Financial warfare is the new global warzone
IT WAS midday on March 20 when an executive at Gunvor Group, the world’s fourth-largest oil trading firm, sitting at his office computer in Geneva, glanced up at the screen and got a jolt: A tweet had popped up saying one of the company’s founders, Gennady Timchenko, a billionaire Russian businessman, had been placed on a US government blacklist, along with 31 other people and businesses said to be linked to Russian president Vladimir Putin.
The previous day, Timchenko had finalised the sale of his 43.59% stake in Gunvor to business partner Torbjörn Törnqvist, a Swedish oil trader, the firm’s other co-founder and now its chief executive.
The two men conducted the transaction amid escalating tensions over Putin’s push into the Crimea region of Ukraine because “they saw the writing on the wall”, the executive explained, adding that “we weren’t tipped off” about the blacklist.
Gunvor had a narrow escape, and the message was heard loud and clear around the world: The first salvo in modern warfare is likely to be financial — and the result is increasingly effective.
“Fifteen years ago, the idea that the US Treasury Department would be at the centre of our national security would have been inconceivable,” said Daniel Glaser, assistant secretary for terrorist financing at treasury. “But we have developed a whole new set of tools to put at the president’s disposal.”
The control room in this new kind of war is a unit inside the US Treasury Department: The Office of Terrorism and Financial Intelligence, with 730 staff.
Don’t let the name fool you. This little-known branch of treasury, created by Congress in the wake of the September 11 attacks, isn’t just going after terrorists or hunting illicit offshore money flows anymore. It is using sophisticated financial weaponry to hit carefully chosen targets linked to hostile governments.
“This is the 21st century version of waging war,” says Judith Lee, a lawyer and sanctions expert at Gibson, Dunn, & Crutcher in Washington.
TFI was responsible for drawing up the blacklist, which sought to paralyse the financial dealings of Putin’s inner circle as Russian troops advanced Crimea. In Russia, the assault has led to severe disruptions in the financial affairs of blacklist targets such as Timchenko, as well as Bank Rossiya, a mid-sized St Petersburg bank catering to senior Russian government officials, which has around $10bn (€7.2bn) of assets and which found its Visa and MasterCard services abruptly halted and its credit downgraded by Standard & Poor’s.
Once blacklisted by the Treasury, an individual or corporation can no longer conduct business using US dollars, which are involved in 87% of the world’s foreign-exchange transactions, according to the Bank of International Settlements.
How does this work? Foreign banks generally “dollarise” payments by routing the transaction through US banks, which are required to block any payment when a blacklisted person or entity has a direct interest.
Since sanctions were levied, the Treasury has noted an increase in Russia’s capital outflows — a measure of the money leaving the country. So far this year, it says, these “have exceeded the entirety of outflows last year”.
While Russia’s economy was already faltering, there are signs the Ukraine crisis is exacerbating the downturn. The International Monetary Fund recently forecast Russian growth of just 1.3% in 2014, representing a downward revision blamed in part on the Ukraine crisis. Anton Siluanov, Russia’s finance minister, has given a more dire prediction, warning government officials: “Perhaps it will be around zero.”
TFI has lawyers and financial analysts who honed their skills targeting rogue states, such as North Korea and Iran, and terrorist organisations such as al-Qaeda, in addition to drug kingpins in Latin America. Russia presents an entirely new type of challenge. Here, for the first time, Treasury is pointing its guns at a fellow member of the G8 — one with trade ties to the US, Europe, and Asia.
In many ways, Russia is the test case. At the heart of Treasury’s power is the Office of Foreign Assets Control, a division of TFI that compiles and shoots out Treasury’s blacklist, and whose legal authority stems from executive orders issued by the US president.
This branch of Treasury freezes the assets of targets inside US jurisdictions and imposes millions of dollars of fines on violators, which can include any individual or entity, foreign or American, found to be doing business with anyone on the blacklist.
The list also applies to entities that are 50% or more owned by those that have been blacklisted. Already there have been ripple effects, with banks from JPMorgan Chase to Goldman Sachs and financial institutions from MasterCard to Visa scrambling to stay on the right side of the US.
“The financial sanctions depend on direct outreach to private financial institutions, rather than on going to the foreign governments in which those institutions are based,” says Orde Kittrie of the Foundation for Defense of Democracies, a think-tank. Kittrie was a senior state department economic policy official from 1993 to 2004.
Treasury’s blacklist is sent out a bit like a Google alert. “We have an RSS feed with every financial institution in the country on it, and hundreds of other banks, not just in the United States but all over the world, who subscribe to the list too,” said Adam Szubin, director of the Office of Foreign Assets Control. “We blast it out, and it takes effect instantly.”
Szubin says non-US financial institutions also pay close attention to the list because they don’t want the associated risk of dealing with an outlawed individual or bank, such as Bank Rossiya. “The biggest, most sophisticated banks have it built into their filters and start screening out potential transactions within minutes,” he says.
Take JPMorgan, for example, which processes up to $4trn a day. On March 26, it incurred the wrath of the Russian Federation when it blocked a routine payment of $3,080 by the Russian embassy in Kazakhstan to a Moscow-based insurer that, only days earlier, had been majority owned by Bank Rossiya.
Although the payment was eventually cleared in early April after it was confirmed that Bank Rossiya was, indeed, no longer a majority owner, the foreign ministry in Moscow raged at JPMorgan for a week on its website, stating that the bank’s action was “unacceptable, illegal, and absurd”.
An insider close to the bank who did not want to be identified said: “The Russian embassy is going crazy, but what can the bank do? Unfortunately, it’s caught in the middle.”
Around the same time, both Visa and MasterCard landed in similar hot water over their interpretation of Treasury’s blacklist, which, as of April 11, had grown to include 40 people and business entities. Both credit card companies stopped processing payments for Bank Rossiya and Moscow’s SMP Bank on March 21, prompting the banks to accuse the credit card companies of acting illegally.
In the case of SMP, the ban was lifted by March 23, according to MasterCard, after the Treasury provided some clarity, but the ban on Bank Rossiya remains in place.
Upon hearing of Bank Rossiya’s quandary, Putin — who was not named to treasury’s blacklist, mostly out of deference to his position as president — stated that he would open an account there immediately.
As with JPMorgan, most banks’ compliance desks use sophisticated software and filters to screen suspicious financial activity, including blocking payments of anyone tied to the Office of Foreign Assets Control’s blacklist.
“Once you’re on [its] list, no bank anywhere will deal with you,” says Lee, who specialises in international trade regulation. “The interconnectedness of global processing systems means that what’s now new is the lack of places to hide.”
Treasury’s blacklist now has 5,843 persons and entities on it. That’s an increase of more than 150% over the past decade. Data provided to Newsweek show it has named 558 new persons and entities to its global blacklist every year, on average, for the past four years, compared with 391 on average the prior four years.
Getting on the list requires clearance from multiple agencies and the US justice department. But getting off the list is harder. “We have one client who has been dead for eight months — he’s still on the list,” says Sam Cutler of Ferrari & Associates, a Washington law firm. “Osama bin Laden is still on it. He’s been dead for years. From a legal standpoint, you are better off being designated a foreign terrorist organisation than being designated by Treasury.”
ALARM bells rang inside Treasury on February 21, around the time Viktor Yanukovych, then the president of Ukraine, disappeared and fled to Moscow amid escalating protests. Szubin said his group immediately began gathering intelligence on Russia.
“There was a need here for a rapid response — and rapid in a meaningful, not just symbolic, way — to identify key [Russian] cronies and key financial networks.”
At the end of February, amid reports that Russian troops in Crimea were moving out of their barracks, the White House told Treasury it was preparing orders signed by the president and designed to legally underpin the blacklist.
“This is the first time we have articulated such transparent, well-defined sanctions levels,” says Mujtaba Rahman of Eurasia Group. “There are three levels with escalating triggers and consequences, with level one being symbolic, level two targeting individuals, and level three threatening to punish entire sectors of the Russian economy.” Russia is at level two.
A former senior Treasury official tells Newsweek that “right now, we’re still doing shots across the bow and letting the dust settle. But if Putin takes on more, then the die is cast.”
Until recently, the US relied largely on centuries-old methods of international statecraft rooted in bombs, boots on the ground, and broad sanctions — such as trade embargoes — as blunt, unilateral instruments for crushing its opponents. This frequently created unwanted collateral damage that crippled neighbouring countries and their economies.
In the new world order of highly targeted financial sanctions, the Treasury has turned globalisation and financial domination to its advantage.
“It wasn’t easy,” recalls the mastermind of this new order, Juan Zarate, a Harvard-trained lawyer who is now a senior adviser at the Centre for Strategic and International Studies, a think tank. The FBI and justice department didn’t want Treasury meddling with law enforcement. “We had to prove that the greatest power Treasury has... had nothing to do with guns and badges, and everything to do with markets and our financial suasion.”
In March 2003, an old Treasury division known as the Office of Enforcement was transferred, along with most of its staff, to the newly created Department of Homeland Security. For those left behind, it was a ghost town. Gone were the customs agents, alcohol, tobacco, and firearms suits and Secret Service officials. In their place was a new, elite force led by Zarate: Half a dozen treasury officials and analysts grappling for a new way to approach national security.
Zarate, who had joined Treasury two years earlier at the age of 30 after prosecuting terrorists at the justice department, presided over what was initially the Executive Office for Terrorist Financing and Financial Crimes.
The group began piecing together a sprawling network of resources, drawing from the international banking system, the global intelligence community, federal agencies, formal and informal networks of domestic, and international regulators and law enforcement officials, and what the treasury likes to call “all-source” data.
(Don’t ask them what it means, they won’t tell you. An email heavily vetted by top Treasury officials and their representatives and sent to Newsweek stated: “ALL THE CONTACTS — with the financial community, US government agencies, other financial ministries and central banks AROUND THE WORLD — AND ALL THE FINANCIAL TOOLS.” Capitals theirs, not ours.)
Zarate’s eureka moment came one spring night in 2003, during a chat in his second-floor office with Glaser, then a junior treasury official. “Our financial reach was so far and deep,” Zarate remembers thinking. “It’s a system that we dominate. And we could use that as the basis of a conduct-based approach of financial sanctions rather than a trade-based or diplomatic-based approach.”
In 2004, Zarate’s group, by then called TFI, became the nerve centre of the treasury. It has what Glaser describes as arguably the most formidable Rolodex of financial and intelligence contacts in the world.
Within months, Stuart Levey, another Harvard-trained lawyer and then a senior justice department official working on counter-terrorism, was sworn in as the nation’s first under secretary for terrorism and financial intelligence. Levey, according to one high-ranking official, took Zarate’s idea and ran with it, raising financial warfare to another level.
But will precision financial warfare make Putin blink?
The White House has “written off” trying to deal with Putin, says a person briefed on the administration’s thinking, adding that administration officials see “no point in trying to reach him directly”.
Another former senior Treasury official says: “These sanctions are designed not to have him back off Crimea, which we’ve already lost, but to act as a prophylactic” against future aggression. “We have a chance of succeeding and in not bringing down Russia and the world economy.”
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