November 26, 2024 • 47 mins
As with the transition of power for every Presidential administration, agendas are rethought, and priorities realigned. And although America’s global economic and political power is buttressed by the integrity of its markets and sound rule of law, we must still be mindful of evolving methods of economic warfare and continued threats to our national security and economic standing. So what exactly should the incoming Trump administration be focused on and prioritizing?
Juan Zarate was the US counterterrorism czar under President George W. Bush, the first Assistant Secretary at the Treasury Department to oversee Terrorist Financing and Financial Crimes, and also authored Treasury’s War: The Unleashing of a New Era of Financial Warfare. Juan joined Designated host Yaya Jata Fanusie to share his expertise on the risks our adversaries and these massive threats pose to our economic, social, and political lives and how the Trump administration would be best served in addressing them.
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Episode Transcript
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Speaker 1 (00:00):
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(00:24):
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join our next workshop. The Honorable Wanzarat was the US
(00:52):
Counter Terrorisms are under President George W. Bush and also
the first Assistant Secretary at the Treasury Department to oversee terrorists, financing,
and financial crimes. In those roles, he helped to design
and implement US rules for anti money laundering and countering
the financing of terrorism, rules that affect the way you
bank today and the rules illicit actors try to circumvent
(01:15):
when moving dirty money. Several years ago, Juan wrote the
groundbreaking book Treasury's War, The Unleashing of a new era
of financial warfare. If you want to understand how sanctions
and money laundering relate to national security, he's your guy.
It's an honor to have Juan Zerrate as our guest,
(01:36):
someone whom I deeply respect. In this conversation, Wan gives
us his take on how economic and financial threats have
evolved and what the new Trump administration needs to prioritize.
He also reflects on the successes he's seen stemming from
the use of sanctions, and is also honest in addressing
their limitations. Juan Zerat, are you ready to get designated?
Speaker 2 (02:01):
Let's do it. Yeah, yeah, all right. One.
Speaker 1 (02:05):
It's always great to talk to someone who has been
on the inside and has a lot of institutional memory.
I want to ask you, out of all the national
security threats that you remember from the end of let's
say two thousand and eight, which of those threats are
you most surprised that they still exist?
Speaker 2 (02:27):
Oh? Yeah, yeah, that's a good question. Yeah. I love
being on with you. You're always You're always so smart
and insightful. Thank you. You know, I think what surprises
me is that, you know, the cybersecurity threats that we
saw clearly emerging, they were already existing at that time.
(02:50):
In some ways, I've only gotten worse or have metastasized
in ways that make it, you know, harder to manage,
and certainly in ways they've taken advantage of other technologies
like ransomware, right, And so it's not that it's a
surprise that it's still around. It's just that it's so persistent,
and in some ways can anticipate that. But I think
(03:12):
that's part of it. One other thing I would say, yeah, ya,
is in many ways we were anticipating the convergence of
nefarious actors, malign actors, rogues however you wanted to label them,
in the international system. I called it in my book
the Alliance of financial rogues. And I know you've done
(03:35):
lots of work on this, especially in the crypto context.
I think I haven't been surprised about it. But I
think it's interesting that we've seen much more clearly this
acceis of resistance, the aligance between China and Russia and
Iran and North Korea, and how much that's accelerated in
(03:55):
the last few years. Again, we saw glimmers of that,
and we were certainly worried about it, certainly worried in
the context of illicit finance, the fact that that's accelerated
so much. And now you've got North Korean troops Lloyd
in Ukraine. You've got Chinese vessels which may or may
not have been helping cut undersea cables on behalf of Russia.
(04:18):
You've got you know, Iran supplying drones into the Russian
war machine. All of this is a pretty stark and
open reflection of that alliance. And so that would be
another element of surprise to a certain extent.
Speaker 1 (04:35):
You know, in the intel world, we used to talk
about an elevator briefing, which is when you know, you
find yourself in the elevator with the principle like yourself,
like wanzerate, and as an analyst, you have to give him,
you know him or her the top, you know, the
top the quick beat on what are the key threats,
(04:55):
and you know, in your role now you're outside of
the government. So I'm wondering if if we could think about,
you know, if you were in front of the let's say,
the Trump transition team and you just had an elevator
ride to tell them what are the key financial economic
threats that they need to focus on. What would you
(05:16):
tell them.
Speaker 2 (05:18):
I think there are three things that concern me most Yayau.
One is this convergence of illicit actors, most state and
non state, that are very much willing to and able
to misuse the financial system, misuse technologies like crypto to
not only profit, but then to advance their interests, often
(05:41):
in opposition to the United States. And so this idea
of the alliance of countries like China and Russia and
Iran and North Korea and Venezuela, many of which are
sanctioned in different ways, coming together to support each other
and to engage agent Ellsted activity that not only threatens
(06:02):
our national security but also threatens the integrity of the
financial and commercial system. So that's it's that convergence of
that alliance I think that's really threatening, in addition to
the kinetic threats and the military threats that are attached
to it. I think secondly is the challenge to American
(06:25):
systemic dominance in the international financial system. The attempts, the
open attempts, it's no longer veiled. You hear it in
the bricks plus conversations. You hear it from leaders like
Lula de Silva from Brazil, A real desire to break
the reliance on the US dollar, find alternatives to the
(06:49):
American backed financial system, to create alternate payment systems and
cross border settlement processes that don't rely on London or
New York or even Tokyo, but have other sources of
both legitimacy and facility. So that I think is very
(07:12):
important because there's a systemic attempt to take us out
from the middle and to replace it with something else
that's either Chinese driven or otherwise more chaotic. Third is,
I think we always have to be aware that the
actors that we're most worried about from a security perspective
(07:34):
are going to find ways to use the financial and
commercial technology systems against us. They're going to try to
get access to things that we're trying to prevent them
from getting access to export controls. They're going to try
to get into financial systems despite sanctions, and so we're
(07:56):
going to have to figure out how we're using the
full tool get of economic and commercial measures to isolate
those rogues and those that present a threat to us,
and sharpening that strategy, sharpening those capabilities is something the
new administration I think needs to concentrate on well.
Speaker 1 (08:17):
One with those threats and those risks that are around. Then,
what would you say would be the state of those
tools that the US has? Right you? I mean, you know,
I know you're modest, but you were a part of
that effort to create and to enhance US tools for
(08:38):
financial pressure, for anti money laundering, and to counter terrorist financing. Obviously,
the sanctions piece is there, and you've talked and written
so much about that, But in twenty twenty four, especially
when there's a lot of pressure and people are saying
these tools, these sanctions tools, may not be so robust,
(08:59):
what would you say is the state of US tools
of economic power?
Speaker 2 (09:04):
Well? Yeah, I think first and foremost we have recognized
in twenty twenty four we're talking about a full range
of tools, right, So not just the classic sanctions we've
thought about for the last twenty years, which is the
isolation of rogue actors from the financial system, denying them
access to goods or to institutions. You know, that's really important.
(09:25):
We'll get to that in just a second. But you've
got anti money laundering tools that are intended to prevent
illicit capital from getting into the system. Some real problems
with that system. There's export controls, there's investment security, both
inbound and outbound that's been evolving and as information as
we speak. And then there's positive economic tools. And so
(09:50):
there's a full spectrum of these tools that in some
ways reinforce each other and that are very much at
play when you talk about economic state craft, and I
I think the reality is the United States still has
predominance in many of those fields, whether you're talking about
exquisite semiconductors for AI purposes, or you're talking about access
(10:12):
to the US financial system, or reliance on the dollar,
or the predominance of dollar back stable coins, which is,
you know, the predominant use in trade and stable coins.
The US and the dollar and its system and its
technology still hold a primary place, not solely, but a
primary place along with its allies. So those tools have
(10:36):
to be have to be nurtured and considered together in
a system where we don't want the US government to
co opt the private sector, right, we don't want to
become a Rusher or a China, But we have to
realize we're having to compete with those countries that are
applying state authoritarian capitalist models to the system. But with
(10:56):
respect to sanctions in particular, Yeah, I think we're a
real inflection point, and by that I mean three things. One,
I think in the post Russia context, in particular in Europe,
there's a recognition that sanctions are not just an interesting
part of or an adjunct to diplomacy or an element
(11:18):
of economic statecraft as I was just describing. It's actually
a part of warfare. Right This is part of the
hybrid warfare that Russia has engaged in the context of
the use of its energy resources. China's engaged in some
of this with what it's been willing to do to
shut down exports of rare earth minerals, for example, or
(11:40):
some of the supply disruptions, for example, to US drone
makers that are then supplying those drones to Ukraine. Right.
So there, now, I think is a more fundamental recognition
that sanctions are a part of the new form of
warfare that we're engaged in. Now. It's not a shooting war.
(12:00):
Sanctions fundamentally are part of that, which is different than
simply you do this to signal a probrium or as
an alternate to a diplomacy. The second thing is we
have to be very careful, and many voices have said
this for many years to not overuse sanctions. But by that,
I think we mean not that we not use sanctions
(12:22):
when we need to for clear national security reasons, but
that we not proliferate sanctions and over use them for
what are seen as purely political reasons or to put
our thumb on the scale on some particular issue in
some particular country. And I think we run the risk
(12:42):
of that when sanctions are being used as a tool
of moral probrium or policy disagreement as opposed to a
tool of coercive state craft or even warfare. And so
I think that has to be thought about, because the
more that we over use sanctions and ways that dilute
their power and effectiveness, the more that the sanctions just
(13:05):
are going to be less effective, and the more that
we're going to drive actors to find ways around them
and are going to have less cooperation frankly, to make
them effective.
Speaker 1 (13:16):
One do you think that around sanctions the tables could
ever turn? Maybe not now, but can you imagine or
do you see any indicators where sanctions could be turned
towards the United States?
Speaker 2 (13:31):
Absolutely, And this is something I warned about in Treasury's
War at the tail end of the book talking about
the coming financial wars. It was clear that the Russians
were already thinking about this in the context of use
of oil and gases, both a sword and a shield
in terms of sanctions or economic warfare. The Chinese were
(13:52):
already threatening US companies that were supplying military weaponry to
Taiwan had taken some demonstration effects. This was back in
twenty eleven, twenty twelve, twenty thirteen, to let you know,
produce from East Asian neighbors that were you know, challenging
(14:14):
them in the South China see letting bananas rot in
the port, you know, with the Philippines for example, or
denying rare earth mineral exports to countries like Japan as
part of diplomatic engagement and confrontation. So you it was
(14:35):
already very clear that you had countries thinking about how
they use the power of their own markets, their own
resources to influence and to coerce, and that's in essence sanctions, right,
And I think you've started to see that in different ways,
with the Chinese being more explicit. They have you know,
lists of people that they designate. Now they take actions
(14:58):
against different companies they certainly have designated or have sanctions
related to Taiwan now, and as I've mentioned, in subtle
and not so subtle ways, they've shut off supplies of
necessary minerals and components for purposes of the United States
(15:20):
and in particular for this drone maker that is exporting
to Ukraine. So in a way, we're already in that
environment where other countries are recognizing they can use sanctions
to exclude actors, to punish, to send messages. And we're
certainly in an environment where it's not just the US
(15:41):
that applies these tools. The EU, London, Japan, even Russia, Moscow,
others are applying these tools of economic coercion for their
national security interests.
Speaker 1 (15:54):
So in this environment of economic warfare, competition, competition, slash warfare,
where every country can assert its interests or try to
what would you say about the incoming administration in this environment,
and you don't have to get specific about specific individuals,
(16:16):
but just the Trump administration is coming in. Do you
see any strengths. Let's start with strengths. We can talk
about weaknesses, but what strategic strengths might the administration bring?
Speaker 2 (16:27):
Well, the administration has already signaled that they want to
use sanctions more aggressively again with Iran moving back to
a maximum pressure campaign. And for those of us who've
watched this regime over time, the sanctions regime itself, you know,
it's a regime like any other that needs constant tending, right,
(16:51):
It's like weeding a garden, and you can't expect sanctions
to work over the long term unless you're constantly tending
to it or pressure it. Now there's debates as to
what when you apply sanctions or not, you know, does
it provide diplomatic openings, et cetera. So all that's important.
But what's interesting about this administration is they clearly want
(17:13):
to choke off sources of capital to Iran, which creates
interesting next steps, but also complications because we know, for example,
that China buys a lot of Iran's oil. We know
that there are growing connections between Iran and China, certainly
(17:33):
Iran and Russia out in the open, and lots of
challenges with Iran stoking conflict of course around Israel through
its proxies and even directly. So it's a it's a
challenging environment. But I think this administration is coming in
with a pretty clear strategy, which is we're going to
apply maximum pressure with our financial and economic tools to
(17:58):
deprive this regime of resources that it needs either to
continue its adventurism with these proxies, or develop nuclear programs,
or to do other things that are that are dangerous.
Again not without complication, but that to me strikes me
as a very clear strength and something we're going to see.
Speaker 1 (18:17):
And you've watched, you know, multiple administrations, whether you were
in them or of course out outside for the past
decade plus. Can you pinpoint potential weaknesses?
Speaker 2 (18:32):
Yeah, I think maybe a couple of things. One, you know,
every administration comes in, you know, wondering whether or not
they need to use sanctions, how effective sanctions are. The
Biden administration, for example, came in with the mind that
sanctions were being overused, they were too unilateral. There was
(18:52):
a report that the administration put out, and then the
reality of the world sets in, uh, you know, the
reality of the Russian invasion Ukraine in particular set in,
and that reality is that the US government doesn't have
that many tools of coercion to apply, and often sanctions
(19:13):
are seen as the first and last tool to be
applied to try to coerce a counterparty or an adversary
not only to deprive it, to deprive them of things,
but to make it harder for them to operate and
maybe even in an ultimate way, to affect their behavior. Right,
(19:34):
this was the hope, certainly in trying to deter Russian
invasion Ukraine. Didn't work, didn't happen, And so I worry
a little bit about that kind of instinct of well,
we need to maybe rethink sanctions, etc. And then the
reality of the world will hit and they will simply
resort to the same playbook and the same things we've
(19:55):
done in the past, without frankly being more thoughtful about it.
So I worry abou that. The other thing I worry
about is, and you've heard me say this before, sanctions
are most effective when they're well understood, when there's well
reasoned data and justification for them, and when they're in
(20:17):
service of, frankly, international security issues and issues of risk
for the financial system. And so that means, even if
somebody doesn't like a sanction or designation from the US
or from Europe or London, if it's in furtherance of
something that's well understood, preventing terrorist financing, preventing proliferation, preventing
(20:41):
high end corruption, kleptocracy, all of which most of the
countries around the world, the vast majority of them, have
agreed to fight combat prevent If it's in furtherance of that,
it's very hard to argue against it or to bucket
or to suggest this is an abuse of the power.
(21:04):
On the other hand, if sanctions are being used in
very political tactical ways, seen as you know, getting back
at you know, particular politicians or regimes. You've seen this
recently in the threats to sanctioned particular ministers in Israel
for things that they've said. The Europeans have threatened it, London,
(21:26):
even the US administration has threatened it. I think that's dangerous.
You start to in a very real way pick sides,
politicize and use sanctions as a frankly just a tool
of moral and policy opprobrium as opposed to a tool
of coercion in more understood and universal ways. And so
(21:51):
you know, every administration falls into those traps thinking they
don't need to use sanctions or maybe want to change
the use and the reality of the need, and then
also a tendency to maybe want to use these in
political ways that then does damage to their credibility and legitimacy.
Speaker 1 (22:10):
One, you make me think about something which might be
controversial for me to ask, so I'll ease it to it.
Speaker 2 (22:19):
I don't have to answer, but.
Speaker 1 (22:22):
Well, this is I'm going to ask for a judgment
call maybe two questions. I mean. The first one is
this is the easier part maybe, which is, if you
were to grade American use of sanctions over let's say
the past twenty ish years, twenty years abcd F, what
would you grade, Well, how would you grade our use
(22:44):
of sanctions?
Speaker 2 (22:46):
I think it's an A minus. I think it's an as.
It's yeah, because I think over the past twenty years.
And I say that for a couple of reasons. One,
I think over the past twenty years, and I tried
to lay this out in treasuries War we did some
very innovative things in ways that injected sanctions into the
(23:10):
broader risk calculus of the private sector. Right. That was
something it's almost obvious now, but pretty innovative that we
weren't just trying to isolate countries with trade sanctions these
kinds of things. We were trying to inform the risk
calculus of banks, major corporates, shipping companies, insurance companies around
(23:33):
the world to consider the risks attendant to doing business
with rogue regimes, rogue actors, those that are trying to
access the financial system illegally, et cetera. That I think
was highly successful. It's why the sanctions hurt so much
against Iran despite the fact that Iran had been under
(23:54):
sanctioned since nineteen seventy nine. Right or the reason why
the North Koreans after the Banko Delta Asia Section three
eleven action in two thousand and six, we're crying to
get back to the negotiating table than six party talks
to have the sanctions lifted. They'd been under sanctions before,
and none of the Kim regime was coming to New
(24:17):
York to go shopping. So what was it? Was this
idea of isolating rogue activity rogue actors from the international
financial and commercial system upon which these regimes and actors
rely heavily. If they're to do anything of scale or
import right, they need access to capital, they need access
to goods. And if you make it harder, costinger, and
(24:40):
riskier for them to do that, you've started to succeed.
And if you change their behavior as a result, you
have a strategic win. And I think we did that
in many ways in the last few years. And it
has nothing to do with me. You know, the people
at Treasury, State, White House, both administrations, both political parties,
(25:00):
done a very nice job of refining the tools, finding
different ways of using the tools against higher end targets,
a G twenty economy in Russia, dealing with debt and
equity related concerns, going after oil interests, going after different
kinds of oil transactions. Right, there's just there's more nuance
(25:24):
around how sanctions are being applied to try to reistat
how they work. The reason I don't give, you know,
our team an A or an A plus is I
don't think we've done a good enough job of figuring
out how the sanctions play with other tools, you know, cohesively,
(25:45):
and I think that's yet to come. I also think
we haven't thought through or executed. And you know, these
are things I tried, and we didn't. We didn't we
didn't get them done. How do you use positive economic
power to influence and to complement what we're trying to
do with sanctions? Because with sanctions, with Section three eleven
(26:08):
of the Patriot Act, with these other tools. These are
tools of exclusion. What are the tools of attraction and inclusion?
We can bring to the table US western capital, greater
insurance for investment from abroad, charitable backfill where that's needed,
(26:28):
development aid, and assistance in interesting ways. So if we're
going to challenge and try to exclude actors, we're gonna
have to find ways to fill the gap and offer alternatives.
That's certainly the case we've seen with China, and I
think that's something that we haven't done well enough as
a part of sanctions policy.
Speaker 1 (26:49):
So it sounds like you're saying, right that instead of
or not instead of But in addition to these negative,
you know, these consequences through sanctions, there should be incentives,
economic incentives. One can you give us an example of
how that would work? In what situation might the US
provide a positive incentive to get a policy objective overseas?
Speaker 2 (27:15):
Maybe a couple of examples, Yaya. The first is something
I've argued for for a long time, which is to
think about sanctions, delisting or lifting of sanctions as a
strategic tool unto itself. That is to say, we often
think about sanctions in a very rote binary way, right,
you're either designated or you're not. Right. Sanctions is either
(27:40):
on or off. It doesn't work that way. And what
we've found and seen is designated parties, especially ones that
are designated for a very long time, and especially ones
that are commercial actors, often want to find ways out
from under the sanction. Now. Sometimes they're elicit bad actors
(28:01):
and they're just trying to evade sanctions. Sometimes they want
to cooperate, and sometimes they want to get out from
under the restrictions because they're too heavy. They can't do business,
their families affected, board you know, board members that are
we're on boards with them. They you know, they have
to to isolate themselves. Uh, they just can't do business
the way that they'd like to. And so seen us
(28:22):
in particular with the global Magnitsky regime that has gone
after individuals and companies for corruption and human rights abuses.
These are often ongoing concerns. These are companies that are
producing things. These are uh they're they're you know, mining
companies in Africa. So there are interesting questions about how
(28:45):
do you not only apply sanctions but prepare immediately for
what the D listing looks like. Uh, in a proactive
way to say, look, if you want to get off
this list, if if you want to cooperate, here are
the five things you need to be doing, and frankly,
not wait for lawyers to show up at the door
of O fact to do that, but to say this
(29:06):
is part of the strategic plan, and we're going to
do that in concert with the host government. We're going
to do it in concert with those that are that
are maybe affected by all this. Then it becomes a
dynamic tool. And frankly, those actors then get benefits perhaps
of being able to do business now and being recognized
as having good compliance systems and you know, being able
(29:29):
to bank with Western banks. And so though it's not
like funding the way you would imagine, it's a real
benefit coming off of the stick of the of the
sanctions to convert it almost immediately into a carrot, right,
And I don't think we've done that quite well enough yet,
but I think you start to see rumblings that we
(29:50):
started to see rumblings of this with the way that
we're thinking about the competition with China, especially in places
like Africa. How do these sanctions not hub our ability
to operate, but maybe even enable our ability to operate
in some of these environments. Second example, I'll be real
quick about this is you know, we often talk about
(30:10):
the investments that China makes, for example, in the bri
A project and infrastructure investment, and we compare it to
what the US provides and the US government does and
even the budget at EXIM or the development finance core,
et cetera. And the Chinese investment overwhelms the US investment.
(30:31):
It's often lost leading. It's all. It's it's operating under
different model. But if you look at what Western Capital,
independent investment from Western Capital, American VC's private equity funds,
you look at sovereign wealth funds, you look at you know,
(30:52):
individual investors, it overwhelms the Chinese investment. Now, not all
the investment is going to go to infrastructure in Burma,
but the reality is we haven't thought through well enough
how we align allied capital, if you will, capital that
can be productive for its own purposes and provide the
(31:12):
returns that investors want, but also meet the needs and
the goals of national security in complement to sanctions. Right,
and that is to say, you want to incentivize the
right behaviors, the right activities, the right access to capital
and other things. You don't just want to be excluding actors.
(31:33):
And so if we could find ways of applying sanctions
and applying more of the positive investment and investment opportunities
as a result, I think will be more successful.
Speaker 1 (31:45):
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(32:09):
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Head to Cryptofinnovation dot org to get in touch and
join our next workshop. You've seen a lot in your career,
one can you share some of the successful experiences that
(32:34):
you had with these sorts of tools fighting financial crime,
fighting illicit actors.
Speaker 2 (32:42):
Yeah. I often returned to and frankly resort to what
we saw the targets of these tools, saying and doing
right because it's off of the question do sanctions work?
They really don't work. How do you know they work?
Et cetera. And there's different depending on what you're asking
sanctions to do. I will tell you that in my experience,
(33:07):
whether it was with al Qaeda or with Hesbolah, or
with Iran, or with any other of the target states
or non state actors, the sanctions were never perfect, of course,
but we would see very clear evidence, including from what
(33:28):
they would say to each other and out loud, that
these sanctions hurt, that they were being disallowed access to
the financial system, that donors were drying up for the
activities that people were afraid to do to be associated
(33:49):
with the targeted parties, That even those that claimed to
be political allies with the targets were backing away because
of the risk and the taint of these kinds of sanctions.
And so, you know, I don't think there's probably no
sanctions program, including the Cuba program, which often gets derided
(34:13):
as the one that never worked because the Castro regime
was never toppled. Even the Cuba program demonstrated that the
ability to constrict the ability of these targets to access
whatever they were trying to get access to actually constrain
their ambition, change their behavior and hurt. And I said
(34:35):
it before. The strategy that we had was, look, you're
not going to stop every dollar or yen or pound
or euro from getting into the hands of bad guys,
but you're trying to prevent that. And what you're ultimately
trying to do is make it harder, costlier, and riskier
for America's enemies to raise money and move money around
(34:56):
the world. That's what we did, and and I think
we saw evidence, whether it was al Qaeda communications or
the North Koreans at the negotiating table that this stuff hurt,
They didn't like it, and they wanted it lifted. MM.
Speaker 1 (35:12):
So you've so you were able to see direct or reactions.
You were able to see positive results from the tools
that that you helped to support or put in place.
What about times when things didn't work.
Speaker 2 (35:28):
Well, there's a lot of times things that work. And
I'm thinking broadly about sort of the national security sort
of environment itself, and so you know, I go back
to this idea that you know, we didn't do a
good enough job in figuring out with the vast resources
(35:48):
of the US govern the vast resources of the US
private sector, how you actually affect in positive ways environments
where enemies we're taking advantage of either the actions we
were taking, like sanctions, or the absence of our presence,
or the disillusionment or anger at US policy. You know,
(36:14):
we saw this, and yeah, you and I worked on
some of these issues on countering violent violent extremism. Right,
these these issues where we weren't we weren't really able
to figure out how do you how do you undermine
ultimately the credibility of these ideologies, how do you weaken
(36:34):
their hold in populations? How do you make uh these
environments hostile uh to these ideologies from taking hold? And
I think part of that failure was not not figuring
out well enough how to use the tools of financial inclusion, opportunity,
(36:56):
and investment frankly as way of influencing those environments. I
just don't think we did that well enough.
Speaker 1 (37:04):
So what would you tell the incoming administration or just
anyone anyone you know currently working on these issues in government?
What would you tell them to do differently?
Speaker 2 (37:19):
Well, I think this goes back to the elevator pitch
to the administration. I think the first thing that really
has to happen is everyone needs to take a step
back and recognize we're in a different form of competition
with China, with Russia, with Iran, with North Korea, with Venezuela,
(37:40):
and a whole host of non state actors, proxies, terrorist
groups of militias, et cetera, that are trying to do
something different here. They are not only trying to evade
US sanctions, they're trying to undermine the ability of the
United States to even use these tools at all in
terms of coercion. So they're trying to create alternates to
(38:03):
the Swift bank messaging system. They're trying to experiment with
the digital wand to settle cross border payments, like with
the m Bridge project. They're trying to create new channels
of commerce. You know, the bricks plus is sort of
the ambition of that. I'm not so worried about that,
(38:24):
but it's the ambition. They're trying to attack the fundamentals
of the dollar, and so I would I would argue
to senior policy makers all the way down, you have
to take a step back to realize we're in a
different context here, and the sanctions play a key role
in that. In that context, and even conflict I would
(38:47):
call it, But it's just one tool. And if we
continue to just use sanctions as the reactionary tool to
respond to an invasion or somebody something somebody said we
didn't like, or some act of you know, criminality, we're
going to start to lose the thread on the broader
(39:10):
conflict here. And we've got to think about all of
our tools in concert. And so that would be the
big The big thing I would say is we need
a broad national economic security strategy and approach that takes
the best of what sanctions can do and combines it
with the other tools of state craft and influence that
we need to bring to bear. Well.
Speaker 1 (39:31):
One, what about the everyday person at home? Right? These
are big threats, These are big issues around state actors
in particular, the US is looking more inwardly, right, I
think as a population. I think that even the election
shows us right, there's the sense of at looking domestically,
(39:52):
what's going on with us here as it as it
should be? Right? In many ways, what should the everyday
person who's at home thinking about their everyday life, how
should they be seeing these these risks impacting them? And
what should they be doing?
Speaker 2 (40:13):
You know, it's an interesting question. President Bush would would
often say, you know, when we were in the sitt
room or the Oval office, he'd say, look, we're worrying
about these issues so that citizens, you know, everyday citizens
don't have to worry about these things.
Speaker 1 (40:27):
Right.
Speaker 2 (40:27):
We'd go through the threat matrix, we would be worried
to death over this threat or that threat, and thankfully
there's nothing that citizens ever had to see or worry about.
But it was our job to worry about it, right.
And so there's an element of this where it's the
job of the government to defend our national security and
(40:48):
to promote our interests in ways are advantageous to all citizens. Right.
Communicating that and figuring out, you know, how much you
leverage this form of power. That or and power obviously
part of policy debates, but I think there're you know,
there are some simple things that every day citizens can do.
I think on the cyber security side, I think basic
(41:10):
cyber hygiene is very important. You've got non state actors
and state actors like the North Koreans, for example, taking
huge advantage of crypto and cyber heightst to the tune
of billions of dollars. That's then funding them to fund
their nuclear program and pay pay their generals and pay
(41:32):
to send you know, troops to Ukraine. These kinds of
things that that boils down to institutions, companies, exchanges, banks, individuals,
you know, having better cybersecurity, and a lot of that
devolves to just better cyber hygiene. More than ninety five
percent of you know, most cyber hacks are enabled by
(41:54):
you know, phishing campaign, somebody clicking on the wrong thing,
and so just being or aware of that kind of
hygiene it is actually really important. It's important to individuals, uh,
you know, personal safety, safety of their data, safety of
their finances, but it collectively helps if we're all better
(42:15):
at defending against that. So that's something simple, but it's important.
I think. Secondly, we have to recognize yah, yah, that
malign actors, and we've seen this with the Russians and
the and the Iranians and the Chinese are trying to
take advantage of our our political divisions and they are
(42:35):
stoking debates. Some of it is misinformation, some of it
may not be, but they're trying to stoke divisions intentionally.
So my plead to my fellow citizen is, you know,
beware of divisiveness in part is sort of artificial divisive
(42:59):
iss I'm not saying we don't be skeptical of the government.
I'm not saying don't debate. I'm not saying don't read
a bunch of stuff on whatever sources you want. But
let's be careful not to demonize each other in the
context of political debates or otherwise, because that's exactly what
our enemies outside the United States are trying to stoke.
(43:21):
So we need a bit of patience with each other,
a bit of national resilience in that regard, and in
a recognition that the bad guys like it when we're
tearing each other apart, and so we need to be
careful about taking that too far. The final thing I'd
say is the fundamentals, and we haven't talked as much
(43:42):
about this, but the fundamentals of our power in the
economic and financial domain is the fact that we've got
the largest, most vibrant economy in the world. We've got
a financial system, a capital market system that's open, that's trusted,
the rule of law you know, you know, is fundamental
(44:02):
to it, uh and is highly attractive. The dollars, the
chief reserve and trading currency around the world, still even
in the crypto context where you look at the stable
coins back by US treasuries or US dollars. We have
to tend to those fundamental things. And I think calling
on our you know, our government leaders, our representatives to
(44:25):
make sure we're tending carefully to the fundamentals of our economy,
including our debt. Our debt can't be that big that
investors and markets start to lose confidence, uh in in
the US economy, because that it's the US economy and
our power that allows us to influence and to defend
ourselves through the economic and financial domain.
Speaker 1 (44:49):
One, you know, thank you, I mean, I see you.
Some some will say you're an economic warrior, and I
know you you will you'll hopefully take that as a
badge of honor. I think that's true, or Lisa, a
founder of so much of the tools that the US
has been able to use. But also I would say
you are a statesman, you know, a great advisor, and
(45:13):
I hope people take heed and what you described, especially
as you were talking about what we need to do
as citizens. It just reminds me of the term, you know,
for us to have a more perfect union. Right, things
things aren't things aren't perfect, but you've outlined some ways
for us to try to get there, So I appreciate
that and appreciate your wisdom and your insight today.
Speaker 2 (45:32):
Yeah, I'm humbled by by your comments. You know how
much I love and respect you. And you're one of
the great experts in the space, and certainly in the
crypto domain, where you staked out a place among the analysts.
Before you know, many people knew even what bitcoin was.
You were analyzing the threats and the risks and the opportunities,
(45:54):
and so I want to thank you. I always learned
from you, and I've been privileged to work with you,
so I appreciate it.
Speaker 1 (46:02):
Talking with Juan's Rat reminds me of what is at
stake today when it comes to national security and economic warfare.
These massive threats might sometimes seem to be abstract, disconnected
from our everyday experiences, but he pointed out how tangible
they are, like clicking on a link that has been
placed by operatives for North Korea to try to hack funds,
(46:24):
and how America's global economic and political power is buttressed
by the integrity of its markets, sound rule of law,
and the attractiveness of our environment and human capital. These
things make life better for all who live here. Adversaries
of the US, who don't necessarily have these strengths are
seeking to exploit the divisions in our social and political life.
(46:46):
Wan urges us to be mindful of that so we
don't fall into the trap of being so focused on
our differences within that we fall victim to the warfare
being waged from without. I'm yaya Jata Finussi. This is
designated on the Illicit Edge Network
A few words about one of our sponsors, the Crypto
Council for Innovation. The Crypto Council for Innovation is shaping
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UK and Asia. We collaborate directly with security professionals, law enforcement,
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(00:24):
national security personnel with the latest insights into what's coming next,
helping them build connections with industry experts and fellow officials.
Head to Cryptofinnovation dot org to get in touch and
join our next workshop. The Honorable Wanzarat was the US
(00:52):
Counter Terrorisms are under President George W. Bush and also
the first Assistant Secretary at the Treasury Department to oversee terrorists, financing,
and financial crimes. In those roles, he helped to design
and implement US rules for anti money laundering and countering
the financing of terrorism, rules that affect the way you
bank today and the rules illicit actors try to circumvent
(01:15):
when moving dirty money. Several years ago, Juan wrote the
groundbreaking book Treasury's War, The Unleashing of a new era
of financial warfare. If you want to understand how sanctions
and money laundering relate to national security, he's your guy.
It's an honor to have Juan Zerrate as our guest,
(01:36):
someone whom I deeply respect. In this conversation, Wan gives
us his take on how economic and financial threats have
evolved and what the new Trump administration needs to prioritize.
He also reflects on the successes he's seen stemming from
the use of sanctions, and is also honest in addressing
their limitations. Juan Zerat, are you ready to get designated?
Speaker 2 (02:01):
Let's do it. Yeah, yeah, all right. One.
Speaker 1 (02:05):
It's always great to talk to someone who has been
on the inside and has a lot of institutional memory.
I want to ask you, out of all the national
security threats that you remember from the end of let's
say two thousand and eight, which of those threats are
you most surprised that they still exist?
Speaker 2 (02:27):
Oh? Yeah, yeah, that's a good question. Yeah. I love
being on with you. You're always You're always so smart
and insightful. Thank you. You know, I think what surprises
me is that, you know, the cybersecurity threats that we
saw clearly emerging, they were already existing at that time.
(02:50):
In some ways, I've only gotten worse or have metastasized
in ways that make it, you know, harder to manage,
and certainly in ways they've taken advantage of other technologies
like ransomware, right, And so it's not that it's a
surprise that it's still around. It's just that it's so persistent,
and in some ways can anticipate that. But I think
(03:12):
that's part of it. One other thing I would say, yeah, ya,
is in many ways we were anticipating the convergence of
nefarious actors, malign actors, rogues however you wanted to label them,
in the international system. I called it in my book
the Alliance of financial rogues. And I know you've done
(03:35):
lots of work on this, especially in the crypto context.
I think I haven't been surprised about it. But I
think it's interesting that we've seen much more clearly this
acceis of resistance, the aligance between China and Russia and
Iran and North Korea, and how much that's accelerated in
(03:55):
the last few years. Again, we saw glimmers of that,
and we were certainly worried about it, certainly worried in
the context of illicit finance, the fact that that's accelerated
so much. And now you've got North Korean troops Lloyd
in Ukraine. You've got Chinese vessels which may or may
not have been helping cut undersea cables on behalf of Russia.
(04:18):
You've got you know, Iran supplying drones into the Russian
war machine. All of this is a pretty stark and
open reflection of that alliance. And so that would be
another element of surprise to a certain extent.
Speaker 1 (04:35):
You know, in the intel world, we used to talk
about an elevator briefing, which is when you know, you
find yourself in the elevator with the principle like yourself,
like wanzerate, and as an analyst, you have to give him,
you know him or her the top, you know, the
top the quick beat on what are the key threats,
(04:55):
and you know, in your role now you're outside of
the government. So I'm wondering if if we could think about,
you know, if you were in front of the let's say,
the Trump transition team and you just had an elevator
ride to tell them what are the key financial economic
threats that they need to focus on. What would you
(05:16):
tell them.
Speaker 2 (05:18):
I think there are three things that concern me most Yayau.
One is this convergence of illicit actors, most state and
non state, that are very much willing to and able
to misuse the financial system, misuse technologies like crypto to
not only profit, but then to advance their interests, often
(05:41):
in opposition to the United States. And so this idea
of the alliance of countries like China and Russia and
Iran and North Korea and Venezuela, many of which are
sanctioned in different ways, coming together to support each other
and to engage agent Ellsted activity that not only threatens
(06:02):
our national security but also threatens the integrity of the
financial and commercial system. So that's it's that convergence of
that alliance I think that's really threatening, in addition to
the kinetic threats and the military threats that are attached
to it. I think secondly is the challenge to American
(06:25):
systemic dominance in the international financial system. The attempts, the
open attempts, it's no longer veiled. You hear it in
the bricks plus conversations. You hear it from leaders like
Lula de Silva from Brazil, A real desire to break
the reliance on the US dollar, find alternatives to the
(06:49):
American backed financial system, to create alternate payment systems and
cross border settlement processes that don't rely on London or
New York or even Tokyo, but have other sources of
both legitimacy and facility. So that I think is very
(07:12):
important because there's a systemic attempt to take us out
from the middle and to replace it with something else
that's either Chinese driven or otherwise more chaotic. Third is,
I think we always have to be aware that the
actors that we're most worried about from a security perspective
(07:34):
are going to find ways to use the financial and
commercial technology systems against us. They're going to try to
get access to things that we're trying to prevent them
from getting access to export controls. They're going to try
to get into financial systems despite sanctions, and so we're
(07:56):
going to have to figure out how we're using the
full tool get of economic and commercial measures to isolate
those rogues and those that present a threat to us,
and sharpening that strategy, sharpening those capabilities is something the
new administration I think needs to concentrate on well.
Speaker 1 (08:17):
One with those threats and those risks that are around. Then,
what would you say would be the state of those
tools that the US has? Right you? I mean, you know,
I know you're modest, but you were a part of
that effort to create and to enhance US tools for
(08:38):
financial pressure, for anti money laundering, and to counter terrorist financing. Obviously,
the sanctions piece is there, and you've talked and written
so much about that, But in twenty twenty four, especially
when there's a lot of pressure and people are saying
these tools, these sanctions tools, may not be so robust,
(08:59):
what would you say is the state of US tools
of economic power?
Speaker 2 (09:04):
Well? Yeah, I think first and foremost we have recognized
in twenty twenty four we're talking about a full range
of tools, right, So not just the classic sanctions we've
thought about for the last twenty years, which is the
isolation of rogue actors from the financial system, denying them
access to goods or to institutions. You know, that's really important.
(09:25):
We'll get to that in just a second. But you've
got anti money laundering tools that are intended to prevent
illicit capital from getting into the system. Some real problems
with that system. There's export controls, there's investment security, both
inbound and outbound that's been evolving and as information as
we speak. And then there's positive economic tools. And so
(09:50):
there's a full spectrum of these tools that in some
ways reinforce each other and that are very much at
play when you talk about economic state craft, and I
I think the reality is the United States still has
predominance in many of those fields, whether you're talking about
exquisite semiconductors for AI purposes, or you're talking about access
(10:12):
to the US financial system, or reliance on the dollar,
or the predominance of dollar back stable coins, which is,
you know, the predominant use in trade and stable coins.
The US and the dollar and its system and its
technology still hold a primary place, not solely, but a
primary place along with its allies. So those tools have
(10:36):
to be have to be nurtured and considered together in
a system where we don't want the US government to
co opt the private sector, right, we don't want to
become a Rusher or a China, But we have to
realize we're having to compete with those countries that are
applying state authoritarian capitalist models to the system. But with
(10:56):
respect to sanctions in particular, Yeah, I think we're a
real inflection point, and by that I mean three things. One,
I think in the post Russia context, in particular in Europe,
there's a recognition that sanctions are not just an interesting
part of or an adjunct to diplomacy or an element
(11:18):
of economic statecraft as I was just describing. It's actually
a part of warfare. Right This is part of the
hybrid warfare that Russia has engaged in the context of
the use of its energy resources. China's engaged in some
of this with what it's been willing to do to
shut down exports of rare earth minerals, for example, or
(11:40):
some of the supply disruptions, for example, to US drone
makers that are then supplying those drones to Ukraine. Right.
So there, now, I think is a more fundamental recognition
that sanctions are a part of the new form of
warfare that we're engaged in. Now. It's not a shooting war.
(12:00):
Sanctions fundamentally are part of that, which is different than
simply you do this to signal a probrium or as
an alternate to a diplomacy. The second thing is we
have to be very careful, and many voices have said
this for many years to not overuse sanctions. But by that,
I think we mean not that we not use sanctions
(12:22):
when we need to for clear national security reasons, but
that we not proliferate sanctions and over use them for
what are seen as purely political reasons or to put
our thumb on the scale on some particular issue in
some particular country. And I think we run the risk
(12:42):
of that when sanctions are being used as a tool
of moral probrium or policy disagreement as opposed to a
tool of coercive state craft or even warfare. And so
I think that has to be thought about, because the
more that we over use sanctions and ways that dilute
their power and effectiveness, the more that the sanctions just
(13:05):
are going to be less effective, and the more that
we're going to drive actors to find ways around them
and are going to have less cooperation frankly, to make
them effective.
Speaker 1 (13:16):
One do you think that around sanctions the tables could
ever turn? Maybe not now, but can you imagine or
do you see any indicators where sanctions could be turned
towards the United States?
Speaker 2 (13:31):
Absolutely, And this is something I warned about in Treasury's
War at the tail end of the book talking about
the coming financial wars. It was clear that the Russians
were already thinking about this in the context of use
of oil and gases, both a sword and a shield
in terms of sanctions or economic warfare. The Chinese were
(13:52):
already threatening US companies that were supplying military weaponry to
Taiwan had taken some demonstration effects. This was back in
twenty eleven, twenty twelve, twenty thirteen, to let you know,
produce from East Asian neighbors that were you know, challenging
(14:14):
them in the South China see letting bananas rot in
the port, you know, with the Philippines for example, or
denying rare earth mineral exports to countries like Japan as
part of diplomatic engagement and confrontation. So you it was
(14:35):
already very clear that you had countries thinking about how
they use the power of their own markets, their own
resources to influence and to coerce, and that's in essence sanctions, right,
And I think you've started to see that in different ways,
with the Chinese being more explicit. They have you know,
lists of people that they designate. Now they take actions
(14:58):
against different companies they certainly have designated or have sanctions
related to Taiwan now, and as I've mentioned, in subtle
and not so subtle ways, they've shut off supplies of
necessary minerals and components for purposes of the United States
(15:20):
and in particular for this drone maker that is exporting
to Ukraine. So in a way, we're already in that
environment where other countries are recognizing they can use sanctions
to exclude actors, to punish, to send messages. And we're
certainly in an environment where it's not just the US
(15:41):
that applies these tools. The EU, London, Japan, even Russia, Moscow,
others are applying these tools of economic coercion for their
national security interests.
Speaker 1 (15:54):
So in this environment of economic warfare, competition, competition, slash warfare,
where every country can assert its interests or try to
what would you say about the incoming administration in this environment,
and you don't have to get specific about specific individuals,
(16:16):
but just the Trump administration is coming in. Do you
see any strengths. Let's start with strengths. We can talk
about weaknesses, but what strategic strengths might the administration bring?
Speaker 2 (16:27):
Well, the administration has already signaled that they want to
use sanctions more aggressively again with Iran moving back to
a maximum pressure campaign. And for those of us who've
watched this regime over time, the sanctions regime itself, you know,
it's a regime like any other that needs constant tending, right,
(16:51):
It's like weeding a garden, and you can't expect sanctions
to work over the long term unless you're constantly tending
to it or pressure it. Now there's debates as to
what when you apply sanctions or not, you know, does
it provide diplomatic openings, et cetera. So all that's important.
But what's interesting about this administration is they clearly want
(17:13):
to choke off sources of capital to Iran, which creates
interesting next steps, but also complications because we know, for example,
that China buys a lot of Iran's oil. We know
that there are growing connections between Iran and China, certainly
(17:33):
Iran and Russia out in the open, and lots of
challenges with Iran stoking conflict of course around Israel through
its proxies and even directly. So it's a it's a
challenging environment. But I think this administration is coming in
with a pretty clear strategy, which is we're going to
apply maximum pressure with our financial and economic tools to
(17:58):
deprive this regime of resources that it needs either to
continue its adventurism with these proxies, or develop nuclear programs,
or to do other things that are that are dangerous.
Again not without complication, but that to me strikes me
as a very clear strength and something we're going to see.
Speaker 1 (18:17):
And you've watched, you know, multiple administrations, whether you were
in them or of course out outside for the past
decade plus. Can you pinpoint potential weaknesses?
Speaker 2 (18:32):
Yeah, I think maybe a couple of things. One, you know,
every administration comes in, you know, wondering whether or not
they need to use sanctions, how effective sanctions are. The
Biden administration, for example, came in with the mind that
sanctions were being overused, they were too unilateral. There was
(18:52):
a report that the administration put out, and then the
reality of the world sets in, uh, you know, the
reality of the Russian invasion Ukraine in particular set in,
and that reality is that the US government doesn't have
that many tools of coercion to apply, and often sanctions
(19:13):
are seen as the first and last tool to be
applied to try to coerce a counterparty or an adversary
not only to deprive it, to deprive them of things,
but to make it harder for them to operate and
maybe even in an ultimate way, to affect their behavior. Right,
(19:34):
this was the hope, certainly in trying to deter Russian
invasion Ukraine. Didn't work, didn't happen, And so I worry
a little bit about that kind of instinct of well,
we need to maybe rethink sanctions, etc. And then the
reality of the world will hit and they will simply
resort to the same playbook and the same things we've
(19:55):
done in the past, without frankly being more thoughtful about it.
So I worry abou that. The other thing I worry
about is, and you've heard me say this before, sanctions
are most effective when they're well understood, when there's well
reasoned data and justification for them, and when they're in
(20:17):
service of, frankly, international security issues and issues of risk
for the financial system. And so that means, even if
somebody doesn't like a sanction or designation from the US
or from Europe or London, if it's in furtherance of
something that's well understood, preventing terrorist financing, preventing proliferation, preventing
(20:41):
high end corruption, kleptocracy, all of which most of the
countries around the world, the vast majority of them, have
agreed to fight combat prevent If it's in furtherance of that,
it's very hard to argue against it or to bucket
or to suggest this is an abuse of the power.
(21:04):
On the other hand, if sanctions are being used in
very political tactical ways, seen as you know, getting back
at you know, particular politicians or regimes. You've seen this
recently in the threats to sanctioned particular ministers in Israel
for things that they've said. The Europeans have threatened it, London,
(21:26):
even the US administration has threatened it. I think that's dangerous.
You start to in a very real way pick sides,
politicize and use sanctions as a frankly just a tool
of moral and policy opprobrium as opposed to a tool
of coercion in more understood and universal ways. And so
(21:51):
you know, every administration falls into those traps thinking they
don't need to use sanctions or maybe want to change
the use and the reality of the need, and then
also a tendency to maybe want to use these in
political ways that then does damage to their credibility and legitimacy.
Speaker 1 (22:10):
One, you make me think about something which might be
controversial for me to ask, so I'll ease it to it.
Speaker 2 (22:19):
I don't have to answer, but.
Speaker 1 (22:22):
Well, this is I'm going to ask for a judgment
call maybe two questions. I mean. The first one is
this is the easier part maybe, which is, if you
were to grade American use of sanctions over let's say
the past twenty ish years, twenty years abcd F, what
would you grade, Well, how would you grade our use
(22:44):
of sanctions?
Speaker 2 (22:46):
I think it's an A minus. I think it's an as.
It's yeah, because I think over the past twenty years.
And I say that for a couple of reasons. One,
I think over the past twenty years, and I tried
to lay this out in treasuries War we did some
very innovative things in ways that injected sanctions into the
(23:10):
broader risk calculus of the private sector. Right. That was
something it's almost obvious now, but pretty innovative that we
weren't just trying to isolate countries with trade sanctions these
kinds of things. We were trying to inform the risk
calculus of banks, major corporates, shipping companies, insurance companies around
(23:33):
the world to consider the risks attendant to doing business
with rogue regimes, rogue actors, those that are trying to
access the financial system illegally, et cetera. That I think
was highly successful. It's why the sanctions hurt so much
against Iran despite the fact that Iran had been under
(23:54):
sanctioned since nineteen seventy nine. Right or the reason why
the North Koreans after the Banko Delta Asia Section three
eleven action in two thousand and six, we're crying to
get back to the negotiating table than six party talks
to have the sanctions lifted. They'd been under sanctions before,
and none of the Kim regime was coming to New
(24:17):
York to go shopping. So what was it? Was this
idea of isolating rogue activity rogue actors from the international
financial and commercial system upon which these regimes and actors
rely heavily. If they're to do anything of scale or
import right, they need access to capital, they need access
to goods. And if you make it harder, costinger, and
(24:40):
riskier for them to do that, you've started to succeed.
And if you change their behavior as a result, you
have a strategic win. And I think we did that
in many ways in the last few years. And it
has nothing to do with me. You know, the people
at Treasury, State, White House, both administrations, both political parties,
(25:00):
done a very nice job of refining the tools, finding
different ways of using the tools against higher end targets,
a G twenty economy in Russia, dealing with debt and
equity related concerns, going after oil interests, going after different
kinds of oil transactions. Right, there's just there's more nuance
(25:24):
around how sanctions are being applied to try to reistat
how they work. The reason I don't give, you know,
our team an A or an A plus is I
don't think we've done a good enough job of figuring
out how the sanctions play with other tools, you know, cohesively,
(25:45):
and I think that's yet to come. I also think
we haven't thought through or executed. And you know, these
are things I tried, and we didn't. We didn't we
didn't get them done. How do you use positive economic
power to influence and to complement what we're trying to
do with sanctions? Because with sanctions, with Section three eleven
(26:08):
of the Patriot Act, with these other tools. These are
tools of exclusion. What are the tools of attraction and inclusion?
We can bring to the table US western capital, greater
insurance for investment from abroad, charitable backfill where that's needed,
(26:28):
development aid, and assistance in interesting ways. So if we're
going to challenge and try to exclude actors, we're gonna
have to find ways to fill the gap and offer alternatives.
That's certainly the case we've seen with China, and I
think that's something that we haven't done well enough as
a part of sanctions policy.
Speaker 1 (26:49):
So it sounds like you're saying, right that instead of
or not instead of But in addition to these negative,
you know, these consequences through sanctions, there should be incentives,
economic incentives. One can you give us an example of
how that would work? In what situation might the US
provide a positive incentive to get a policy objective overseas?
Speaker 2 (27:15):
Maybe a couple of examples, Yaya. The first is something
I've argued for for a long time, which is to
think about sanctions, delisting or lifting of sanctions as a
strategic tool unto itself. That is to say, we often
think about sanctions in a very rote binary way, right,
you're either designated or you're not. Right. Sanctions is either
(27:40):
on or off. It doesn't work that way. And what
we've found and seen is designated parties, especially ones that
are designated for a very long time, and especially ones
that are commercial actors, often want to find ways out
from under the sanction. Now. Sometimes they're elicit bad actors
(28:01):
and they're just trying to evade sanctions. Sometimes they want
to cooperate, and sometimes they want to get out from
under the restrictions because they're too heavy. They can't do business,
their families affected, board you know, board members that are
we're on boards with them. They you know, they have
to to isolate themselves. Uh, they just can't do business
the way that they'd like to. And so seen us
(28:22):
in particular with the global Magnitsky regime that has gone
after individuals and companies for corruption and human rights abuses.
These are often ongoing concerns. These are companies that are
producing things. These are uh they're they're you know, mining
companies in Africa. So there are interesting questions about how
(28:45):
do you not only apply sanctions but prepare immediately for
what the D listing looks like. Uh, in a proactive
way to say, look, if you want to get off
this list, if if you want to cooperate, here are
the five things you need to be doing, and frankly,
not wait for lawyers to show up at the door
of O fact to do that, but to say this
(29:06):
is part of the strategic plan, and we're going to
do that in concert with the host government. We're going
to do it in concert with those that are that
are maybe affected by all this. Then it becomes a
dynamic tool. And frankly, those actors then get benefits perhaps
of being able to do business now and being recognized
as having good compliance systems and you know, being able
(29:29):
to bank with Western banks. And so though it's not
like funding the way you would imagine, it's a real
benefit coming off of the stick of the of the
sanctions to convert it almost immediately into a carrot, right,
And I don't think we've done that quite well enough yet,
but I think you start to see rumblings that we
(29:50):
started to see rumblings of this with the way that
we're thinking about the competition with China, especially in places
like Africa. How do these sanctions not hub our ability
to operate, but maybe even enable our ability to operate
in some of these environments. Second example, I'll be real
quick about this is you know, we often talk about
(30:10):
the investments that China makes, for example, in the bri
A project and infrastructure investment, and we compare it to
what the US provides and the US government does and
even the budget at EXIM or the development finance core,
et cetera. And the Chinese investment overwhelms the US investment.
(30:31):
It's often lost leading. It's all. It's it's operating under
different model. But if you look at what Western Capital,
independent investment from Western Capital, American VC's private equity funds,
you look at sovereign wealth funds, you look at you know,
(30:52):
individual investors, it overwhelms the Chinese investment. Now, not all
the investment is going to go to infrastructure in Burma,
but the reality is we haven't thought through well enough
how we align allied capital, if you will, capital that
can be productive for its own purposes and provide the
(31:12):
returns that investors want, but also meet the needs and
the goals of national security in complement to sanctions. Right,
and that is to say, you want to incentivize the
right behaviors, the right activities, the right access to capital
and other things. You don't just want to be excluding actors.
(31:33):
And so if we could find ways of applying sanctions
and applying more of the positive investment and investment opportunities
as a result, I think will be more successful.
Speaker 1 (31:45):
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join our next workshop. You've seen a lot in your career,
one can you share some of the successful experiences that
(32:34):
you had with these sorts of tools fighting financial crime,
fighting illicit actors.
Speaker 2 (32:42):
Yeah. I often returned to and frankly resort to what
we saw the targets of these tools, saying and doing
right because it's off of the question do sanctions work?
They really don't work. How do you know they work?
Et cetera. And there's different depending on what you're asking
sanctions to do. I will tell you that in my experience,
(33:07):
whether it was with al Qaeda or with Hesbolah, or
with Iran, or with any other of the target states
or non state actors, the sanctions were never perfect, of course,
but we would see very clear evidence, including from what
(33:28):
they would say to each other and out loud, that
these sanctions hurt, that they were being disallowed access to
the financial system, that donors were drying up for the
activities that people were afraid to do to be associated
(33:49):
with the targeted parties, That even those that claimed to
be political allies with the targets were backing away because
of the risk and the taint of these kinds of sanctions.
And so, you know, I don't think there's probably no
sanctions program, including the Cuba program, which often gets derided
(34:13):
as the one that never worked because the Castro regime
was never toppled. Even the Cuba program demonstrated that the
ability to constrict the ability of these targets to access
whatever they were trying to get access to actually constrain
their ambition, change their behavior and hurt. And I said
(34:35):
it before. The strategy that we had was, look, you're
not going to stop every dollar or yen or pound
or euro from getting into the hands of bad guys,
but you're trying to prevent that. And what you're ultimately
trying to do is make it harder, costlier, and riskier
for America's enemies to raise money and move money around
(34:56):
the world. That's what we did, and and I think
we saw evidence, whether it was al Qaeda communications or
the North Koreans at the negotiating table that this stuff hurt,
They didn't like it, and they wanted it lifted. MM.
Speaker 1 (35:12):
So you've so you were able to see direct or reactions.
You were able to see positive results from the tools
that that you helped to support or put in place.
What about times when things didn't work.
Speaker 2 (35:28):
Well, there's a lot of times things that work. And
I'm thinking broadly about sort of the national security sort
of environment itself, and so you know, I go back
to this idea that you know, we didn't do a
good enough job in figuring out with the vast resources
(35:48):
of the US govern the vast resources of the US
private sector, how you actually affect in positive ways environments
where enemies we're taking advantage of either the actions we
were taking, like sanctions, or the absence of our presence,
or the disillusionment or anger at US policy. You know,
(36:14):
we saw this, and yeah, you and I worked on
some of these issues on countering violent violent extremism. Right,
these these issues where we weren't we weren't really able
to figure out how do you how do you undermine
ultimately the credibility of these ideologies, how do you weaken
(36:34):
their hold in populations? How do you make uh these
environments hostile uh to these ideologies from taking hold? And
I think part of that failure was not not figuring
out well enough how to use the tools of financial inclusion, opportunity,
(36:56):
and investment frankly as way of influencing those environments. I
just don't think we did that well enough.
Speaker 1 (37:04):
So what would you tell the incoming administration or just
anyone anyone you know currently working on these issues in government?
What would you tell them to do differently?
Speaker 2 (37:19):
Well, I think this goes back to the elevator pitch
to the administration. I think the first thing that really
has to happen is everyone needs to take a step
back and recognize we're in a different form of competition
with China, with Russia, with Iran, with North Korea, with Venezuela,
(37:40):
and a whole host of non state actors, proxies, terrorist
groups of militias, et cetera, that are trying to do
something different here. They are not only trying to evade
US sanctions, they're trying to undermine the ability of the
United States to even use these tools at all in
terms of coercion. So they're trying to create alternates to
(38:03):
the Swift bank messaging system. They're trying to experiment with
the digital wand to settle cross border payments, like with
the m Bridge project. They're trying to create new channels
of commerce. You know, the bricks plus is sort of
the ambition of that. I'm not so worried about that,
(38:24):
but it's the ambition. They're trying to attack the fundamentals
of the dollar, and so I would I would argue
to senior policy makers all the way down, you have
to take a step back to realize we're in a
different context here, and the sanctions play a key role
in that. In that context, and even conflict I would
(38:47):
call it, But it's just one tool. And if we
continue to just use sanctions as the reactionary tool to
respond to an invasion or somebody something somebody said we
didn't like, or some act of you know, criminality, we're
going to start to lose the thread on the broader
(39:10):
conflict here. And we've got to think about all of
our tools in concert. And so that would be the
big The big thing I would say is we need
a broad national economic security strategy and approach that takes
the best of what sanctions can do and combines it
with the other tools of state craft and influence that
we need to bring to bear. Well.
Speaker 1 (39:31):
One, what about the everyday person at home? Right? These
are big threats, These are big issues around state actors
in particular, the US is looking more inwardly, right, I
think as a population. I think that even the election
shows us right, there's the sense of at looking domestically,
(39:52):
what's going on with us here as it as it
should be? Right? In many ways, what should the everyday
person who's at home thinking about their everyday life, how
should they be seeing these these risks impacting them? And
what should they be doing?
Speaker 2 (40:13):
You know, it's an interesting question. President Bush would would
often say, you know, when we were in the sitt
room or the Oval office, he'd say, look, we're worrying
about these issues so that citizens, you know, everyday citizens
don't have to worry about these things.
Speaker 1 (40:27):
Right.
Speaker 2 (40:27):
We'd go through the threat matrix, we would be worried
to death over this threat or that threat, and thankfully
there's nothing that citizens ever had to see or worry about.
But it was our job to worry about it, right.
And so there's an element of this where it's the
job of the government to defend our national security and
(40:48):
to promote our interests in ways are advantageous to all citizens. Right.
Communicating that and figuring out, you know, how much you
leverage this form of power. That or and power obviously
part of policy debates, but I think there're you know,
there are some simple things that every day citizens can do.
I think on the cyber security side, I think basic
(41:10):
cyber hygiene is very important. You've got non state actors
and state actors like the North Koreans, for example, taking
huge advantage of crypto and cyber heightst to the tune
of billions of dollars. That's then funding them to fund
their nuclear program and pay pay their generals and pay
(41:32):
to send you know, troops to Ukraine. These kinds of
things that that boils down to institutions, companies, exchanges, banks, individuals,
you know, having better cybersecurity, and a lot of that
devolves to just better cyber hygiene. More than ninety five
percent of you know, most cyber hacks are enabled by
(41:54):
you know, phishing campaign, somebody clicking on the wrong thing,
and so just being or aware of that kind of
hygiene it is actually really important. It's important to individuals, uh,
you know, personal safety, safety of their data, safety of
their finances, but it collectively helps if we're all better
(42:15):
at defending against that. So that's something simple, but it's important.
I think. Secondly, we have to recognize yah, yah, that
malign actors, and we've seen this with the Russians and
the and the Iranians and the Chinese are trying to
take advantage of our our political divisions and they are
(42:35):
stoking debates. Some of it is misinformation, some of it
may not be, but they're trying to stoke divisions intentionally.
So my plead to my fellow citizen is, you know,
beware of divisiveness in part is sort of artificial divisive
(42:59):
iss I'm not saying we don't be skeptical of the government.
I'm not saying don't debate. I'm not saying don't read
a bunch of stuff on whatever sources you want. But
let's be careful not to demonize each other in the
context of political debates or otherwise, because that's exactly what
our enemies outside the United States are trying to stoke.
(43:21):
So we need a bit of patience with each other,
a bit of national resilience in that regard, and in
a recognition that the bad guys like it when we're
tearing each other apart, and so we need to be
careful about taking that too far. The final thing I'd
say is the fundamentals, and we haven't talked as much
(43:42):
about this, but the fundamentals of our power in the
economic and financial domain is the fact that we've got
the largest, most vibrant economy in the world. We've got
a financial system, a capital market system that's open, that's trusted,
the rule of law you know, you know, is fundamental
(44:02):
to it, uh and is highly attractive. The dollars, the
chief reserve and trading currency around the world, still even
in the crypto context where you look at the stable
coins back by US treasuries or US dollars. We have
to tend to those fundamental things. And I think calling
on our you know, our government leaders, our representatives to
(44:25):
make sure we're tending carefully to the fundamentals of our economy,
including our debt. Our debt can't be that big that
investors and markets start to lose confidence, uh in in
the US economy, because that it's the US economy and
our power that allows us to influence and to defend
ourselves through the economic and financial domain.
Speaker 1 (44:49):
One, you know, thank you, I mean, I see you.
Some some will say you're an economic warrior, and I
know you you will you'll hopefully take that as a
badge of honor. I think that's true, or Lisa, a
founder of so much of the tools that the US
has been able to use. But also I would say
you are a statesman, you know, a great advisor, and
(45:13):
I hope people take heed and what you described, especially
as you were talking about what we need to do
as citizens. It just reminds me of the term, you know,
for us to have a more perfect union. Right, things
things aren't things aren't perfect, but you've outlined some ways
for us to try to get there, So I appreciate
that and appreciate your wisdom and your insight today.
Speaker 2 (45:32):
Yeah, I'm humbled by by your comments. You know how
much I love and respect you. And you're one of
the great experts in the space, and certainly in the
crypto domain, where you staked out a place among the analysts.
Before you know, many people knew even what bitcoin was.
You were analyzing the threats and the risks and the opportunities,
(45:54):
and so I want to thank you. I always learned
from you, and I've been privileged to work with you,
so I appreciate it.
Speaker 1 (46:02):
Talking with Juan's Rat reminds me of what is at
stake today when it comes to national security and economic warfare.
These massive threats might sometimes seem to be abstract, disconnected
from our everyday experiences, but he pointed out how tangible
they are, like clicking on a link that has been
placed by operatives for North Korea to try to hack funds,
(46:24):
and how America's global economic and political power is buttressed
by the integrity of its markets, sound rule of law,
and the attractiveness of our environment and human capital. These
things make life better for all who live here. Adversaries
of the US, who don't necessarily have these strengths are
seeking to exploit the divisions in our social and political life.
(46:46):
Wan urges us to be mindful of that so we
don't fall into the trap of being so focused on
our differences within that we fall victim to the warfare
being waged from without. I'm yaya Jata Finussi. This is
designated on the Illicit Edge Network
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