Patriot Act success story

David Ignatius:

Everybody knows that economic sanctions don't work. Just look at the decades of fruitless pressure on Cuba. But guess what? In the recent cases of North Korea and Iran, a new variety of U.S. Treasury sanctions is having a potent effect, suggesting that the conventional wisdom may be wrong.

These new, targeted financial measures are to traditional sanctions what Super Glue is to Elmer's Glue-All. That is, they really stick. Deputy Treasury Secretary Robert Kimmitt doesn't even like to call them sanctions, preferring the term "law enforcement measures." Explains Stuart Levey, Treasury's undersecretary for terrorism and financial intelligence: "Sanctions are scoffed at. They have a bad history."

Authority for the new sanctions, as with so many other policy weapons, comes from the USA Patriot Act, which in Section 311 authorizes Treasury to designate foreign financial institutions that are of "primary money laundering concern." Once a foreign bank is so designated, it is effectively cut off from the U.S. financial system. It can't clear dollars; it can't have transactions with U.S. financial institutions; it can't have correspondent relationships with American banks.

The new measures work thanks to the hidden power of globalization: Because all the circuits of the global financial system are inter-wired, the U.S. quarantine effectively extends to all major banks around the world. As Levey observed in a recent speech, the impact of this little-noticed provision of the Patriot Act "has been more powerful than many thought possible."

Treasury applied the new tools to North Korea in September 2005, when it put a bank in Macao called Banco Delta Asia on the blacklist. There was no legal proceeding -- just a notice in the Federal Register summarizing the evidence: Banco Delta Asia had been providing illicit financial services to North Korean government agencies and front companies for more than 20 years, according to the Treasury notice. The little Macao bank had helped the North Koreans feed counterfeit $100 bills into circulation, had laundered money from drug deals and had financed cigarette smuggling. North Korea "pays a fee to Banco Delta Asia for financial access to the banking system with little oversight or control," Treasury alleged.

Wham! The international payments window shut almost instantly on Pyongyang's pet bank. Transactions with U.S. entities stopped, but the Treasury announcement also put other countries on notice to beware of Banco Delta Asia. The Macao banking authorities, realizing that they needed the oxygen of the international financial system to survive, took regulatory action on their own and froze the bank's roughly $24 million in North Korean assets. And around Asia, banks began looking for possible links to North Korean front companies -- and shutting them down.

A similar financial squeeze is being applied to Iran. Here again, the impact has come from the way private financial institutions have reacted to public pressure from Treasury. "As banks do their risk-reward analysis, they must now take into account the very serious risk of doing business in Iran, and what the risks would be if they were found to be part of a terrorist or proliferation transaction," says Kimmitt.

...
These sanctions have teeth because they effect the liquidity of the offending countries. North Korea may be vulnerable because it is a basket case economy to begin with and any disruption is material. Iran on the other hand is vulnerable for the opposite reason. It has substantial cash flow from oil sales which need the banking system to operate. Investments in its infrastructure are also being blocked. It is possible that both countries have been counterfeiting US currency and the banking shutdown disrupts those operations also. Iran is probably still ferrying cash to its terrorist operations such as Hamas and Hezballah, but it is finding th process difficult and subject to confiscation.

Update: This AP story in the NY Times quotes Assistant Secretary of State Christopher Hill as saying "that U.S. financial restrictions connected with North Korean money laundering and counterfeiting had forced banks around the world to question their business dealings with Kim Jong Il's government."

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