The Two Sides of Counter-Threat Finance

Photo By: Lance Cpl. Joshua R. Heins

Photo By: Lance Cpl. Joshua R. Heins

By: Jackson Fuhrman

Follow the money. In a time of changing dynamics of war, with new theaters and new enemies to fight (cyberspace, networks, terrorists), new tools are needed to counter emerging threats. I posit that one of these tools—counter-threat finance (CTF)—is an effective, flexible way to counter threats, both old and new, at the state and sub-state level. Here, an analysis of CTF’s ability to deter states from action or punish them (macro) will be undertaken by examining problems that have arisen in sanctions regimes. Further, a conclusion is reached that although CTF is a game-changing national security asset, it is also a national security vulnerability—a two-faced coin.

First, it is useful to define what is meant by “counter-threat finance”. Threat finance is the means and methods by which organizations and states finance illicit operations and activities that pose a threat to the United States, as well as global financial stability. How can states prevent this? Cutting a threat off from the larger financial system (effectively isolating it), restricting money flow, restricting movement of goods, and otherwise preventing access to financial resources could end the threat in the best case, and at the very least make financing illicit activities more challenging. This is CTF.

From a macro perspective, CTF can be used to punish states in the international system deemed to be acting irresponsibly, as well as deter states from action. Action typically takes the form of sanctions, applied domestically or internationally. These sanctions prevent the designated state from engaging in financial transactions with the imposing state, and depending on circumstances, can be effective in crippling states. They can be general, or better—targeted.

It has been apparent that for a long period of time, the sanctions on Iran were ineffective in achieving the goals of the United States. The North Korean sanction regimen still has not forced major policy changes upon its target. For quite some time, the debate about whether sanctions have or could have their desired effect raged on in the counter-threat finance community.1

The first and most obvious problem in CTF sanction regimes is determining if they are effective in attaining the outcomes they seek. When states impose sanctions on other states, results are mixed, as is seen in the two cases examined here. Initially, the sanction regime on Iran was weak and had little effect.2 3 However, when sanction regimes were revised domestically and internationally to be more stringent in the late 2000s, the regimes clearly had an effect on the Iranian economy and helped incentivize Iran returning to the negotiating table—the only logical place to find a solution. But looking at the case of North Korea, sanctions have not plied the DPRK into caving to the demands of the international community, despite having huge negative repercussions for the economy of the state. The conclusion is that one cannot come up with a comprehensive answer as to whether sanctions are effective, but must instead examine effectiveness on a case-by-case basis.

Clearly, specific factors exist that can impact the effectiveness of sanctions regimes. The first question to pose is whether states can function and participate in the global economy if they have been removed from the formal financial system via sanctions. The answer is apparent—yes. Iran has remained active in international economics by maintaining close ties with its trade partners, trading with countries outside of the sphere of the influence of NATO countries and taking advantage of exceptions within sanctions regimes. North Korea has taken a different approach, focusing on building a thriving and illicit economy based primarily off of the sale and transfer of weapons, counterfeit goods and currency, and other illicit rogue-state activity. Sanctions have actually been the cause of making this rogue state a worse actor than it was by pushing it to an alternative means of profit by participating in illicit transfer, thus creating a criminal-state. This has important implications for CTF regimes targeting states; determining how to most effectively remove rogue states from international economic exchange of any sort would make sanctions regimes much more effective. Preventing illicit exchange, as seen in the case of North Korea, is a difficult endeavor, but too few resources are being devoted to this effort. Similarly, identifying gaps in sanctions regimes that can be taken advantage of, such as the exceptions in the Iran sanctions regime, could facilitate a greater effect leading to the desired result.

An important consideration in the effectiveness of sanctions is targeting the regime versus targeting the people. In both sanctions regimens examined here, the citizens of the targeted states have suffered greatly.4 With results only occurring in the long term and no accurate way to monitor progress or influence, calls for sanctions to end for humanitarian concerns are often made. However, isolating the regime from the people is part of the advantage of using sanctions to punish for desired results. Sanctions are designed to hurt the general populace of a targeted state, but have the goal of people forcing change upon the regimes that govern them. Pushing the people to demand because of their suffering is a difficult, if not impossible endeavor. This is particularly true in autocratic regimes, where the media can focus only on the sanctions-imposer as the aggressor. Further, autocrats need not be as concerned about audience costs as democratic regimes. Autocrats have total control over their states and forcing them out of power is difficult, while democratically elected governments can easily be voted out in the next election cycle. Autocrats can use their military to crack down and force the people to be subjugated by the political decision of the autocrat. Humanitarian concerns and the regime type of the target of sanctions are important considerations in cases of states imposing sanctions on other states.

Other considerations in the effectiveness of sanctions against states are the size and influence of the state imposing a sanction and the size of the economy being targeted. Large economies can generally impose effective sanctions against smaller economies, while smaller economies only have a small effect imposing sanctions on a larger economy. The greater the disparity in size of economy, the more effective the large economy will be at imposing sanctions on its smaller target. Both countries will suffer if a sanction is imposed, regardless of the size of the economies, though smaller economies generally suffer more. Sanctions can be argued to be imposed rapidly rather than over time, or the targeted economy can likely adjust to account for the loss and mitigate damage. Goals of sanctions should be modest to ensure they are executed in a timely manner to lessen loss to both parties as an economic principle. Bilateral sanctions are not nearly as effective as multilateral, since increasing the participants in sanctions decreases the international economy with which the target has access. Sanctioning countries can fail if they sanction a good, group, person, or bank that has a very inelastic export curve or if the targeted economy has a very elastic import curve. In layman’s terms, the sanction will fail if the targeted country does not need/want to participate in the formal international economy.

Some methods of circumventing sanctions regimens include using intermediaries in transactions to scrub the goods or money being transferred clean, therefore preventing sanctions from taking effect. There are, of course, other methods. “Iran has tried, with mixed success, to mitigate the effects of sanctions. Government-linked entities are creating front companies, and Iranian importers and exporters are increasingly using barter trade and informal banking exchange mechanisms. Iran is also increasing non-oil exports or exports of hydrocarbon products other than crude oil, such as gas condensates. Affluent Iranians have invested in—and driven up prices for—real estate and securities listed on the Tehran stock exchange.”5

Perhaps the most compelling problem is one we are only now facing: what should be done in the case of a successful sanctions regimen? For example, Iran expressed a desire to return to the negotiating table as a result of the crushing sanctions imposed. The United States and the International Community agreed, and a compromise was reached, resulting in a gradual de-escalation of the regimen with no new sanction imposition.6 However, the United States and international community could have also responded a different way. Knowing the success of sanctions, rather than reconcile, the response could have been to further escalate sanctions knowing Iran was weakening. Precedence for this can be likened to the situation in World War II after the United States dropped the first atomic bomb on Hiroshima. Japan proposed a conditional surrender; however, the United States refused, choosing to only accept an unconditional surrender. The result? A second atomic bomb was dropped on Japan and the ultimate goal of unconditional surrender was attained. With Iran’s sanctions regime, Iran proposed the first “conditional” surrender by expressing a desire to return to the negotiating table, where the demand by Iran was to reduce sanctions in return for nuclear concessions.

Most believe that the Fall/Winter of 2013 was the time to negotiate and make the sanctions. Coupled with political change, it was expected to have the highest impact.7 Rather than accept the eventual agreement, which could be perceived as the international community’s and US’s “abject surrender,” they could have further escalated sanctions to the highest level and crushed Iran, forcing unconditional surrender by economic war, or more drastically and controversially, starting a conventional war.8 9 Although this may not have been the original intent, pushing Iran further using sanctions (not conventional war, this would be foolish) could have resulted in even better concessions, if sanctions are as effective as is purported by the US Government and by this paper. Personally, I believe this was the time to negotiate, as political change in Iran coupled with the effect of new sanctions made for a good negotiating environment. But the arguments to continue to push Iran are interesting. What would further economic war look like? What would the aftermath of Iran’s economic collapse mean for the international community? These ideas will be discussed to a greater extent in the section about the future of CTF.

In short, there are many factors that contribute to the effectiveness of sanctions targeting a particular state. As evidenced by Iran, under the right circumstances sanctions can be effective, even in cases of an autocratic target. With the recent success of the Iranian sanction regime, it is likely we will see sanctions against bad international actors expand and become more effective as best practices are learned. Sanctions provide a flexible, non-kinetic approach to deterrence that is much more cost-effective than military options, and much less risky. Using sanctions and other counter threat finance tools is a new means of fighting war in an era where kinetic approaches are increasingly less viable options.

Perhaps the largest risk posed by existing counter threat finance regimes is the opening of Pandora’s Box. Other countries see the United States’ use of CTF in countering states and networks, and may seek to participate in this form of warfare themselves. Its non-kinetic properties make it particularly appealing, with little risk of retribution for war-mongering from the international community. As other countries’ economies catch up with the United States, particularly China’s, we could see them take advantage of their economic market share and influence the financial system to their own ends. For example, in 2008, there was an incident of Russia proposing to China that the two countries instantaneously sell all of their shares of Fannie Mae and Freddie Mac, which in the initial stages of a US economic recession would have certainly plunged the United States into a longer, harsher depression. It would have eliminated US government credibility in its ability to pay off debts as it scrambled to find cash to buy the shares back, but the size would have made the effort futile. Fortunately, China recognized the interdependence it has with the United States economically and chose not to follow Russia’s recommendation. However, the low barriers to entry and likelihood of maintaining anonymity in participating in threat finance and counter threat finance as a state make the concept of a new era of financial warfare enticing for the large economies. This poses a massive risk to the stability of the US economy and the stability of the global financial system.10

How do we prepare for new threats and risks in the CTF environment? First, better cooperation between the public and private sectors in identifying bad actors, emerging threats, and how they can be countered is critical. Second, as the field continues to grow, bureaucratic impediments—specifically, the division of assets across multiple agencies—have inhibited inter-agency cooperation. Perhaps in the future, the creation of a National Economic Security Intelligence Bureau could reduce bureaucratic red tape in CTF efforts and facilitate more flexible, creative responses. Finally, creating more interdependence in the current financial system disincentivizes states from targeting other states in financial war, which could have ripple effects and crash the entire fragile system.11

CTF is a double-edged sword. CTF can protect the United States from hostile actors by disincetivizing bad action in the first place and by punishing those entities that operate contrary to the goals of the United States. The regulatory framework is in place for the efficacy of sanctions to continue. However, the problems that have been examined in this paper remain. Other actors may begin to participate in CTF. China, in particular, has the holdings to vast amounts of US debt. Economic cyber-intrusions pose a major threat. Ripple effects from a single bad act can have huge consequences for the international economic system. In this sense, CTF is not only a national security asset, but also a national security vulnerability to be mindful of in the future.

The views expressed in this article are the author’s own and do not necessarily reflect the views of the Global Politics Student Association.

1 Matthew Levitt, “Can Sanctions be Effective in Halting Iran’s Nuclear Program?” Council on Foreign Relations

2 Matthew Levitt, “Iran Sanctions: Can They Be Effective?” The Washington Institute

3 Michael Wilner, “CRS Questions the Effectiveness of Iran Sanctions,” JPost

4 Glenn Greenwald “Iran Sanctions Now Causing Food Insecurity, Mass Suffering,” The Guardian

5 Kenneth Katzman, “Iran Sanctions,” Congressional Research Service, Summary

6 “Obama Urges Against Fresh Iran Sanctions,” BBC News

7 M. Hashem Pesaran, “Iran Sanctions: Now is the Time to Negotiate,” The Guardian

8 Doyle McManus, “Iran Sanctions: Dancing with Tehran,” The LA Times

9 Thomas Bishop “Experts Praise Effective Iran Sanctions while Fox’s Bolton Calls for Strikes

10 Zarate, Treasury’s War, 383

11 Ibid, 416-419


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