Post a Comment On: China Matters

Even though John Bolton is gone, like Lord Voldemort he left part of himself in horcruxes scattered through the US government.

With the realist takeover of the State Department and the exorcism of Bob Joseph, one of the last bastions of Boltonianism is Stuart Levey’s operation, the Office for Terrorism and Financial Intelligence at the Treasury Department.

Given the secretive nature of international banking compounding the instinctive secretive tendencies of the Bush administration, Stuart Levey’s operation has largely avoided public attention and scrutiny.

But that may change now that the Treasury Department has persistently and disruptively inserted itself into the execution of the North Korea Six Party Agreement, to the point that the execution of the Agreement is seriously endangered.

Most recently, the North Korean delegate walked out of the Six Party talks in Beijing because the matter of the Banco Delta Asia—which Christopher Hill had promised to resolve within 30 days—was still left hanging, with the Bank unwilling or unable to remit the funds into North Korea’s account at the Bank of China, probably because of behind-the-scenes obstruction by Treasury.

Treasury’s role as an independent and increasingly nettlesome factor in the North Korean negotiations has become increasingly apparent since last year’s mid-term elections exiled Bolton, catapulted Secretary Rice and the realists in control of the North Korea negotiations, and created a divergence between the priorities of State and Boltonian dead-enders at Treasury and elsewhere.

I blogged on it here, here, here, here, and here.

Now, the press is paying attention to the Treasury Department’s incessant efforts to throw sand in the gears of the Six Party Agreement on North Korea’s nuclear programs.

Via Arms Control Wonk, in mid-March, the Nelson Report reported “shock” in the State Department at the intransigent tone of the Treasury Decision on BDA.

On March 22, The Financial Times ran a piece laying bear the rift between State and Treasury, Rice helped unfreeze N. Korean funds.

And today the LA Times quoted an expert pointing out how unhelpful it was for Treasury to withhold its decision on BDA until the very last minute, shaving thirty days off the sixty days mandated under the agreement for North Korea to shut down the Yongbon reactor:

The importance North Korea has attached to these funds is no secret, prompting Li and other analysts to point a gentle finger at the U.S. for waiting until just hours before the Monday start of talks to announce the end of its investigation."

Maybe someone in the Bush administration believes they can't give in too easily," said Joseph Cheng, professor at the City University of Hong Kong. "But they already made the concession. Allowing enough time for the transfer to proceed smoothly would have been wiser."

And stories are starting to percolate about how elements in the Treasury Department might be working behind the scenes to make hinder the repatriation of the funds to Pyongyang’s account in Bank of China—a delay that caused a North Korean walkout from talks in Beijing on March 21, knocking off a few more days from the time available to get the deal done:

"As far as I know, the Bank of China refuses to accept the transfer of the frozen funds" from BDA, Xinhua's news agency quoted Russian envoy Alexander Losyukov as saying.

A diplomatic source said: "China, in fact, does not want to play a role in getting the 'dirty money' back to North Korea. The Americans are smart enough to toss the ball in the Chinese court over the questionable funds."

The North Korean situation is starting to shine unwelcome light on Levey’s Office of Terrorism and Financial Intelligence which, I expect, much prefers to operate behind the scenes to keep maintain its aura of power and unpredictability.

Stuart Levey is not a money man. He’s a lawyer, a smart cookie, (Harvard undergrad/law) one of many Bush loyalists that proved his merit in the Florida recount —he worked in Martin County—and found a slot in the Justice Department working on counter-terrorism.

He came to Treasury in 2004.

He wasn’t just filling an empty seat at Treasury or, for that matter, just a new slot on the organization chart.

According to his confirmation hearings, his mission at Treasury was to create a new counter-terrorist capability—a new office of Terrorism and Financial Intelligence-- inside Treasury.

In his prepared statement, Levey talked about an expanded enforcement role for Treasury, exploiting provisions of the Patriot Act:

I hope to bring a heightened sense of urgency to the terrorist financing mission at the Treasury Department...the overarching mission for the new Office of Terrorism and Financial Intelligence will be to ensure that the Treasury Department is fully exploiting all of it authorities, capabilities and all of the government’s information to combat terrorist financing and financial crime...I will strive to make better use of the tools the Congress provided in the new PATRIOT Act and of Treasury’s other enforcement powers. I also would build a new Office of Intelligence and Analysis that will exploit Treasury’s own information and integrate the Department more fully into the intelligence community...

Describing his work as the Justice Department’s principal representative to the Terroriist Financing Policy Coordinating Committee, Levey stated:

I have also become familiar with Treasury’s new and promising powers under Section 311 of the USA Patriot Act to impose counter-measures against financial entities or foreign nations that are a primary money laundering concern...the battle against terrorist financing [is]...a campaign to disrupt and cripple the end=users of these funds—the terrorists themselves.

About that intelligence office:

In response to a question from Senator Grassley concerning his vision for the Intelligence Analysis office, Levey responded:

The first function of the OIA (Office of Intelligence and Analysis—ed.) is to build a robust analytical capability on terrorist finance. The Department of the Treasury needs actionable intelligence that can be used to fulfill its mission and exercise its legal authorities. Analytical products from the intelligence community tend to be based on anecdotal information and are largely intended to inform policymakers rather than provide them with date points that can be a basis for then [sic] taking action. They also tend to be highly classified, whereas Treasury often needs to use the lowest classification possible to be used openly to press foreign governments or in evidentiary packages. While OIA will draw on all-source analytical products from the intelligence community, it willl produce its own intelligence reports tailored to the particular needs of Treasury’s mission.

To me, the money quote is “actionable intelligence”. Just like Stephen Cambone at Defense, Levey would have his own intelligence, his own justification for policy, and his own license to act.

If you’re thinking “stovepipe”, “independent spook operation”, so am I. In this case, however, the weapons are dollars instead of guns, and the battlefields in the plush offices of the world’s banks instead of on dusty deserts.

Levey worked hand-in-glove with John Bolton to squeeze North Korea and Iran, using the philosophy that it was not enough to hinder financial operations directly related to banned activities

Instead, Levey believed it was necessary to degrade the overall financial capabilities of the nations behind the activities by banning US banks from doing business with them, and persuading or intimidating the world’s banks into following Treasury’s lead.

I don’t know how successful Levey has been in conducting a worldwide financial boycott against North Korea and Iran.

Like most Bush administration initiatives, there is probably a lot of psy-ops and self-promoting bluster involved. China and Russia are certainly opposed to Treasury’s financial inquisitions, and the Europeans probably don’t like them either: the whole policy smacks more of intentional destabilization and regime change instead of interdiction or conventional counter-proliferation.

Back in November I questioned Levey’s grandiose claims concerning the financial noose that Treasury’s BDA sanctions were tightening around Pyongyang’s neck, opining that Chinese good offices had a lot more to do with the progress toward the Six Party Agreement than Levey’s Inspector Javert-like pursuit of Kim Jung Il’s $25 million.

Nevertheless, there is no question that threatening Chinese or European banks access to the US banking system is an extremely powerful weapon.

A hint that Treasury might threaten a harassing investigation of how Bank of China handled the North Korea transfer might be enough to stall it, and compel the Chinese to ask for clarification and reassurance from the State Department before they proceeded.

Levey has employed Treasury’s new powers discretely and persistently, even if we don’t know how effectively.

Until now.

The overt actions by Treasury against the North Korean deal make Levey’s shop look like a rogue department pursuing a vendetta against Pyongyang, deliberately undercutting the State Department, and embarrassing President Bush in one fell swoop.

It also makes Treasury look less like a team of dedicated, dogged government investigators and more like a cabal of disgruntled, obstructionist Boltonians.

There might be more to Treasury’s efforts to derail the North Korean deal than sheer ideological cussedness.

Treasury is undoubtedly infuratated that the State Department was able to override Treasury on the decision to release all the BDA accounts.

It’s not so much a question of principle.

It’s one of power.

Treasury destroyed BDA simply by announcing its investigation—and by asserting that its actions were under the Patriot Act, a matter of US law and enforcement, unrelated to UN sanctions, and therefore beyond international pressure or compromise.

The ability to sanction international banks while sheltered behind the Patriot Act and U.S. law would appear to be at the core of Treasury’s power—and just the sort of enforcement Easter egg that John Bolton would be happy to plant in the U.S. government.

That position was blown out of the water by the U.S. government’s backdown on BDA.

If foreign governments believe that Treasury’s decisions can be overturned by State on grounds of overriding national interest—or just casual deal-greasing—then Treasury’s intimidating “I’ll huff and I’ll puff and I’ll blow your bank down” approach to dealing with foreign governments and banks will look more like empty bluster.

As the Financial Times reported:

The same official, who broadly supports making small sacrifices to achieve the larger gain, said it was "very unseemly" to have Treasury publicly acquiesce in Beijing. It also appeared at odds with previous statements by Mr Hill, who in a speech to the American Enterprise Institute in 2006 said he had no influence over the Treasury action on BDA.

"We have a separation of duties and it is not for me to tell law enforcement people not to pursue and not to do their jobs," Mr Hill said.

Indeed, the Treasury Department had gone to great lengths in its initial moves against BDA to describe them as domestic enforcement issues, unrelated to the concurrent UN sanctions.

Of course, as the flip-flop ordered by the State Department reveals, it would have been more honest to characterize the Treasury investigation as “one element of U.S.
activities directed against North Korea and coordinated with John Bolton’s efforts at the UN but shielded behind the excuse that it was a Patriot Act enforcement activity”.

But I don’t think the U.S. government was fooling anybody. Certainly not the Chinese and North Koreans.

China’s sensitivity to the “Treasury weapon”, and the added possibility that it is out of control of the State Department, may very well turn out to be more of a headache for the United States—which has $350 billion of its bonds held by China, and would not like to see China moving to a new forex basket with decreased exposure to that dangerous dollar—than for China.

On matters of bureaucratic power, as well as enforcement power and institutional credibility, Treasury is on the defensive. The Financial Times reported on another measure that assured State’s current ascendancy over Treasury:

[A Capitol Hill staffer] added that the Treasury shift [to endorse release of all funds] came after the departure of Bob Joseph, the former state department hardliner on North Korea who "worked hand in glove" in opposing Mr Hill.


Stuart Levey’s operation has a lot riding on it.

With the State Department in the hands of the realists, the Treasury Department has become the stronghold of the hardliners, as can be seen from Levey’s recent uncompromising testimony before Congress on Iran.

The big fish in international financial counterterrorism is, of course, Iran.

With Iran sanctions sputtering, Stuart Levey might want to use the BDA matter to send a message to the UN and the State Department that Treasury, with its independent intelligence, investigatory, and enforcement powers authorized by numerous US resolutions and findings vis a vis Iran, is a force that still must be reckoned with in fixing US policy—and ignored at the peril of its foes, domestic as well as foreign.