The Watchful Eye of the U.S. Dollar
By Edoardo Saravalle (he/him) • May 19, 2021 • Vol. 01 No. 05
Photograph by Berett Wilber (she/her)
Editor’s Note: Ever since the U.S. dollar became the world's reserve currency in the 1940s, the United States has enjoyed unique advantages—from borrowing cheaply abroad to sustaining large trade deficits. But in recent years, a perk of a different kind has been added to this exorbitant privilege: the ability to regulate global finance. In this review essay, Edoardo Saravalle traces how the United States obtained this new power and how it can be put to good use.
Reviewed:
Global Banks on Trial: U.S. Prosecutions and the Remaking of International Finance
Pierre-Hugues Verdier, Oxford University Press, 2020
On June 5, 2014, at a dinner before a joint 70th anniversary celebration of D-Day, French President Francois Hollande approached President Barack Obama with a request: leave our bank alone. At the time, BNP Paribas, a major French financial institution, was under investigation by U.S. regulators and prosecutors for facilitating the evasion of U.S. sanctions on Cuba, Iran, and Sudan. It was facing regulators’ demands to fire key employees; it was staring at fines of more than $10 billion; and it risked a long-term ban on conducting dollar-based business in the United States, a major blow for any international bank.
The prosecution had provoked outrage across the French political spectrum, uniting government officials and the opposition. France’s finance minister warned that the case could torpedo transatlantic trade negotiations. Far-right leader Marine Le Pen accused the French president of weakness before U.S. “racketeering.” Nevertheless, in response to Hollande’s plea to back down, Obama demurred: the final decision was up to the Justice Department. Following an established norm, solidified by Watergate and honored in the breach by the administration of Donald Trump, U.S. presidents do not involve themselves in individual prosecutions. Prosecutors, meanwhile, are expected to exercise their independent judgement free of political influence, even when key diplomatic relationships are at stake. BNP Paribas ended up paying an almost $9 billion penalty, facing a temporary ban on processing certain transactions denominated in U.S. dollars, and implementing invasive compulsory compliance reforms.
Before the prosecution, it was not obvious that U.S. enforcement for sanctions evasion could target foreign banks. While the French bank was certainly dealing with parties sanctioned by Washington, it was a foreign financial institution conducting business with non-U.S. clients: hardly a straight shot for Southern District of New York prosecutors or the New York Department of Financial Services. BNP Paribas had even received assurances from a U.S. law firm that its transaction structuring would shield it from legal liability. For example, its Paris and Geneva offices would conduct business for Sudan through an unaffiliated U.S.-based bank rather than through the bank’s own New York office.
Finance may be global, but it plays by U.S. rules.
The lawyers’ assurances turned out to be wrong, and BNP Paribas paid the price. Following this and other similar blockbuster prosecutions, international banks learned that regardless of where they operate, they are likely subject to U.S. law. Finance may be global, but it plays by U.S. rules.
In Global Banks on Trial: U.S. Prosecutions and the Remaking of International Finance, Pierre-Hugues Verdier, a professor at University of Virginia School of Law, shows how banks that previously thought of themselves as beacons of a globalized, stateless world came to terms with their entanglement with the U.S. legal system. By the end of the events detailed in the book, banks follow U.S. rules, employ scores of compliance officers (often former U.S. government officials), and advance the policy goals of the Obama and then Trump administrations.
Yet, as fearsome as these measures have been for individual banks, they remain underdeveloped. Washington has chosen to intervene in some areas—notably, fighting money laundering—but it has not written a coherent global rulebook. Using the tools it already possesses, the United States could bring all of international finance under its watchful eye and build a fairer international economic system.
Washington’s Global Infrastructure
Companies, banks, and individuals borrow in dollars, save in dollars, pay in dollars, and get paid in dollars. Most times any significant deal happens anywhere in the world, the parties will either need or use dollars. Roughly 40% of international payments are denominated in dollars and 50% of international trade is invoiced in dollars. The currency’s importance goes beyond the symbol on the invoice; it shapes how the transactions happen.
Verdier makes clear that the power of the U.S. dollar is the ultimate reason for international banks’ compliance with U.S. rules. Companies, banks, and individuals borrow in dollars, save in dollars, pay in dollars, and get paid in dollars. Most times any significant deal happens anywhere in the world, the parties will either need or use dollars. Roughly 40% of international payments are denominated in dollars and 50% of international trade is invoiced in dollars. The currency’s importance goes beyond the symbol on the invoice; it shapes how the transactions happen.
To illustrate, when a Middle Eastern oil producer sells its oil to an Asian buyer, the sale takes place in dollars. Since buyers do not ship dollar bills back and forth, “payment,” in practice, means subtracting dollar amounts in an account at one bank and adding them to an account at another one. Firms do not usually have accounts at the same bank, so for the numbers to even out, there has to be a dollar-dealing intermediary institution, a “correspondent bank,” that subtracts the money from one account it holds on behalf of the buyer’s bank and adds it to another account it also holds for the seller’s bank. Given the importance of correspondent banks and their likelihood of being located in the United States, most international transactions will end up having a tie-in with U.S. jurisdiction and its rules.
This dollar structure also gives the banks a very good reason to comply. When Washington sanctions a bank, it can require other financial institutions to stop any dealings with it, including ending intermediary services such as correspondent banking. Losing these bank-to-bank relationships can be devastating. Once isolated, the sanctioned bank will no longer be able to process transactions, so clients who need access to correspondent banking services—say, the Asian oil buyer—will desert it, and the bank will likely fold.
This process is often swift: it took Latvian bank ABLV just thirteen days to collapse and ultimately self-liquidate after the Treasury Department announced its intention to name it an “institution of primary money laundering concern” and to require other banks to shut down its U.S. correspondent banking accounts. Sometimes, such devastating consequences don’t even require U.S. government action. Just the appearance of wrongdoing can be enough for third-party banks to cut ties preemptively, so banks will stay away from anything that could come close to tainting their reputation. In a phenomenon called “de-risking,” U.S. and European banks have voluntarily scaled back their foreign relationships, from Africa to the Caribbean, figuring the costs of these partnerships in terms of fines, reputation, and due diligence outweigh the business benefits.
Correspondent bank accounts are just one of the pipes in the global financial system’s plumbing. All sorts of other intermediaries contribute to money’s constant international recirculation—from Western Union allowing immigrants to send their savings home; to stock indices like the S&P 500 and the MSCI Emerging Markets Index helping asset managers spread their investments worldwide; to SWIFT, the Society for Worldwide Interbank Financial Telecommunications, enabling secure communication between banks. Throughout his book, Verdier describes how these intermediaries work and how they are a necessary component of economic exchange. In one enlightening passage, he explains what it means to own a bond today: both in terms of payment (how the money goes from the Argentinean government to a retiree’s bank account) and ownership (how Argentina can be sure to pay the right retiree the right amount at the right time). In addition to outlining the global market structure that makes U.S. dollar power possible, these descriptions demystify the subject matter: the picture that emerges is less about the romance of financial “masters of the universe” and more about the humdrum of accounting and recordkeeping.
This financial infrastructure is invisible until it isn’t. In January’s GameStop furor, it was the “clearing and settlement” infrastructure that took on the starring role. Much like dollar bills, shares are not physically shipped around. Instead, intermediaries, such as the Depository Trust & Clearing Corporation (DTCC), keep track of and update the ownership of shares. When a broker closes an order, it takes two days for the intermediary to transfer ownership from buyer to seller. In the meantime, the broker in the middle must put cash aside to ensure that, at the time of transfer two days later, the transaction will actually close. In the case of internet broker Robinhood, this meant that the firm had to put up ever greater amounts of cash aside as speculators juiced the GameStop price. Overwhelmed by demand, Robinhood had to halt purchases of the stock after DTCC asked it to put up $3 billion, forcing the broker to raise emergency funding. While some cried foul, arguing for example that it was hedge funds and “insiders” who wanted the stock’s vertiginous climb to stop, the culprit was far more boring: infrastructure.
The infrastructure’s failure in the Robinhood debacle was unintentional, the product of frenzied trading facilitated by a new tech platform. But, used properly, these settlement regulations could deliberately lead to specific results. What if DTCC had changed its rules to require brokers to put more money aside, thereby forcing Robinhood to stop trading even earlier? Or what if DTCC had said that only Robinhood had to put this money aside, while other brokers did not, thereby creating a tiered brokerage system?
As Verdier shows, that is exactly what the United States has done. Rather than just setting the rules and letting the system play out, Washington has pressured intermediaries to change their practices in support of goals that have little to do with basic market functioning. For example, while DTCC does not have special rules for Robinhood, it does bar entities sanctioned by the United States. There is more to finance than Robinhood’s smooth smartphone UX. It is the so-called “back-office employees” at banks and brokers, as well as intermediary entities like DTCC, that make the system work—for the private sector and for the United States, too.
From International Enforcement to “World Tax Police”
The components of dollar-based infrastructure, from correspondent banks to DTCC, have been in place for decades. But only in the past twenty years have these intermediaries started listening and catering to requests from the U.S. government.
Reaching this new settlement required a change in the culture and practices of U.S. regulators. Historically, a kaleidoscope of regulators and supervisors has overseen U.S. financial institutions. Federal regulators such as the Federal Reserve look over a financial institution’s overall conduct. More focused agencies such as the Consumer Financial Protection Bureau will supervise specific practices. Finally, the Department of Justice will prosecute an institution for breaking the law. If the financial institution has a footprint in or a license from a state, it may also respond to state-level regulators such as the New York Department of Financial Services. Throughout, these agencies do not work in unison. Each has its own priorities (some favor stability, others justice) and style (some prize transparency, others discretion).
It took aggressive U.S. prosecutions to give U.S. rules their international bite. Before, regulators and supervisors had tended to take the cooperative approach. In investigating banks’ manipulation of key interest rate benchmarks, for example, UK and U.S. regulators were discreet, more focused on not destabilizing markets during the post-2008 recovery than on publicizing and punishing wrongdoing.
By comparison, when the U.S. Department of Justice, the Commodity Futures Trading Commission (CFTC), and the Federal Bureau of Investigation (FBI) got involved, they blew the case open. With no responsibility to stabilize the system or instill “confidence,” prosecutors have gone after big targets and used aggressive legal tools, from wiretaps and undercover agents during the investigation stage to threats of devastating penalties at settlement. Prosecutors have also been further from the center of power so they have been more willing to ignore sensitive diplomatic considerations. They would not, for instance, be the ones dealing with the Hollandes of the world.
Verdier looks at four case studies of U.S. extra-territorial financial enforcement, roughly in order of their laudability. In the positive examples, aggressive U.S. unilateral action makes up for lax financial regulation and kickstarts multilateral reform efforts. In the negative ones, the United States acts alone, with neither the consent of affected parties nor a constructive agenda.
In his first—good—case, U.S. prosecutors targeted the traders and banks outside the United States manipulating the London Interbank Offering Rate (LIBOR) and foreign exchange rate benchmarks. These numbers are fundamental to the global economy (trillions of dollars in loans have rates defined as “LIBOR plus x%”), but, before the scandal broke, they were set through a haphazard, gameable process. For LIBOR, at the end of each day, large banks would submit to the British Bankers’ Association (BBA) their best guess of what interest rate they would get if they wanted to borrow, whether or not they actually did. The BBA would then average the submissions and make them public, at which point they would become key inputs in global financial markets. With such little oversight and substantiation, it is perhaps not surprising that traders could cooperate to manipulate the numbers and make money. One conspirator would arrange “wash trades,” transactions that netted each other out but resulted in major commissions for collaborators, in exchange for their setting the number at a certain level; as he told one counterpart, “If you keep 6’s unchanged today, yeah, I will fucking do one humongous deal with you.”
In 2008, as evidence of wrongdoing mounted, UK and U.S. oversight was weak. In line with their focus on stability and discretion over enforcement and punishment, the Bank of England and the Federal Reserve Bank of New York refrained from any actions that might rock the boat in the midst of the global financial crisis. Then, U.S. prosecutors uncovered the conspiracy and got the foreign banks to plead guilty—a rarity when financial institutions can often settle without admissions of wrongdoing. The banks paid substantial fines, including over $10 billion for their foreign exchange manipulation, and agreed to implement major new compliance programs to avoid repeating these mistakes. Verdier is cool toward suggestions that banks and individuals got off easy. More important, to him, is that these prosecutions sparked a wave of reform in international financial practices. Spurred by aggressive enforcement from other agencies, the previously cowering regulators proposed far-reaching changes, and both governments and the private sector kicked off a round of multilateral cooperation that had previously seemed out of reach. Left unsaid is whether these technocratic improvements can sustainably sate more basic demands for fairness and punishment for high-flying financial executives.
The benchmark manipulation prosecutions were novel in their foreign reach, but they were still traditional prosecutions; they did not use the full toolkit available to U.S. enforcers. Prosecutors would be far more innovative when targeting Swiss-enabled tax evasion, Verdier’s second example. Tax evasion is the classic transnational problem: as long as one country is willing to turn a blind eye to bad practices, all countries will suffer. In this case, it was Switzerland that opposed U.S. and European evasion crackdowns. Most glaringly, the country’s banks had put in place an internal separation in tax practices. U.S. branches of the Swiss banks played by U.S. rules and disclosed account owners to the IRS. Meanwhile, their Swiss branches refused to disclose their U.S. customers to tax authorities. They served U.S. customers at conveniently located Zurich airport branches, and their Swiss representatives, without informing their U.S. colleagues, would cross the Atlantic to meet with clients under a veil of secrecy, handing over bank statements wrapped in Sports Illustrated issues at the New York Mandarin Oriental Hotel. Aside from these colorful details, though, it was the same bank using the same infrastructure.
As with the LIBOR case, U.S. prosecutors obtained settlements and a few path-breaking guilty pleas from banks as well as promises of internal reforms. But here, prosecutors went further. In January 2012, the Department of Justice indicted Wegelin, Switzerland’s oldest private bank. This may have seemed like a perfunctory step. Unlike the bigger banks facilitating evasion, Wegelin had neither U.S. branches nor U.S. representatives. Instead, the U.S. government went after its only U.S. touchpoint, a correspondent bank account at the UBS branch in Stamford, Connecticut, which Wegelin used to process checks and wire transfers on behalf of its undisclosed customers. Invoking U.S. anti-money laundering laws, U.S. prosecutors seized the $16 million in the account and shut it down. Unable to conduct dollar-based business and unsuccessful in challenging the Department of Justice’s action, Switzerland’s oldest bank closed permanently.
In shutting down Wegelin, the United States was at the peak of its powers. After these drastic actions, Swiss banks started cooperating with tax authorities, and the Swiss government began to share more information first with the United States and then with other governments. Verdier notes that it would have been “highly unlikely that the world would have made much progress in the fight against offshore tax evasion without these U.S. actions.” Plus, the indictment that paralyzed Wegelin was quick, more akin to a speedy regulatory action than the drawn-out LIBOR judicial process. Assessing this second case, the best point in favor of U.S. extra-territoriality, he concludes that “global banks are now special deputies in the world’s tax police,” using national prosecution for global enforcement.
Fighting tax evasion is the best proof of concept for unilateral U.S. enforcement, but sanctions, the focus of Verdier’s third case study, are the most common. These are not the old trade sanctions, which were simple restrictions on doing business with certain countries. They are the more far-reaching financial ones that impose limitations on intermediaries—not just “no buying Iranian pistachios” but also “no providing correspondent banking services for Iran to sell its oil.”
Because sanctions are integral to U.S. foreign policy, policymakers tend to focus on their aims, whether persuading Russia to leave Crimea or North Korea to denuclearize. This focus on the goals, however, can distract from sanctions’ more prosaic nature as tools of financial regulation.
Because sanctions are integral to U.S. foreign policy, policymakers tend to focus on their aims, whether persuading Russia to leave Crimea or North Korea to denuclearize. This focus on the goals, however, can distract from sanctions’ more prosaic nature as tools of financial regulation. They are just rules for where money can and cannot flow: it just happens that the rules are “money cannot flow to Iran” rather than “money cannot flow to banks that do not meet some specific capital ratio” or another easily recognizable financial regulation. The mechanisms, otherwise, are the same. Verdier does a great service by showing sanctions’ parallels with traditional financial regulation. After all, the pioneering case of shutting down correspondent banking accounts to punish a bank, Wegelin’s cause of death, was against Macao-based Banco Delta Asia, an institution accused of facilitating North Korean sanctions evasion. When targeted in 2005, the Macao bank froze up so quickly it even surprised some U.S. officials who had developed the measure.
The national security context does lead to some major differences between sanctions and the benchmark and tax evasion enforcement actions. First, as Verdier rightly highlights, sanctions have real humanitarian consequences for targeted populations, a more sympathetic group than the denizens of the Mandarin Oriental. These collateral consequences are especially important given that sanctions have a mixed track record of effectiveness. Second, because sanctions have to respond to ever-changing national security crises, they are far more dynamic. In the tax evasion and benchmark cases, the United States was simply enforcing its disclosure and fraud laws internationally. With sanctions, the executive branch is constantly updating and changing its regulations to fit the crisis of the day. No single sanctions program looks the same, and the specific measures can vary widely. Then the Justice Department and other regulators jump in and give these measures teeth through enforcement. Third, sanctions’ different goals make an overarching decision about whether they are net positives or negatives more fraught. Measures targeting nuclear proliferation or the financing of terrorism might be useful global enforcement tools, comparable to the targeting of tax evasion. But as President Donald Trump’s exit from the Iran nuclear deal and subsequent coercion of European allies suggest, these same measures might also be examples of unilateral U.S. power gone rogue. Verdier leans toward the latter, but the very indeterminateness of their use—constructive or destructive—leaves the possibility that they could serve as potentially world-building measures.
Goodbye Globalization
Globalization was supposed to build a different world from the one Verdier describes. No one country should have been able to regulate international banks the way the United States does today. In a globalized world, markets would not be responsive to the demands of individual states. Historian Quinn Slobodian (citing German jurist Carl Schmitt) sketches this worldview of globalization’s theorists. There are, in this view, two worlds: an economic world, one of property, contracts, and money—dominium—and a political one, one of states, governments, and human beings—imperium. These worlds overlap: business activity is incorporated and operates in individual states. For the most part, though, they are separate. Supply chains, trading, and production span states and jurisdictions, so an economic map would look different than a political one. Sometimes, these two worlds even conflict, like when a newly independent country uses its political power to nationalize its former colonist’s private property.
To ward off these conflicts, the goal for the theorists was “encasement”: protecting the boundaryless economic world from political and democratic encroachment. For example, international “investment treaties” empower international tribunals, as opposed to democratic electorates, to decide whether a state can nationalize or regulate a foreign company. In this way, encasement protects markets from democracy. Globalizing the economy while keeping regulation at the state level, they realized, could also help protect the dominium. Because no one state could regulate an economic sector as a whole, it would be hopeless to regulate it at all, just as with tax evasion before unilateral U.S. enforcement. As globalization evangelist Thomas Friedman asked in 1999, even if you wanted to put sand in the gears of globalization to slow down a speeding up world, “where do you put the sand when dealing with a fund manager sitting in Connecticut using the Internet to invest in Brazil via a bank domiciled offshore in Panama?”
That question does not seem as insoluble today as it did then: you just put the sand in the hedge fund’s bank account in New York. This may have once seemed rash. In the 1990s, policymakers feared that putting in place financial regulations or controls might spook markets; investors would flee, and crisis would ensue. States’ inability to govern capital flows was what made regulatory attempts so dangerous. In another paean to globalization, Friedman praised this “Electronic Herd” of investors constantly moving money around and punishing countries that deviated from the “golden straitjacket” of globalization. James Carville said that “if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
Investors can buy and sell, but their bank accounts and the depositories keeping track of what they own will still be in the United States, following U.S. regulations. Capital is mobile, but the infrastructure that makes those moves possible is stationary and responsive to imperium, specifically Washington’s.
But as Verdier’ book makes clear, Carville should not have been intimidated. Investors can buy and sell, but their bank accounts and the depositories keeping track of what they own will still be in the United States, following U.S. regulations. Capital is mobile, but the infrastructure that makes those moves possible is stationary and responsive to imperium, specifically Washington’s. Wegelin, the 270-year-old Swiss bank, may have thought it was outside the reach of U.S. political power, but it soon realized it was not.
Encasement still has a fighting chance. In his last case study, Verdier looks at the dispute between the Government of Argentina and U.S. hedge funds. Here, rather than prosecutors, it is the hedge funds themselves who used U.S. legal process to push a sovereign government to give in to private U.S. interests. After Argentina had refused to make disputed bond payments, these investors sued them in U.S. courts. They eventually succeeded by using the same infrastructure-targeting techniques mastered by U.S. prosecutors. The hedge funds obtained a court order prohibiting financial intermediaries like DTCC from processing Argentinean payments. Facing the prospect of no longer being able to pay its bills to any other creditors through these intermediaries, Buenos Aires had no choice but to accede to the hedge funds’ wishes.
Rather than interfering with private economic power, in this case U.S. political power abetted the hedge funds’ prerogatives. Acting through the federal courts, these hedge funds reinforced a strict demarcation between the world of bond contracts and payment obligations and the world of politics. The Argentinean government’s political power and its promises to its people could not interfere with international financial contracts. If the Argentinean government tried to privilege its citizens, U.S. financial might—wielded privately—would strike it down. U.S. officials had proven that they could use U.S. financial power to achieve their goals. Now, it was clear that the private sector could as well.
Ranked World Order
Argentina’s collapse before U.S.-based litigation makes clear that there is a pecking order in the global financial system. The U.S. government comes first, private actors who can gain control of the U.S. legal system second, and everyone else reliant on its financial infrastructure comes third. This, in turn, calls into question another vision of globalization: that of non-hierarchical, decentralized networks sharing power in a global commons. In that world, one foretold by scholars such as New America’s Anne-Marie Slaughter, the United States would not wield “power over” countries; it would “exercise ‘power with’” them. To be sure, Argentina would probably disagree that it was exercising “power with” anyone. Describing the current financial architecture, Verdier cites a seminal paper by political scientists Henry Farrell and Abraham Newman focused precisely on dispelling this utopian view of globalization. In their telling, a transnational network of correspondent banks and financial communication technologies did knit the world together in an interdependent network, but it did not lead to greater global cooperation or problem solving. Instead, it allowed those who controlled this network—mostly the United States—to “weaponize” that interdependence to achieve their own goals.
In this new pecking order, the intermediaries themselves are not passive followers. The internal compliance desks of banks and financial institutions, not the Treasury Department, are in charge day-to-day: they decide what transactions can and cannot go through and what clients can and cannot open accounts. Verdier understates how much the U.S. government depends on private institutions to make the front-line decisions. Indeed, Washington may have limited oversight into how these desks make decisions. It was PayPal, not the U.S. government directly, that blocked the payments of nine writers for Jewish Currents, a left-wing magazine about Jewish politics and culture. The publication had tagged one of the payments as “January plus Iran piece” and inadvertently set off PayPal’s sanctions compliance review. To allow the money to change hands, the company required “an explanation of the reference to ‘Iran’” and a description of “the purpose of [the] payment, including a complete and detailed explanation of what is intended to be paid for.” Such a proactive response says more about PayPal’s fear of U.S. enforcement than the U.S. government’s policy. But it also suggests Washington may have limited insight into how private actors are putting its rules into action.
More generally, in the absence of explicit government directives, these private intermediary companies choose whether or not to involve themselves in political hot-button issues. After the January 6 storming of the U.S. Capitol, payment processor Stripe severed ties with the Trump campaign. Following the furor caused by an article by New York Times columnist Nick Kristof about underage exploitation, credit card companies cut off online pornography websites. Journalist Matthew Zeitlin has compared these private companies to the nobility of pre-Revolutionary France: nobles had lost most of their political power to the king, but they still held onto their economic privileges like the ability to charge commonfolk for using the town mill or a local bridge. Today, financial companies lack the ability to make their own rules without political interference, but they can still exert their economic power to shape participation in the economy.
And while Washington ultimately retains the power to penalize these private intermediaries, the companies’ internal policies can also thwart affirmative U.S. objectives. After the United States lifted sanctions on Iran in 2016 as part of the nuclear deal, banks’ compliance teams impeded rapprochement with Tehran by keeping in place their internal policies of not dealing with the country. As then-Secretary of State John Kerry urged banks to rekindle their relationships with Iran, they held back. In the recent escalation of tensions with China, financial institutions have played an ambiguous role, not always furthering U.S. policy alone. In Hong Kong, even as Chief Executive Carrie Lam found she could no longer use her credit cards because of U.S. sanctions, banks with global operations, under pressure from Beijing, suspended their business with local pro-democracy activists.
Not Just the Same Plumbing
When critics object to the United States’ weaponization of interdependence, they take two routes. Some fault these measures on pragmatic grounds, either because they do not achieve their purported goals (sanctions have a mixed history of success) or because they imperil U.S. dollar dominance. Better policymaker judgment would quiet these concerns. Others take a more ethical stance: no country should hold that power over others. Historian Nicholas Mulder has called for a left foreign policy to reject sanctions because “the costs of intransigence are incurred by citizens and often by the very weakest in the socioeconomic order.” Verdier criticizes uses of weaponized interdependence for sanctions enforcement and bond bargaining for serving zero-sum rather than communal goals. Their disapproval focuses on the hierarchical, unaccountable power that dollar dominance makes possible.
But U.S. extra-territorial regulations pose two challenges to globalization: yes, they undermine utopian images of global, non-hierarchical cooperation, but they also reassert national political power over stateless economic power.
But U.S. extra-territorial regulations pose two challenges to globalization: yes, they undermine utopian images of global, non-hierarchical cooperation, but they also reassert national political power over stateless economic power. Even critics who focus on the perils of hierarchical U.S. unilateralism are wary of a world where economic power escapes political control. While he criticizes sanctions’ current uses, Mulder calls for adapting these same tools to crack down on tax evasion in Panama, Friedman’s example of globalization making capital flows untouchable.
To maintain the primacy of political power while ensuring international accountability, the United States should pursue a two-pronged approach. First, Washington should claw back more of the sovereignty relinquished to financial globalization. The United States should expand its use of economic measures such as sanctions, in effect adding more and more conditions to the use of the financial infrastructure it controls. Just recently, Congress passed a major overhaul of its anti-money laundering laws. One provision allows the U.S. government to subpoena documents from any bank with a correspondent account in the United States. Leveraging its power over correspondent banks, the United States is building a world where any participant in the financial system will ultimately be accountable to Washington’s directions. The United States should push this conditionality as far as possible. Access to U.S.-based correspondent banking can become contingent on all sorts of demands, whether requiring greater transparency from financial actors, preventing tax avoidance, or even implementing a unilateral global transaction tax.
Growing U.S. power over finance can also steer investment. This is already happening, in effect, in the national security space: for example, the United States bans investment in Iranian energy projects. Washington could adopt this approach more broadly, choking off flows of investment to heavily polluting sectors such as oil sands extraction and redirecting it instead to innovative, clean uses. Such an approach would break down the still-too-defined distinction between dominium and imperium. National political priorities, not just private profit, can start to direct the flow of capital globally. The world of contracts and democracy will begin to resemble each other more.
To make this expansion happen, Washington will have to improve its regulatory capacity. Prosecutors far from the seat of U.S. power have given U.S. rules their extra-territorial power, but now the federal government should take back control. If Washington is to justify its ability to regulate global finance, it cannot let ambitious, independent prosecutors dictate its policy. Instead, the United States should self-consciously think of its financial regulation and enforcement as a coherent, global effort. The recent anti-money laundering reform contains the seeds of this change. One initiative requires prosecutors to report their settlements with financial institutions to Congress. Greater oversight will ensure a unified effort. This transition to centralization will entail some loss of shock value—unlike individual prosecutors, Washington policymakers will inevitably have to weigh financial stability, economic growth, and relationships with allies against the benefits of aggressive action—but it will make possible longer-term planning for the global financial system and a fairer international economy.
As it asserts its power over the global financial system, Washington should change its relationship with financial intermediaries. Banks will always be the front-line decision-makers that determine what goes through and what gets blocked, but today they have too much discretion to forge their internal policies. As their unwillingness to reengage with Iran suggests, financial institutions can be difficult partners. A new system would be more explicitly collaborative. Australia provides one example of a way forward. There, a pilot program places bank and government employees in the same office where they collaborate to tackle challenging forms of illicit capital flows, such as those related to child pornography. Through this system, the public and private sectors get comfortable with each other, share information horizontally among banks and vertically with the government, and learn to spot and think through emerging threats.
This collaborative approach would not treat banks as black boxes, unsupervised until a major enforcement action rains down on them. Instead, it would ensure constant collaboration. Both financial institutions and the government would benefit. Banks could engage in more business because they would have a clearer idea of what the United States wanted, so they could play closer to the line. For example, they might reengage with previously sanctioned countries because they understood the small risks involved. At the same time, the United States would both better understand the internal decision-making processes of banks—allowing for better data collection and subsequent policymaking—and it would ensure that its policies do not have unwanted ripple effects as a result of over-compliance.
Expansive U.S. action coupled with greater cooperation with banks will limit opportunistic attempts to commandeer private infrastructure and U.S. dollar power by the private sector. Additional efforts could further this goal. Congress could limit the ability of courts to impose conditions on key financial intermediaries. At the same time, the executive branch should wield its national security authorities to prevent private actors from using neutral financial intermediaries for private gains that weaken U.S. national interests. Finally, as regulators develop closer relationships with financial institutions, they should discourage them from becoming tools of private profit. In this effort to put the U.S. government’s interest first, policymakers might have the cooperation of the infrastructure themselves who may prefer a reliable government partner to unreliable hedge funds. During the Argentina debacle, various infrastructure providers took the side of Buenos Aires and fought to preserve their independence as intermediaries.
Unilateral enforcement and regulation, however, should not be the endgame for the United States. Washington will win few friends relying solely on its unparalleled financial power. Other countries will point out U.S. hypocrisies and inconsistencies. Tumultuous presidential transitions are likely to make these concerns worse. Trump’s undoing of his predecessor’s Iran deal is the most consequential example of the seesawing that is possible when the executive branch in one country can unilaterally direct the flow of international investment, but even smaller occurrences can cast doubt on the reliability of the United States as a global regulator. In one parting act, the Trump administration undid sanctions on Israeli billionaire Dan Gertler, allowing the mogul—who was targeted for his “opaque and corrupt mining and oil deals” in the Democratic Republic of the Congo—to move his money out of U.S. reach. Plus, Washington itself may, over time, find its partnership with the private sector to be less helpful in achieving its goals, especially if intermediaries start to become more responsive to foreign governments’ requests than to its own.
Washington’s goal for financial infrastructure should be supranational. Concurrent with increasing its direction of capital flows, Washington should build new financial infrastructure under international control. A public, international SWIFT, for example, would make possible transparency and common rules for financial telecommunications. A publicly-guided index would allocate capital in a more constructive fashion. Like the United Nations, such international intermediaries would bring together all countries as equals and be staffed by an international cadre of policymakers. Rather than leaving decisions about which remittance to process or whether to transfer ownership of a share to the whims of internal bank compliance staff—or, worse, in the eyes of the international community, to the whims of a new president—a supranational system would put these decisions firmly under the control of states acting together. With greater international control, no one country could enforce its norms and demands unilaterally. Instead, countries would have to deliberate and compromise. Yes, a supranational payment clearinghouse would be gridlocked as long as countries disagree about whether payments for fossil fuels, nuclear proliferation, or corruption ought to be blocked. But when parties find ways to reach agreements on these questions, the reach of these measures will even dwarf current U.S. power.
Global Banks on Trial shows how Washington has taken control over the pipes of global finance. Two decades in, the United States can do more than just control the pipes; it can rearrange this plumbing to build a better world as well. But the COVID-19 pandemic has proven the limitations of this purely regulatory approach. Through sanctions and similar commandeering of global finance, the United States can cut off areas of investment and punish wrongdoers, but it cannot build better alternatives. This tendency reached its absurd climax last summer, when members of Congress called for sanctions as a response to COVID-19. Instead, it is the massive investment in research, production, and distribution of vaccines that promises to lead the United States out of the crisis.
A different facet of U.S. dollar power was behind this aspect of Washington’s pandemic response. Rather than choking off dollars to the world, the U.S. Federal Reserve spread them widely—most notably through the Federal Reserve’s so-called dollar swap lines that allowed foreign central banks to keep their financial institutions and populations afloat. The Fed’s monetary response coupled with both the Trump and Biden administrations’ fiscal action have remade the United States. The U.S. government did not meekly channel investment, it has generated the needed money. As Congress authorized $5 trillion in expenditures, Secretary Kerry’s asking banks to please be helpful in rekindling ties to Iran seems like a distant memory. Washington had the tools it needed all along. Pandemic-fighting spending has made it possible to see a world after the crisis. For example, Skanda Amarnath and Alex Williams at Employ America, a labor market and economic policy research organization, have argued that aggressive U.S. fiscal and monetary action may have sparked a resurgence in investment in semiconductors, potentially setting the stage for a new phase of U.S. industry. The inflow of funding for the climate transition might be next.
Washington’s global enforcement will always matter. Controlling the pipes will be key to building a better post-crisis world. But after 20 years of small rejiggering, it is not just time to fix a few pipes. It is time to build new plumbing and flush the system with water.
Edoardo Saravalle (he/him) is a former researcher at the Center for a New American Security and a former fellow at the Senate Committee on Banking, Housing, and Urban Affairs.
Edited by Eddie Fishman (he/him)
