Treasury's War

Part I

FOUNDATION

1

A NEW KIND OF WAR

As our US Air Force C-17 approached Kabul, we were jostled in our jump seats as the pilot corkscrewed down toward the airport to avoid surface-to-air missiles. I looked down the line at our group of Treasury Department officials. We were strapped into the sides of the plane with cargo nets enveloping us. We were clean-shaven, decked out in suits and ties, our briefing books stored away and our briefcases now at the ready. It was November 2002, and our delegation was beginning what would become our “century-hopping” tour of Afghanistan, Pakistan, and India.

In Afghanistan, we were trying to build the government’s capacity to counter Al Qaeda and Taliban financing, which originated largely from the poppy trade and was transmitted via the nascent banking sector, cash couriers, and the traditional hawala network of traditional moneylenders. In Pakistan, we were trying to partner with the government to dismantle the financial networks coursing through the country via charities, bank accounts, and trusted couriers, funding routes that Al Qaeda and the Taliban had relied upon for two decades. And in India, we would be meeting with the G20 Finance Ministers to push for global controls on movements of illicit financing to terrorist groups, with an emphasis on trying to regulate the hawala networks that bound Central and South Asia to the Middle East, Africa, and the rest of the world. My job was to advise Secretary of the Treasury Paul O’Neill on terrorist financing and money laundering and to help shepherd our policies along with others.

As we landed in Kabul, the members of the Secret Service’s elite Counter Assault Team (CAT) who were traveling with us to protect Secretary O’Neill stood up in the plane. They began to don body armor and load their automatic weapons. The CAT members would be the last line of defense for the secretary against a direct attack. Unlike the men of the classic Secret Service plainclothes protection division, they did not want to blend into the environment. These were big, bulky, ominous-looking security professionals. They spent their training days lifting weights, running, and perfecting their marksmanship. As one of them said to us as they prepared their M5 assault rifles and bulked up with their body armor, “We want people to know we are here.”

Suddenly, I, too, felt dangerously conspicuous. My suit and tie seemed wholly inappropriate and out of place, if not outright dangerous. It was almost laughable. I looked at Tim Adams and Rob Nichols, two senior Treasury officials, down the row and wondered what we were doing in Afghanistan. Our thick briefing books full of memos and background papers would be our only protection. Though the fighting in Kabul had ended with the fall of the Taliban regime, we were walking out of the plane into a war zone.

As we exited onto the tarmac—briefcases in hand—the light of dawn had just broken the darkness. The snowcapped Hindu Kush Mountains stood at 15,000 feet like waking giants in the distance. On the side of the airport runway, I saw the tattered remnants of planes—the tails and fuselages of Soviet-era jets with the vivid hammer-and-sickle insignias still visible. I felt as if I had flown back into history.

We joined with Secretary O’Neill on the tarmac and immediately boarded transport helicopters. Flanked by two armed Black Hawks as our escort, we flew over the dusty and destroyed city. Looking down, I imagined the decades of fighting and civil war the people must have witnessed from their mud homes. A little more than a year before this, Al Qaeda and the Taliban had roamed freely in the training camps and towns of this destitute country. We flew through the mountains surrounding Kabul, well beyond the city, and when we landed, the Black Hawks remained in the air, circling overhead for security. Within seconds after stepping off the helicopter, I felt the effects of the altitude and the dryness of the air. There wasn’t much visible on the horizon other than dusty mountains. Very quickly, villagers began descending out of nowhere from the surrounding area—a boy with a donkey, small children, and a few men, all curious to see the visitors who had just landed in their midst. We were like aliens landing in a seventeenth-century village.

As I looked around, the reality of the new war we were waging hit me. We were doing battle with many of the same financial networks and support mechanisms that had been developed long ago to support the fight against the Soviet Union in the villages and mountains of Afghanistan. These were financial structures used now by Al Qaeda to drive its global agenda and war against the United States.

Our power and reach had to have an impact well beyond the conventional tactics and strategies—beyond the military and the diplomats to the Treasury Department’s power and role. Our financial influence and tools needed to be used to help our friends and allies, and had to be tailored to pressure and impact our enemies’ financial networks. And this needed to happen not just in the comfortable, modern banking centers of the world, but in the most remote and underdeveloped corners of the globe. This was a war that required new thinking about the use of financial pressure and influence to undercut the enemy’s influence and reach, and we were at the center of it. We had already come a long way since 9/11.

In September 2001, from my desk on the fourth floor of the Treasury building, I could see Reagan National Airport, the Potomac River, and the Pentagon. I had just started my new job at the Treasury Department only weeks before, on August 24. In my previous job as a federal prosecutor in the Department of Justice’s Terrorism and Violent Crimes Section, I had been blessed early on with opportunities to work with and learn from the nation’s best terrorism prosecutors—Patrick Fitzgerald, George Toscas, and John Lancaster—and had been asked to help with our investigations of the 1998 embassy bombings case, and later, the October 12, 2000, attack on the USS Cole in Aden, Yemen. I had been brought over to Treasury to serve as senior adviser for all things international to the new undersecretary for enforcement in the department, Jimmy Gurulé.

The undersecretary for enforcement had enormous statutory responsibilities, overseeing all of Treasury’s law-enforcement agencies, including the US Customs Service; the Secret Service; the Bureau of Alcohol, Tobacco, and Firearms; the Federal Law Enforcement Training Center (FLETC); and the Treasury Executive Office for Asset Forfeiture (TEOAF), as well as Treasury’s coordination with the IRS’s Criminal Investigative Division. Treasury agents made up about 40 percent of federal law-enforcement personnel, and they investigated all manner of financial crimes—from money laundering and counterfeiting to financial fraud and tax evasion.

A well-respected former prosecutor and law professor, called an “inspired choice” for the job by Senator Orrin Hatch, Gurulé also had oversight of the agencies responsible for managing all of the US government’s sanctions, through the Office of Foreign Assets Control, and overseeing application of the Bank Secrecy Act (the requirements for banks to file currency transaction and suspicious activity reports). Since assuming the office, Gurulé had been intent on increasing Treasury’s focus on money laundering at home and globally—a focus that would prove relevant to the campaign to come.

On 9/11, Gurulé and his Treasury spokesperson, Tasia Scolinos, sat with a reporter from the Wall Street Journal, previewing the launch of the Bush administration’s first National Money Laundering Strategy, to be signed by the secretary of the treasury, the attorney general, and the secretary of state and published publicly the next day. This strategy was intended to be the focus of Gurulé’s tenure and would shape the work of the entire office, including the enforcement agencies of the Treasury.

News of the first and second planes hitting the World Trade Center as well as the attack on the Pentagon traveled throughout the Treasury building very quickly. As I watched the thick black smoke from from across the Potomac, it was clear to me that the world had changed and that we were at war. Soon thereafter, the evacuation sirens blared, and everyone in the historic Treasury building poured out into the streets. A handful of us would retreat to Secret Service headquarters to watch the skies and radar for more planes, wondering what was next.

On September 12, the White House asked the Treasury what the department could contribute to the response. President Bush had directed that all elements of national power be leveraged to respond to the attacks on New York and Washington—and to prevent another attack from hitting our shores. He called for an unconventional response, and he wanted to go after all elements of the network—including Al Qaeda’s support networks and lifelines. In this task, Treasury’s role became clear when, on September 24, 2001, President Bush announced, “We will direct every resource at our command to win the war against terrorists: every means of diplomacy, every tool of intelligence, every instrument of law enforcement, every financial influence. We will starve the terrorists of funding, turn them against each other, rout them out of their safe hiding places, and bring them to justice.”¹

This meant going after Al Qaeda’s money.

The 9/11 attacks themselves demonstrated the nimble and global nature of the Al Qaeda financial infrastructure. For years, it had used the funding coming from charitable donations, deep-pocket donors, and supportive allied groups to build up its capabilities. It paid for and trained thousands of recruits in its camps devoted to Arab foreign fighters; it managed a hub of financial activity in Peshawar, Pakistan, to receive and disburse funds; and it paid for operations and pensions as needed. It had a budget for all its operations, and moneymen with the ability to raise and move money around the world.

In the 9/11 attacks, Al Qaeda relied on its tried and true financing networks, with Mustafa Ahmad al-Hawsawi serving as the money manager for that operation. The hijackers were wired money from accounts in Dubai. In Germany, they used Dresdner Bank,² and once in the United States, they used bank accounts in their true names at Sun Trust Bank in Florida and Bank of America as well as multiple regional banks. In San Diego, Nawaf al-Hazmi and Khalid al-Mihdhar used an administrator’s bank account at the Islamic Center of San Diego to receive wire transfers from Ali Abdul Aziz Ali, Khalid Sheikh Mohammed’s nephew in Dubai.³ All nineteen of the hijackers used legitimate bank accounts in their own names, frequently making cash deposits and withdrawals as well as sending and receiving wire transfers from Dubai. None of the hijackers triggered Suspicious Activity Reports in any of their banking transactions, owing to the small amounts and the regular nature of their activity.

In total, the amounts used specifically for the attacks reached only half a million dollars—a modest investment for the mass destruction that was to follow. Al Qaeda had devoted millions since the mid-1990s to building the capabilities to launch 9/11, as well as the other operations known and unknown around the world that targeted the United States. Al Qaeda’s investments would result in the most devastating terrorist attack on US soil in history. The resulting destruction, economic aftermath, and response would cost the United States billions of dollars.

The next attacks needed to be crippled and stopped. Following and disrupting the money flows within the Al Qaeda system became an imperative. The Al Qaeda financial support networks—charities, deep-pocket donors, and front companies—and the means by which Al Qaeda moved money around the world—banks, couriers, wire transfers, hawaladars—would become our targets.

In a subsequent meeting at the White House, Deputy National Security Adviser Gary Edson asked Treasury representatives to come up with steps it could take to squeeze Al Qaeda’s finances. Edson was an economist responsible for international economic policy matters, and he was known for not suffering fools lightly. He and many others around the table were new to this world—the nexus between financial power and national security—but there were financial tools, already developed over the years, that were ready to be deployed, and a small group of actors within the government who knew about them. The challenge would be to shape the classic financial weaponry of anti-money-laundering strategies and sanctions into a robust set of tools that could disrupt Al Qaeda’s operations and to then dismantle its networks. Though we didn’t know it at the time, these first tasks would set the stage for a far broader campaign of financial warfare—with Treasury at the helm. But it all began with the campaign to combat terrorist financing.

Terrorist financing—the raising and movement of funds intended for terrorist causes—presents a unique problem for governments. In simple terms, the financing of terrorism has often been described as “reverse money laundering.” Generally, money laundering consists of a financial scheme or transaction used to make illegitimate funds appear legitimate.⁴ This allows criminal groups to cleanse the proceeds of crime so that the funds can be used more freely in the banking and commercial systems and appear legitimate.

Terrorist-related funds, however, are often derived from legitimate sources that are then diverted or used to support terrorist causes. Terrorist funds—often transferred in very small amounts and destined for operatives or sympathetic groups—are often commingled with money raised for legitimate causes. The transactions are veiled behind the uncertainties of determining the motivations and intent of those involved. The task of determining motivations is further complicated by the fact that although the funds may be used for nefarious purposes (e.g., paying a terrorist sleeper cell), they may also be used for legitimate purposes (e.g., feeding orphans).⁵

Tracking such money is also difficult, since those who handle it resort to a variety of different methods of hiding the origin, transfer, and ultimate destination of these funds. They use false identities to open bank accounts and to make wire transfers; layer their transactions with the use of pass-through and joint accounts, front companies, or charities; and use alternative remittance systems that may not be subject to the same oversight as the formal financial system.⁶

The commingling of legitimate and illegitimate funds is only one characteristic of terrorist financing. A terrorist financier’s motivation or intent is a unique and defining component of the financing of terrorism. As a US government report explained, terrorist groups, unlike criminal organizations, are not necessarily motivated by greed in the first instance, but by “non-financial goals such as seeking publicity, political legitimacy, political influence, and dissemination of an ideology.” As the report noted, “terrorist fundraising is a means to these ends.”⁷ Thus, when one is attempting to identify terrorist financing, for whatever purposes, the intent of those involved becomes a critical part of the calculus.

Since the political, social, or religious causes espoused by terrorist groups may coincide with the goals and beliefs of certain nation-states and individuals, terrorist groups also receive financial and other forms of support from countries and willing donors.⁸ These sources of funding provide a font of resources to terrorist groups, and it is this type of support that differentiates these groups from traditional international criminal conglomerates.

Terrorist financing has historically taken several different forms, depending, in part, on the terrorist group involved and the region in which the group or its members operate. Terrorist groups are opportunists and do not shy away from the use of classic criminal activity to raise funds for their criminal goals. Like international criminal organizations, terrorist groups around the world have been known to use all forms of criminal activity to raise money, including drug trafficking, extortion, kidnapping, human trafficking, all forms of fraudulent schemes, and counterfeiting.⁹ The Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia, or FARC) developed from being a terrorist insurgency into a sophisticated cocaine-trafficking cartel. The Taliban has used the poppy and heroin trades to increase its influence and fuel its operations against North Atlantic Treaty Organization (NATO) and Afghan forces. Groups such as the Basque terrorists in Spain and France and the Tamil Tigers in Sri Lanka have used extortion against local populations and diaspora communities to raise funds for arms and political initiatives. Other groups, such as Aum Shinrikyo in Japan, have relied on financial criminal activity or the payroll of its membership to fuel their deranged agendas. Such financial schemes—taking advantage of whatever financial opportunities may be available—are seen throughout the world today as a means of sustaining terrorist operations and cells as well as a means of terrorizing those with whom the terrorist group comes in contact. We now needed to launch a campaign against terrorist financing.

Rick Newcomb, the director of the Office of Foreign Assets Control (OFAC), a veteran Treasury official and well known to a select few in the national security community, knew immediately what needed to be done with Treasury’s powers to go after Osama bin Laden and his assets. Newcomb, a man with thinning hair and large circular glasses, was a savvy lawyer who had quietly built OFAC into one of the government’s most powerful yet least understood offices. OFAC, which was small in government terms, with just over one hundred employees after 9/11, was responsible for the administration of all US sanctions programs and had the delegated ability to target and sanction violators with asset freezes and fines.

In World War II, the US government tried to control the assets of German, Italian, and Japanese companies and agents. It managed this with a little office at the Treasury Department known at the time as “The Control.” The Control became the US government’s primary tool for going after the assets of enemy regimes. In the 1950s, with the Korean War raging, The Control was renamed the Office of Foreign Assets Control, and it was used to target Chinese assets.¹⁰

After the Cuban missile crisis of 1962, OFAC became the hub for administering sanctions on Cuba. Restrictions were placed on what and who could enter Cuba in an attempt to strangle the Castro regime economically. A turning point for OFAC came during the Iran hostage crisis of 1979, after which Iranian assets—liquid assets as well as real property such as the embassy and consulates—became the subject of freeze orders. On November 14, 1979, President Jimmy Carter signed Executive Order 12170, which blocked all property of the government of Iran under US jurisdiction, totaling $12 billion.¹¹ The work of freezing and managing Iranian assets amid the hostage crisis—and subsequently, in resolution with the Iranian government via the Algiers Accords—made it clear that OFAC needed to become more than just a licensing office. It had to be expanded to manage this case and those to come.

In many ways, OFAC thrived on being seen as a technical office. A distinct mystery surrounded the office and its operations. OFAC, housed in the Treasury Annex next to leafy Lafayette Park, across Pennsylvania Avenue from the main Treasury building, was perhaps the most powerful yet unknown agency in the US government.

What made OFAC so powerful was not so much its ability to freeze assets or transactions as its power to bar designated parties and those associated with them from the US financial system. In the mid-1980s, Newcomb and one of his key deputies, Bob McBrien, decided to change the way they notified banks of OFAC’s decisions. McBrien, a wiry, blue-eyed technocrat, had been part of the inner core of the US counterterrorism officials assembled by the White House after the 1972 Munich Olympics massacre to devise a strategy to address the new forms of terrorism then emerging. He was a rare breed at the time for Treasury and would spend most of his career working with Newcomb. In 1986, OFAC issued its first public list of Specially Designated Nationals, sending letters of explanation to the Federal Reserve banks. Of the thirteen banks in the Federal Reserve system, only the New York Fed paid much attention to the letters, in part because most of the transactions and assets subject to OFAC attention flowed through New York banks. But it was a start to isolating those designated from the banking system.

Those labeled as Specially Designated Nationals by the US government and subject to OFAC’s jurisdiction and US sanctions laws would find it difficult to do business in the United States, because American citizens, businesses, and other entities were prohibited from interacting commercially or financially with them.

Though the government’s authority was domestic in these cases and technically relevant only to those institutions and individuals subject to US jurisdiction, the nature of the list and the desire of citizens and businesses to maintain their access to the US financial system made this power a multilateral tool by effect. Banks around the world, especially those wanting to maintain a presence in the United States, had to monitor, if not honor, the lists. For years, banks in Latin America had implemented the OFAC list tied to the drug-trafficking cartels, often referred to in Spanish as “la lista Clinton” because of its use during the Clinton administration. The OFAC power was an inherently international power because of the importance of the American banking system and capital markets.

This power extended beyond US shores thanks to the United States’ status as the principal capital and banking market worldwide. If you want to be a serious international institution with the ability to work globally, you have to access New York and the American banking system.

The reach of this kind of US financial power derives as well from the predominance of the US dollar as the principal reserve and trading currency around the world. Companies and traders use the dollar as a benchmark for international trade. Countries, companies, and individuals keep dollars or accounts in dollars as security against the uncertainties of other currencies. Dollar-denominated transactions of any sort—from oil deals to settlement of commercial contracts—have to pass through dollar-clearing accounts. For most dollar-clearing transactions—including oil deals—the transactions pass through a bank account in New York. Defying OFAC is therefore not an option for most banks or businesses. Compliance offices and law practices have been built around compliance with OFAC regulations.

OFAC would take full advantage of these kinds of targeted, public sanctions to go after Al Qaeda’s finances. Newcomb knew how to freeze assets in the international financial system and stop any transactions suspected of being tied to Al Qaeda. All he needed was a new executive order expanding the Treasury’s powers to go after the Al Qaeda financial and support network. At the same time, the Treasury general counsel, David Aufhauser, and his deputy, George Wolfe, saw such an executive order as a way of offering the White House powerful new armaments in the unconventional war on terror.

Aufhauser was a quintessential Washington lawyer. A partner at the famed, cutthroat law firm of Williams & Connolly, he had helped the Bush campaign manage its Florida electoral legal strategy. Aufhauser was sharp and relished the ability to make convincing arguments with the flair of a master litigator. Wolfe, his deputy, was a South Carolina lawyer. His southern drawl was disarming and endearing, but his words belied a cutting and deep intellect. Wolfe would become a key figure for the Treasury’s legal work at home and in war zones. One of their chief lawyers, Bill Fox, a master problem solver and a big, jovial man who had been an attorney for the Bureau of Alcohol, Tobacco, and Firearms, would serve as Aufhauser’s chief adviser and would begin to take a central role in the post-9/11 work of the Treasury Department.

The lawyers saw the executive order as a means of driving the financial war in a new direction. It could punish the bankers of terror and dissuade others from crossing the line to support Al Qaeda or other terrorist groups.

The drafting began, with Aufhauser’s lawyers and the OFAC experts joining forces to lay out the contours of the executive order. In its scope and impact this order would be different from earlier ones. This was an emergency executive power to be wielded not just against Al Qaeda and its direct supporters but against terrorism support writ large. Prior attempts to use this power against terrorists had been limited to very specific terrorist targets and were not used to go after the financial infrastructure of the networks. This broader model had been used by OFAC against drug-trafficking organizations, but not against Al Qaeda.

The executive order itself laid out a new principle to attack terrorist financing: that financial supporters of terrorism, the companies or businesses owned or controlled by them, and those “associated” with them were potentially subject to designation. The bankers and passive investors in terror who may have played the game of willful blindness in the past were now on notice. The US government was making clear that straddling the fence, with one foot in the legitimate financial and commercial world and the other in the arena of support for violent extremism, was no longer acceptable. This approach opened up the spigot for potential targeting and sent a clear message to the private sector that banks tarred with the label of “terrorist support” risked having their assets frozen and reputations soiled. This would prove a powerful tool in the post-9/11 period.