Over the last five years, U.S. national security policy and the international banking system have become inextricably intertwined. With terrorism and nuclear proliferation at the top of the United States' foreign policy agenda and few diplomatic or military levers left to pull, Washington has increasingly turned to the private sector for help in confronting some of its biggest international challenges. That has meant, above all, an effort to work with banks to put pressure on states and other international actors that the United States otherwise has little ability to influence.
This effort is defined by a careful dance between the U.S. government and the global banking industry. Through targeted financial measures, Washington has signaled to banks situations in which it sees dangerous actors intersecting with the international financial system. Banks, for the most part, have acted on these signals, and the two most recent chapters in this unfolding story -- Iran and North Korea -- suggest that using global finance to shape the behavior of international actors can be remarkably powerful.
But financial measures are only as effective as the banks that implement them. Given the role that banks, rather than governments, now play as agents of international isolation, policymakers must develop a more sophisticated and accurate understanding of what this new tool of statecraft can and cannot do. In its bid to curb Iran's and North Korea's destabilizing efforts to develop or expand their nuclear programs, the U.S. government has, in recent years, financially targeted not only Tehran and Pyongyang but also the individuals, companies, and associations that front their illicit activities. These measures have depended on a diplomatic campaign aimed at the world's financial centers.
In the immediate aftermath of 9/11, financial diplomacy meant lobbying foreign governments to freeze assets. Now, U.S. financial diplomacy increasingly involves global financial institutions in addition to governments. Traditionally, Washington has worked with compliance departments in global banks to combat terrorism, weapons proliferation, the narcotics trade, and corruption. Governments issue watch
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