial community.”

The activist Treasury played a similar role in relation to North Korea, which should serve as an object lesson in its dangers. Levey told the U.S. Bar Association last Month that the North Korea experience showed the potential of his department’s interventions to turn the international banking system into a form of leverage for U.S. foreign policy. FinCEN had targeted the Macau-based Banco Delta Asia, through which Pyongyang did business, for similar measures, based on unproven allegations of money laundering and counterfeiting, resulting in a panic that forced the bank to immediately freeze hundreds of millions of dollars of North Korean assets. In response, of course, North Korea withdrew from the Six-Party diplomatic process set up to deal with its nuclear program, making clear that it would not talk as long as the U.S.-imposed asset freeze remained in place. It took 18 months for U.S. diplomats to untangle the mess created by their colleagues in the Treasury, during which time North Korea actually tested a nuclear device.

Iran, of course, is more integrated into the international economy, as one of its largest energy exporters — and that means denying it the credit facilities to conduct international trade could prove very painful. Don’t expect it to buckle, however. Instead, Iran would be more likely to respond on other fronts where it has some capacity to inflict pain on the Americans. Iran is presumably capable of making the U.S. mission in Iraq far more complicated and dangerous than it currently is, and it might well see bloodying the Americans next door as an asymmetrical means of responding to U.S. financial pressure. And then there’s the oil question: If it’s feeling the squeeze anyway, Tehran might see a short-term turning off of its own oil spigots — or sabotaging those of others — to send prices to $150 or more, as another effective response.

Playing the oil card would also help the Iranians create a counter argument for those countries who do the most business with Iran — particularly China — from complying with the U.S. Treasury measures.

Then again, China, won’t appreciate being forced to support controversial U.S. foreign policy positions to the extent that they impinge on its own trade and investment activities, particularly in search of energy supplies. Beijing won’t want to have to choose between access to U.S. banks and access to Iranian energy exports. Nor will it see why it should have to tolerate such a dilemma being imposed on it by a country currently in debt to Beijing to the tune of $3 trillion, and counting. Bankers in China, the Gulf, and elsewhere, to which U.S. banks have recently turned in a desperate search for liquidity, might be tempted to suggest that the U.S. Treasury’s regulatory energies might be more properly exercised in pursuit of measures to contain and prevent a recurrences of the sub-prime mortgage disaster and related products of a woefully under-regulated environment, than on enforcing unpopular U.S. diplomatic positions.

Given the weakness of the dollar and the U.S. position in the global financial system right now, the international system’s tolerance for the excesses of an activist U.S. Treasury may not be infinite.