When the dollar became a weapon

When John Kerry accused President Bush of not putting enough economic pressure on Iran with sanctions in their 2004 debate, Bush responded in a tone of exasperation. “We’ve already sanctioned Iran!” he said, looking into the camera. “We can’t sanction them any more.”

There was virtually no trade between the two countries by then, so there didn’t seem to be anything left to sanction. 

And yet, Iran’s shelves remained stocked with American-made consumer goods. “Maytag refrigerators, Diesel clothing and Victoria’s Secret lingerie are quite popular,” the New York Times reported at the time.

Thousands of Iranian businesses were evading US sanctions simply by setting up offices and bank accounts in Dubai. “The best place to do business in Iran,” one of these businesspeople told the Times, “is in Dubai.” 

Arrangements like these had rendered US sanctions ineffective. But Bush’s comment in the presidential debate inspired one Treasury official to revisit them.

“Stuart Levey took this sense of resignation as a personal challenge,” Edward Fishman writes in Chokepoints: American Power in the Age of Economic Warfare.

Levey was Under Secretary of the Treasury for Terrorism and Financial Intelligence at the time, tasked with finding ways to cut off funding for sanctioned groups and countries.

He reinvented how it was done. Fishman calls Levey a “founding father of American financial warfare.” Others called him a “sanctions technocrat.” Still others, “a guerilla in a gray suit.”

Levey earned those monikers over 10 years of government service. But his enduring influence stems from a single insight: Banks could simply be told who not to deal with.

Levey’s eureka moment came in 2006, when he read a newspaper account about a Swiss bank that had voluntarily cut all ties with Iran.

“It sort of clicked for me,” he said later. “When we say we’re ‘all sanctioned out,’ what we mean is that it’s illegal for US companies to do business with Iran. It does not mean the world has stopped doing business with Iran.”

The problem was that, while Iranian banks had been barred from dealing with US banks since the mid ‘90s, they still had indirect access to the US banking system through correspondent banking. 

To pay for something in dollars, Iranian banks would send money to a European or Asian bank, which would then route it to a recipient through a US correspondent bank — a bank that settles dollar transactions on behalf of other banks.

It seems like an obvious loophole now, but before Levey, no one in government had thought much about this niche corner of the financial system. To the extent they had, there seemed little to be done. Stopping these transactions appeared to require the painstaking work of convincing other governments to instruct their banks to stop transacting with Iran.  

Levey’s insight was that he could appeal to the banks directly.

“From his time in private law practice,” Fishman wrote, “Levey was familiar with how corporate executives thought about regulatory and reputational risk. He believed he could persuade them to cut ties with Iran of their own accord, whether their home governments were on board or not.”

The persuasion came mixed with a warning: Treasury would be looking for violations of US sanctions enabled by correspondent banking.

“We never threaten,” Treasury Secretary Hank Paulson told Fishman. “We talk about how important it is not to violate the rules and engage in illicit transactions.” 

Nice bank you have there…

The implied threat was that violating US sanctions law could lead to large fines or even losing access to US correspondent banks and therefore the ability to move dollars.

Not every bank received the message kindly.

Fishman cites a response from the second-in-command at Standard Chartered: “You fucking Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?”

They found out a few years later when US law enforcement agencies fined Standard Chartered $359 million for sanctions violations. 

Others required no persuasion at all.

“We haven’t had Chinese banks tell me that they won’t do deals with Iran,” Levey told Fishman. “They just stop.”

“Eighteen months into the campaign, nearly all the world’s largest banks had stopped servicing transactions with Iran, even though neither their own governments nor the UN required it,” Fishman wrote.

A measure of the effectiveness of Levey’s campaign is that the governor of Iran’s Central Bank labelled it an act of “financial terrorism.” 

But one man’s financial terrorist is another’s financial freedom fighter. Fishman calls the campaign an act of economic war.

Treasury Secretary Scott Bessent prefers the term “economic statecraft.”

Levey’s per Diem

In a talk last month, Secretary Bessent defined economic statecraft as “the disciplined use of America’s economic power in service of our sovereignty.”

This includes the power that Levey had discovered. Access to the dollar system, Bessent said, is “no longer unconditional.”

In truth, it’s been conditional for some time now. Even before Levey, the US denied access to its banking system as a way to punish adversaries like Cuba and Libya.

Levey’s discovery was just how much of a chokepoint the dollar system could become, and how the US could use it to pursue its geopolitical goals.

Bessent’s emphasis on economic statecraft is a declaration that the US intends to use it even more aggressively.

Fishman would likely applaud the idea — he believes economic war can be an effective alternative to kinetic war.

To that end, he suggests that the US create “a permanent economic war council” that would make quicker and better policy recommendations in a crisis.

But he also warns that it won’t work forever. Financial sanctions are like antibiotics, he says: They are effective in high doses, but lose their potency if overused.

The US is probably overusing them already, as evidenced by the increasing measures its adversaries — and its friends, even — are taking to create alternatives to the dollar system.

Some of these alternatives involve crypto, including the billions of dollars that Iran has moved in stablecoins in recent years.

The potential for stablecoins to be used in sanctions evasion is why Stuart Levey joined Facebook’s stablecoin project, Diem, as CEO in 2020 — “because he wanted to ensure digital currencies would not undermine American financial power,” Fishman wrote.

Diem shut down less than two years later, unfortunately. 

But Levey — the founding father of American financial warfare — landed on his feet.

As chief legal officer at Oracle, he made $14.5 million last year.

— Byron Gilliam