Provocations - Juan C. Zarate
Harnessing the Financial Furies: Smart Financial Power and National Security
Over the past eight years, a new paradigm of smart financial power has emerged which has made a particular brand of financial suasion more targeted, effective, and central to critical issues of national security import. At the heart of this paradigm has been the integration of complementary financial and national security objectives to protect the integrity of the international financial system and isolate rogue financial activity. This evolution from classic, state-based sanctions has depended on a deeper involvement of the private sector in arenas previously confined to the halls of governments, with a commensurate and widening appreciation within governments of the power of markets and the private sector to influence international security.
What makes this approach so powerful is that it relies more on the risk-based compliance calculus of global financial institutions than the policy decisions of governments. For legitimate financial institutions, there are no benefits to the risk of facilitating illicit transactions that could bring high regulatory and reputational costs if uncovered. This means that rogue actors who try to use the financial system to launder money, finance terrorism, underwrite proliferation networks, and evade sanctions can be exposed and denied access by the financial community itself. It also means that the sanctions are based on the conduct of the rogues themselves, relying on the illicit or suspicious behavior of the actors trying to access the international financial system to trigger their isolation, and not on the political decisions of governments.
This new paradigm has done away with the old orthodoxy that defined sanctions as being either unilateral or multilateral. In essence, this new brand of financial power is multilateral by nature, given that the international financial community is the key protagonist in isolating rogue actors from the financial system. The United Nations and government actions are important and make financial pressure more effective, but those are not essential components of this power. If financial entities act according to their own commercial interests, targeted actors and their fronts will be denied access to the facilities of the international financial system such as bank accounts, cross-border money transfers, and letters of credit. If some banks decide to provide these services, they themselves run the risk of becoming financial pariahs, even before they become objects of sanctions themselves. In a system such as this, financial institutions act as the guardians at the gates of the financial system.
Yet, how has this system evolved and what factors make it effective? How will smart financial power most likely be applied in the coming months in Iran and North Korea? Most importantly, will this tool remain effective, and what are the challenges facing the application of this smart power in the years to come?
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