In "Treasury's War," Juan Zarate relates how, after 9/11, he and a band of "guerrillas in gray suits" turned the Treasury Department's authority over the world's financial system into a powerful and creative weapon against America's enemies.
For nearly a century the U.S. has been imposing trade embargoes against rogue regimes and global malefactors. But by 2001, sanctions had lost their mojo. If they were unilateral, they hurt American industry more than the target. Even multilateral sanctions had little effect on Kim's North Korea and Saddam's Iraq. Both countries managed to shift the pain of sanctions to ordinary people while the elite, and the military, kept living high on the hog. And when Treasury went after individual officials, freezing their accounts, the targets just moved their money to banks outside Treasury's jurisdiction.
In Mr. Zarate's telling, that all changed when a little-noted provision of the post-9/11 Patriot Act allowed Treasury to declare any bank, anywhere in the world, to be an institution "of primary money laundering concern." That gray phrase turned out to be a death sentence for banks from Macau to Lebanon, and its threat would extend America's reach to every corner of the globe.
The key was increased enforcement of the laws against money laundering. Treasury has attacked money laundering by big banks, imposing fines up to $2 billion on institutions around the world. As a result, banks have toughened their compliance regimes. Under the slogan "know your customer," they now feel obliged to run checks on their customers' reputations and to shun even faintly suspicious transactions.
In such a climate, it's easy to become a customer no one wants to know. And the easiest way of all is to be officially labeled a "primary money laundering concern." A bank that has been tarred with that brush quickly becomes a pariah to every bank with a compliance program. Because a pariah can't perform normal financial transactions under such conditions, its solvency is immediately drawn into question. And, boom, within 24 hours, even a bank with no direct ties to the U.S. is effectively out of business, brought down by a Treasury-induced run. Treasury's designation turns out to be a remarkably effective weapon—the Predator drone of financial sanctions—killing instantly, without warning, far from home.
In one of his better stories, Mr. Zarate shows how Treasury's new weapon struck even North Korea, a veteran sanctions-buster that had sheltered comfortably in China's lee for decades. The Hermit Kingdom was unconcerned when Treasury slapped a money-laundering label on its favorite Macau bank. But then the bank was ostracized by other banks, forcing local regulators to seize the bank and freeze its North Korea accounts. Fearing they might be next, compliance officers everywhere began scouring their accounts for any hint of a Pyongyang connection. As the North Koreans tried to hide from the unwelcome attention, their transactions started looking even more suspicious, triggering yet more scrutiny.
China's diplomats stood by their client as usual, but not its banks. Rather than risk its access to world financial markets, even the state-owned Bank of China in Macau froze North Korean accounts. Later, after many ceremonial toasts at a session of the international talks on nuclear proliferation, one inebriated North Korean negotiator leaned in to his American counterparts and admitted: "You Americans have finally have found a way to hurt us."
Mr. Zarate brings verve and the joy of combat to this and other tales. I served with him in government; and "Treasury's War" certainly speaks with his hard-nosed, in-it-to-win-it voice. He is indeed a warrior-bureaucrat (and, truth be told, one after my own heart). In Mr. Zarate's hands, what could have been a dry series of think-tank papers becomes a lively narrative filled with heroes, villains and fools. He makes us feel his exasperation when, for instance, the State Department, suffering from naive "deal heat" and financial ignorance, shoves Treasury aside and then settles for empty North Korean promises.
The author's enthusiasm for his new weapon is heartfelt. Since leaving government, though, I've had a chance to see Treasury's war from the other side. Like a Predator strike, it looks a little different on the ground. If you own a bank, Treasury's designation can wipe out your investment overnight. Yet because the decision is fatal, challenges are rare. Treasury never sees its errors or the collateral damage it has caused. And what begins as a sobering responsibility soon becomes a routine part of the bureaucracy's toolbox, prone to overuse and free from oversight.
Mr. Zarate discusses the targeting, in 2011, of the Lebanese Canadian Bank, and he tells a lurid tale of drug-related terrorist connections. My firm was hired to help clean up the mess after the bank was seized, and we saw so little in the way of drug and terror-linked accounts that we began to wonder whether another incentive for taking down the bank was the $100 million in forfeited bank assets that would be claimed by Treasury, Justice and the DEA. Used indiscriminately, Treasury's use of seizures and money-laundering charges as a weapon could erode the U.S. position in financial markets and spur the rise of a parallel, "Patriot-free" financial system.
All that said, globalization means that multinationals have more regulators, not fewer, and must appease the harshest and most determined of them. This imperative can harm as well as help U.S. interests. American technology companies may be deterred from working with our intelligence agencies by the threat of European privacy sanctions. American movie studios, threatened with strict content regulation in China but protected by the First Amendment at home, may decide that it's safer for their films to see the world through China's eyes rather than ours. In short, many nations will learn Mr. Zarate's lessons, and Treasury's war may soon be everyone's.
Mr. Baker, a partner at Steptoe & Johnson LLP in Washington, is a former assistant secretary for policy at the Department of Homeland Security and the author of "Skating on Stilts: Why We Aren't Stopping Tomorrow's Terrorism."