Brian Grant is a senior manager in Ernst & Young LLP’s Fraud Investigation & Dispute Services practice.
For ten years before joining Ernst & Young last fall, Grant held various roles in the U.S. Treasury Department, culminating in the directorship of the Office of Global Affairs, a core component of Treasury’s national security policy office. There, he developed strategies to combat illicit financing of terrorism, nuclear proliferation, narcotics trafficking and money laundering.
Main Justice spoke with Grant about his newly published white paper, “Terrorism Finance and Beyond: The Growing Role of the Treasury Department in U.S. National Security.” This interview has been edited and condensed for clarity.
Why did you write this white paper?
Because I felt like a lot of folks in industry are focused on implementing specific regulatory requirements, and rightly so. That’s a full time job. But I thought it would help financial institutions, compliance officers and general counsel to understand the bigger picture if I were able to knit together how the financial regulation coming out of Treasury is plugged in at a higher level to the U.S. national security strategy.
The Treasury Department is playing an increasingly important role in U.S. national security?
It’s been an ongoing process that accelerated dramatically with the September 11, 2001 attacks. It’s really reflective of a realization on the part of national security policy makers that you need to go after threats to U.S. national security — particularly threats like terrorism, weapons of mass destruction and proliferation — with all the tools of national power. And economic tools are front and center.
Tools like sanctions are powerful for a number of reasons. They’re not a hammer; they’re more like a wrench. They can be escalated or deescalated as needed. They’re very flexible. They occupy the space between diplomacy and military action. And they are increasingly being accepted by the international community.
What is the main national security coordinating hub at Treasury?
People focus on specific Treasury “brands” like OFAC (Office of Foreign Assets Control – administers sanctions) and FinCEN (Financial Crimes Enforcement Network – combats money laundering). But they don’t realize they are a subset of a broader organization, the somewhat misleadingly named Office of Terrorism Finance and Intelligence, and of a broader strategy of using financial tools to combat threats to international security. In addition to OFAC and FinCEN, Main Treasury has other important national security components such as the Office of Terrorist Financing and Financial Crimes (which coordinates policy) and the Office of Intelligence and Analysis.
The Treasury Department is the only finance ministry in the world that has its own intelligence capability. That’s very unique. What is Iran doing? What is Syria doing? How are the bad guys, including organized criminal groups, getting and moving their money? These are the questions this office seeks to answer.
Treasury’s current intelligence role was born out of the 9/11 attacks?
It was. And out of 9/11 came a number of other things: A belief that the national security community had in an important way failed, and that a reorganization was in order. You saw that in the creation of the Department of Homeland Security. The Treasury Department used to have a large law enforcement mission – The Secret Service, ATF (Bureau of Alcohol, Tobacco and Firearms), Customs – all those agencies were part of Treasury.
After 9/11, they were transferred to Homeland Security and the Justice Department. That left Treasury in a kind of existential crisis about its role going forward in the national security arena. It’s a cliché to say that the Chinese character for ‘crisis’ also contains the character for ‘opportunity.’ But [the 9/11 government reorganization] really was an opportunity for Treasury. It was able to focus on what it does uniquely, which is illicit finance.
The threats are not just from terrorism anymore?
Definitely not. The traditional threat that Treasury was organized to go after were states. Back in 1963, for example, the longest running sanctions program was put in place against Cuba. Then we saw sanctions programs against Iran, Iraq– these were “country programs,” largely static programs. They were complete embargoes against countries and prohibition on dealing with the governments.
Then starting even before 9/11 in the narcotics arena, we started to have what Colin Powell used to call “smart sanctions” targeting specific bad actors. Country programs got a bad rap – people pointed to civilian “collateral damage” in places like Cuba and Iraq. It was a public relations disaster. What Treasury found almost counter intuitively was that the international community buy-in was easier to get when you minimized the impact on civilian populations. So you saw a real explosion in these types of programs – the anti-terrorism programs, the proliferation and some narcotics programs. As the 2000s went on, you saw a dramatic expansion of these targeted programs.
Over time, you started to see a “lowering of the bar” with some of the newer programs. By that I mean you started to see sanctions programs being used in less dramatic situations – things that previously wouldn’t have been considered a national security threat. People engaging in human rights abuses or removing the national resources of countries. People engaging in or benefiting from public corruption. People using child soldiers or inciting violence.
Why are those considered national security threats now?
This [Barack Obama] administration has a more expansive view of what constitutes a threat to national security. All you have to do is take a look at the national security strategy that came out in 2010. Organized crime, previously viewed as a law enforcement issue, features prominently. And now, there’s a sanctions program targeting organized crime and a national strategy to combat organized crime. This is very new, very significant.
There are two ways of looking at it. You can have the triage approach where you focus all your efforts on the most significant and direct threats, like Iran and terrorism. There’s another view that these threats are interconnected. To focus on one is sort of myopic. Let’s take the financial arena. The way these groups move money, they exploit common loopholes in the international financial system.
That’s why the Treasury Department has focused so much on the Financial Action Task Force, which sets best practices in AML arena. FATF seeks to shore up the international financial architecture and make it less vulnerable to exploitation by bad actors – be they money launderers, terrorist financiers or weapons proliferators.
Why is there such a focus now on organized crime?
One of the reasons is that organized crime has reached such a level of scope and sophistication that in some areas these criminals are gaining control over strategic resources – energy resources, hydrocarbon resources. In other areas, we’re finding that organized crime is the flip side to the corruption coin and is eroding the capacity of states to govern. A lot of this has to do with how organized crime is undermining the legitimacy of states in vulnerable areas of the world. All those reasons pushed the administration in 2011 to name organized crime as a threat.
Two, it’s just nothing succeeds like success. These sanctions programs have been viewed as very successful and powerful against Iran and other threats. So people want to use these tools in other contexts. The costs are relatively modest. It doesn’t put U.S. lives at risk. It generally and increasingly so has international support.
What do companies need to know about this tie-in between financial regulation, sanctions and national security?
Different programs mean different things for companies. But, in general, when you’re talking about economic sanctions, there’s been an exponential increase in the number of programs over the last several years. About 50 new [presidential] executive orders have been issued that have OFAC and sanctions implications since the time I started at Treasury until now. But in addition to a larger number of sanctions, today you have a much broader variety of sanctions programs. Now there are all kinds of nuances, from the country program to the smart program, and back again with the “Arab Spring” programs against the governments of Libya and Syria.
You also have what I call “hybrid programs” such as Burma which have some aspects of the targeted “list-based” program and some aspects of the static comprehensive country program. And, of course, the Burma sanctions are now undergoing significant changes as the US government is encouraging political liberalization through a loosening of sanctions.
You’ve got some programs that are entirely different from previous sanctions regimes – the Comprehensive Iran Sanctions Accountability and Divestment Act of July 2010, or CISADA, as it’s called. There’s also Section 1245 of the National Defense Authorization Act (NDAA) and the “Foreign Sanctions Evader” Executive Order.
What’s unique about these programs is that they are inherently secondary – they target not bad actors per se but third parties for dealings with bad actors. CISADA and the NDAA require Treasury to cut-off foreign financial institutions off from the US financial system if they engage in “significant” transactions with certain categories of sanctions targets.
There’s a sea change in that it focuses on non-U.S. persons and non-dollar transactions. That’s very unique. It’s kind of a financial death sentence if you’re a bank and you can’t clear [transactions] through the United States. But it hasn’t been invoked yet.
What does it mean if you’re a general counsel?
If you’re a general counsel or compliance officer at a company or financial institution, you have to understand these programs and your risk under these programs. It’s going to very much depend on the institutions and the program.
Two examples. If you’re a financial institution, on the one hand, sanctions compliance appears simple. The U.S. government publishes a list of bad guys and you make sure you don’t deal with those bad guys. But most bad guys don’t make payments, or open accounts, in their own name. They use intermediaries and cut-outs. In the roll-out of the new Foreign Sanctions Evader program, for example, Treasury officials identified money exchange businesses and trading companies in the UAE as representing a higher-risk of facilitating Iran sanctions evasion. So, you have to have enhanced transaction monitoring when dealing with these classes of counterparties.
Let’s take correspondent banking – when a U.S. bank offers to a foreign financial institution to hold an account with their institution and allow their customers to engage in transactions through this U.S. bank. That’s how international transactions move, through this network of interlocking accounts at financial institutions. So now, it’s not enough for a U.S. institution to know their correspondent is not on a black list. They have to make sure their correspondents are doing business with any institution in violation of U.S. law. It’s knowing your correspondent’s correspondent.
Or take the organized executive order — EO 13518 – issued in July 2011. The first designation under it came in February. One of the groups designated is the Japanese Yakuza – the largest organized criminal group in the world with over 80,000 members. It’s more pervasive and a little bit more open than other groups – it’s enmeshed in society to an extent you don’t see with other criminal groups. And yakuza groups are very active in certain fraud schemes like corporate extortion.
One interesting area that I don’t think a lot of U.S. companies have thought about is, if you’re a private equity firm making investments in Japan doing pre-deal due diligence, in addition to the standard FCPA and U.K. Bribery Act due diligence, you’re going to want to see to what extent there may be involvement with criminal organizations in Japan because now you’ve got sanctions issues too. It’s not just FCPA. That’s not something a lot of people are thinking about.