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 But the meeting one recent morning convened deep within the
Treasury Department, not the Pentagon. The weapons at hand were not
drones or cruise missiles, but financial sanctions, aimed with
similar precision at U.S. rivals' economic interests.
Before discussing possible next steps against Russia over its
annexation of Crimea, Adam Szubin, the slim, boyish-looking director
of Treasury's Office of Foreign Assets Control (OFAC), thanked his
team for putting in a string of sleepless nights to devise sanctions
against senior Russian officials and associates of President
Vladimir Putin.
The measures, rolled out in three executive orders signed by
President Barack Obama in March, included blocking the Russians and
Bank Rossiya, Russia's 17th-largest bank, from access to the U.S.
financial system and freezing their U.S. assets.
The sanctions were partly symbolic, more intended to send a message
to Russian leaders than damage Russia's economy. It wasn't clear
whether they would be enough to pressure Putin to stop Russia from
forcibly asserting territorial claims elsewhere, let alone reverse
the annexation of Crimea.
But during Reuters' up-close look at how OFAC devises sanctions, one
thing did seem certain to Szubin's team.
"We're going to be looked to ... in the days and weeks to come, to
continue to deliver," Szubin, 41, told about 30 staff members
gathered over a modest celebration of Starbucks coffee and Krispy
Kreme doughnuts.
His prediction was borne out on Sunday, when Samantha Power, the
U.S. envoy to the United Nations, said the United States was
prepared to step up sanctions against Moscow if pro-Russian military
actions in eastern Ukraine continued.
By turning to sanctions in response to Russia's intervention in
Ukraine, Obama reinforced a trend: He — and George W. Bush before
him — increasingly have used financial warfare, rather than the
overtaxed U.S. military, in crises from North Korea to Iran to
Syria.
It has made OFAC's war room something of a front line for the United
States and its allies. In interviews, current and former top OFAC
officials offered insight into some of the often-secret agency's
inner workings, including its key role in imposing economic
penalties on Iran.
The 170-person sanctions unit within Treasury, comprised mainly of
lawyers and intelligence analysts known as "targeters," has
extraordinary powers — and the ability to interrupt dollar
transactions worldwide.
Lawyers and companies who must deal with OFAC to comply with its
sanctions complain that it often imposes penalties without sharing
key evidence to support its actions. Some also say OFAC can
overreach in blocking transactions it deems suspicious.
Among those hit with Ukraine-related sanctions was Russian
businessman Gennady Timchenko, co-founder of leading global
commodities trading firm Gunvor. The firm disputed Treasury's March
20 claim that Putin had investments in the firm "and may have access
to Gunvor funds."
Putin has mocked the U.S. sanctions, which his spokesman, Dmitry
Peskov, has called "unacceptable." U.S. Treasury officials have
declined to produce any proof Putin is involved with Gunvor, and are
not required to under U.S. law.
"We remain confident that that (information) is accurate," Szubin
told Reuters.
"OFAC is probably one of the most powerful government agencies no
one's ever heard of," said Mark Dubowitz of the Foundation for
Defense of Democracies think tank, which backs tough sanctions on
Iran over its suspected nuclear weapons work.
Sanctions don't always succeed, especially unilateral ones. A
54-year U.S. trade embargo has done little to change Cuba's
socialist system or anti-U.S. outlook.
But Treasury, along with the U.S. Congress and the European Union,
quieted many skeptics who said sanctions on Iran would fail. Tough
oil and financial restrictions apparently pushed Tehran into
negotiations over its nuclear program, which the U.S. and its allies
see as a potential threat to Israel in particular.
Thanks partly to the Iran success, the United States faces two major
challenges in waging financial warfare, current and former officials
say.
It took Washington years to win international consensus on targeting
Iran's energy exports, and sanctions were imposed in stages. If
negotiations with Iran succeed, it will be even more complex to
reward Iran by gradually unwinding the thick web of restrictions on
doing business there, officials acknowledge.
Some former officials also predict that the United States, after
leveraging its dominance in the global financial system to punish
adversaries, could itself become the target of financial attack by
countries such as China and Russia.
DRIED FRUIT AND ZIRCONIUM SAND
OFAC's targets are broadly set by White House orders to use
financial tools against a specific country, or adversaries such as
violent Islamic militants. But individual cases often stem from
lengthy investigations by its Office of Global Targeting.
And sometimes, tips come in unsolicited.
In the middle of international nuclear talks with Iran last fall, a
financial institution phoned OFAC about a suspicious transaction. A
Japanese company that billed itself as a seller of fresh and dried
fruit was sending money to a Hong Kong firm, said a senior U.S.
official who was not authorized to speak publicly about the case.
The transaction wasn't huge — tens of thousands of dollars — but it
raised eyebrows at OFAC.
The Japanese firm, Tistria Inc., had an Iranian affiliate, the U.S.
official said. And the Hong Kong company made zirconium sand, a key
ingredient in zirconium tubes, used in heavy-water nuclear reactors.
The U.S. official did not identify Tistria's Iranian affiliate.
"Zircon sand has a whole range of industrial uses. But ... none of
them are in the display or sale of fruit, dried or otherwise," the
U.S. official said. OFAC blocked the U.S. dollar transaction, which
has not been reported previously.
Tistria declined to comment. When Reuters called the Iranian
affiliate listed on Tistria's web site, Yar Trading Group, the
company's chief executive said he has not had ties with Tistria
since 2009, did not know about the blocked transaction and did not
know why his firm was still listed on Tistria's website.
A Treasury spokeswoman declined to comment on the Tistria case.
Word of the blocked transaction was passed to U.S. delegates at the nuclear talks in Geneva, who confronted the Iranians across
the table with the information. The tacit message: The United States
is watching you, and will continue to vigorously enforce existing
nuclear sanctions.
Most investigations require more labor, as OFAC's targeters comb
through classified intelligence reports, financial records and
corporate registrations. They build charts illustrating how striking
one financial node will impact other nodes, those familiar with the
process said.
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After OFAC shifted its focus in late 2012 from imposing new Iran
sanctions to hunting for those who may be violating such sanctions,
one name kept popping up: Babak Zanjani, an ambitious Iranian
businessman whose network of 65 companies stretched from Turkey to
Malaysia. The U.S. government would accuse him of violating
sanctions by selling billions of dollars worth of Iranian oil in
covert transactions.
To OFAC targeters, Zanjani's business structure threw up red flags:
a Turkish cosmetic company that owned a Tajik financial institution
that in turn owned an Islamic bank in Malaysia.
"Zanjani was brash, but in the end not necessarily so bright,"
Szubin said.
Zanjani's empire was dismantled in a one-two punch. He and his
businesses were hit by E.U. and U.S. sanctions. Then he got
entangled in Iran's power shift when President Hassan Rouhani
replaced Mahmoud Ahmadinejad. The new Iranian government accused
Zanjani of owing the nation more than $2.7 billion in oil proceeds.
Arrested in late December, Zanjani has denied wrongdoing. It is unclear what charges, if any, he faces in Iran.
"WE LEARNED ... HOW HARD IT IS"
In late 2012, Iran's economy began to wobble. It was losing billions
of dollars per month as sanctions slashed its oil sales. Its
currency plunged, inflation jumped and the economy went into
recession.
In an interim nuclear deal with Iran reached in November, U.S. and
E.U. negotiators agreed to lift sanctions on sectors such as
petrochemicals and precious metals for six months. They have
promised broader sanctions relief if Iran agrees to permanent curbs
on its nuclear program.
However, the last time the U.S. government eased sanctions to spur
nuclear diplomacy, it did not go well.
In 2005, Treasury used a powerful anti-money laundering tool,
Section 311 of the Patriot Act anti-terrorism law, to blacklist
Macau-based Banco Delta Asia, which it said was used by North Korea
for illegal activities. The move sent a signal to the global banking
system that North Korea was off-limits.
When $25 million in accounts was unfrozen to coax Pyongyang back to
nuclear talks, U.S. diplomats struggled to find a financial
institution willing to handle the funds. They were forced to use the
New York Federal Reserve Bank. That choice and the decision to lift
sanctions for political reasons allowed North Korea to regain some
financial legitimacy.
"The lesson we learned from it, was how hard it is" to unwind
sanctions, said Assistant Treasury Secretary Danny Glaser. "As it
relates to Iran and the posture we find ourselves in, I think the
point is ... it is difficult and complicated and you have to be very
careful how you do it."
OFAC's POWER
OFAC got an unusual compliment in October, from a politically
divided U.S. Congress that rarely agrees on anything.
Amid a government shutdown over a budget dispute, Republican and
Democratic lawmakers joined in urging Obama to exempt OFAC's
employees from furloughs, citing their central role in implementing
and enforcing Iran sanctions.
Created in 1950 during the Korean War, OFAC is part of an activist
national security division at Treasury that was revived after the
September 11, 2001, attacks to develop new financial weapons against
al Qaeda and other terror groups.
OFAC's budget — $30.9 million in fiscal 2013 — and staff have grown
little in recent years. Outside lawyers complain it is stretched
thin, overseeing 37 sanctions programs and dealing with sudden
crises such as the one in Ukraine.
Despite OFAC's modest size, one visit from its officials can leave
bankers and traders scrambling to fulfill its dictums, given its
power to blacklist entities and levy fines.
It can put individuals on the list of "Specially Designated
Nationals" — blocked from the U.S. financial system — without a
court ruling or publication of often-classified evidence. Its
standard is a determination that there is "a reasonable basis" to
believe activity is occurring that merit sanctions, not the stricter
legal standard of "beyond a reasonable doubt."
"There's no appetite for running afoul of OFAC," said Samuel Cutler,
policy adviser at Ferrari and Associates, which handles
sanctions-related litigation. Even with some Iran sanctions now
eased, U.S. and foreign businesses won't risk Treasury's wrath by
rushing to do business with Iran, Cutler predicted.
A few targets of Treasury's sanctions have struck back in court,
claiming unfair treatment.
In 2010, for example, a federal court ruled that Treasury had
violated the due-process rights of a charity known as KindHearts by
freezing its assets without a warrant. Treasury argued that the
freeze was necessary to prevent KindHearts from hiding assets that
U.S. officials suspected were going to Islamist militants. The case
ended in a settlement in which KindHearts folded but was allowed to
keep its assets.
GLOBAL FINANCIAL WARFARE?
Before new sanctions are announced publicly, OFAC coordinates with
the Justice Department, which might have to defend the action in
court.
It also confers with diplomats, spies and law enforcement officials
to determine whether the proposed sanctions could complicate their
work.
U.S. success in using financial sanctions against targets such as
Iran has prompted other countries to expand their own sanctions
capabilities.
A former OFAC official who asked not to be identified recalled a
2011 meeting with Chinese officials, who bombarded him with
technical questions about OFAC and its powers. China was developing
its own laws to authorize unilateral sanctions, he later confirmed.
"I am not sure we're ready for a world where the Russian Federation
and People's Republic of China start having their own lists where
they're sanctioning people," the former official said.
(Additional reporting by Babak Dehghanpisheh in Beirut and Mari
Saito in Tokyo; editing by Alistair Bell and David Lindsey)
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