Finance as a Tool of National Security: Update on the Effort to Combat Terror Financing

November 29, 2007


JOEL ROSENTHAL: I have the honor of introducing our speaker this morning, Matthew Levitt. Matthew's topic is Finance as a Tool of National Security. He has agreed to provide us with an update on the effort to combat terror financing.

Many of us will remember the speeches given immediately after 9/11 announcing a new global war on terrorism. Central to all of those speeches was the idea that this new war would be unconventional in many respects. We were told that all instruments of national power would be needed to wage this campaign. Military strength alone would not be enough. There were many tools in the toolkit. As many political— and even military—leaders were quick to point out, all of these tools would be needed to be used simultaneously. Among the instruments or tools cited were diplomacy, strategic communications and alliance building, intelligence sharing, economic assistance, and of course economic sanctions.

This theme is very much alive today. Just this week, Secretary of Defense Robert Gates delivered a speech at Kansas State University where he said, and I quote: "We must focus our efforts beyond the guns and steel of the military, beyond just our brave soldiers, sailors, Marines, and airmen. We must also focus our energies on the other elements of national power that will be so crucial in the years to come." That's from the Secretary of Defense.

Identifying the sources of financing for terrorist activity and cutting off the supply of funds to terrorist organizations is surely one of the frontiers of conflict in today's world. This challenge leads us into places well beyond traditional battlefields and security perimeters. It leads, instead, to financial networks, nonstate actors, and rogue states. It leads to discussions of sanctions and other restrictive measures. In brief, it leads to an expansive way of thinking about enhancing security and preventing sources of conflict.

Matthew Levitt is one of our country's most respected experts on these issues. His biography has been distributed, so I will not go on at length about his experiences and his expertise. But I will mention that Matthew has served in the Treasury Department and has spent a good deal of his career working on interagency initiatives to protect the U.S. financial system and to deny terrorists the ability to finance threats to U.S. national security.

We are very fortunate to have Matthew Levitt here with us this morning to share some of his insights. Please join me in giving him a warm welcome. Thank you.


MATTHEW LEVITT: Thank you, Joel. I want to thank the Council for having me here again and all of you for braving actually relatively mild weather on this early morning.

I was going to start with the Gates quote too. I think it is extremely important that we have a Secretary of Defense who is speaking this way now. That is a very significant change. There is a lot that the military can do and there is a lot that it can't do, and to recognize that, coming from the head of our military establishment, is extremely, extremely important.

I'm actually not a very big fan of the term "war on terror," because I think it is very misleading, in that it suggests that a lot of what we need to accomplish can be accomplished by traditional military means.
There actually is a role that the military plays in combating terror finance as well. They are very active. The Central Command (CENTCOM), in fact, came up with a term that I like to use instead of "terror finance" now—and when I teach a course on the subject at Johns Hopkins, this is the term I now use—"threat finance." What is meant by that is the financing of a traditional range of illicit activities, from terrorism, to proliferation finance, to insurgency finance; depending on their area of operations, perhaps counter-drug issues in Afghanistan as well.

That is important, in part, because even among terrorist groups that are not one and the same, even among disparate illicit actors that are involved in different types of illegal or illicit activity, you will find them using the same chokepoints, the same means of transferring funds, of laundering funds, and of storing funds in particular. Less so the same means of raising funds, but you will find that sometimes too.

Because of this, what I have argued for a long time—and I believe that this in large part is the strategy that the U.S. government pursues when combating terror financing, in particular—is that the biggest bang for our buck is not in focusing specifically on the fund-raising element of this problem. There will, unfortunately, always be new sources of funds for illicit purposes. There are enough people out there with access to funds that are radical or intend to do harm. If you seize some of those funds, fantastic. Financial measures have a great disruption potential.

But you will have the biggest bang for your buck at that middle section—not at the raising section at the beginning, but at that middle big section of transferring, laundering, and storing funds—first of all, because you will find these chokepoints.

So when sometimes people say that combating terror financing is not very effective because we haven't seized a whole lot of money—which is true, in the scope of things we haven't seized all that much money—they are missing the point. Sometimes we are not even trying to seize as much money as we can; we are trying to shut down key chokepoints. A chokepoint—a charity, an individual when designated—may not even have in its accounts at that given time a whole lot of money, and yet may have a disproportionately large disruption impact by virtue of having been a key chokepoint. Sometimes that is something that will be able to be disclosed in the declassified public statements that the Treasury Department puts out, and sometimes it won't.

Parenthetically, when the Treasury Department right after 9/11 first started engaging in these designations, they didn't put out any information. Right after 9/11, there were just lists: "These are the people who are banned, these are the people whose assets have been frozen. Thank you very much. Have a nice day."

You can imagine the sensitivities within the intelligence community about putting sources and methods at risk. Much of the information underlying those designations is classified. A significant part of my job as Deputy Assistant Secretary for Intelligence and Analysis at Treasury was playing that interagency role, as a member of the intelligence community and as a senior member of the Treasury Department, finding some useful information from the significantly thick underlying evidentiary package for each of these actions that can be shared publicly so as to inform why we are doing this and what it is all about. I think that is an extremely important thing to do.

I will add, parenthetically, that I don't think we do enough with it. If I still have bruises on my face, it's because of those interagency battles about "Is this sensitive? Is it too sensitive? Can we declassify it? Do we need to declassify it? Why do we need to tell anybody anything?"

My feeling is that on the financial war on terror, and really all other aspects of the war on terror, the one area where we are least successful, where I would argue we really haven't fully stepped into the ring, is in the battle of ideas, in strategic counter-terrorism, in counter-radicalization. The Department and the intelligence community go to such great lengths now—and it is a painful process—to declassify material, and I don't think they do enough with it.

It's as if, as I've teased some of my former bosses at the Department, they assume that people wake up in the morning and have a lovely cup of coffee and run to their computers to see if there's anything new on Treasury's Web site. There has to be more that is done.

Now, I was very, very pleased that when the Department took a series of robust actions against Iranian entities a few weeks ago—some for connections to terrorism related to Iran's Quds Force, more related to proliferation—I was very pleased with the public diplomacy effort that they did there. I spoke to some people in the Treasury Department, in the State Department, and elsewhere, and this really was a concerted effort on their part to improve that system. So there is a lot of hope there, and I think that is very important.

But terror financing is only one part of it. There are two sets of metrics. Neither of them is particularly useful. As I mentioned, mentioning how much money has been frozen is not particularly useful. Measuring how many entities have been designated is equally un-useful, because there are many, many reasons why a known entity, an entity that is known to be financing terrorism, would not be designated.

First of all, there are all kinds of interagency equities in this process. You may come to the table, and even if you get everyone around the table to agree that the information indicates that this is a good target for designation, the State Department may say, "Let's put this on hold for a little bit because we are trying to negotiate a peace deal between these two rival parties in this region." Or the intelligence community may say, "We have or are close to getting a great penetration of some sort and we don't want to put this potential source and method at risk." Or the law enforcement community may come and say, "We are actually about to indict someone or the Belgians are about to indict someone. If they come to us, we don't want to seem to be prejudicial."

There are all kinds of reasons why it doesn't happen. And that's okay because—and I find myself saying this over and over and over—we tend to mistake those things which are most public, such as Treasury designations and Department of Justice prosecutions, for the sum total of our counter-terror finance toolbox, when in fact it is only the most blatant tool in the toolbox.

But as you heard, there are multiple tools in this toolbox. We are not the plumber who comes to fix the sink with only a hammer. There are financial intelligence activities that are going on. There is a lot that the diplomatic community and the State Department can do in foreign trading, cross-border courier interdiction, programs that are proving very successful.

That is really important, because terrorists are no longer most dangerous because they are revolutionary; they are most dangerous because they are evolutionary. One of the downsides to providing all this public information is that we are showing our hand in some part, and they are much quicker to change than we are. Having been in this bureaucracy twice now, believe me, it is very slow to change. Even when it knows what needs to be done and even when it knows how to do it, it is slow to change. And they are very, very quick to change. There is no red tape. So if we shut down one type of means of transfer, they will move to another and we need to play catch-up.

Does that mean that this is not a useful technique? I argue no. It is an extremely useful technique. It is very useful in terms of disruption, which to me is what counter-terrorism is all about.

When I testify on the Hill before Congress, I am often asked, "So when are we going to win the war on terror?" That's the first reason I don't like that term, because it suggests at some point I'll be able to say, "We won, that's it."

Really, counter-terrorism is about constricting the operating environment. There are always going to be people who want to do us harm for political reasons, and at its heart that's what terrorism is. The question is: can you get it down to a reasonable level and can you make it harder for them to do all the things they need to do, from procuring false documents and raising, laundering, and most importantly getting, money when they need it where they need it? If we can constrict the operating environment, we can make some great success in counter-terrorism.

Following the money is a very effective tool. Also, sometimes you follow the money and sometimes you freeze the money. There is a tension there, an ongoing debate, in any given case whether you should freeze these funds or follow these funds. There is no "Jack Bauer moment," for those of you who watch "24," a show that my oldest son loves, this counter-terrorism show with this FBI agent who always knows what's going to happen where. There is no "Jack Bauer moment."

But there are some cases where financial intelligence has proven extremely effective in thwarting plots, most recently and most importantly, the Heathrow bomb plot that led to my having to put my little toothpaste in a Ziplock when I came here yesterday.

But as I said, we are dealing with a threat finance issue, not just terror finance. That's one part of the problem.

I think that one of the most interesting and creative issues that we have been tackling now is on the counter-proliferation side of this equation when it comes to Iran. Here there is a great misunderstanding of what Treasury has done, a very creative way to apply what are traditionally called sanctions, but we don't like to use that term because it's loaded and often considered a dirty term. Sanctions are often affiliated with the kind of shotgun, countrywide sanctions that were applied against Iraq with, let's be honest, no success.

Whereas what we are applying now we prefer to call "targeted financial measures," because they are targeted on illicit behavior. It is made very clear "here is the illicit behavior that has to change for these sanctions to be removed." They are graduated—you don't go from zero to 60 right away; you don't do everything that you could possibly do under the sun, because you are trying to change behavior.

But in order for a graduated sanction to work, you have to follow through with your threats. It's like me and my children: If I tell them there's going to be a consequence to bad behavior, that consequence has to happen if that bad behavior is done so that they understand that I mean it when I say it.

This is why it is so critical for there to be a third UN Security Counsel resolution targeting Iran. Because to be effective, we can no longer afford to be so targeted and so limited and graduated in our steps, if we then don't follow through when Iran thumbs its nose and doesn't change its illicit behavior.

Now, there are two types of actions that are being taken here, and this is where the misunderstanding tends to happen.

The first are offense tools. I would put the terrorism designation writ large into this category.

I would also put the majority of the designations under proliferation executive orders under this category as well. This is basically the category of when you know that there is an illicit actor engaging in some type of financing for illicit activities, the Treasury Department has an obligation to take offensive measures to try to deny them access to the international financial system. There is one international financial system today. Even with the dollar where it is, embarrassingly beneath the Canadian dollar even, we are still at the very center of that international system. I'll get back to that in a second.

I think most people understand these offensive tools, mostly through executive orders that empower mostly the Treasury Department, in some cases the State Department, to take these offensive actions.

But there are also defensive tools that the Department has and defensive responsibilities that any finance ministry has to protect its market—I used to say "currency"; maybe that's not so accurate anymore—but really to protect our currency too from abuse.

That's what the Department did in the North Korea case with Banco Delta Asia. People tend to compare the North Korean and the Iran cases all the time. There are some things where the comparisons make sense. Here they don't.

North Korea was not an offensive action; it was a defensive action. We found that there was a bank, Banco Delta Asia, that was holding on to a relatively small amount of money, about $24-25 million, for the North Korean regime, which we later found out was money that was personal Kim Jung Il funds and, therefore, touched a raw nerve with him, and I think that's in large part what it was so successful.

But the issue was that this bank was taking an extra premium to literally look the other way when money that it knew was coming from the proceeds of counterfeit funds, cigarette smuggling, all kinds of different fraud, was being deposited in the bank—literally, "Here's a little extra wad of cash; now you please leave the room."

If you are a risky actor, we, the United States, need to weigh whether or not we can afford to let you be a player in the U.S. financial system, whether your entrée into the system could hurt our system. That's a defensive measure; that's not an offensive measure. "You decide to engage in risky, illicit, illegal behavior, I may not be able to let you into New York." When it comes to banks, they want a branch in New York, if for no other reason than their desire to dollarize transactions.

P.S. From the very first moment of Iran sanctions many years ago, the Treasury Department created a loophole enabling Iranian banks to dollarize their transactions, even though they are not allowed to deal with American banks directly, through third-party banks—say, European banks, Deutsche Bank, Credit Suisse, et cetera—not out of any generosity to them, but because it was in our interests to make sure that the international oil economy remained dollarized. But they are able to do that—Credit Suisse, Deutsche Bank, et cetera—because they have a branch here in New York.

So when we say in the case of Iran to banks, for example, "Look at Banco Delta Asia. Understand that if you continue to engage in business with Iran, forget the fact that it is a regional and an international security threat. Just think about the investment risk. When we give you that information and you continue to do business with them, we may have to take defensive measures."

Now, the banks often see this as an offensive measure, as punishment. I have had these conversations with major banks as a senior Treasury official, and I am often sought out now by these banks, as a former Treasury official, to kind of explain what is going on.

My message to them is as follows: "When it comes to Iran, the Department has gone to great lengths to explain to the financial sector that there is an inherent investment risk to Iran. How can you be sure that money you are investing in Iran, loans you are providing, lines of credit you are providing, are not being used for alternative purposes?

"Iran claims to have a financial intelligence unit, but it does not. Iran claims to have an anti-money-laundering regime; it does not. The Department has declassified intelligence that Iran does have a nine-digit line item in its budget for terrorism support. And it has declassified several instances where banks like Bank Saderat, Bank Sepah, Bank Melli [all Iranian banks] were engaging in deceptive financial transactions, hiding the nature of their and Iran's footprint in a transaction that was to support illicit activity."

That's the kicker, that's when I get the compliance officer's attention, because the best compliance regime in the world will never raise an eyebrow if a transaction looks like a telecommunications company in Turkey is making the transaction. They will have no way to know that this is actually a nuclear or ballistic missile program transaction from Iran.

Deceptive financial transactions are the key, because financial institutions understand that there are market forces at play forcing their hand. It's not the Treasury official—I'm just providing the information. They have reputational risk. They do not want to be on the front page of The Wall Street Journal or Financial Times tomorrow morning for having continued to do business with an entity despite all the risks that they were told about. They have fiduciary obligations to their shareholders and they have due diligence requirements.

Based on those three prongs, you then look them in the face and say: "What confidence can you possibly have, given these deceptive financial transactions, that the money you are investing, the lines of credit you are providing, are not being used for all this illicit activity we know about?" The answer is they can't. They have answered their own question.

You can't overplay your hand. You have to be very careful. Not only in the case of Iran are we dealing with the international oil economy, Iran is obviously at the total opposite end of the spectrum than North Korea when it comes to not only the type of country but the type of economy—totally closed, totally open; completely unintegrated, completely integrated—but when you sit down on a regular basis and analyze what is the best tool to deal with this problem of the various financial tools that we have and are any of the financial tools even among the best tools to be used, you can do some really interesting and creative things. That's what's being done now.

What gives me the greatest comfort is that people are thinking smart. You don't have departments saying, "Well, I have these tools and I feel the need to flex my muscles. Let's use my tool." You actually have people sitting down and discussing what's the best tool.

You will notice in these recent designations of Iranian entities some were done by the State Department, some were done by Treasury, and there are mild differences that I won't bore you with and why. That was very interesting. Some were based on terrorism support. Some were based on proliferation support.

There are other things that can be done. When this concludes, we can have more of a discussion.

For example, I think it is important that others in the international community start having similar discussions with the private sector, much like the U.S. Treasury Department has had. The U.S. Treasury officials have gone out to the Middle East and to Europe and to Asia and they have met with the private sector, and with the governments as well, and not behind the governments' backs.

I think it would be extremely powerful, for example, if London, which is often considered with New York as the two twin power centers, had similar conversations, which is something Her Majesty's Treasury is considering.

I think if there were other segments of the business community, not just the financial community, with whom we started having these types of conversations, there could be other types of utility. Even if it was just making Iran know that we are having conversations with the shipping insurance industry—not so much to talk about the risks of underwriting the shipping of oil out of Iran, because to be honest, from a selfish perspective, oil is expensive enough—but how about if we started talking about the risks of shipping back to Iran the refined oil that they have to re-import because they do not have a sufficient refining capacity at home? Iran re-imports 40 percent of its domestically consumed oil.

There are leverage points here. If they are applied wisely, and if they are applied in an effort to change behavior, not just punish, and those behaviors are clearly articulated, we will continue to have a tremendous amount of not only transatlantic but international support.

There are very specific reasons why Russia and China are not yet onboard, and I believe that it may not be the third UN Security Council resolution we'd all like to see—that I would like to see—but that there will be something, and that that in and of itself will be telling, because the political message to Iran, that even Russia and China are onboard, is in large part, or at least in part, one of the most important messages of the previous two UN Security Council resolutions.

I think that the U.S. sanctions on Iran a few weeks ago targeting a whole host of actors, including banks, including companies tied to the oil industry that are also tied to the Revolutionary Guard Corps [IRGC], in large part was a menu from which the international community has been invited to select a few targets that it can agree upon, one or two targets. Even if, I would argue, it is just one bank, and put that in a UN Security Council resolution, that would be very, very effective.

There is a lot more than can be done here. We haven't solved the problem, and this tool will not solve the problem.

With this I'll conclude. People ask me all the time, "Are sanctions going to solve the problem?" The answer is no, certainly not on the proliferation side. It is disruptive on the counter-terror finance side. And no one suggests it is going to solve terrorism. It's disruptive.

On the counter-proliferation side, I argue that all it is intended to do is to create space for diplomacy, to create leverage for diplomacy. That's what sanctions that are focused on illicit actions, on changing behavior, are all about.

At the end of the day, I do believe that you need to have a credible military option—which, God willing, we will never have to use at any level—and we have to have a soft power option that is firm but soft, and I think that is where the financial angle comes in. At the end of the day, this, like basically most other international problems, will be solved only through not soft diplomacy, not mushy diplomacy—we're not going to go to Tehran and ask them "would you please?"—but it will be solved through very aggressive diplomacy that is backed up by very firm financial consequences, and perhaps a carrier in the Gulf that implies other consequences, that forces people to sit down at the table.

I am very, very pleased and honored that you have chosen to sit down at the table with me this morning. I hope that you have some targeted questions for me.

Questions and Answers

QUESTION: Is there a possibility that the international economy will not remain dollarized, because there has been talk between OPEC nations to peg euros rather than dollars for oil currency?

MATTHEW LEVITT: That's an excellent question. I am not disregarding it with a wave of the hand at any level, but I don't think that there is a great risk. I'm not an economist.

Parenthetically, one of the things that I am most proud of at Treasury that we did as we were building up what was a new Treasury intelligence shop created after the Department of Homeland Security was created and all of Treasury's law enforcement crown jewels were ripped out of Treasury and given to Homeland Security—one of the things that was created in its wake was Treasury's intelligence component, which is where I sat as deputy chief.

One of the things I am most proud of there is that we not only hired pure analysts, but at one point I argued—and it was an argument, but it was one that we were successful with in the end—that we should hire pure economists into our intelligence shop.

My argument was: "I can train people to be intelligence analysis. I'm an Intell guy. I can't train someone to be a Ph.D. economist. What I need to know is the answer to that question."

Like I said, you can't push the envelope too far. You need to know at least where the red lines or the red zones begin and end. What's too far for the dollarization of the oil economy?

Or for that matter, when you are considering to take an action against a bank—for example, let's say the Commercial Bank of Syria, which was designated as a primary money-laundering concern by the Department a couple of years ago under Section 311 of the Patriot Act, which was a different tool, a defensive tool—what would be the best way to target that particular entity based on its illicit activity and where it is and its markets? And what are you trying to accomplish? If you are not trying to undermine the entire Syrian economy, what is the best way to punish this bank without that?

These are the type of questions that we needed answers to and for which we hired pure economists.

What I am told by the economists is that the oil economy has particular reasons why it would in almost all circumstances remain dollarized.

What I do know, beyond what I have just heard from them, is that there have already been instances where Iran, for example, has tried to pay for things in other currencies, and countries—including Russia, by the way—have said "No." So, for example, Russia's $25 million-a-month fee for the Busheer plant—the nuclear plant that it has built and is servicing [in Iran] and that seems to be likely to go operational sometime soon and which has a $25 million-a-month fee—at one point Iran said, "We'd like to pay you in euros." The euro is stronger. Russia shouldn't care. Russia said "No."

QUESTION: A couple of questions:

One, if the problem with Iran is so great—which I think we all agree it is—why is it necessary to embark on a very strong diplomatic effort to get Western European nations and others to collaborate with this effort?

The second part really deals with that, too: What about The New York Times and other media organizations that delight in revealing some of the programs that have been undertaken by the U.S. government and some European nations in the effort to restrict all of these funds?

MATTHEW LEVITT: Let me start with The New York Times disclosure. I was Deputy Chief of Intell at the time. That was a major source of discomfort.

Look, I'll just say this. Several weeks later, The New York Times ran an apology on page 527, Section Z—I'm sure you saw it—saying, "Oops. We thought that there were privacy issues. We thought that there was abuse. We thought wrong."

The 9/11 Commission gave the U.S. government one grade in the A's, an A-minus for terror financing. Thank you very much. One thing they noted there that they were most pleased with was that there was creative thinking of the type that I have described, but also on financial intelligence issues. This is a bipartisan group. I think one of the reasons they were impressed is that people were thinking out of the box and they were doing so leaning over backwards, to the point of tremendous pain, to make absolutely sure that nothing was done to infringe on anybody's rights.

It has since come out—I'm not telling you anything that is secret anymore—that there was a private consulting agency hired that was watching what transactions the Treasury Department was looking at. There had to be a predicate: you could not just go searching any transactions you wanted; it had to be approved. There was live, 24/7 monitoring. They had the ability, literally, to pull the plug at any time.

There was only one instance ever where there was deemed to be a search that was inappropriate. It was stopped. Everything was shredded. It was all forgotten.

The media has a job to do. I often when I am interviewing people will say to people—and it gives them some comfort, as you can imagine—"I'm not a journalist. I'm not out there to expose."

I have had cases where people have told me things when I've done research abroad, for example, very interesting things, things that would have made a great article. I'm thinking of one case in particular.

I went back and I spoke to colleagues of mine at FBI and National Security Council—this was when I was out of government—and said, "This seems to me like something that probably doesn't need to be written about at the time," meaning that it seemed to me that there was something that was going on that people were complaining to me, "Why isn't anything being done?" It seemed to me this type of thing was something that would be ongoing, just not in the papers.

They said, "You know what? Do us a favor. Hold off for three months."

Journalists are not inclined to do that. That's not what their purpose is. They are there to make sure that the public has access to information. There are some journalists, I believe, who need to learn a better balance between the public's right to know and the public's right to be safe.

In terms of why there is a need for such robust diplomacy with Europeans on Iran, I would say that depends. I wouldn't put it in such broad terms.

We have some allies who need no coaxing whatsoever. The European Union has designated under European law every single Iranian entity designated by the United Nations. We in the United States have not yet. Because of our own technical problems, not because we don't want to, we haven't done that yet. In fact, the European Union has added additional names to its designation list above and beyond, as we have too, though they're not necessarily the same. So there are some things they are doing very robustly.

And certainly, with the current French government, sometimes I feel they are a step and a half ahead of us on this issue.

And it depends on where you are in other governments. In the German government, in some cases it depends who you talk to.

Let's just be honest. There's a tremendous amount of European business investment in Iran. I have debated the chief of staff to the EU foreign minister, Benito Ferrero, on this issue in Brussels. It was amazing to me how much it was not a debate. Really, the only thing this gentleman wanted to contest was Congress's inclination to pass extraterritorial legislation, which I also happen to think is an unwise decision—but I also think that it could be useful having that as a stick with which to go to the Europeans and say, "Hey, work with us; otherwise we're going to end up with this extraterritorial legislation by Congress, which is not going to serve either of our interests."

I think at the end of the day the Europeans on the whole are going to come around. But it really has a lot to do with their business.

I recall one conversation I had with a European official. He said, "Look, targeted financial measures, that makes all the sense in the world. We're with you on that. But we need to make a distinction between finance and trade"—which of course is ridiculous. What are we financing? We're financing trade. This was not a fool. This was not someone who thought—or at least I don't think he thought—I was a fool. This is how they were thinking, that maybe they could parse the debate that way.

My answer to him was, in part: "Even if you could make such a distinction, it wouldn't have the impact. Everything we do we have to be asking, 'What are you trying to accomplish?' It's not, 'Gosh, we've got to do something. What can we do? Oh, we can do that.' That's bad policy in the making. Good policy is: 'Something needs to be done. Why? What is the goal you are trying to achieve? What are the unintended consequences that may happen that you are trying to avoid?' Trying to parse the words so that you can do something and make the Americans happy but yet keep all your business is not going to make good policy."

QUESTION:Thank you for being so enlightening.

Could you expand on another case about which you wrote a whole book, called Hamas: Politics, Charity, and Terrorism in the Service of Jihad?

MATTHEW LEVITT: Never heard of it. [Laughter] I'll give you that twenty later.

The last time I had the pleasure of speaking here, was entirely on the subject of the book. I should thank you again for having me for that. [That talk was off the record. There is no transcript available.]

Hamas is no less a problem today than it was last time I was here. In many ways, it's more of a problem.

Someone at our table before was asking me about Annapolis [Summit on the Middle East, November 2007]. I said, "Dennis Ross is a colleague of mine." I've stolen a line of his, as I tend to do. I tell him about it. He wrote a new book on statecraft, so maybe this is a way to plug his book. He said, "Annapolis is a mix between statecraft and stagecraft, maybe a little more of the latter than the former." But there is statecraft sometimes in stagecraft.

I would argue that one of the things the Administration didn't understand perhaps as well as it should have was that, even once it came to the conclusion that there was no partner on the Palestinian side with whom to make any progress for peace after the violence that erupted in 2000, there is utility in still having someone as a point man, a Middle East envoy.

There is utility in having somebody whose job is to think about these things, I'd say for two reasons. One, you never know when there will be some type of breakthrough—I don't mean like peace tomorrow; I mean teeny baby steps that can be exploited for some benefit, some utility. But more importantly, really, I can't tell you how many times I'd be engaging with Europeans, for example, or Asians, on issues having nothing to do with the Israeli-Palestinian conflict and it would come up in terms of one of the reasons that our relationships with them were difficult. So you go through the actions sometimes just to demonstrate that you are still serious about it.

In this case, we have a very interesting situation. We have an Israeli prime minister and a Palestinian president who actually have greater faith and trust in each other than, I would argue, any previous Israeli and Palestinian leaders had. But that's not enough for peace.

You also need your publics and you also need political support. Olmert has basically none. His political ratings went from within the margin of error to just above after he announced that he had cancer. Abbas does not fully control the West Bank by any stretch of the imagination, and of course controls none of Gaza.

I wrote a dissertation, literally, on how outside spoilers, violent actors, can undermine ongoing negotiations with attacks and how they undermine the legitimacy of the conflict resolution process. That makes Hamas all the more relevant today than it has been even in a long time. Hamas has said that any prospect for progress is going to be met with further terrorism.

We have had great success dealing with Hamas on financial grounds. But no one, again, like I said before, is going to tell you that the financial tools are going to do it.

The Treasury Department just a few weeks ago designated one of the largest, most important Hamas charity organizations in Gaza. It does engage in some charity, primarily geared to build grassroots support for Hamas as a mechanism to launder and transfer funds for Hamas, and even in this case as a means of providing logistical support to actual terrorist attacks in the Al-Salah Society. About a couple of weeks later, the head of the Al-Salah Society complained that he could not get access to any of his accounts. Now, that's really telling, because this was not an international designation, this was not a United Nations designation; this was a unilateral U.S. designation. That's telling.

We should engage in multilateral designations, multilateral action, multilateral diplomacy whenever we can. But it is very limited. The UN Security Council Resolutions 1267 and 1373 are limited to al-Qaeda and the Taliban. You cannot designate at the United Nations the IRA or Kach or Kahane Chai or Hezbollah or Hamas or Islamic Jihad. It's a non-starter.

And yet, because there is one international financial system, and because I know of no major international financial bank that does not incorporate all of Treasury's designation lists into their due diligence databases, it has a multilateral impact even when it is a unilateral, U.S.-only designation.

So a charity society run by Hamas in Gaza couldn't get access to its accounts in non-U.S. banks across the world because of a unilateral U.S. designation.

There is a lot more that needs to be done beyond the financial realm. Again, a lot of it is going to be political. The biggest question in everybody's mind is how to deal with the fact that they now control Gaza and will the Israelis end up having to re-invade or what. Abbas will be the first to tell you that the only reason he has any level of control of the West Bank is because of the Israeli military presence there.

QUESTION: I'm sure the terrorists would love to do something to disrupt the international financial and banking systems, and I suspect that our government is doing what it can to make sure that that doesn't happen. I wonder if you could, to the extent that you can, disclose some of the stuff that is going on in terms of protecting the integrity of international banking.

MATTHEW LEVITT: Other than to tell you that people are very aware of the problem and are very engaged, there's not a whole lot I can tell you.

You saw not that long ago a very real threat in Newark, about a block from where my mother works—that makes it personal—to the financial sector.

Bernard Lewis, the acclaimed historian, has said many times that it's uncanny how often the radicals and terrorists tell us what they want to do and uncanny how often we don't listen. I guess cognitive dissonance.

They have made it very clear that they are very interested in targeting our economy. Bin Laden himself has made it clear that 9/11 was successful mostly because of what it has done to our economy. And there can be no doubt that they would like to target our economy through physical attacks or otherwise if they could.

We have whole departments and offices dedicated on the cyber side and on the physical side, to working on this issue.

One area that I think we need to be doing more—and I actually said this to a big trade conference yesterday—is when I look at especially our counter-proliferation, counter-Iran sanctions programs we are doing right now, what is most exciting to me is the public/private dialogue and cooperation, this relationship. What it suggests to me is that this is something that we are not yet doing enough with.

The military has for a very long time found ways to give contractors clearances so that they could work on highly classified projects without being parts of the Department of Defense. Why can't other parts of the government find ways to give compliance officers and others within the financial industry some level of clearances? Why can't we do a better job at providing tear lines, which is a declassified version, a sanitized version, of intelligence to elements of the private sector?

The private sector is the gatekeeper to all the financial information, and they really don't know what they don't know. They don't know what to look for unless we give them some insight.

I was at a trade conference on this issue yesterday. I said this to the audience. Everybody's heads—I see yours too—were going like this.

I think the public/private cooperation issue is something we need to do a lot more with. And not only do I think the private sector would have some great insights into what are some of our vulnerabilities as the private sector that the public sector could then try to address, but the public sector could alleviate some of the concerns better by being able to tell some elements of the compliance and security offices within major international financial institutions what they are doing.

QUESTION:You talked earlier about taking a number of measures to change behavior, and also stepping up the consequences of investment and market impact on Iran. As you look at it now, and in light of the recent measures you mention, can you see any changes in Iranian behavior, and do you have a sense of what the economic impact has been over these years in terms of lower GDP or other measures?

MATTHEW LEVITT: I mentioned earlier in the context of terror financing that there are two main types of metrics and they are both flawed. What I didn't mention is what we are, therefore, left with are basically anecdotal tidbits that strung together may give you some insight. In large part, certainly in the open source world, that is what we are left with with Iran. But I would argue—I have argued—that there is enough anecdotal evidence when it comes to Iran to demonstrate that we are really having some significant impact.

The OECD [Organization for Economic Cooperation and Development] risk rating for Iran has been significantly increased. Iran has issued ration cards for domestic oil consumption that were supposed to last many months, and people went through them like water, very, very quickly.

Iranian officials have come out and said that there are only three European banks that will convert currency for them anymore and that those three could stop at any moment. There were many more than three just a few months ago. In fact, when we first started out on this campaign, I would argue that what we saw most of the time was banks that were ceasing to engage in dollar transactions, doing the minimum necessary to avoid U.S. penalty, but continuing, and expanding even, non-U.S. currency transactions. This is a huge, huge change.

We see Iran unable to get access to dollars. Three of Iran's four largest banks have now been hit with U.S. and/or international sanctions. The next bank that has already been publicly disclosed as also engaging in deceptive financial practices is Bank Markazi, the central bank. Now, there are, parenthetically, huge international oil implications to targeting the central bank, which is probably why it hasn't been done yet. But just throwing out there that we know about it, making the Iranians know that we know, has an impact.

There has been a flurry of recently retired Iranian officials, some of whom were retired, who came out publicly criticizing the regime, which we had not seen for a very, very long time.

came to power on a pledge to improve the economic situation in Iran, which he has failed to do. Say what you will about Iran—and it is a flawed democracy, but it is a semblance of democracy—they will have an election, and Ahmadinejad will not be able to just snap his fingers and continue in power, as it seems Putin will be able to do one way or the other. That is telling also. Some of the people who are running against him are no less radical. Others are, interestingly, moderate in some ways, even if not in all the ways we'd need them to be.

So I would argue yes, we are having some very significant impacts. Perhaps the most important impact, and one on which I think we have the fewest insights and metrics, is what is the impact on the average Iranian on the street. There is a very huge, very young demographic in Iran. Iran is not technically part of the Middle East—they are Persian, not Arab—but if you allow me to put them in the greater Middle East, it's one of the few places in the world where—sure the regime hates us, but most people in Iran don't. We do get some insights, because there is a tremendous number of people coming through our consulate in Dubai and other places to get visas to do business. So we hear about that.

One last potential answer to your question is this. I don't take credit for it. I was one of many, many people arguing that when the United States next engaged in sanctions it had to target more banks, which it did, and it had to target companies with an oil footprint that were related to the Revolutionary Guard Corps, like Khatam al-Anbiya [Reconstruction Organization] and others, seven or eight of which were designated in this last round of designations.

Why this, in part, is so important is not only because they are affiliated with the Revolutionary Guards Corp and are funding the most illicit behavior that we are concerned with, but also because Iran is a bazaar merchant economy, it's a merchant society. The one thing we kept hearing—and this is public, open source—is discontent among the business class with the fact that the Iranian regime was giving all these IRGC Revolutionary Guard-related companies access to no-bid contracts, huge contracts, South Pars oil deals, South Pars gas deals. That made them pretty angry. So taking action against those companies actually had some traction on the street for a completely different reason, and that's always good.

QUESTION: There was a very good book, and then an equally good film after it, called "The Day of the Jackal," in which the French detective is successful. He didn't know whose phones to tap, so he tapped them all. My question really is: In this struggle, we have the legal documents, we have the declarations of the United Nations, and all that sort of stuff, and that's all very well and good, but how much do we have to be as deceptive and as dishonest as they are in order to combat this?

MATTHEW LEVITT: Well, I would contest the dishonest part in many ways. I am certainly not an apologist for all the things this Administration has done. I think there are many things that need to be changed and should be changed. Some of the things that need to be changed, including Guantanamo, it's easier said than done. There are very few European, Asian, or Middle Eastern countries that are willing to take some of these individuals that we would like to remove from Guantanamo.

But the nature of tackling a sub-state, nongovernmental, covert actor is going to have to involve some level of covert action of your own. I mean by that intelligence activity, not covert action in the traditional sense of black operations or that type of thing.

Intelligence plays an absolutely critical role in figuring out what they are trying to keep secret from us. That does not need to be—I guess it's inherently deceptive, in that we are not telling the public what we are doing necessarily. I don't have a problem with that, as long as it is done within the rubric of the law.

I think there are some issues that are more legitimately contested than others. I believe, for example, that it is incredibly dangerous for the government not to have the ability to quickly tap conversations that involve a person in this country and a known terrorist associate outside the country. How quickly can that authority be granted? Can it be done without authority, and then how much time can pass before you get that authority? These are very important questions.

I remember right after 9/11 people saying, "You know, they want to let the FBI start spying domestically. We can't have that." My response was, "When I was in the FBI—I was on the Intell side—of course we spied domestically, and you want us to spy domestically. You want us to know what's going on here. You want us to be able to provide security and insight—within parameters, of course."

So to me there is a tremendous amount of legitimate debate that needs to be happening, maybe even more than is happening. But I also believe that the debate has been politicized to a useless degree. I think that there is a perception that there is more dishonesty than in fact there really is. I think that is because of certain very senior and public individuals who have maybe been, or at least are perceived to have been, themselves dishonest.

You can tell that I was recently a diplomat.

JOEL ROSENTHAL: We have time for one more.

QUESTION: Thank you very much.

I'd like to go back to a point you made a few minutes ago. There is often an assumption that because the United States is a big country and was attacked and feels threatened, that for that very reason the United States is the most active in the war against terrorism.

You said a few minutes ago that France was a step and a half ahead on Iran in some ways. We know that, for example, in the counter-terrorism work against al-Qaeda that Judge Bruguière and his unit in France have actually found and disrupted al-Qaeda cells in places like Columbus, Ohio.

What is there in your experience—and I'm not just confining this to France—that other countries are doing that the United States ought to be doing? And specifically, since you said France was a step and a half ahead—I'm not asking for an advertisement for France here, although if you want to give it—what are the lessons learned that we haven't learned yet from the people who wish us well?

MATTHEW LEVITT: He asks that question with one minute to go. It's okay. I can answer that. Here we go. It's a very important question.

There is a lot we can learn from others. And indeed, France was the target of terrorism that we later—and Bruguière himself also, who I know well personally, will be the first to admit he too only later realized were part of al-Qaeda, mostly in terms of Algerian terrorists targeting trains and other targets there—and had, by the way, warned the Canadians about Ahmed Ressam long before his almost-successful plot to bomb Los Angeles International Airport at the turn of the millennium.

I think, to get back to a theme I hit earlier, the single most important thing we can learn from some of our allies is not so much on the tactical counter-insurgency side, where I think all of us are pretty good—we can all kick down doors and tap phones, maybe too well—but where we're not as good is in the strategic counter-terrorism, in the battle of ideas.

In Europe there are some very interesting programs going on. The Singaporeans have some very interesting counter-radicalization efforts going on, especially in the prisons, and they are trying to help the Indonesians in this regard. The Jordanians have a very similar program to the Singaporean program. The Saudis claim to, but it is not quite clear that it is as robust and equally as effective, in part, because it's more opaque and we just don't have as much insight—maybe it is. So there are a whole bunch of things that on the larger strategic battle of ideas I think others are doing better than we are.

Certainly, I think they have paid attention to the need to have more linguists in strange, if you will, languages, like Dari and Pashto, long before we did.

But again, it's as if people—and it's not just Treasury, but I can stick it to them because I was there—it's as if people assume people have a warm cup of coffee and check the Web site every morning. It can't just be a "Well, I put it on the Web site," but how are you getting it out there.

The terrorists have mechanisms built in. If they create a new Web site, there are mechanisms to push people to that Web site. If we create a Web site, even covertly, that doesn't have any U.S. government connection to it, how do we get people to go to that Web site?

And let's say for argument's sake that we have some psychological operations going on where we put out Web sites that are a little bit radical but have a slightly different message, to maybe get people to go to the Web site and then have other messages on there too. How much of a hook can you have? How radical can you be, or how radical do you have to be, to get them to go to the Web site, and how radical can you be so that you're not contributing to the problem yourself? It's actually a very, very complicated issue.

I think that there are lots of people out there who are doing some really interesting things. I do know there are parts of the U.S. government that are in fact going out and listening to and learning from some of these actors and others. So we don't know it all.

Matthew, thank you very much.

Thank you.

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