Since 9/11, Washington has deployed a powerful weapon to halt the financing of terrorism: the Patriot Act’s Section 311. By shutting down the ability of banks to facilitate cross-border payments, Section 311 has revolutionized the field of anti-money laundering and helped the U.S. lead aggressive and effective sanctions against Iran and North Korea.
While this was an extremely useful tool in the war on terror, the strategic environment is changing. Rogue states, terrorists, and money launderers have developed innovative tactics to evade sanctions. Meanwhile, 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 nations with systemically important financial institutions and economic linkages. Russia and China top the list.
America’s sanctions strategy, however, hasn’t evolved to meet this challenge. 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. It’s time for a new Economic Patriot Act that can provide the scalpel-like instruments Washington needs to thwart our adversaries with speed and precision.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Section 311 is in danger of falling victim to its own success. After nearly two decades, the mere threat of its deployment can trigger severe reputational damage; its actual use can generate devastating shockwaves across a regional banking sector.
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, triggering a run on the bank and causing Macanese authorities to freeze $22 million in North Korean deposits. But the effects of the 311 swept across the entire Asian banking system, with Chinese banks in particular dumping 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 $22 million 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, labeling 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.
These steps were a victory in the fight against terrorism, but they aren’t designed for an era of great power competition. As the United States sanctioned Russia, a nation with significantly more financial links to the Western World (Europe in particular) this became apparent. The costs to our European allies of implementing financial and energy sanctions from the Iran playbook against Moscow are too steep for Brussels to seriously contemplate escalating to this stage.
China presents an even trickier challenge. China’s four largest 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 done deliberately.
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 from jurisdictions ranging from Cyprus to Delaware. Money laundering from Russia represents not only a law enforcement issue, but one of geopolitics: The ability to move money outside of Russia’s boundaries and place it in the security of European banks upholds the patronage networks that form the beating heart of the Kremlin’s kleptocracy.
The Patriot Act’s Section 313 fully banned correspondent banking with foreign shell banks, which have no physical presence in a jurisdiction, and as such are virtually unregulated entities. The move was instrumental in fighting terrorist financiers, but today, 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 U.S. Treasury has done quietly heroic work to financially weaken terrorists and rogue states. But complacency over 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 deputy executive director of the Trilateral Commission, senior adviser to Atlantic Council President and CEO Frederick Kempe, and adjunct professor at Boston University. From 2015-2017, Greenwald served as the US Treasury attaché to Qatar and Kuwait. He previously held counterterrorism and intelligence roles in the US government.