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Scarlet letters: US tool that usurps sanctions?

Patrick L Young is expert in global financial markets working in multiple disciplines, ranging from trading independently to running exchanges.

Published time: May 01, 2014 19:32
Justin Sullivan / Getty Images / AFP

America has a tool to wreak economic havoc. A simple, old-fashioned letterhead with a suitable blunt message is all it takes. But is it foolproof?

It isn’t secret, but it is a weapon of stealth. It doesn’t arrive by drone; rather it drops in through the regular mail. The “scarlet letter” was devised under Section 311 of the US Patriot Act in the wake of 9/11. The aim is simple – it is a way of ensuring that your friend is actually your friend, and a means to convince your foe's service providers to rethink their affiliations, too.

Clearly if you have a branch in the USA, the last thing you want is a horde of federal agents roaming across your brand, looking for evidence of suspicious financial activity throughout the open office cubicles, or, worse still, the C-suite offices. Thus America has a simple tool, a piece of correspondence which looks akin to a standard bulk mailshot from the 1980's but is much, much more likely to elicit a response from the recipient than an offer to subscribe to Reader’s Digest. Essentially those who provide business services, as well as banks and insurers, are a perfect target. Service providers can be accused of money laundering, or the difficult to define concept of underwriting terrorist offenses and thus be inflicted with a toxic stain of reputational damage, not to mention a lengthy court process and likely restitution.

Such processes recently captured the Clearstream business of Germany’s stock exchange. Clearstream had not broken European sanctions to Iran but by dint of having an office in the US, federal officials extracted a $152 million fine. Criminal investigations are ongoing.

When faced with large fines and, worse still, a spell in an orange jumpsuit, even the most focussed of client organizations are keen to mouth the mantra that “central government (not the client) is always right.”

Thus in the short term, the scarlet letter process could wreak havoc by targeting those who deal with Russia. Then again, previous successes have all been relatively minor affairs. China capitulated to scarlet letters in 2005, but that concerned a tiny bank in Macau – hardly an institution which was at the epicenter of Chinese finance, dealing with North Korea. In a world where Visa and MasterCard barely disappeared for hours before the systems were switched on again in Moscow, can the US realistically wield such exhaustive power against Russia?

Initially, scarlet letters clearly scare off anybody with offices in the USA and perhaps those who don’t concentrate on US dealings but are worried about Western brand damage. However, given that Russia remains a lucrative source of high yield debt, is it impossible to conceive that no other nations will want to have some investment interaction? After all, current refunding worries in Russia can only lead to a desire to borrow money at higher rates and those higher rates will benefit savers...will bond buying be bolstered by Russian citizens, perhaps? Or will it fall to traditionally non-aligned states or those less sympathetic to the US, to channel funds towards the rich opportunity of Russian debt and equity markets?

Scarlet letters have a remarkable deterrent value for the home US constituency and may even prove a better way to whip the EU into America’s desire for harsher sanctions than simply choosing names from the Kremlin area telephone directory, as appears to be the current vogue. In the modern world, payment systems are diverging from Anglo-American analogue era legacy systems to state of the art decentralized digital blockchains competing in cyberspace…Who can tell who is providing investment funds, if, for instance Russia just opts to ignore the old Western money markets and seeks debt issues in anonymized bitcoin instead?

Scarlet letters are clearly a powerful deterrent but they are not a panacea. In the brave new world of digital technology, pieces of paper have some remarkable legacy uses but they are unlikely to be able to outperform the power of a vast multinational network. In the single superpower model, America had a huge advantage with the Scarlet letter. In a world where many increasingly question the competence of Messrs Obama, Biden, and Kerry et al to manage US affairs coherently, it is not unreasonable to assume a widespread letter writing campaign may initially draw blood but soon the natural impact of higher returns will attract cash from within Russia, or the Middle East, or perhaps elsewhere amongst the BRICS…Markets abhor a vacuum.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.

Comments (10)

 

RockyRacoon 22.05.2014 01:32

Only the American people that can stop the madness which is the US gov't INC. Occupy 2.0 United front left and right General Strike. Prosecute Bush Obama War Crimes, Prosecute Wall Street, Audit Fed and Pentagon. All police violence must be subject to review by people in community directly affected. When the cash register stops ringing Then the BOSS listens. Occupy 2.0 with these limited Demands in the form of a General Strike will Restore Constitution, Bill of Rights and Equal Justice...a class struggle you know against those that Warren Buffet said are on his side and winning the CLASS WAR that was going on.

 

DoAskDoTell 03.05.2014 09:01

...scarlet "shame" letters to threaten on "western fearful whatever"; while "sanctions" ; to threaten on the rest of the world...

WH y the desperately self-cannibalizing tactics? Whatever happened to "globalization& quot; and "free trade"?scams?

The 'neo-liberal-con-wha tever' mabsters o.t.univ. behind the "CNN curtain" are finally exposed => naked gangsters and criminal have been "privatize xyz and rent them back" to everyone.

S ecret: There is no investment in the sickUS, the only exports in the economy is the dollar which is a debt the US taxpayers are on the hook for enriching a 0.01% middle class and 400+ oligarch.

 

cra 02.05.2014 21:01

For me, excellent article and comments. If the US begins
using "Scarlet letters" widely and inappropriately, others will begin to avoid doing business with the US. End of story.

View all comments (10)
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