Juan Zarate: "Treasury's War: The Unleashing Of A New Era Of Financial Warfare"

MR. FRANK SESNO

11:06:54
And thanks for joining us. I'm Frank Sesno of the George Washington University and host of Planet Forward, sitting in for Diane Rehm. She will be back on Wednesday. Juan Zarate was the Treasury Department's first assistant secretary for terrorist financing and financial crimes. In a new book, he provides an insider's account of how the department developed a financial arsenal to fight terrorist groups and enemy states in the wake of 9/11.

MR. FRANK SESNO

11:07:20
The title is "Treasury's War: The Unleashening (sic) Of A New Era Of Financial Warfare." Juan Zarate is currently with the Center for Strategic and International Studies and an analyst for CBS News. And he joins me in the studio. And, Juan, it's great to see you.

MR. JUAN ZARATE

11:07:34
Frank, great to see you. Thanks for having me.

SESNO

11:07:36
Oh, thank you very much for being here. You write in your book very dramatically. This book tells the story of this new era of financial warfare. A new era of financial warfare?

ZARATE

11:07:49
Absolutely. The financial warfare, the use of economic power, it -- in state craft, in national security -- is not new. I chronicle in the introduction a bit of a history of this, you know, dating back to the Peloponnesian War, of course. And so that isn't new. What's new in this period -- and it really did start after 9/11 -- was the use of the globalized financial system, the role and centrality of the dollar and tools that we had that were brought to bear quite aggressively and were put on steroids after 9/11 to really isolate rogue financial behavior from that international financial system.

SESNO

11:08:30
The bad guys.

ZARATE

11:08:31
The bad guys. And so in the first instance -- and this is how it all started -- was going after al-Qaida and its finances. President Bush signed an executive order on Sept. 24, 2001, importantly, the first step we took post-9/11 in the war on terror.

SESNO

11:08:47
Executive order 13224.

ZARATE

11:08:49
Right. And that executive order is very important because what it did was it said, A, we're going to use financial authorities and powers to go after the funding of terrorist groups. But, importantly, it really expanded and authorized the secretary of the Treasury to go after the financial infrastructure of these groups.

ZARATE

11:09:09
And so we weren't just going after bin Laden or Ayman al-Zawahiri or where they might have bank accounts in Pakistan or Dubai. But we were going after those who were financial intermediaries and potentially even the banks that were financing or facilitating their activity.

SESNO

11:09:25
And you say this new brand of financial warfare was -- these are your words -- unprecedented in its reach and effectiveness.

ZARATE

11:09:32
Right.

SESNO

11:09:32
And you were right in the middle of all of that.

ZARATE

11:09:35
Well, I was honored and privileged to be in the middle of it. What we did do was we had the political will and top cover to make this an aggressive international campaign. Many of these tools and systems existed prior to 9/11. The notion of targeted sanctions, of course, had been evolving through the 1990s. President Clinton used them effectively in the Balkans. We'd used them effectively against Colombian drug cartels.

ZARATE

11:10:00
The anti-money laundering system, the know your customer rules that banks are required to engage in, the reporting of suspicious activity -- all of that was in place. But, really, what you had was a focus and an intensity of the international community lead by the Treasury Department to focus on these issues as central to international security. And that changed the complexion politically. And with the tools in place and the enforcement measures we took started to reshape the landscape to allow us to reach not just into New York, but far afield into the global financial system.

SESNO

11:10:35
So take us there for a minute. You arrived at the Treasury Department just weeks before the 9/11 attacks.

ZARATE

11:10:39
Yeah.

SESNO

11:10:40
You watched that happen. You looked across the river and saw the smoke billowing from the Pentagon. You knew the country was at war. Give us a sense of the early days and the role of the Treasury in response, in that response.

ZARATE

11:10:55
Well, Frank, I had come over from the Department of Justice. I'd been a terrorism prosecutor, had been working on the embassy bombings case, the al-Qaida attacks in East Africa, the USS Cole attack outside of the port of Yemen. And so I had, in some ways, understood sort of what we were facing vis-à-vis al-Qaida. What was interesting and important for the Treasury Department with 9/11 was it drew the Treasury Department centrally into the fight against terrorism.

ZARATE

11:11:25
We knew we were at war. Clearly, as a nation, we were dealing with the tragedy of 9/11. But what was clear was President Bush said to the departments, and particularly to Treasury Department, you need to use your authorities, your capabilities, your reach, to go after the elements of this terrorist threat so it doesn't happen again -- never again -- and, secondly, so we disrupt and dismantle and deter the financing of terror.

SESNO

11:11:47
Now, up until that point, what powers did Treasury have? What kinds of -- because this wasn't the first time that the Treasury realized -- I mean, we've had sanctions in this -- against South Africa, apartheid-era South Africa, and certainly Iraq and Iran and North Korea. So what were these new tools that you were developing?

ZARATE

11:12:07
You're right. Some of these tools were amplified tools. And so, like I said, we had targeted sanctions in the past. Certainly we had designated Osama bin Laden as being an impediment to the peace process, for example. But what we did, particularly with this executive order, we had the authority to go after a broader swath of individuals, entities, elements of a network to actually isolate them from the banking system.

ZARATE

11:12:30
So we could freeze their assets. We could also say to the international community and also through the United Nations, these are individuals, pariahs, in the international system who should not be -- done business with.

SESNO

11:12:41
And you could do this unilaterally?

ZARATE

11:12:43
We could do it unilaterally. Certainly, through the U.S….

SESNO

11:12:45
But we didn't need to -- you know, we just had this conversation about Syria. You didn't need to consult with allies or go to the United Nations or seek IMF approval or anything like that?

ZARATE

11:12:54
No. We didn't have to. We chose to in many ways. The U.N. with the sanctions, the regime that existed with respect to al-Qaida and the Taliban, under Resolution 1267 and the new resolution that was passed, 1373, allowed us to go to the U.N. And so the actions we would take, we would multi-lateralize through the United Nations or through the European Union.

ZARATE

11:13:15
So we wanted to do that. That was important. But it wasn't dependent on them. And what was interesting in this period, Frank, and what started to evolve was that the banks in international financial institutions grew very sensitive to doing business with rogue actors, in part because we had these authorities. We also had broadened the requirements for the anti-money laundering system.

ZARATE

11:13:35
So not just banks, but non-bank financial institutions, like the Western Unions of the world, even dealers in precious stones and metals, had to start reporting on money laundering. And we had built an international coalition to do this around the world. And so the system started to get sensitized and risk averse to doing business with bad actors.

ZARATE

11:13:54
And so the moment the U.S. government would take an action, name an individual, a bank, a front company, that would be noticed around the world and noticed by not just governments, but by bank CEOs, compliance officers, and lawyers, who would say, look, we've got to be very careful. We cannot be doing business with these people. And that started to shape a new financial ecosystem.

SESNO

11:14:15
And that new financial ecosystem was shaped, too, because we were coming right out of the wreckage of 9/11. I mean, literally, the heart of the financial district of the world was still smoldering. So I imagine it was much easier to forge that kind of consensus both domestically and politically and commercially around the world than it would be if you were, say, trying to do it today just because it was a good idea.

ZARATE

11:14:39
No. I think that's right, Frank. And I think there was a sense, especially to your point about New York itself being hit, the center of American commerce and finance being at the heart of the attack. That sensitized America's bankers and the financial institutions to this threat and risk and allowed things like the Treasury's terrorist financing tracking program, the arrangement with the European-based SWIFT program to come to fruition. It allowed greater cooperation with banks. And, frankly, it made banks just more sensitive to these issues.

SESNO

11:15:10
Would you climb inside for just a minute to explain to us what President Bush's Executive Order 13224 actually said and did and what the significant points of departure were there?

ZARATE

11:15:22
Right. What's important in that executive order was it gave the secretary of the Treasury, and in some cases the secretary of state, the ability to designate not just terrorist groups or individuals, but those elements of the financial network of those groups that were engaged in supporting or providing financing to those groups.

SESNO

11:15:43
Explain.

ZARATE

11:15:45
We knew, for example, that al-Qaida in the run-up to 9/11 didn't just have bank accounts that belonged to their cell members, didn't just have bank accounts in Hamburg or in Florida, for example, that were relevant to the attack. But they had a financial infrastructure. They had deep-pocket donors around the world, and in particular in the Arabian Gulf to support the...

SESNO

11:16:05
Individuals.

ZARATE

11:16:06
Individuals. They used charities both directly and indirectly to funnel money and to move money around the world. They had front companies, a honey-producing company, for example, in Yemen to raise and move money. They would siphon money off wire remittance operations, the Al-Barakat network, for example, moving money around the world into Somalia.

ZARATE

11:16:27
Ten percent of that was going to al-Qaida coffers. And so there was an entire infrastructure to al-Qaida that had been built up since the Soviet Mujahideen days that was supporting not just al-Qaida but their broader network. And so the idea was this authority allowed us to not just go after those that were attacking on 9/11 but those that were providing the financial infrastructure. The other thing it did, Frank, importantly, was it allowed for us to go after those who were associated with those networks. And so...

SESNO

11:16:59
Now, when you say go after, this executive order allowed you to go after the honey-producing company?

ZARATE

11:17:04
Yes.

SESNO

11:17:05
And what did you do?

ZARATE

11:17:06
What you do is you can name that honey-producing company, that bank, that institution. That allows the secretary of Treasury to freeze the assets. Orders go out. The banks have to freeze the assets. It means international institutions have to wary of doing business with that particular individual or entity. And so you begin to lock those designated parties out of the system. And, importantly, Frank, keep in mind this is an administrative war-based power. And so this is not a criminal indictment. This is about arresting assets, not people.

SESNO

11:17:39
I understand. But -- so let's come back to the honey company for a minute.

ZARATE

11:17:41
Yeah.

SESNO

11:17:41
All right. So here's this company in Yemen. They're making honey, and they're funneling all this money. And they're a revenue stream, if you will, for al-Qaida.

ZARATE

11:17:48
Yeah.

SESNO

11:17:49
What do you do? Do you shut them down? Do you siphon the money into an account, so now it's somebody else's money? Do you prevent the money from getting to them? I mean, how do you actually stop it?

ZARATE

11:17:57
It's a great question. And one of the tradeoffs that you have in the U.S. government -- and we've had over time -- is, what do you do with that information? Do you sit and watch it? The intelligence community will want to watch perhaps longer than you would want in terms of disrupting. But disruption means freezing their bank accounts if you can, shutting them down physically, so cooperating, for example, with Yemeni authorities to go in and raid, get financial records.

ZARATE

11:18:20
It could mean working overtime, as we did with the Saudis, on shutting their largest charity, which was used by al-Qaida, al-Haramain, to shut down key branches that al-Qaida relied on.

SESNO

11:18:29
So you actually shut some of these down?

ZARATE

11:18:30
You actually shutter….

SESNO

11:18:31
And the honey company, they still in business?

ZARATE

11:18:33
No, they're out of business.

SESNO

11:18:34
We're talking with Juan Zarate, author of "Treasury's War: The Unleashing Of A New Era Of Financial Warfare." I'm Frank Sesno, and you're listening to "The Diane Rehm Show." Coming up, more of our conversation.

SESNO

11:20:02
Welcome back to "The Diane Rehm Show." I'm Frank Sesno, sitting in for Diane today. And we're talking with Juan Zarate. He is the former deputy assistant to the president and assistant national security adviser for combating terrorism. He did that job from 2005 to '09. Prior to that he served in the Treasury Department as the first assistant secretary for terrorist financing and financial crimes.

SESNO

11:20:21
He is author of "Treasury's War: The Unleashing Of A New Era Of Financial Warfare." In your book you write: This is the story of the small group of officials from the Treasury Department and other government agencies who engineered this new brand of financial power. From the bowels of an emasculated Treasury Department, bureaucratic insurgents, guerillas in gray suits, you call them, envisioned a new national security landscape.

SESNO

11:20:45
And by the way, you spelled guerilla as, g-u-e-r, not g-o-r. So guerillas in...

ZARATE

11:20:51
Yeah. Not the great ape.

SESNO

11:20:51
Sort of undercover, underground guerillas in gray suits. What assured due process here? What assured -- where was your accountability? Where was your transparency as you launched a global on what you believed to be these third party actors who might have been funneling money to al-Qaida and others. How did you assure that you are not trampling on the rights and certainly there was no due process because you were doing your thing. But on the rights or the ability to do commerce for people who were innocent.

ZARATE

11:21:23
Yeah. You know, it's a great question and an important one. We thought a lot about and certainly built into how we did business. What emerged very quickly after 9/11 and after the president signed the executive order was, in essence, an inter-agency group that met on a regular basis, often multiple times a week that had lawyers' committees attached to them. So lawyers from the Department of Justice, the State Department, the Treasury, the Office of Foreign Assets Control, even the intelligence community to do two things.

ZARATE

11:21:56
One, to ensure that the information we were relying upon was credible and sufficient to serve as a basis for any action and secondly to ensure that not only was there sufficiency but that these were the right kinds of actions to take with these extraordinary powers. As I said, these are powers that emerged from wartime powers. The International Economic Emergency Powers Act, allows the president and secretary of Treasury to freeze assets, preventatively, administratively.

ZARATE

11:22:23
Those are enormous powers. And so, I think we took that very seriously and we had at every stage from start to finish groups of lawyers watching and vetting what we did, to the point, Frank, where I mentioned in the book where we started to, I think, be overly cautious. The lawyers, the diplomats were very concerned that we not be seen as overly aggressive with the use of these powers.

ZARATE

11:22:49
And that spurred important debates within the U.S. government. And I think the checks internally were really what happened. And in the system as well, Frank, it's important to note, those who are designated can file administratively with the Treasury Department to appeal and also have the recourse of the federal courts.

SESNO

11:23:06
Secretary O'Neill, who was secretary when you were there, had something called the 80/20 rule. What was that?

ZARATE

11:23:10
80/20 rule is a management rule. Keep in mind, Secretary O'Neill came from Alcoa and the management world. This is intended to ensure that there isn't a paralysis by analysis. That we don't attempt to get the perfect answer or the perfect picture before taking action. So his directive to us, especially in the immediate aftermath of 9/11, as we were trying to prevent further taxes, let's not seek perfect information.

ZARATE

11:23:41
Let's get credible, good information that is sufficient legally. But let's not paralyze ourselves by trying to be perfect and get all information. Part of this was to spur to action, because if you wait for all the information possible about a terrorist network, its motivations, how it's financing, you may never get that full picture before taking action to disrupt. And so it was more of a battle cry to ensure that we were use authorities as opposed to sitting back and waiting too long to see another attack happen.

SESNO

11:24:12
So what were the diplomatic and legal consequences of that? And were there innocent people or organizations who got caught up in that?

ZARATE

11:24:21
I wouldn't say they were innocent people who were targeted with designations at all. They were certainly subject to designations, pursuant to the legal rules and review processes. But what you had in this process was the designation of networks. And so in the context of those networks being designated, no doubt you had individuals who may not have understood what the network was doing, may not have wanted al-Qaida to be funded.

SESNO

11:24:46
Yeah, but you didn't get on a plane and go over and knock on the door and say, oh, by the way, you know, you're working with some people here who aren't very savory.

ZARATE

11:24:51
No, no, of course not.

SESNO

11:24:53
They did get caught up in that. If they were...

ZARATE

11:24:54
Of course.

SESNO

11:24:55
...wittingly or unwittingly involved, they got shot down or at least interfered with.

ZARATE

11:25:00
Of course. And that was the whole point of the power, which is to preventatively prevent assets from moving into the wrong hands. And the executive order allowed for that to be done without notice and preventatively. And I think that was the essence of the power. Some of these individuals were eventually delisted. They applied. They showed that they were not directly culpable and they pledged not to be associated with that network ever again. And so, they were delisted.

SESNO

11:25:28
When in the meantime, though, right, when you were taking these actions against them if they were caught up in this dragnet and it hurt their business or it hurt their activities, you know, could they -- they're not gonna be able to come to you and say, well, you know, hand over some damages here because your set is bad. So what was the form of redress and compensation? Or was there one?

ZARATE

11:25:49
No compensation to my knowledge of anybody who has been so designated in part because it's not been found that anybody was designated improperly. And there had been challenges in court, and the U.S. Treasury has been upheld in those actions. I think -- you raised the question, Frank, of what the broader diplomatic consequences were. And I think the interesting episode here -- and I talk about financial diplomacy in the book, which was an important development in this period.

ZARATE

11:26:18
One of the challenges with our Europeans colleagues, in particular, was this question of what due process should be afforded ex-ante at the start in this process versus due process after the fact?

SESNO

11:26:31
You have the issue of due process before and after, and then you have the related issue of your own burden of proof, which you talk about as 80/20.

ZARATE

11:26:38
That's right. And the question as to whether or not the rest of the world the level of proof to be the same. And so, in many cases, and this was important in the broader debate about the war on terror, Frank. Do we apply a criminal standard to everything we do? Requiring proof beyond a reasonable doubt and culpability and knowledge? Or do we apply other standards and other tools that are preventative, but may not be a criminal standard?

SESNO

11:27:07
Let me ask you this question. Let's look at al-Qaida for just a minute, right? Because they severely degraded, obviously, military force kinetic as well financial. What is left of al-Qaida's financial network? You write in the book, for example, that when we went in we ended up with bin Laden's computers that was clear evidence that they were starved of money.

ZARATE

11:27:29
Yeah.

SESNO

11:27:29
All right, so obviously something worked. How much worked? How much after you shut off one revenue stream does another one pop up some place else?

ZARATE

11:27:39
Al-Qaida has been hurting quite a bit over the last 12 years in terms of financing, in particular to the al-Qaida core. There's two developments I want to talk about. But let me answer your question first. What we tried to do was not just go after the particular note that was financing al-Qaida today. What we're trying to do was inoculate the system from allowing al-Qaida to raise or move around.

SESNO

11:28:03
How much money were they raising and moving? (unintelligible)

ZARATE

11:28:06
Millions, millions. We never had a final calculus. And the number that's often thrown around, for example, the 9/11 attacks is half a million dollars. Not a lot, of course, and all the attacks we've seen subsequently doesn't cost a lot. The reality, though, was al-Qaida was paying for infrastructure. They were paying for training. They were paying for the pensions of the family members of suicide bombers.

ZARATE

11:28:31
They're paying for the alliances they had with other groups. And so, the budget actually was large and they had an Egyptian accountant who ran their financials quite rigorously. He would demand receipts. He would need to know what was going on in the system and was actually not very well liked as a result. He was kind of a CFO for the group. But what happened, Frank, we were trying to not only stop the financing but deter it in the future.

ZARATE

11:29:01
And what that entailed was making sure that not only those that were financing now but who may in the future, donors, were less willing to do that. And I think we did that effectively. The problem now, though, is the financing of al-Qaida has followed the structural splintering of al-Qaida itself. And so it's grown more localized, more embedded in the regional groups and more embedded in criminality.

ZARATE

11:29:25
Al-Qaida in the Islamic Maghreb is raising millions of dollars now with kidnapping and smuggling. Al-Qaida in Iraq engages in bank robberies and other criminality like oil smuggling. You have the al Shabaab movement in East Africa that levies taxes and has a charcoal, sugar-based, trade-based money laundering to raise money, quite sophisticated. And so you have the al-Qaida network itself evolving its own financing to allow subsistence.

ZARATE

11:29:50
And in the case of al-Qaida in the Islamic Maghreb actually raising of millions of dollars for its purposes.

SESNO

11:29:58
So what can guerillas in gray suits do about that? Can't get in and you can't shut down the kidnapping and the ransom that someone's going to pay in cash.

ZARATE

11:30:05
It's very hard. It's very hard. And I think the more you move outside the formal financial system, the harder it is to use some of these paradigms and tools that we've established over time. But the reality is a lot of these local financial networks, criminality eventually touch the financial system. So you look at East Africa, the piracy and the smuggling and the ransoms that are garnered there and the taxes that are levied eventually find their way into the banking system.

ZARATE

11:30:35
In particular in Kenya. And so there are ways of thinking about how you make it harder and costlier for people who are making money illicitly to move that money and to place it.

SESNO

11:30:45
We've talked a lot about al-Qaida as an example. Another example with this kind of financial warfare is fairly public. We see some of it, is Iran. Very targeted sanctions, very targeted and deliberate efforts to incentivize, shall we say, banks and other corporations that are doing business there have led to a very strict sanction regime. Financial warfare, I think you can call it that, targeted the Iranians that has really created mass havoc in their economy.

SESNO

11:31:16
The value of the currency. What are some of the two or three specific things that you could cite that are a result of this kind of new sort of warfare that were targeted against Iran?

ZARATE

11:31:26
Yeah. The Iranian campaign is really a constriction campaign intended to make it harder for the Iranians to access the banking system and the commercial system. It...

SESNO

11:31:36
Is that something new and dramatically different?

ZARATE

11:31:38
Well, it's new in the way that we did this. And the same goes for North Korea, by the way, Frank, because I think the orthodoxy has been, especially in Washington, you know, we've done everything we can to these countries. We don't trade with them. We've sanctioned them for decades, what more is there to do? The more to do is this new set of strategies, which is to isolate from the financial system.

ZARATE

11:32:01
Those actors and elements of the regimes that need access to the financial system to do things like build weapons programs or siphon money to terrorist groups. And so with Iran in particular, what has happened since 2005, 2006 is a growing constriction, kind of like a boa constrictor around the elements of Iran's economy, largely driven by the Revolutionary Guard Corps. The military unit that is responsible for the weapons program and support for terrorism.

SESNO

11:32:29
The military unit that was also into all other parts of the economy.

ZARATE

11:32:33
That's exactly right.

SESNO

11:32:34
Way beyond the military.

ZARATE

11:32:34
They had control of the telecoms industry, control of development of ports, infrastructure, which in many ways an advantage for the U.S. because the U.S. then can say to banks, you don't know who you're doing business with when you're doing business with Iran. And more than likely, it is with the Revolutionary Guard Corps. And you don't know what they're doing with that money. And that's really the essence of the constriction campaign.

SESNO

11:32:57
I'm Frank Sesno, and you're listening to 'The Diane Rehm Show." If you'd like to join us, please give us a call at 1-800-433-8850. Send us an email to drshow@wamu.org. We're talking with Juan Zarate. He is author of "Treasury's War: The Unleashing Of A New Era Of Financial Warfare." Juan, we have an unusually detailed and apparently authoritative or knowledgeable at the very least email from someone here who questions the Treasury Department financial war because he says it's based to some extent on a false premise.

SESNO

11:33:34
As for example the charities constitute a substantial means of financial support for al-Qaida's sake. And he writes the following: The problems with Treasury's approach to Muslim charities during your tenure, a myriad, as courts in the United States and Europe and the ombudsperson of the U.N. Security Council had found the process by which Treasury designates entities as supporters of terrorism provides no due process to those entities.

SESNO

11:33:57
He writes: The lack of due process and transparency has produced the impression that the U.S. had been waging a war on Islam and Islamic philanthropy. He writes that Treasury has relied extensively on experts -- outside experts who may not be as knowledgeable about the Islamic world as they should. He says many of them have ideological or even financial motives.

SESNO

11:34:22
He says that the process, while you portray it as meticulous and even handed, has been represented elsewhere as capricious. Your response to that?

ZARATE

11:34:34
Well, I disagree. But he raises important questions and issues. And I'm happy to address them.

SESNO

11:34:42
Well, let's start with the courts in the U.S. and Europe, and then the criticism that the process provides no due process.

ZARATE

11:34:50
Well, absolutely, there's been an ongoing debate. And we talked about it just a few minutes ago. Between the European court, certainly the European Union and the U.S. about how these powers are used, how to isolate known actors or suspected actors engaged not just in terrorism but you have this question as well with respect to Iran with recently Iranian entities challenging their designation at the European Union.

ZARATE

11:35:19
And so, there's no question that there's an ongoing debate, has been about how to use these authorities and what checks and balances there are. There is simply a difference of opinion in terms of the U.S. approach and the European model. Although I will say, Frank, that the Europeans have grown more and more aggressive in their use of these powers. And in fact, have started to outstrip the U.S. in terms of the use of these powers, vis-à-vis Syria and Iran in some cases.

SESNO

11:35:45
And what about the perspective in this email that this has been viewed as a war against Islam and Islamic charities?

ZARATE

11:35:55
That was an important issue, no doubt. And in fact, I spent a lot of my time when I was at the Treasury doing outreach to Muslim American groups and Muslims around the world to explain to them that this was not a war on Islam. It was not a war on Islamic charity and not by any stretch was it a war on philanthropy, which I think was often the point.

SESNO

11:36:19
That certainly was the perception. And there was a -- it was very hard for a while to make your donations to your Islamic charity.

ZARATE

11:36:24
No, that's right. But I think there was also a new reality post-9/11 that people had to come to grips with, and that was the fact that there were charities that were being used intentionally by terrorist groups, not just al-Qaida, but as part of a program of fundraising for groups like Hamas and Hezbollah which are prescribed groups in the U.S. and in the European Union, at least Hamas is.

ZARATE

11:36:47
And that these are groups and functions that allow for the financing of terrorist operations, not just charitable good deeds but also terrorist infrastructure. And so no doubt that was an issue and something we try to deal with. But I would say, you know, part of the challenge here is having people not only aware of the fact that charities were misused and were part of terrorist groups, but that charities had to engage in due diligence if they were going to engage in conflict zones where terrorist groups and organizations did business.

ZARATE

11:37:24
That was just a new reality of the post-9/11 world. And frankly, there was a bit of laxity in that regard prior to 9/11.

SESNO

11:37:33
And we're talking with Juan Zarate. Author of "Treasury's War: The Unleashing Of A New Era Of Financial Warfare." You're listening to "The Diane Rehm Show." After this short break we'll take your calls and questions.

SESNO

11:40:02
And welcome back to "The Diane Rehm Show." I'm Frank Sesno sitting in for Diane today. She'll be back with you on Wednesday. Our guess this hour, Juan Zarate. He is the author of "Treasury's War: The Unleashing of a New Era of Financial Warfare." He served as deputy assistant to the president and assistant national security advisor for combating terrorism. He served at the Treasury Department as the first assistant secretary for terrorist financing and financial crimes. Currently he's a senior advisor at the Center for Strategic International Studies. And occasionally he appears as a national security analyst for CBS News. So we want CBS News to get their plug, Juan, as well.

ZARATE

11:40:35
Thank you, Frank. I appreciate that.

SESNO

11:40:36
So they can pat you on the back when you go back. Patting you on the back is not something that many of our listeners are doing and they have some tough questions for you. So let me...

ZARATE

11:40:44
It's okay. That's good.

SESNO

11:40:45
...well, as they should and let me pass some of these along. Alex writes, "What happens to the money in the U.S. account that was frozen for association with terrorists? Does it go to the bank, to the government?"

ZARATE

11:40:57
Money that's frozen is not seized I think it's an important distinction both legally and functionally. So if the government civilly or criminally seizes money, it goes into U.S. government coffers and gets used by the forfeiture funds based on those management principles. If money is frozen though, for example, diplomatic assets or assets that are frozen pursuant to this executive order we've talked about, those stay frozen.

ZARATE

11:41:24
They can be accessed by license by the Treasury Department, sometimes by lawyers who are defending the listing on behalf of the designee. But that money in general stays frozen and does not transfer to U.S. control, but certainly isn't available to the use of the designated party.

SESNO

11:41:42
Now Clifford writes, from his iPhone I should point out, "What oversight is there" -- we talked a little bit about this but I want to pursue Clifford's question -- "What oversight is there? This activity's extra judicial," he writes. "What keeps the government from using these methods for everything it doesn't like, not just terrorism, such as silencing WikiLeaks by getting Visa, MasterCard and PayPal to shut down contributions to WikiLeaks?"

ZARATE

11:42:02
It's a great question. Let me take the last part first because it's an interesting reflection of the current environment. The U.S. government did not mandate the service providers or the banks to not do business with WikiLeaks. WikiLeaks is not designated, is not subject to some sort of treasury enforcement action. Those were decisions made by the private sector itself. And that's an important reflection of this new environment, Frank, that I lay out in the book, which is financial institutions themselves are making these decisions based on a risk calculus.

ZARATE

11:42:39
They are risk averse and based on their bottom line, they're determining that it's not worth the reputational consequences to do business with WikiLeaks, etcetera. Part of this is the tempering of the environment that the Treasury Department does. Part of this though is the bottom line, the decision-making by these banks. In terms of oversight, it's the process itself in terms of internal lawyers. There's IGs that look at this, the GO, there's congressional oversight. And there is checks from the court, post facto no doubt, after somebody's been designated or after a regulatory measure has been taken. But there is recourse legally both administratively and in the federal courts.

SESNO

11:43:19
I'm sure it doesn't escape you -- it certainly doesn't escape me -- that some of this sounds like what we've heard from the Department of Justice or the NSA about internal checks and balances. And why should taxpaying American citizens be able to trust or believe what you're saying is happening internally any more than they've been able to trust or believe elsewhere that this authority and this power isn't going to be misused, isn't going to invade people's privacy and get in the way of innocent citizens trying to conduct commerce or otherwise go about their lives?

ZARATE

11:43:46
Right. Fair question and I think it's a question of trust and faith and confidence in the institutions that we have.

SESNO

11:43:52
Does it worry you that trust and faith and confidence in institutions that we have is as low as it is?

ZARATE

11:43:56
Absolutely. I mean, it's hugely corrosive.

SESNO

11:43:58
So what should the Treasury Secretary and other people do about this? Because on the one hand, people do want you do use these tools to combat genuine bad guys.

ZARATE

11:44:08
Right.

SESNO

11:44:09
On the other hand, we are a nation of laws and we do respect, according to our constitution, the privacy of individuals and individual commerce. This is a very difficult balancing act.

ZARATE

11:44:21
No, that's right. First I would say, you look to the record. I don't think the record demonstrates that this tool has been used wantonly or frivolously. And I think the challenges that have happened in court have all gone in the way of the U.S. Treasury, both in terms of substance of the information and the use of the authority. I do think that the U.S. government has a responsibility to explain these tools and to defend them properly.

ZARATE

11:44:45
One thing that's interesting here, Frank, when we developed the financial intelligence tools with SWIFT, the ability to look at financial data, to track terrorist financing and suspect actions, one of the things we did there was to embed privacy and civil liberties and how we constructed that program. And so we not only did all the things that you would expect in terms of internal checks and balances, but we allowed the company itself to have external auditors. We allowed them to have real time monitoring of our activities and our analysis.

ZARATE

11:45:15
We gave the European Union, after it was revealed, the opportunity to inspect all the reports, all the audits to ensure we were doing what we were doing. And the reality was not only what we're doing was legal, not only was it effective but we were acting within the constraints of what we said, and in fact, constraining our access to information overtime. And so the ability to explain that I think is critical to having faith and confidence that people are taking these responsibilities seriously. And I think the government in this age, especially with the mistrust that has grown, has to find ways of not only demonstrating but explaining how it is that we're checking our power.

SESNO

11:45:49
Let's go to the phones now with some calls. Watkins calls us from Virginia. Hi, Watkins.

WATKINS

11:45:54
Hi. Thank you for taking my call. The newspapers have reported quite frequently that in cases of quote unquote "national security" the U.S. government has come in to -- against challenges of one sort or another and pled national security. And the case gets thrown out without ever being heard. Your guest said some time ago that the Treasury's position had been confirmed by the U.S. courts without exception, yet the European courts seem to have come to some different conclusions. What I would like to know is how many of the U.S. cases were heard on the facts and how many were summarily dismissed on grounds of national security?

ZARATE

11:46:45
All of the cases that I was referring to in U.S. courts were, if I recall correctly -- I need to go back and check each and every one -- but I think they were all judged on the merits. One thing that the Patriot Act gave was the authority for courts to look at the classified information that may be used for these designations ex parte and without the other side seeing it. Now that creates challenges as well of course, but that means that the courts have the opportunity to see all the information, the entire record and to make a determination. And in those cases they've sided with the Treasury.

ZARATE

11:47:20
On the European side, the Europeans have ruled against some of the European designations in some cases on procedural grounds based on how the designations happen in European rules, and also based on the substance. And so there's a mishmash of reasons for some of the European rulings.

SESNO

11:47:37
A call now from Tim in Louisville, Ky. Hi, Tim.

TIM

11:47:40
Hi. This is not the Treasury's war. This should be America's war if we need another war. If the United States was embargoed, its currency deflated or its assets frozen, we would consider that an act of war. We need congress to declare this war. That doesn't mean we start shooting but we need to be put on notice if we have to go to war that there's going to be some very angry people on the other side.

SESNO

11:48:10
So are you saying that this financial war that Juan is talking about here should have congressional approval every step...

TIM

11:48:15
Yes, have congressional approval (unintelligible) ...

SESNO

11:48:18
...every step of the way?

TIM

11:48:20
Well, no. Just like any other war but the American people need to know that ten years from now or ten days from now when we're attacked again, we're not standing around with our hands in our pockets wondering why they hate us because we've been at war with them. If my city was embargoed like this I would start taking up arms. And I think the Iranians or these countries are going to do the same thing.

SESNO

11:48:48
Okay. Thank you very much, Tim. Juan, what is -- what about the consultation with the congress and oversight from the congress, if in fact this is a form of warfare, as you say it is? We just had a very graphic example from the President of the United States of consultation with congress. Your boss President George W. Bush did go to congress before he launched his war.

ZARATE

11:49:09
Right.

SESNO

11:49:09
What relationship with congress did the Treasury Department have -- have you had as you've formulated this form of warfare?

ZARATE

11:49:17
Right. I hope people read the book because I get into quite a bit, not only the basis of these campaigns but also the relationships within government. And congress has not only been supportive of all this, but has provided the basis for these authorities, not just in the last ten years but even before. So things like the Bank Secrecy Act, the International Economic Emergency Powers Act, Section 311 of the Patriot Act, even the most recent and fairly severe sanctions on Iran are all congressionally mandated.

ZARATE

11:49:48
The very creation of the Office of Terrorism and Financial Intelligence came with deep consultant with congress. And so these authorities have bipartisan support. And, in fact, congress is often asking the Treasury, especially now, to be more aggressive. And so the notion that Congress isn't aware or there aren't -- there isn't a basis and authority and congress is really just not accurate. The other thing I would say...

SESNO

11:50:11
Are there public hearings?

ZARATE

11:50:13
Absolutely. I mean, I testified, you know, multiple times. Treasury officials were testifying all the time about not only these campaigns but in recent years, especially in Obama years, they get harangued for not being more aggressive in the use of these tools. And part because congressional authorities and the public see this as the middle ground between diplomacy and war. And these are powers that allow us additional leverage without having to drop bombs. It's the ability to influence and pressure, based on illicit conduct, the actions of these foreign governments and rogue actors.

SESNO

11:50:48
Terrific question here from Scott in Baltimore who's been listening to you, so here you go. "I've heard the author interviewed twice now on different programs," Scott writes, "and I'm very curious, how does he reconcile his conclusion on the effectiveness of the Treasury's war on terrorism with recent too-big-to-fail slap on the wrist that HSBC received? According to the expose in Rolling Stone magazine, HSBC was known to be dealing with terrorists and drug dealers, not following the U.S. law for over a decade and the U.S. knew about it and kept giving it warnings. But HSBC was able to ignore the warnings and continue with its illegal activities unabated."

SESNO

11:51:21
"How effective," Scott asks, "was the Treasury if HSBC was able to ignore the rules for a decade and then in the end get punished with a slap on the wrist?"

ZARATE

11:51:32
It's a great question about how effective these tools are and whether or not the banks are actually being compliant. And I think you've seen time and time again, whether it's HSBC or Standard Charter or you name the bank, getting hit with a fine or a sanction of some sort precisely because they haven't adhered to money laundering obligations and rules. And so I think it's a fair criticism. I think it's an imperfect system because you still have banks engaged in certain activity that they shouldn't. There's profit-making where they shouldn't.

ZARATE

11:52:04
But the other side of this is that you've got to be careful because the strategy here is exclusion from the financial system of rogue capital. But at a certain point you can overdo it by affecting the inclusion in the system. And so banks that are often hit with these fines, it's not just the fine that matters, the amount. It's the reputational affect. And so they start to shrink from doing business in places where you may want them to do business. One note here for listeners. I have been brought in by HSBC after their fine to help advise the board as to how to clean things up. So I want to make that clear that I've been brought in by HSBC to help.

SESNO

11:52:43
I appreciate the transparency. I'm Frank Sesno and you're listening to "The Diane Rehm Show." Our guest is Juan Zarate. His book "Treasury's War: The Unleashing of a New Era of Financial Warfare." A few minutes remaining, we'll get to some more of your calls and questions as we can. But Juan, before we run out of time there are two areas that I think you must address. One is North Korea. This is certainly a rogue state. Dennis Rodman appears to be going there with some success but I don't know about anything else. What's taking place there?

ZARATE

11:53:09
Well, North Korea seems to be flirting again with uranium enrichment, perhaps evening opening up the plant that they had shut down per the six-party talks and negotiations that the U.S. was engaged in. We have overtime tried to use financial tools to isolate North Korea. Now North Korea is known as the soprano state. They've engaged in money laundering, drug trafficking, the best counterfeit U.S. $100 bills in the world. And what we did in 2005, Frank, was to try to isolate them from the financial system.

ZARATE

11:53:38
We used a domestic regulatory rule, the Section 311 of the Patriot Act to designate Banco Delta Asia in Macau, a small private bank, as a primary money laundering concern for doing business with North Korea. That sent shockwaves around the banking world, isolated the North Koreans in the most significant way we'd seen in decades and led to the first time that North Koreans ever called the U.S. government to start talks.

ZARATE

11:54:02
And for two years they started and ended every conversation by saying, we want our money back, because the financial pressure had so excluded them from the system it was affecting their ability to access the banking and commercial world. That was very important. We unwound it unfortunately prematurely -- and I lay that out -- that story out in the book. And that, I think, was problematic because we've let North Korea and the Chinese off the hook. And now North Korea and China have established trading relationships that in essence allows the North Koreans out of that financial bind.

SESNO

11:54:33
You use a very interesting term unwind -- unwinding the sanctions. In the case of North Korea you argue when you point out in the book as you say, you think it happened too soon. It allowed commerce to resume at a certain level and the pressure was lost. Another one may be about to play out, and this is with Iran. A new president, there seems to have been some tentative outreach. We talked a moment ago about how pressing these sanctions have been and these targeted aspects of financial warfare have been against the Iranians. How then does that come into play in these tentative early steps? What kind of a carrot is that compared to the stick?

ZARATE

11:55:09
Yeah, this is a huge issue, Frank. I think President Rouhani's inauguration has brought lots of hope in terms of diplomacy. And he has certainly signaled that one of the goals he has both for his tenure and also for the negotiations is relief from the economic pressure. And...

SESNO

11:55:25
They want to sell oil and pistachios and everything else.

ZARATE

11:55:27
...and rugs and they don't want the rial to lose most of its value in trading in world currency markets. And so this is a key lever for the U.S. government in terms of how we negotiate. It is something we can potentially give if they're going to substantively give us what we need, which is a promise to not move forward with the nuclear program. The challenge though here, as was in the case of North Korea, is these measures -- these are not light switches. You can't turn them on and off.

ZARATE

11:55:57
There reason Iran has been so choked financially is we have convinced the International Community, the banking community in particular, that Iran is suspect in terms of its activities, because it engages in proliferation, terror financing sanctions of Asian (sp?), a whole host of elicit conduct that infects the financial system. And so if you unwind these pressures, you've got to be very careful that we don't hurt the credibility of what we've laid out with respect to the case against Iran. But also allow it to be a point of leverage in terms of the diplomacy.

SESNO

11:56:30
What would be unwound first to demonstrate, for example, a degree of good faith?

ZARATE

11:56:35
Well, to date you've -- we've layered the sanctions and we've gotten to the point of embargoing oil, in particular in Europe. And so you could probably give on some of the oil restrictions. But those are perhaps the most tempting of sanctions for the Iranians.

SESNO

11:56:47
Many issues here, economic, diplomatic, military and moral. Juan Zarate, "Treasury's War: The Unleashing of a New Era of Financial Warfare." Thank you very much.

ZARATE

11:56:56
Thank you, Frank.

SESNO

11:56:57
And you've been listening to "The Diane Rehm Show." I'm Frank Sesno sitting in for Diane. She's back on Wednesday. Have a terrific day. Thanks so much for listening.
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