Does the Treasury Department's Designation of a Terrorist Financier Make a Difference?

By Andrew Cochran

After the Treasury Department targeted Hezbollah's and Iran's financial institutions last week, I was interviewed about the designation and asked whether (a) a singular action by the U.S. makes a real difference, and (b) whether other countries, particularly in Europe, will follow suit. Treasury Department officials today testified about those and other questions before a U.S. Senate committee (statements and testimony available there), while senior Treasury officials are traveling to Europe and the Middle East this week to seek collaboration on last week's deisgnations. One Treasury official, the Director of the Office of Foreign Assets Control, which technically issues the designation, provided the official answer to question (a) above (the same answer I gave to the reporter):

As it turns out, even when we initially act alone, we can have a dramatic impact. There are two main reasons for this. First, the United States is the world's leading banking and financial center; to paraphrase an old saying, "all financial roads lead to New York." When a designated party in Afghanistan tries to send money to Southeast Asia, that transfer will often pass through a United States bank, if only for an instant. The result is typically that these funds are frozen and we are notified by a call to our hotline or the filing of a blocking report. In addition, it is important to remember that U.S. persons and U.S. branches situated abroad are subject to U.S. law, and must comply with OFAC's regulations as if they were in the United States.

Our second "force multiplier" is that international financial institutions frequently implement our sanctions voluntarily, even when they are under no legal obligation from their host countries to do so. We have seen this time and again, in countries from Kuwait to Latvia. These financial institutions may do so because they don't want to be hosting the business of terrorist organizations, even if it is legally permissible. They may cooperate because of reputational risk. Or, perhaps they do so because of fears of litigation or U.S. action. Whatever the cause, the "OFAC list," as it is known, is on the computer screens of bank compliance officers the world over. As a result, our "unilateral" actions are anything but and can have a decisive impact against terrorist supporters, narcotraffickers, and WMD proliferators.

Of course, our designations are not always followed by allied action elsewhere (see Victor Comras' post on Europe's foot-dragging with resepct to Hezbollah), but every designation raises the cost of terrorist operations just a little more, even if it forces them to use nonbanking mechanisms which can take more time and are less reliable. Foreign policy veterans will remember the debate over the utility of export controls during the Cold War. As a Reagan Administration appointee at the Commerce Department, I participated in some of those discussions with American industries. I would assert that the export control regime raised the cost of national defense for the old Soviet Union and contributed to its demise. We aren't at that point on anti-terrorist financing, but we haven't been at it for 40 years, either.

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