The Funding of Terrorism (Part III) – America Needs a New Economic Patriot Act

by Michael Greenwald

8 August 2019

Section 311 of the Patriot Act, an effective tool against money laundering (Image credit: Financial Tribune)

 

Since 9/11, Washington has deployed a powerful weapon to halt the financing of terrorism: Section 311 of the Patriot Act. By shutting down the ability of banks to facilitate cross-border payments, Section 311 has revolutionised the field of anti-money laundering while helping the U.S. implement aggressive and effective sanctions against Iran and North Korea.

Take the case of Banco Delta Asia (BDA), a bank that facilitated financial transactions with North Korea. When the 311 was used in 2005, BDA lost its access to correspondent banking in the United States. This loss provoked a run on the bank and caused Macanese authorities to freeze $22M in North Korean deposits. However, the effects of the 311 were not localised—they swept across the entire Asian banking system. Chinese banks, in particular, dumped their North Korean exposure for fear of being targeted with a 311 designation themselves. The 311 was so powerful that, when North Korean negotiators demanded the release of the $22M in frozen funds, no Asian banks were willing to facilitate the payments transfer.

In the sanctions campaign against Iran, Washington used the 311 designation to punish a nation-state for the first time. Treasury officials had one-on-one discussions with CEOs and officers to convince them that the compliance costs of doing business in Iran were too steep to justify investment. Later, the United States sanctioned several private banks before levying a 311 on the Central Bank of Iran. Doing so classified the entire Iranian jurisdiction as a primary money laundering concern. This translated into the Society for Worldwide Interbank Financial Telecommunications (SWIFT) disconnecting the Iranian financial system from access to international commerce.

While Section 311 has been extremely useful in weakening terrorist and other enemy nations, the current strategic environment is changing. Rogue states, terrorists, and money launderers have developed innovative tactics to evade sanctions. Additionally, secular shifts in the global economy have altered Washington’s sanctions calculus. In today’s era of great power competition, priority threats are no longer rogue states with little economic clout but instead nations with systemically important financial institutions and economic linkages. Russia and China top the list.

America’s sanctions strategy, however, has not evolved to meet the challenges of this new global landscape. Like Thor’s Hammer, Section 311 remains a powerful tool, but its collateral costs are too high to confront banks that are too big to fail. After levying this tool throughout the past two decades, it has become clear that the mere threat of its deployment can trigger severe reputational damage; its actual use can generate devastating shockwaves across a regional banking sector.

It is time for a new Economic Patriot Act that can provide the scalpel-like instruments Washington needs to thwart our adversaries, such as Russia and China, with speed and precision.

As the United States sanctioned Russia, a nation with significantly more financial links to the Western World (and Europe in particular), this weakness became apparent. The costs to of implementing financial and energy sanctions from Iran’s playbook against Moscow are too great for Brussels to seriously contemplate an escalation to this stage.

China presents an even trickier challenge. China’s four biggest banks rank among the largest in the world. If even one of them were targeted in the same manner, as the far less systemically important Iranian banks, the result could be a deep financial crisis not limited to China’s borders. Think of it as a Lehman Brothers-style collapse – only a deliberate one.

Section 311 may be a crude cudgel, but Washington still has options to develop a savvy sanctions strategy in the era of great power competition. In the fight against illicit finance, Russia benefits from lax financial transparency in jurisdictions ranging from Cyprus to Delaware. Money laundering from Russia represents not only a law enforcement issue but also a geopolitical dilemma: Russia’s ability to move money outside its boundaries and place it in the security of European banks upholds the patronage networks that form the beating heart of the Kremlin’s kleptocracy.

Other sections of the Patriot Act have also proved out-dated and ineffective in the current geopolitical landscape. The Patriot Act’s Section 313 fully banned correspondent banking with foreign shell banks, which have no physical presence in a jurisdiction and are thus virtually unregulated entities. The move was instrumental in fighting terrorist financiers, but these vulnerabilities are no longer loopholes that facilitate threats. These loopholes are threats themselves and form the core of the Kremlin’s business model.

Over the past two decades, the US Treasury has done quiet heroic work to financially weaken terrorists and rogue states. But complacency regarding the Patriot Act is handicapping our ability to respond to Russian and Chinese provocations. An executive order spelling out a new Economic Patriot Act would enable a smarter sanctions strategy backed by a suite of new, powerful instruments for the era of great power competition at hand.


Michael B. Greenwald is a fellow at Harvard Kennedy School’s Belfer Center for Science and International Affairs. He is also a Senior Adviser to the Atlantic Council President and Chief Executive Officer Frederick Kempe and an Adjunct Professor at Boston University. From 2015-2017, Greenwald served as the US Treasury attaché to Qatar and Kuwait.

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