The Iran Wars

by Jay Solomon

  This dynamic changed radically after 9/11. The Bush administration quickly prioritized strategies for cutting off the financing of terrorist groups globally, with Treasury at the center of these efforts. Spearheaded by the Patriot Act, passed in 2001, expansive new laws were rushed through Congress to combat international money laundering and terrorist financing. The legislation strengthened the government’s powers to conduct surveillance on telephone communications and wire transfers. And Treasury used its subpoena power to gain access to many of the records of the Belgium-based SWIFT network, which facilitates virtually every bank-to-bank transaction around the globe. Allowing the United States this access fueled unease among European financial regulators, who cited privacy concerns. But Treasury analysts suddenly had the ability to spy on businesses or executives believed to have terrorism links.

  TFI had only one financial intelligence analyst in 2004 but quickly grew to having more than a hundred and a front-row seat in prosecuting Washington’s wars in Iraq and Afghanistan. And it mastered the secret game of drying up terrorist groups’ finances. Treasury uncovered al Qaeda’s and the Taliban’s financial ties to Saudi Arabia, Pakistan, and the Gulf states. And it scored early successes in dismantling U.S.-based charities that were financing militant groups such as Hamas and Hezbollah.

  The Treasury also proved adept at cutting off rogue states’ funding. In the early 2000s, U.S. officials discovered that North Korea was financing its nuclear and missile programs by exporting heroin, knock-off cigarettes, and counterfeit dollars. Many of the funds raised this way, the Bush administration learned, were moving back to Pyongyang and its leadership through a small bank in the former Portuguese colony of Macau. The Treasury warned banks globally that Banco Delta Asia was engaged in money laundering and moving contraband. North Korea suddenly found itself virtually incapable of dollar transactions, and foreign banks from Singapore to Mongolia feared being targeted by Treasury if they engaged in business with the Macanese firm. Wary depositors eventually made a run on the bank, forcing the local government to take it over.

  “We learned that denying access to the dollar was a crucial tool in punishing the U.S.’s enemies,” said Juan Zarate, a Bush administration official who helped lead Treasury’s counterterrorism operations after 9/11. “It was emerging as a potent weapon in our national security architecture.”

  Indeed, Treasury knew that major businesses simply couldn’t function without access to U.S. dollars, the world’s default currency. Treasury could force foreign firms to choose between doing business with the United States or conducting it with rogue states and criminal enterprises. To most, the decision would be a no-brainer.

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  TREASURY SOON PLACED IRAN squarely in its crosshairs following the arrival in 2004 of its first undersecretary for terrorism and financial intelligence, Stuart Levey. Levey had no special expertise in finance when he took the post. A public prosecutor educated at Harvard, he served in the Justice Department of the George W. Bush administration after providing legal advice to the candidate during the 2000 campaign and recount in Florida. Levey, in his early forties at the time, had boyish looks for a high-powered attorney; some friends joked about his recent bar mitzvah. But he’d proved to be an aggressive prosecutor. And he knew how to work the Washington bureaucracy.

  Once at Treasury, Levey used his legal mind to ruthlessly fixate on Iran. The Iranians, having backed out of earlier commitments to the Europeans to freeze their production of nuclear fuel, had an essentially unrestrained program under their new fanatical president, Mahmoud Ahmadinejad, when Levey began his work. And Tehran had paid only a small price for backing out of the European diplomatic agreements. The Bush administration needed to develop an overarching strategy to curb Iran’s capabilities, so Levey decided to build on the tactics Treasury had developed during the first four years after 9/11 to put in place one of the broadest campaigns of financial warfare ever launched against a single country.

  On Secretary of State Condoleezza Rice’s plane, Air Force III, in the winter of 2006, as she was en route to the Middle East, Levey gave the diplomat a menu of financial weapons for the Bush administration’s new campaign against Tehran. The initial focus, he told Rice, would be small: cutting off some of Iran’s major state banks, such as Melli, Saderat, Sepah, and Mellat, from access to the U.S. dollar. Major international business transactions, including oil and gas sales, are almost always priced and conducted in the U.S. currency, due to its stable rate and availability. Levey argued that the United States was unlikely initially to get the United Nations Security Council to support sanctions on these banks, as many European, Chinese, and Russian firms still did business with Iran. But he believed that over time unilateral U.S. actions toward these banks would have a devastating impact on their businesses. Any reputable foreign bank or company had to have access to U.S. dollars if it was going to conduct international business.

  “We wanted to find a way to put the Iranian regime under so much pressure that it would be forced to choose between integration with the international community, along with the attendant benefits, and increasing, painful financial isolation,” Levey told me in a series of interviews starting in 2007. “It was never about containment; we wanted an option short of military action that could potentially be a game-changer.”

  Levey went on to describe to Rice an intensifying assault on Iran’s finances, which would be tempered only if Tehran gave ground in nuclear negotiations. Virtually all sectors of Iran’s economy would be fair game: shipping firms, airlines, insurance companies, and ports. The United States also saw a particularly ripe target in the Revolutionary Guard. The military unit was carving out a dominant position in large sections of the Iranian economy, including the lucrative oil and gas sector. Targeting the IRGC, Levey believed, could essentially kill two birds with one stone: weakening Iran’s military and its broader economy as a whole. Regular Iranians might even welcome the move, Levey hoped, because they were being pushed out of business by the IRGC and its cronies.

  Levey didn’t explicitly state it, but his office’s strategy of cascading waves of sanctions on various sectors of Iran’s economy amounted to a nearly total trade embargo on Iran. Without access to banks and the dollar, and with its shipping firms and airlines blocked, Tehran would be incapable of conducting normal business. Faced with such conditions, Levey hoped, Iran would capitulate and give up its nuclear ambitions. And the campaign might also fuel broader opposition to the regime among the Iranian public, if not foment a new revolution. “We saw an escalating financial war that had virtually no end, if Iran didn’t capitulate,” Levey says. “And Secretary Rice was on board and fully supportive from the beginning.”

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  CUTTING OFF IRAN’S FINANCES, Levey soon learned, would be a global game of whack-a-mole. Governments in Europe, Asia, and the Middle East were initially reluctant to go along with the United States’ financial war against Iran. The UN Security Council was also wary of placing major Iranian commercial banks or companies on sanctions lists, in part because many international businesses remained deeply invested in Tehran. Unlike North Korea, Myanmar, or Zimbabwe, Iran was not yet a global pariah. And unlike those countries, Iran had oil wealth, a skilled workforce, and a youthful population that sought engagement with the West.

  This dynamic forced Levey to embark on global road shows to sell Arab, Asian, and European bankers on the need to wall off Iran’s economy. The Treasury official’s presentation was simple: Any business with Iran is a risk because seemingly legitimate commerce is often a front for nuclear trade or terrorist activity. If you take the chance of doing commerce with Iranian firms, Levey said in speeches from Dubai to Istanbul and Beirut, you could lose your own bank’s or company’s access to the U.S. financial system. European and Arab diplomats privately groused when they learned Levey and Treasury officials were arriving in their towns to lecture their bankers on the threat Iran posed to their businesses. His message was clear, however: they could do bus
iness with Iran or with the United States, but not both.

  “As you make your business decisions, I urge you to consider whether it’s wise for your company to focus its efforts on doing business with Iran,” Levey told a gathering of Arab bankers and businessmen at the Fifth Annual Conference on Trade, Treasury, and Financial Management in Dubai in March 2007. “I recognize that it may be tempting to step into the void that is being created by other companies pulling back their business in Iran, but they are pulling back for a reason….You should worry too.”

  Levey’s appearance belied his tough talk. His voice cracked like a teenager’s when he spoke at press conferences. He often appeared shy and deferential. The fact that he was Jewish, like many senior Treasury officials, fed into the conspiracy theories that ran rampant across the Middle East. They described a U.S. and global financial system controlled by Israel and the Jews. Levey and his colleagues at Treasury were aware of these stories and felt uneasy about them. In Tehran, Levey was promoted to public enemy number one—a Zionist agent in Washington bent on destroying the economy of the Persian Empire. Protestors marshaled by Iran’s government to chant anti-American slogans on Tehran’s streets took to carrying pictures of Levey and other U.S. officials.

  Levey’s strategy increasingly focused on choking off Iran’s oil sales, which made up roughly two-thirds of Tehran’s state revenues. China, India, South Korea, Japan, and other major powers were dependent on Iran for oil supplies and therefore were unwilling to place their economies at risk by abruptly shutting off their energy purchases. Treasury knew this, but Levey and his team still began to devise ways to block oil transactions by severing Iran’s access to global banks. And U.S. officials were looking to find alternative oil supplies for America’s allies.

  The strategy, though, was controversial. For decades, Iran had been among OPEC’s top oil exporters. Economists at the Treasury, and Treasury secretaries Henry Paulson and Timothy Geithner, privately warned Levey that rapidly cutting off Tehran’s oil exports could hurt the United States’ own economy by shrinking the fuel supply and driving up global energy prices.

  “We were concerned that…[if we were] so abrupt in imposing these sanctions on oil and financial institutions, and not giving us certain waiver authorities, that it could effectively crash the global economy,” Ben Rhodes, Obama’s deputy national security advisor, told me. “If you flip the switch a certain way, it could have negative effects or countries could simply ignore it.”

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  LEVEY AND THE TREASURY also turned up the pressure on Iranian insurance companies, airlines, ports, and transport firms. A special emphasis was placed on the Islamic Republic of Iran Shipping Lines, or IRISL, the country’s largest cargo handler. Treasury had blacklisted the company in 2009 for allegedly moving arms to Hezbollah and Hamas through the Mediterranean and for importing equipment for Iran’s nuclear program. But U.S. officials knew IRISL was also a major cog in Iran’s legitimate economy, shipping everything from food to automobiles. This raised a moral quandary that Levey and his staff continually faced in combating Iran: how to stop its nuclear program without unfairly damaging the lives of normal Iranian civilians.

  IRISL engaged in an elaborate game of subterfuge as Treasury pressed foreign companies to stop allowing the company’s ships into their ports. IRISL repainted the colors of their fleet’s outside hulls. They sailed ships under the flags of Liberia, Malta, and other countries that sold flagging rights. And Tehran established hundreds of front companies in Caribbean and European cities in an effort to hide Iranian ownership. But IRISL’s ships were still increasingly denied access to foreign ports, particularly when global insurance companies denied them coverage.

  Treasury was also choking off Iran’s ability to fly internationally. In the wake of the Islamic Revolution in 1979, the United States had sanctioned exports of American airplane parts to Tehran as punishment for the hostage crisis. The result was that Iran’s international flag carrier, Iran Air, possessed an aged and depleted fleet of Boeing aircraft that had been bought, for the most part, during the shah’s era. The safety of many of the planes was in question due to the lack of regular maintenance. Tehran publicly stated that the United States should be charged with human rights violations in an international court as Iranian planes increasingly ran the risk of crashing because of maintenance-related issues.

  The Treasury Department under Levey stepped up its efforts against not just Iran Air but also smaller airlines such as Yas and Mehr. All of these companies, Treasury argued, were engaged in terrorist activity due to their shipments of weapons to Hezbollah, the Assad regime, and militant groups in Iraq. International airports subsequently began denying Iran Air, the country’s lone overseas carrier, landing rights because of security concerns.

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  BUT TEHRAN WAS STILL finding ways to exploit holes in the world’s financial system. Many smaller banks and countries were eager to pick up the slack as multinational companies left Iran. They could charge higher fees or interest rates to Iranians in exchange for the risk they were taking by defying the U.S. Treasury Department.

  Europäisch-Iranische Handelsbank AG, or EIH Bank, of Frankfurt, was among the small firms still willing to take the risk. German companies were the largest European traders with Iran, providing engineering expertise, specialty metals, and software, and many German firms that did business in Iran conducted all of their trade through EIH. Iran and Germany established deep political and economic ties in the 1930s, when the Nazis were aligned with Reza Shah Pahlavi. Germans and Persians both identify themselves as descendants of the Aryan race. German firms built much of Tehran’s infrastructure, including its subway system. The close business relationship endured after the United States and Britain replaced Reza Shah with his son Mohammad in 1944 because of the father’s Nazi sympathies, and later the relationship even survived the 1979 revolution that threw out the family altogether.

  The Treasury sanctioned EIH in late 2010, banning it from using the U.S. dollar or engaging with American banks. The move sparked an outcry from German businesses and politicians. Powerful trade groups pressed the German government not to follow Washington’s lead. Levey personally delivered intelligence to German finance officials to document how Iran had used EIH to finance at least two transactions aimed at procuring equipment for Iran’s nuclear program. The Germans complied and blacklisted EIH, rather than risk broader U.S. penalties.

  Levey believed that offering countries the choice of doing business with either Iran or the United States, but not both, was the brilliance of their Iran strategy. It assumed that most foreign governments and businesses didn’t want to cooperate but that ultimately they would have to. The result was that by 2010 most of Europe had largely cut itself off from Iran because of the fear of more U.S. sanctions and fines. And while Washington’s heavy hand angered European businesses, U.S. officials believed President Obama’s repeated efforts to hold direct negotiations with Iran on its nuclear program made it easier for Washington to pursue sanctions, as it meant that the Europeans couldn’t blame the White House for not extending a hand to Tehran. The onus of blame for the stalemate was shifting.

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  TEHRAN BEGAN MOVING MORE of its assets to the East. In the 1970s, with the help of the United Nations, Iran had established a little-known trading office in South Asia called the Asian Clearing Union (ACU). The ACU brought together seven of the region’s poorer countries that faced trouble conducting trade due to both a lack of U.S. dollars and their fluctuating currencies. The ACU allowed these countries to essentially barter goods through its system, which in a large part was based on IOUs. The ACU’s headquarters were in Tehran, and many of its senior executives were Iranians. At the time of ACU’s establishment, Tehran saw the trading office as a vehicle to cement Iran’s role as an economic leader in the Middle East and Central and South Asia.

  Levey and other U.S. and European officials in 2010 grew alarmed by the amount of trade going through the ACU. The Treas
ury found it virtually impossible to detect who was conducting what type of business thanks to ACU’s opaque trading system, but it believed many of the trades involved sanctioned banks, such as Saderat and Mellat, selling their oil to Asian buyers. Further, U.S. officials worried that the ACU masked Tehran’s ongoing efforts to procure equipment for its nuclear program through middlemen based in India and Pakistan.

  In January 2011, Treasury wreaked havoc on the Indian economy when it announced it was sanctioning the ACU, barring it from U.S. dollar transactions. Indian officials had begun conducting much of their oil trade with Iran through the ACU after Germany’s EIH shut down its business. After its access to oil via the ACU was blocked, New Delhi first tried to purchase Iranian oil in rupees as a means to evade American sanctions. But India’s oil purchases from Iran totally outpaced the country’s ability to make payments in its own currency. So New Delhi was forced to start looking for alternative energy supplies beyond Iran where it could pay in dollars, a dynamic that was repeating all over the world as U.S. sanctions hit one bank after another.

  The Treasury’s action effectively shut down the ACU, which was almost completely dependent on Iran. India and others couldn’t afford to cross the Treasury. Iranian financial officials and businesses were getting desperate as the global economy was closing itself off to them. Levey and his staff were successfully plugging up the holes.

  Tehran established one more financial channel through the Persian Gulf in order to continue its oil trade. Noor Islamic Bank, the UAE bank headquartered in a small business complex in downtown Dubai, was controlled by the son of the emir of Dubai, Sheikh Mohammad bin Rashid Maktoum. Its business was largely focused on providing Islamic banking services to businesses in the Gulf. For example, Islamic law prohibits the charging of interest, so the bank had rules against paying interest to clients. The practice attracted Muslim clients but prevented Noor from being a major player in international business.