June 14, 2007
HP-457

Remarks by Treasury Secretary Paulson on
Targeted Financial Measures to Protect Our National Security

Good morning. Thank you, Hank, and thank you to the Council on Foreign Relations for hosting us. It is a pleasure to be with you.

New York is the heart of the world's financial system and Treasury Secretaries often come here to talk about the role that system plays in our economic health. Today, I want to talk about something a little different - the financial system's importance to our national security.

Throughout history, Treasury Secretaries have focused their efforts on promoting policies and actions to help ensure the safety and soundness of our financial system. Today, the Secretary must focus on the security of the financial system, as well as its safety and soundness.

Global financial flows are growing rapidly and greatly exceed the trade in goods and services. This is a positive trend; open finance and free trade enhance the economic security and prosperity of people in this country and around the world. But bad actors seek to abuse this global financial system to support their illicit purposes. The world of finance and the world of terror and weapons proliferation intersect through the same system that spreads prosperity at home and abroad.

National security is not only an integral part of my job; it is also a sobering one. Our enemies are determined, and there are significant threats that aren't going away anytime soon. As part of the National Security Council, I work with the President and his Cabinet to address these threats. Treasury is now a key pillar of the President's national security and foreign policy strategy.

An integrated world economy presents challenges and opportunities. The challenge and importance of protecting the integrity of our global financial network have never been greater. Our financial system also presents us with enormous opportunities because technology and integration have made it more difficult for anyone using the financial system to hide. This makes financial intelligence a particularly valuable tool to detect and disrupt bad actors. Recognizing this, Congress and the President have provided an expanded set of tools that allow innovative and more focused uses of financial intelligence. These targeted financial measures are proving to be quite effective, flying in the face of a widely-held historical view that dismisses sanctions as ineffective, harmful to innocents, or both.

There are certainly times when that conventional wisdom is true, particularly with broad, country-wide sanctions that are perceived as political statements. It can be difficult to persuade other governments and private businesses to join such sanctions. Even when other governments agree with us politically, they generally tend to be unwilling to force their nation's businesses to forego opportunities that remain open to others. When the private sector views such broad sanctions as unwelcome political barriers to trade, companies are unmotivated to do more than what is minimally necessary to comply. Indeed, history is replete with examples of participants in the global economy working to evade such sanctions while their government turns a blind eye.

The dynamic is different when we instead impose financial measures specifically targeted against those individuals or entities engaging in illicit conduct. When we use reliable financial intelligence to build conduct-based cases, it is much easier to achieve a multilateral alignment of interests. It is difficult for another nation, even one which is not a close political ally, to disagree with targeted measures to isolate actors who are demonstrably engaged in conduct that threatens human rights or global security. And multilateral support is critical to the success of financial measures in today's world.

When we use targeted financial measures aimed at explicit wrongdoing, the private sector around the world tends to support these measures thereby amplifying their effectiveness. Rather than grudgingly complying with, or even trying to evade our sanctions, we have seen the banking industry in particular voluntarily go above and beyond their legal requirements because they do not want to do business with terrorist supporters, money launderers or proliferators. This is a product of good corporate citizenship and a desire to protect their institution's reputation.

Once some in the private sector decide to cut off those we have targeted, it becomes an even greater reputational risk for others not to follow, and so they often do. Such voluntary implementation by the private sector in turn makes it even more palatable for governments to impose similar measures, thus creating a mutually-reinforcing cycle of public and private action. In the end, if we do our jobs well, especially by sharing critical information with the key governmental and private sector parties around the world, there is the potential for us to create a multilateral coalition to apply significant pressure on those who threaten our security.

Because we are learning to apply our tools in this way, our financial actions have produced demonstrable impacts on threats ranging from terrorist groups to narcotics cartels, and on dangerous regimes in North Korea and Iran. This new strategy uses conduct-based, intelligence-grounded, targeted financial measures to harness the power of the private sector and form the basis of multilateral coalitions, adding an innovative financial dimension to our national security effort.

Treasury can effectively use these tools largely because the U.S. is the key hub of the global financial system; we are the banker to the world. We understand that maintaining this standing, which makes our strategy possible, requires focused and fact-based action, so that the private sector and other governments are most likely to amplify our measures.

The starting point for Treasury's approach to targeted financial measures is information. To identify and act against threats, we need specific, current, and reliable intelligence. And the global financial system is a rich source of the information we need.

Illicit actors who otherwise try to avoid detection often use the formal financial system because there is no good alternative and, in many cases, no alternative at all. Proliferation networks need import and export financing to buy materials and equipment. Rogue nations depend on the financial system for everything from holding reserves to currency transactions. Terrorist networks use the system to raise and move funds when more opaque alternatives are too cumbersome or risky.

These transactions typically leave a trail of detailed information which we can follow to identify key actors and their networks. Opening an account or initiating a funds transfer requires a name, an address, a phone number; identification information that does not lie. Unlike a phone call or conversation that essentially disappears if it's not captured at the moment it occurs, the financial system produces records that tend to survive.

In 2004, Treasury became the first finance ministry in the world to develop in-house intelligence and analytic expertise to use this information. We now work with the broader intelligence community, requesting the data necessary to understand the financial networks that threaten our national security. Treasury then evaluates this information with an eye towards potential action – be it a designation, an advisory to the private sector, or a conversation to alert other finance ministers to a particular threat or bad actor.

It is also critical that the government handle and use the information it gathers appropriately. As Treasury implements these efforts to help protect national security, we simultaneously take rigorous steps to protect privacy and preserve civil liberties. We seek to discover those who are abusing the system, keeping in place sufficient controls and safeguards to protect those who are not.

When considering how best to approach a threat, Treasury draws on an array of powerful authorities. Some are very old, such as the Trading with the Enemy Act, originally passed in 1917. Some are much newer, such as the authority to cut off access to the U.S. financial system for an entity that is "of primary money laundering concern" under Section 311 of the PATRIOT Act.

The innovative use of these authorities against national security threats is fairly recent. We have drawn on lessons learned from earlier programs aimed at Colombian drug cartels. Over the last ten years, as these cartels, their associates and financial holdings have appeared on a Treasury list designating them as narcotic traffickers, U.S. banks have frozen their accounts and assets. Colombian and other countries' banks have then followed suit, refusing to hold or move their money. When given good information, honest bankers won't do business with these criminals. Treasury has designated over 1,400 individuals and companies, and caused the disruption or seizure of more than $1 billion in proceeds related to these cartels. The cartels refer to being placed on the Treasury list as "muerte civil" or civil death.

Since September 11th, Treasury has been applying these lessons in a more focused effort against global terrorist threats, beginning with a September 23, 2001 Executive Order that authorized the identification and designation of terrorists and their facilitators worldwide. We have based our actions on clear evidence and encouraged the private sector and other nations to follow suit. Under a U.N. resolution, worldwide, targeted sanctions are now in place against members and supporters of al Qaida and the Taliban. The European Union and other nations have joined the United States in designating the terrorist group Hamas, and the United Nations has designated individuals responsible for the genocide in Darfur.

The targeted financial measures used against terrorists and their supporters are likely to be as effective in combating proliferation networks. While terrorist organizations may attempt to shift their financial dealings to informal networks or cash couriers, proliferators tend to depend upon access to the formal financial system, where our controls and visibility are greatest. Those seeking to procure items for a nuclear program, for example, often seek to disguise their efforts by making the transaction appear to be for a legitimate commercial purpose. Those who participate in a proliferation transaction because of profit, rather than ideology, are susceptible to being deterred from such transactions if we can credibly threaten to publicly expose and isolate them. Recognizing this fact, in 2005, President Bush took a visionary first step---issuing a new Executive Order authorizing Treasury to target proliferators and their support networks, just as we do terrorists.

The consequences of these targeted measures can be seen on a number of levels, some obvious and some less so. Most directly, when the U.S. designates a terrorist supporter or a weapons proliferator, U.S. entities and persons, wherever located, must freeze the target's assets and stop doing business with them. Given the U.S. financial system's prominence, this can have a severe impact. All major U.S. and foreign banks have offices dedicated to protecting their institutions from infiltration by illicit money. Our designations let these officials know who they need to protect against.

These measures have also led to a base of international, private sector support. Reputable banks around the world don't want to hold accounts for terrorists and proliferators any more than U.S. banks do. My strong view, based on personal experience, is that the major financial institutions, and the individuals who run them, care deeply about the integrity of the financial system and the reputations of the institutions they run. They genuinely want to be good corporate citizens and want nothing to do with illegal behavior. Additionally, a lack of vigilance on their part is not worth the risk of a regulatory action.

These institutions, which are, in a sense, the true gatekeepers of the financial system, have also become more effective in detecting and combating illicit money flows. As a result, they have made us all safer, and they have become sounder and stronger. We strive to make information-sharing a truly two-way street by expanding and improving the information we provide, to help them make better-informed decisions about their customers.

The information the financial sector shares with the government is critically important to our efforts, and they do so under obligations that they sometimes perceive as unduly burdensome. We will continue to work to ensure that the security benefits justify the regulatory obligations, and will make adjustments as warranted. If we communicate well with the private sector, I believe that we can make our regulations more efficient and simultaneously be more effective in protecting our national security.

Targeted Financial Measures in Action

The impacts of these new financial measures are evident around the world. I would like to highlight a few notable examples.

Treasury continues an intensive effort to track and disrupt terrorist financing that has been effective on several levels. This effort has involved government-wide cooperation, applying law enforcement, military, intelligence, and financial tools depending on the target and the situation. While individual terrorist attacks may be inexpensive to carry out, global terrorist groups need large sums of money to pay operatives, to recruit and train members, to acquire false documents and travel. By exploiting the financial intelligence generated by that activity and combining it with other available information, we have made progress in mapping these terrorist networks. In many ways, that has been the Treasury Department's most important, but least visible, contribution to the fight against terrorist groups.

Our actions have had additional disruptive effects. We have frozen assets and closed off conduits, such as terrorist-supporting charities in the United States. Some international entities have shut down simply by virtue of being publicly designated and exposed. When we restrict the flow of funds to terrorists groups or disable a link in their financing chain, they then have to shift their focus from planning attacks to concern about their financial viability. These designations may also have a deterrent effect on the financiers who want to keep one foot in the legitimate business world while supporting murder and violence on the side.

When the target provides support to al Qaida or the Taliban, we have perhaps the best example of a multilateral program of targeted financial measures: a U.N. Security Council list that requires all member states to freeze the assets of designated actors. Even when we don't have that multilateral regime, such as in the case of financial supporters of Hizballah or the Palestinian Islamic Jihad, we have found that our designations make an impact beyond their formal, legal reach, as many banks around the world, who are not obliged to do so, screen their customers and transactions against our list of designated terrorist supporters.

In North Korea, we have used targeted financial measures to help protect the U.S. financial system from the DPRK's illicit financial conduct. We used our authorities to designate several North Korean entities involved in its weapons programs. Because it served as a primary conduit for North Korean illicit actors to access the international financial system, we have also cut off Macau-based Banco Delta Asia's access to the U.S. financial system.

The real impact, however, has come from the information made public in conjunction with these actions. Worldwide, private financial institutions decided to terminate their business relationships with the designated entities as well as others suspected of engaging in similar conduct. The result is North Korea's virtual isolation from the global financial system. The effect on North Korea has been significant, because even the most reclusive regime depends on access to the international financial system

It is clear to everyone in the world today that the U.S. government takes very seriously its responsibility to preserve the security of the financial system and protect it against abuses of WMD proliferation, money laundering and other illegal activities. We have potent tools that can change behavior. In this case, our financial measures are part of a wider campaign to change North Korean behavior, including the State Department-led effort to bring about a de-nuclearized Korean Peninsula.

We are currently in the midst of an effort to apply these same lessons to the very real threat posed by Iran. It is well known that Iran is pursuing nuclear weapons in violation of international agreements and channeling hundreds of millions of dollars to terrorist groups. Still, when I was first briefed on the details, I was surprised to learn the extent to which Iran was exploiting global financial ties to pursue and finance its dangerous behavior, and the extent to which reputable financial institutions were being drawn into these schemes. Financial institutions that would exercise extreme caution to avoid even small-time crooks were unknowingly handling the money of Iran's proliferation front companies. I knew that the people who run these financial institutions would be shocked and disturbed, to say the least, if they were aware of the facts.

So, to combat the Iranian threat, we embarked on a strategy that combines the use of intelligence-based targeted financial measures with a concentrated outreach strategy to inform financial leaders, in governments and, especially in the private sector, of what was happening. Treasury put together a briefing describing the range of Iran's deceptive financial conduct. We explained how Iran uses front companies and other mechanisms that make it difficult, if not impossible, for businesses dealing with Iran to "know their customer" or counterparty. We also explained how the Iranian regime uses its state-owned banks to pursue its missile procurement and nuclear programs, as well as fund terrorism. Repeatedly, state-owned Iranian banks, including the Central Bank of Iran, ask other financial institutions to remove their names from global transactions. This practice aims to evade risk-management controls and threatens to involve responsible financial institutions in transactions they would never knowingly handle.

At around the same time, in September 2006, Treasury cut Iran's state-owned Bank Saderat off from any direct or indirect access to the U.S. financial system, and publicly disclosed some of the information underlying that decision, including that the Central Bank of Iran was sending money through Bank Saderat to Hizballah. We also disclosed evidence that Bank Saderat was providing financial services to other terrorist groups such as the Palestinian Islamic Jihad and Hamas. Almost immediately, financial institutions around the world began to adjust their business with all Iranian state-owned banks and with Bank Saderat, specifically. The private sector, when presented with our solid evidence, is able to act much more quickly than governments who often lack the necessary authority or the political will to take action on their own.

As part of our outreach, we shared extensive information with some of our allies about another Iranian state-owned bank, Bank Sepah, which was providing financial services to Iranian missile firms and trying to disguise its activities. It was our hope that another nation would take the lead in pursuing an action against Bank Sepah, especially when we learned that one of our allies had independently corroborated the information we had shared. Due to a lack of legal authorities and political will, that did not happen. So, in January of this year, we unilaterally designated Bank Sepah as a facilitator of Iranian proliferation.

Other nations often seem to lack the political will to take unilateral actions, and our goal has always been multilateral action. To that end, our outreach eventually proved to be successful when our allies joined us in persuading the United Nations Security Council to blacklist Bank Sepah in its most recent resolution against Iran. Now the entire world must freeze Bank Sepah's assets, and isolate it from the global financial system.

As a result of our outreach and targeted measures, financial institutions around the world are more sensitive than ever about the very substantial risks posed by doing business with Iran. Most of the world's top financial institutions have now dramatically reduced their Iranian business or stopped it altogether. For the most part, they are not legally required to take these steps but have decided, as a matter of prudence and integrity that they do not want to be the bankers for such a regime. To those banks that have decided to stop dollar-based business, but continue to transact Iran's business in other currencies, I would say that the risk of transacting Iran's business is present in every currency. The engagement of Iran's state-controlled banks and its Central Bank in advancing the regime's policies should be cause for great concern to financial institutions around the world.

Due to our State Department's outstanding work, the UN has passed two unanimous Security Council resolutions sanctioning Iran, and is working on a third. As we approach this next resolution, we are increasingly focused on the role of Iran's Revolutionary Guard Corps (IRGC). The IRGC, a paramilitary arm of the regime, has been directly involved in the planning and support of terrorist acts, as well as funding and training other terrorist groups to pursue the military objectives of the regime. Based on its role in proliferation activities, the UN has targeted IRGC companies and officials in recent resolutions. The IRGC is so deeply entrenched in Iran's economy and commercial enterprises, it is increasingly likely that if you are doing business with Iran, you are somehow doing business with the IRGC.

In a country where the regime uses its state-owned banks, military entities, and state-run industries to fund, facilitate, and conceal its WMD and missile programs, the eyes of the world will inevitably turn to the decision maker, the regime itself, and demand that it be held accountable. By approaching the Iran issue the way we have, focusing intensely on specific illicit conduct and making the private sector a partner in the effort, we are in a better position to discuss broader measures with our allies. While the financial isolation of the entire regime may impose costs on our partners and on us, it would be far less costly than a nuclear-armed Iran.

As these examples show, the innovative use of targeted financial measures has advanced our national security, but there are gaps in this effort that must be filled.

One of the greatest challenges of this century will be to keep the most dangerous weapons out of the hands of dangerous people. As I travel and meet with my colleagues in finance ministries around the world, everyone acknowledges that we must find effective ways to deal with these threats, short of military measures. Yet other nations are not moving quickly enough to accomplish this goal.

Specifically, nations must implement the laws necessary to give their finance ministries the authority to access and use intelligence, and they must move to integrate financial and security functions. This will enable further cooperation and multilateral action, which is in the world's best interest. And, these authorities must be available for use against terrorist financing, money laundering and the dangerous, emerging practice of proliferation financing.

Although there has not been a terrorist attack on American soil since 9/11, terrorists have struck London, Madrid, Jakarta, Mumbai, Amman, Bali, and Istanbul. Several of our key allies who support the global effort against terrorism have yet to take such basic steps as adequately criminalizing money laundering and terrorist financing. An even greater number of countries have failed to develop the national authorities and capabilities necessary to apply targeted financial measures to any terrorist group other than Al Qaida and the Taliban. We have a shared responsibility for our mutual security, and our allies, who confront risks at least as great as those confronting the United States, must find the political will to enact the authorities they need to join in effective multilateral action. These authorities may not deal a knock-out-punch, but they can and will produce results and change behavior.

My finance ministry counterparts and I have the same responsibility: to broaden our role beyond economic stewardship and become valuable contributors to help ensure our countries' and our citizens' security. In performing these dual roles we seek essentially the same end: preserving the global financial system's integrity, which will enhance economic security and prosperity for people around the world.