The popular image of the war on terrorism involves counterinsurgency and drones, with soldiers hunting militants in dusty desert villages and on mountainsides. In his part-history, part-memoir “Treasury’s War,” Juan C. Zarate adds a new cast of characters to the picture: bureaucrats, bankers and illicit moneymakers. His thorough, thoughtful insider’s account of the U.S. Treasury Department’s post-Sept. 11 battle to cut off funding to terrorist groups and rogue regimes is at once self-congratulatory and self-aware: the story of a gifted innovator both proud and wary of his creation.

Zarate, a senior adviser at the Center for Strategic and International Studies, plays the role of the bureaucrat. He joined the Treasury Department just weeks before the 2001 attacks to aid the agency’s enforcement wing. At the time, it oversaw many of the most iconic U.S. law enforcement agencies: the Secret Service, Customs, and the Bureau of Alcohol, Tobacco, Firearms and Explosives — as well as a lesser-known entity called the Office of Foreign Assets Control (OFAC), responsible for sanctions.

Zarate devotes the first part of his book to recounting how Treasury enlisted these stalwarts of the war on drugs to fight the war on terror. This section introduces Treasury’s new intelligence-gathering methods and details a long list of actions against al-Qaeda and other terrorist and criminal elements, such as the infamous “Merchant of Death,” Viktor Bout, arrested in 2008. Most of these tactics, however, amounted to well-worn anti-money-laundering strategies freshened up for another battle: boosting financial intelligence gathering, freezing the assets of al-Qaeda members and their supporters and business associates, and working with foreign governments to increase banking transparency.

The real story begins when Zarate steps back to 2002, when Treasury encountered an implacable foe: the swelling national security apparatus. Despite the fact that Treasury represented nearly 40 percent of federal law enforcement, Zarate writes that other government agencies saw it as the “little brother” to the Justice Department, better suited for dollar bills than badges. The ensuing bureaucratic tussle, the first of many that Zarate reveals and ably translates for general readers, left Treasury gutted, with the Secret Service and Customs decamping to the Department of Homeland Security and the ATF to the Justice Department. Only the financial offices remained, and without the enforcement agencies, they seemed toothless. Zarate recalls entering the “oddest, most confusing, and difficult period” of his professional life, persuaded by his superiors to remain on board but unsure of what was left to steer.

But he soon had an epiphany. The department may have “been stripped . . . to its core strengths,” but to reassert its relevance to national security, it could tap its unparalleled sway over the international financial system. The true value of Zarate’s book lies in explaining the difference between traditional sanctions and this new form of financial warfare. Instead of targeting terrorists and dictators directly by freezing accounts and levying sanctions, the department would aim for their banks. If Treasury could not fell the beasts alone, it could at least restrict their sustenance.

‘Treasury's War: The Unleashing of a New Era of Financial Warfare’ by Juan Zarate

To do so, it would traffic in a new currency: reputation. As Zarate writes, after Sept. 11, banks “feared permitting even a whiff of illicit financial activity into their systems,” worried that an American investigation might tar their prestige or even lead to their expulsion from the U.S. banking system — a virtual death sentence. Treasury would harness that fear through Section 311 of the Patriot Act. Largely unused until 2003, it permitted the department to designate jurisdictions, banks, accounts and transactions as “primary money laundering” concerns.

This was a middle ground between privately warning banks of illicit behavior and the “nuclear option” of freezing assets. In doing so, Treasury could impose countermeasures against suspicious entities, such as forcing them to keep more scrupulous records, and compel U.S. banks to avoid facilitating their financial activity — all under wide parameters and without the need to prove criminal culpability. Section 311, the logic went, would allow Treasury to “place the onus on banks to police their own system,” all but forcing reputation-conscious banks to end their dealings with the designated actors. If banks and ministries would not cooperate after negotiations, Zarate and his team could fire a warning shot and allow the markets to force them into line.

Treasury launched its most ambitious assault with this new weapon on a tiny bank in Macau. That bank, Banco Delta Asia (BDA), caught the department’s attention in 2003 for doing a hefty amount of business with North Korea. Classic sanctions, such as freezing individual bank accounts and forbidding commercial activity, had succeeded in isolating Pyongyang, but BDA, among others, helped the country stream its profits from illegal arms sales, money laundering and counterfeiting into the international financial system. In the most notable revelation of the book, Zarate recounts a chain reaction that no one predicted. Within two weeks of its September 2005 designation as a primary money laundering concern under Section 311, a hemorrhaging BDA shuttered all of its North Korean accounts and handed its administration to the Macau government. Fearing the North Korean taint, banks in financial hubs worldwide, and even North Korean ally China, ended business with North Korea.

The Kim regime initially dismissed the designation as yet another feckless sanction. But as its lifelines collapsed, it panicked. North Korean leaders refused to return to the six-party nuclear talks until Treasury, in Zarate’s words, removed “the scarlet letter from their reputation.” By designating BDA for its North Korean dealings, the United States exposed a raft of illegal North Korean financial activity, from money laundering to drug trafficking, that no bank wanted to be associated with.

The designation bought the United States real leverage with North Korea. But just when it could have waited for Pyongyang to flail its way into concessions, the administration folded. Zarate bitterly recalls watching from his new perch at the National Security Council as, without any North Korean compromise, the State Department badgered Treasury into reversing the action so as to kick-start the talks. By trying to “put the genie back in the bottle,” Zarate argues, Washington undermined its credibility and “cashed in on BDA too soon.”

If Treasury’s new weapon was robbed of its chance to succeed against North Korea, it now has that chance against Iran. In 2006, Undersecretary of the Treasury Stuart Levey, who took command after Zarate’s departure, applied the lessons from the BDA saga to a new campaign against Tehran. Zarate reports that Levey met more than 100 times with bank officials around the globe to persuade them to end ties with Iran. With each new designation of an Iranian bank or shipping enterprise, Tehran responded by turning to ever more illicit means of moving its money, deepening private-sector suspicions. After an initial lull to explore negotiations — which Zarate considers a mistake — the Obama administration embraced the work that Treasury began under President George W. Bush, forcing“the question in Tehran as to whether proceeding with a nuclear program was worth the economic costs.”

The question for Washington is whether these tactics will compel Iran to make that choice. Zarate admits that “financial measures alone will not be able to change [Iran’s] calculus” and that they can work only when packaged with other forms of pressure. He also fears that Tehran and other malicious actors have studied Treasury’s invention, learned how to evade it and may turn it on a vulnerable United States in the future.

The Pandora’s box left open at the end of “Treasury’s War,” however, has to do not with money but with policy. If Iran obtains a nuclear weapon, will Zarate’s financial innovation amount to a cozy bipartisan option that curbed Iran’s money flows but also curbed U.S. strategy? Will it merely have given Washington the cover of tangible results to avoid decisive action, diplomatic or otherwise? Until that question is resolved, the place of Treasury’s warriors in America’s post–Sept. 11 national security efforts will remain blurry. But in this valuable insider’s history, Zarate has firmly planted them in the picture.

Jordan Chandler Hirsch is a J.D. candidate at Yale Law School and a former staff editor at Foreign Affairs.


The Unleashing of a New Era
of Financial Warfare

By Juan C. Zarate

PublicAffairs. 488 pp. $29.99