U.S. Unilateral Sanctions Are Having An Effect

It is somewhat ironic that, in all this rush to negotiate sanctions at the UN Security Council to deal with Iran, and before them North Korea, the most effective sanctions appear to be those we can - and have - taken unilaterally using the powers of the Patriot Act. David Ignatius explains in the Washington Post:

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.

Given that the U.S. banking system is at the heart of the world's economy, such sanctions, or the threat of sanctions against institutions that cooperate with the money laundering designee in spite thereof, have proven remarkably effective.

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.

Treasury began squeezing Iran last September, when it accused Bank Saderat, one of the largest government-owned banks, of financing terrorism by funneling $50 million to Hezbollah and Hamas since 2001. The Treasury order cut the bank off from any access to the U.S financial system, direct or indirect. A similar ban was imposed in January on Bank Sepah, which Treasury alleged was a key intermediary for Iran's Aerospace Industries Organization, the agency that oversees the country's ballistic missile program.

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