Stuart Levey, “father” of the North Korean atomic bomb, is back, and with him is the threat that the United States will deploy the most feared and dangerous weapon in its diplomatic arsenal – sanctions against foreign corporations and foreign banks – to advance its Iran and North Korea policies.
Levey, director of the US Treasury Department’s Office of Terrorism and Financial Intelligence (OTFI), returned to the spotlight with the announcement of US add-on Iran sanctions in the wake of United Nations Security Council (UNSC) Resolution 1929. China has a considerable amount of experience with Levey, mostly negative, and will be observing his actions on Iran and North Korea with a good deal of wary curiosity.
With the exception of Secretary of Defense Robert Gates, Levey is the highest-ranking George W Bush administration holdover in the Barack Obama administration. The retention of the architect of financial sanctions against North Korea was a signal that Obama was much enamored of them as the “smart power” alternative to military force as a coercive instrument of American policy. Hopefully, the results for the US this time will not be as dire as North Korea’s rush to the atomic bomb occasioned by the sanctions campaign of the Bush administration.
Certainly, the US dollar is still king and the threat of ostracization from the US financial system is a real and significant worry … but not necessarily for America’s enemies. North Korea and Iran have already been cut off from the US financial system. The real threat is to America’s allies and “strategic competitors”, such as China, who do not toe the line in a satisfactory fashion.
Sanctioning of third-country financial corporations has a dismal history under the Bush administration. The Obama administration appears to be taking steps to avoid duplicating the mistakes of its predecessor but, given the inherent contradictions of sanctions, may nevertheless be doomed to repeat them.
OTFI first emerged after 9/11 as an extension of the Treasury Department’s money-laundering investigative activities, traditionally concentrated on drug trafficking, to terrorism.
Its terrorism-related efforts were largely ineffective. In contrast to the gigantic transnational rivers of cash needed to sustain the booming drug trade, the tiny amounts of money needed to finance conspiratorial terrorist activity such as al-Qaeda’s were a drop in the international ocean of financial transfers, virtually impossible to detect except in hindsight.
Nevertheless, OTFI exploited the anti-terrorism powers given to it and evolved into an important instrument of American foreign policy under the Bush administration.
OTFI received new powers under Section 311 of the Patriot Act – penned by Democrat John Kerry – which gave the Treasury Department the power to sanction foreign financial institutions that were insufficiently transparent and cooperative in matters of tracking terrorist financing by cutting them off from the US financial system.
The Bush administration welcomed OTFI’s expanded mandate and powers, since it gave the executive branch a powerful and arbitrary instrument of unilateral power beyond international challenge or congressional oversight. On the basis of its internal investigations and with the justification of protecting the US financial system from terrorist infiltration, the Treasury Department could ban designated foreign banks from transacting business with US financial institutions.
Wielding – and abusing – this power proved an irresistible temptation to the Bush administration in its campaign against the two members of the “axis of evil” – Iran and North Korea – that survived after the military overthrow of Saddam Hussein’s regime in Iraq.
OTFI, under Levey, enthusiastically and unapologetically deployed the threat of financial sanctions.
Significantly, its targets were not Iranian and North Korean banks – which were already barred from dealings with US corporations under US law. Instead, the genuine object of OTFI’s threats were the financial institutions of American allies – allies that, for reasons of principle, greed or strategic necessity, had not seen fit to impose the same national sanctions on Tehran and Pyongyang that had been imposed by the United States.
During the second Bush administration, the peripatetic Levey roamed the globe, chivvying the huge European financial institutions but also venturing into backwaters like Mongolia and Bulgaria to threaten local banks that dared take Iranian and North Korean deposits and offer the two pariahs access to the international financial system.
In one significant instance, the Treasury Department moved beyond threats to actually institute sanctions against a targeted bank. This was the case of Banco Delta Asia – BDA – a small bank in Macau that accepted North Korean deposits.
In September 2005, alleging that BDA was laundering North Korean counterfeit money, the department announced it was investigating BDA as a “bank of money laundering concern”.
There was a prompt run on the bank, the Macau authorities took BDA over, and $24 million or so in North Korea-related funds in 51 accounts were frozen at American insistence. That represented the highwater mark of America’s success in quarantining BDA.
There were several worrying consequences.
First, and most importantly, North Korea withdrew from the six-party talks in fury, abandoned its nuclear haggling with the United States, and detonated its first atomic bomb on October 9, 2006. Despite revisionist attempts to decouple BDA from the bomb, Levey’s paternity of the Nork nuke is pretty much indisputable.
Secondly, America’s image as an honest broker impartially protecting the integrity of the dollar-based international financial system was seriously tarnished.
In the past, the Treasury Department’s efforts to combat counterfeiting and stem the oceans of cash sloshing through the world’s drug economy were universally respected. However, by unleashing OTFI on Iran and North Korea, the Bush administration had made the fateful decision to “weaponize” financial enforcement, using it to advance nontransparent, unilateral geostrategic goals far removed from the department’s genuine mission.
In order to justify a unilateral financial assault on North Korea, the Bush administration hitched its star to the “Supernote” counterfeiting allegation to redefine the North Korea problem as an attack on the US dollar rather than a multilateral security issue in North Asia. As far as US allies and interlocutors – especially China – were concerned, the OTFI initiative signified Washington’s effort to seize control of the North Korea dossier and pre-empt their input.
In the realm of international law, it was also a worrying case of de facto extra-territoriality – applying US jurisdiction to foreign corporations operating in foreign countries. The fact that OTFI money-laundering sanctions were completely non-transparent applications of US executive branch rules, by which the accused party could not even appear, let alone mount a defense, certainly contributed to the OTFI’s intimidating aura, but also fueled international fear and resentment.
US laziness in making its case – though largely unchallenged by the media with the exception of McClatchy’s Kevin Hall – did not enhance international confidence in OTFI’s ability to wield this considerable power responsibly.
A convincing explanation was never offered for how the tottering North Korean state was able to import the only press capable of printing US banknotes, develop the highly specialized papermaking technology, either duplicate or acquire from Switzerland the necessary optically variable inks, or track the US currency through 19 design changes, in order to produce a mere $45 million worth of Supernotes over 10 years. 
The United States accused BDA of laundering Supernotes, ignoring the inconvenient fact that BDA sent all of its cash deposits for independent inspection by Hong Kong & Shanghai Bank (HSBC) before sending them off the Federal Reserve for credit – and no counterfeits had been detected since 1994.
So OTFI became associated with American unilateralism, the back-door assertion of extra-territorial jurisdiction, and shoddy procedures: essentially, an abuse of America’s privileged position at the center of the financial world.
Third, even after the North Korean test had sidelined American advocates of confrontation and the six-party talks were set to resume, the Treasury Department blocked the remittance of the North Korean funds at BDA – the key confidence-building measure negotiated by Christopher Hill – by issuing a scorched-earth ruling formalizing the complete cutoff of BDA from the US banking system. On the dubious pretext that its unilateral administrative ruling against BDA could not be undone without violating US laws, the Treasury Department blocked the remittance for another excruciating eight weeks. Finally, the State Department, after futile and humiliating public contacts with several US and international banks that refused to handle the funds because of the threat of Treasury sanctions, arranged the remittance via the US Federal Reserve and a Russian bank.
The realization that Levey, whether or not he was acting in collusion with diehards of the Dick Cheney stripe to sabotage the resumption of the six-party talks, could defy the executive branch virtually openly, was undoubtedly a sobering reminder to the Bush administration that unilateral, unchecked power can cut both ways.
The final, and strategically most significant, fallout of the BDA affair was that it showed China’s leadership how far the United States was prepared to go to attack core Chinese interests in pursuit of its foreign policy goals. The BDA sanction was, openly and avowedly, designed to intimidate China with the threat of being cut off from the US financial system.
The China aspect extended beyond the fact that BDA was in Macau – a Chinese jurisdiction – and was run by Stanley Au, a local businessman with close ties to Beijing who was a delegate to the China People’s Consultative Congress.
David Asher, the brash architect of the hardline North Korea policy, testified before Congress in 2007 that BDA was a case of “killing the chicken to scare the monkeys”.
“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 [of dollars], we’re talking hundreds of millions.” 
To a certain extent, Asher’s public testimony may have been vainglorious. Certainly, one objective of the attacks on North Korea’s bank dealings was to harass South Korea. Under the conciliatory regime of Kim Dae-jung, Seoul was funneling billions of dollars in Sunshine Policy payments to Pyongyang through Hong Kong or Macau banks. With proper timing and selection of target, the Treasury Department could have frozen billions of dollars of South-to-North cash and put a serious crimp in Kim Dae-jung’s dollar diplomacy as well as Kim Jung-il’s bank account.
However, China treated the BDA matters as a matter of its core interests, angrily summoning Treasury functionaries to Beijing for protracted negotiations during the convoluted remittance crisis. It learned, to its dismay, that the Treasury Department was unwilling to grant the People’s Bank of China a waiver to allow it to handle the BDA funds and get the six-party Talks – the crown jewel in Beijing’s efforts to claim recognition for its central role in regional diplomacy – restarted.
Given this baggage, and OTFI’s rather dismal record of failure and insubordination on BDA, it is interesting that the Obama administration kept Levey in his post after it took office.
The administration’s infatuation with smart power applied through multi-lateral initiatives is well-known, and financial sanctions are viewed as a critical force multiplier allowing America to recruit and lead a global coalition by virtue of its central role in the international financial system.
Retaining Levey to execute that policy may be a matter of tactics: reminding China that the loose cannon that threatened to bombard China’s central bank in 2006 is still available and ready for action.
Same pit bull; new minder?
When the UN Security Council approved Iran sanctions and the spotlight moved to national sanctions, the Obama administration’s first act was to appoint the State Department’s Robert Einhorn as a “sanctions czar” for Iran and North Korea, charged with coordination of the implementation of a sanctions regime that included other countries’ national as well as UN sanctions, and as the US government made clear:
Mr Einhorn will direct US efforts to ensure full and effective implementation of all UN Security Council resolutions related to Iran, including most recently UNSCR 1929. He will lead US efforts with partners and allies around the world to strengthen multilateral and national measures to impede Iranian proliferation activities. 
This was construed as reassurance to hardliners that the State Department – supposedly a nest of sanctions-averse, diplomacy-centric appeasers – was completely on board vis-a-vis an aggressive sanctions push.
However, Einhorn’s appointment would also reassure wary governments and corporations overseas that the integrated sanctions program was under professional, unified, and presidential management, and there would be no duplication of the insubordinate, and uncontrolled foreign policy by proxy conducted through OTFI under the pretext of enforcing US domestic money-laundering rules.
China should not derive too much consolation from the evolution of US sanctions policy beyond the cowboy years of the Bush administration.
What China should be concerned with is that the Obama administration has devoted considerably more effort than the Bush administration in establishing a solid strategic, legal, and diplomatic foundation for sustained and successful third-country sanctions.
The key flaw of sanctions is that, unless they are universal, somebody ends up eating everybody else’s lunch.
Even as the UN resolution on the fourth round of Iran sanctions wound its way uncertainly through the Security Council, it was an open secret that China would water down the UN resolution.
The stated solution was follow-on national sanctions that, if not “crippling” as desired by Israel, would hit Iran where it hurt – in the energy sector. The perceived flaw to that solution would be that China would honor the UN resolution, impose no follow-on national sanctions, and scoop up Iran contracts while the US and Europe stood on the sidelines.
National and EU sanctions are useless if all they do is drive Iran – and its energy investments, petroleum products, and import/export and financial dealings – further into China’s arms, as Glenn Kessler reported for the Washington Post:
US and European officials acknowledge that the administration’s gambit faces uncertainties.
China, for instance, could swoop into Iran to replace Western investors. “China is the elephant in the room,” one diplomat said, but the hope is that China will face political pressure not to appear to profit from an international pullout. Officials also say China cannot replicate some of the technologies and products produced in Europe. 
Both Russia and China have insisted that, in return for their support of the UN resolution, they received assurances that follow-on national sanctions by the US and Europe would not damage their energy and economic interests.
However, the obsessively forward-thinking Obama administration would certainly have a plan for addressing the underlying weakness of a massive geostrategic effort that has consumed the energies of the US administration for the last six months.
Perhaps the White House gave Russia and China the desired assurances with the caveat (perhaps implied or unspoken) that, if Iran’s behavior didn’t change, then promises to lay off Russian and Chinese interests would have to be honored, as they say, “in the breach”.
The enabling US legislation on Iran sanctions – H.R. 2194, the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 – will arrive on Obama’s desk by early July and provide ample justification for imposing third country sanctions, whether in sorrow or in anger. 
Its key feature, as announced after a meeting between Senate and House leaders resolved outstanding differences between two versions of the legislation: third country sanctions.
The proposed bill, announced in a joint statement by Representative Howard Berman (D-Calif.) and Senator Christopher Dodd, would bar non-US financial institutions dealing with Iran’s Islamic Revolutionary Guard Corps (IRGC) or targeted Iranian banks from also doing business with the US banking sector. The bill would also penalize firms selling gasoline to Iran through restrictions on their US bank transactions, property transfers and foreign exchange in the United States.
“The act presents foreign banks doing business with blacklisted Iranian entities a stark choice – cease your activities or be denied critical access to America’s financial system,” an outline of the bill states, adding that it would address problematic moves taken by international branches of US financial institutions. 
US reporting has emphasized the expansion of third-party sanctions to the IRGC and gasoline trade; previous, though largely unenforced demands to sanction large foreign investments in Iran’s energy sector apparently remain on the books.
Obama made a show of asking for explicit waivers for “cooperating countries”, understood to be Russia and China, in return for their support on the UN resolution, as a show of good faith. He didn’t get the blanket waivers, but he is perhaps not unhappy that he didn’t. He will be able to grant one-year exemptions for individual corporations, albeit with a “name and shame” requirement to put the recipients on the public record.
Therefore, if China is excessively forward in exploiting opportunities in Iran, the familiar weapon of financial sanctions against its banks can be deployed, with the potential range from limited sanctions in clear cases of footsie with the IRGC to broad-brush sanctions affecting China’s strategic investments in Iranian oil and gas.
So the stage is set for third-party sanctions round two, or the return of Levey.
But in this case, the US will not be sneaking unilateral third-country sanctions under the pretext of domestic anti-money laundering rules.
The Obama administration has established an international legal basis for national sanctions with the UN resolution and will soon have a domestic basis with the congressional legislation. Beyond establishing a sound legal basis, it has indicated that the sanctions will be carefully and rationally imposed under the direction of the White House and State Department and has persuaded many of the key European countries to jump aboard the sanctions boat.
As European and EU sanctions are imposed, they will institutionalize a shared US and the EU interest in preventing China and Russia from profiting overly from the economic and strategic vacuum created by the increased sanctions.
Beyond the Obama administration’s manifest geopolitical cleverness, however, there is the question of what greater goal will be served by a global full-court press on Iran sanctions.
Will Iran’s behavior change? Or will imposition of third-party sanctions merely deepen the existing divisions between China and the United States? And, unexpectedly, will the Obama administration’s determination to reassert America’s geopolitical supremacy lead to exactly the opposite result?
One of the ironic sidelights to the BDA affair was that, even after Banco Delta Asia was suffering full ostracization from the US financial system under Patriot Act 311, it still was able to continue to operate under the receivership of the Macanese financial authorities and even turn a modest profit in its local market.
It’s a big world out there, and it is inexorably drifting away from dollar dominance.
Middle Eastern states attempting to avoid the long reach of US financial sanctions have frequently agitated for a shift from the US dollar to the euro as the currency of account for energy sales. Conspiracy theorists point to Saddam Hussein’s announcement that he would seek to denominate his oil exports in euros as the provocative act that galvanized the Bush administration in its determination to prosecute the Iraq invasion.
With the EU largely lined up on the US side of the fence now, the focus is shifting from the euro as an alternative to China.
Considerable interest (and dismay) was occasioned by a suggestion by the head of the People’s Bank of China in 2009 that the IMF’s Special Drawing Rights (SDR) international reserve, which derives its valuation based on a basket of currencies including but not absolutely dominated by the dollar, might be adopted as the international currency of account.
Meanwhile, China is quietly expanding the international role of the yuan, also known as the renminbi (RMB).
The Hong Kong Trade & Development Council summarized China’s RMB strategy as follows:
The RMB’s internationalization will likely follow a three-stage process (i.e. when it is used in pricing and settlement of trade and financial transactions; use as an international investment vehicle; and use as an international reserve currency), especially after the demand for RMB has hit certain critical mass in external trade and financial transactions. 
The first stage – trade settlement – is under way under a pilot program allowing enterprises in five Chinese cities to conduct RMB-based transactions with Hong Kong and the ASEAN nations.
Bank of China announced it holds 100 international accounts that settle trade in RMB (including a new account in Peru), with a transaction volume of 9 billion yuan (US$2.7 billion) over in the first nine months of the program. Standard Chartered Bank and Hong Kong & Shanghai Bank are both offering RMB commercial services. 
In a classic case of “don’t ask what you wish for – you might get it”, a by-product of American insistence that the yuan appreciate will be increased interest in transacting yuan-denominated business by nations that wish to avoid the financial risk of having to conduct their business using a devaluing dollar.
China likes the program, too, because it reduces the domestic fiscal and financial burden of buying up its exporters’ US dollars with yuan and then sterilizing the inflationary consequences with sales of government bonds.
That’s another less-than-ideal outcome for the United States, which relies on China’s need to recycle its massive dollar holdings to absorb America’s sizable sales of sovereign debt.
It may be a long time – or probably never – before China takes on the US role of provider of the global reserve currency.
However, it may not be too soon before the yuan is a legitimate international currency and a viable haven for states wishing to insulate themselves from the consequences of US fiscal, economic, and strategic policies (while leaving the US with the intolerable burden of managing the liquidity needs of the rest of the world’s economy as it grows and its own share shrinks).
Even with US financial sanctions integrated into a largely consensual, legal, and multi-lateral effort, when it comes to the bottom line the US is still exploiting its financial clout to advance US geopolitical goals.
Looking into the long term, will the application of financial sanctions in the service of US policy objectives simply accelerate the disintermediation of the US dollar and displacement of the US from the center of the financial universe?
For US ambitions and interests, that might be an outcome worse than an Iranian atomic bomb.
PETER LEE is a business man who has spent thirty years observing, analyzing, and writing on Asian affairs. Lee can be reached at peterrlee-2000@yahoo.
A version of this article appeared in Asia Times.
1. US counterfeiting charges against N. Korea based on shaky evidence, McClatchy, Jan 10, 2008.
2. David Asher’s Dead End, China Matters, Apr 28, 2007.
3. Robert J. Einhorn to Serve as U.S. Coordinator for Iran and North Korea Sanctions, United States Mission, Jun 10, 2010.
4. US, Europe target Iran investment, trade, Washington Post, June 18, 2010.
5. Dodd, Berman Statement on Iran Sanctions Conference Report Agreement, Committee on Foreign Affairs, US House of Representative, June 21, 2010.
6. Lawmakers Agree on Iran Sanctions Bill, NTI, Jun 22, 2010.
7. The Pilot RMB Trade Settlement Scheme and RMB Internationalisation, HKTDC, May 29, 2009.
8. BOC: Cross-border trade RMB settlement accounts top 100, Trading Markets, Apr 21, 2010.