Obama Prepares to Get Tough on Iran

Stuart Levey is the last person to put you in mind of Tony Soprano. Slight and good-natured, he pooh-poohs the notion that what he does for a living is a kind of genteel arm-twisting—intended to, um, persuade international banks and businesses it would be bad for them to be seen dealing with rogue states like Iran and North Korea. Yet Levey's effectiveness at these backroom tactics—his quiet visits to scores of global banks in recent years, mainly in an effort to choke off Iran's financial air supply—is the biggest reason why he was the most senior Bush administration official, after Defense Secretary Robert Gates, to be retained by Barack Obama. Though he's been mostly silent for the first year of Obama's presidency and his name is hardly known to the American public, Levey is feared and hated in Tehran, where "all the officials know how to pronounce his name right," says a European diplomat who follows Iranian affairs for his government. (It rhymes with "heavy.")

In fact, Levey's reappointment as undersecretary of the Treasury for terrorism and financial intelligence in February provoked bitter protests from Iran, whose finance minister at one point denounced him as "one of the U.S. government's Zionist deputies." Through back channels, Tehran passed word that it viewed the move as inconsistent with Obama's public pledge to pursue a friendlier approach, according to a source directly familiar with the protest who asked not to be identified because of diplomatic sensitivities. Levey himself was surprised to get the call telling him that the pro-engagement president wanted him to stay on—and he hesitated before accepting.

Until now, Obama has kept Levey in his back pocket. But the president has concluded that his offer of an "outstretched hand" to Iran will not, on its own, produce the results he needs. Even as he received the Nobel Peace Prize last week, Obama was fast approaching his informal year-end deadline for seeing "progress" in talks to shut down Iran's nuclear program. Tehran has by all accounts refused to cooperate. After a moment of promise in early October, when Iran pledged to ship much of its uranium abroad, Tehran has reneged on almost every tentative deal. Worse, since Iran admitted to building a secret uranium-enrichment facility near the religious city of Qum, it has brazenly pledged to build 10 more. "There is nothing happening," says one senior European diplomat who would not discuss the talks on the record. "Zero. Zero. Zero."

As a result, barring a last-minute concession by Iran, the president is now firmly committed to imposing tougher sanctions, says a senior administration official who would discuss internal deliberations only on condition of anonymity. "It's important for Obama that the United States do exactly what it says it's going to do," the official told NEWSWEEK. "We said at the end of the year we would turn to sanctions" if diplomacy didn't produce results. That time has come, the official says. "Nobody is going to say to the United States, 'You're just like the Bush administration.' We tried the engagement route."

So Stuart Levey's moment on the world stage has arrived once again. The White House has approved an aggressive plan to squeeze Iran's economy, and Levey will be at the center of it, the senior administration official says. One key target will be the Iranian Revolutionary Guard Corps, the force that has largely taken control of the country and its economy. Since the election in June, the hated IRGC has become notorious for harassing and killing pro-democracy protesters. But the Guards have also bought a controlling interest in the Telecommunication Company of Iran—an $8 billion deal that potentially enables it to tighten its grip over the country's telephone and Internet systems. The IRGC has expanded its reach into Iran's financial and energy industries as well—both the subjects of an intensive investigation by Levey's office. "The IRGC is taking over larger swaths of the Iranian economy, pushing out other businesses and getting preferential treatment in terms of no-bid contracts—thereby being potentially resented by the rest of the population in Iran," Levey said in an interview.

While the Revolutionary Guards pretend to be the incorruptible shield of the Islamic Revolution, individual commanders are believed to be wealthy private investors, especially in neighboring countries like Dubai. "What will cause the Guards their demise is their corruption," an Iranian intelligence official told NEWSWEEK on condition that his name not be used. "For the past 20 years, they've been allowed by the Supreme Leader and consecutive governments to make money in a shadowy world." The West's new approach, Levey indicated, is to focus on the IRGC as "the face of repression," thereby supporting democracy activists in Iran without arousing Iranian national pride over their nuclear program.

The plan is for Levey's office to publicly identify "dozens" of Iranian Revolutionary Guard Corps front companies and then pressure suppliers and trading partners to cut off ties—or risk being sanctioned by the U.S. government, says the senior administration official. "There will be a big effort by Stuart to work with like-minded countries to target IRGC front companies," the official says. "We know which ones [the IRGC] are affiliated with and we know which ones they control." Levey says he wants to make the foreign firms understand that "if they're dealing with Iran it's nearly impossible to protect themselves from being entangled in that country's illicit conduct."

Legal authorities are already in place: U.N. Security Council resolutions currently identify top IRGC commanders as violators of international law; also, in the fall of 2007, the Bush administration designated the IRGC as a weapons proliferator and its super-elite Quds Force as a terrorist group. What's new is that U.S. and European officials have accumulated a lot more intelligence in recent years about the Guards' business activities—including which IRGC officials have investments and where.

Obama will have at least some international support for tougher measures. The European Union, which during the Bush years seemed reluctant to take aggressive steps, has more recently been demanding a shift in tactics. Last week the EU foreign ministers issued a joint statement calling for new sanctions in the U.N. Security Council. And Congress, in a rare display of bipartisanship, is soon expected to approve a Comprehensive Iran Sanctions, Accountability, and Divestment Act. The law will prohibit any foreign companies that help ship sensitive technologies or refined petroleum to Iran from doing business in the United States (though it may allow Obama to waive the sanctions at his discretion).

Foreign companies doing business in Iran are already coming under pressure. Among them is Reliance, the giant Indian energy and petrochemicals firm that for years has been supplying refined gasoline to Iran. In early 2008, under pressure from Levey, two giant French banks—BNP Paribas and Crédit Agricole—cut off letters of credit for Reliance's Iran deals. Then late last year an Arizona State University law professor and former State Department nuclear-nonproliferation official, Orde Kittrie, discovered that Reliance had benefited from two U.S. Export-Import Bank loan guarantees totaling $900 million. Members of Congress—led by Democratic Rep. Brad Sherman of California and Republican Mark Kirk of Illinois—demanded that the Ex-Im Bank cut off U.S. taxpayer assistance. After consulting with its high-priced Washington lobbying firm, BGR, Reliance quietly passed the word to members of Congress: it was halting all sales to Iran and would insist that its trading partners do the same. "We are not selling gasoline to Iran either directly or through third parties," Reliance said in a statement to NEWSWEEK. "To this end, we include a destination-restriction clause in our contracts to prevent sales to Iran."

Another new point of Iranian vulnerability is debt-plagued Dubai. In recent decades, Iranian interests have plowed some $250 billion into Dubai, much of it believed to be from Revolutionary Guard–controlled front companies. Now neighboring Abu Dhabi, which is less friendly to Iranian interests (on the coffee table in his Treasury office, Levey has placed a pictorial promo from Abu Dhabi), may underwrite some of Dubai's defaulting loans, possibly in exchange for more economic control. If so, that could help to squeeze out the IRGC.

Levey's strategy dates back to 2006, when the United States was getting little support for multilateral U.N. sanctions. The Bush administration was scrambling for new ways to get tough with Iran and North Korea. Inspired in part by the way the U.S. government once pressured Swiss and German banks over Holocaust assets—such efforts "laid the groundwork," he says—Levey proposed to then–secretary of state Condi Rice that Washington mobilize the private sector around the world. "He thinks out of the box," says former boss John Cassidy, a white-collar criminal lawyer who hired Levey, a Harvard summa cum laude, straight out of law school.

So Levey began flying around the globe and—as he describes his job—visiting corporate offices to inform executives about "the risks of doing business with Iran" or North Korea. No threats are made; Levey's former deputy assistant secretary, Matthew Levitt, says most banks typically realize on their own they don't want to be tainted by such activities. Still, some foreign firms perceive an implied U.S. threat: if you bank with the Iranians, you may suddenly find it tough opening up that branch or doing mergers and acquisitions in the world's biggest economy. Banks are chronically nervous about the risks to their reputations, and Levey will also remind them they don't want newspapers like The Wall Street Journal or the Financial Times to uncover that they've been doing business with rogues. Whereas traditional sanctions target entire countries, Levey's approach focuses on illicit and deceptive conduct by certain parties and is "more about disabling their ability to do business," he says. "Normal commerce becomes incredibly difficult. Banks won't write letters of credit. Insurance companies won't insure shipments. Shipping companies won't take cargo."

Even advocates of tougher sanctions acknowledge there are huge obstacles to making such an approach work. If global oil firms publicly forswear trading with Iran, for example, they may well continue to do so indirectly—by selling gasoline, for example, to an Arab Gulf firm that acts as a middleman and in turn sells to Tehran. "These guys have decades of doing end runs around sanctions," says Mark Dubowitz, executive director of the Foundation for Defense of Democracies, a conservative advocacy group that is promoting tougher measures. Representative Sherman concedes that none of the tougher sanctions being talked about by the Obama administration is likely to have any immediate impact on the Iranian regime. "We're asking them to give up their firstborn," he says, referring to Iran's nuclear program, "and we're threatening them with the possibility of paying an increase in their ATM fees."

Levey himself acknowledges that there is a debate inside the administration about how pressure tactics will affect Iran; even reformist candidates like defeated presidential contender Mir Hossain Mousavi came out recently against the proposed deal for Iran to ship uranium outside the country for processing. Another key question is whether Russia, China, and other major Iranian trading partners can be persuaded to help squeeze Iran. Moscow has shown more willingness to get tough, while China remains reluctant to disturb its energy trade. Still, Obama's yearlong campaign of engagement with Iran may pay dividends by creating a deeper consensus against Iran than has ever existed.

In the end, Levey's reemergence is further evidence that Obama's differences with his predecessor on national security are not, perhaps, as stark as they seem. Standing by the door of his spacious Treasury Department office—the same one he had under George W. Bush—Levey proudly points to two framed photographs he keeps on a table. In one, he is seen smiling with Bush, then–Treasury secretary Hank Paulson, and then–White House chief of staff Josh Bolten. In the photo propped up next to it, Levey is being introduced to President Obama as Treasury Secretary Tim Geithner and chief economic adviser Larry Summers look on grinning. The only thing the two pictures share in common is Stuart Levey.

With Maziar Bahari in London and Kevin Peraino in Jerusalem