The Birth of OFAC and the Rise of Global Sanctions

A version of this article appears as the cover story in ACAMSTODAY, September 2019- Annual Conference Addition

In 1939, Americans were treated to a cinematic masterpiece with the premiere of The Wizard of Oz. The beloved film provided much needed escapism from the chilling geopolitical events of the time. That year, Hitler invaded Poland—marking the start of World War II. For many, the world suddenly seemed ominously unsettling. Permeating public consciousness was a pronounced fear that Hitler would partake in homeland sabotage or even invade the U.S. Like in The Wizard of Oz—where Dorothy’s companions sought a brain, a heart and courage—the U.S. needed to muster up wartime strategic wisdom, a galvanizing patriotic heart and stoic bravery to combat the existential threat.  

THE BATTLE OF THE HOMELAND

The government endeavored to oversee the largest and most rapid expansion of the military. Meanwhile, President Franklin Delano Roosevelt (FDR) issued a statement in September 1939 ordering all police officers, sheriffs and all other law enforcement officers to turn over any information acquired pertaining to espionage, counterespionage, sabotage and subversive activities expeditiously to the nearest FBI representative.    

By 1939, J. Edgar Hoover, director of the FBI, was riding a wave of popularity. To the public, Hoover was American’s top cop and the No. 1 G-MAN (the common moniker the media used for the FBI). This popularity primarily stemmed from a plethora of Hollywood G-MEN movies including the widely popular Dick Tracyseries, which valiantly portrayed the G-MEN taking down American’s criminal masterminds and enemy spies through harrowing gun battles, car chases and raids. Hoover also had his own public relations man who diligently worked to ensure reporters portrayed the director as American’s top criminologist and most trusted law enforcement leader.  

A critical ingredient in committing crimes is the funds to finance such operations. Thus, cutting off funds to saboteurs is enormously debilitating. The key to identifying and disrupting terrorism financing is following the money. Though glorified in film and comic books, Hoover’s G-MEN were not the top dogs in the financial sleuthing prowess. That honor went to the special agents of the Department of the Treasury, the T-MEN. Although many in the public believe that G-MEN brought America’s criminal elite to justice, most kingpin gangsters and corrupt officials met their demise by T-MEN of the intelligence unit (now IRS Criminal Investigation) through tax evasion charges.

In protecting the homeland, Hoover did see the importance of following the money—to this end, he dispatched approximately 200 agents to various major banks to gain insight into financial dealings of the Axis power . Hoover also placed FBI undercover agents as employees in businesses that manufactured materials of primary importance to the Army and the Navy.      

TREASURY ENTERS THE FIGHT

In April 1940, Hitler invaded Denmark and Norway. That same year, Germany defaulted on its foreign loans and most of its trade relied upon barter. To fund the enormous cost of waging aggression, the Nazis pilfered gold and securities from invaded nations. In response, FDR enacted executive order No. 8389—referred to as the freezing order—which mandated freezing assets of invaded countries held in the U.S. to deprive Hitler from financing his war and terrorist crimes.  

Immediately after issuing the freezing order, Treasury established the Office of Foreign Funds Control (FFC) as an administrative agency within its department. A total of $267 million in Norwegian and Danish property was controlled by FFC.   

By the summer of 1940, Treasury was receiving intelligence from various sources on Nazi suspicious financial dealings. The Nazis were transferring funds out of the U.S. to Switzerland to avoid the freezing order. Hoover provided intel reports to Secretary of the Treasury Henry J. Morgenthau, alerting him to suspicious movement of funds. 

Pursuant to the Neutrality Act of 1939, no arms could be transferred to belligerent nations and U.S. shipments were barred from transporting any non-arms goods to warring countries. Initially, Hoover was authorized to enforce this act but by mid-1940, the authority to enforce it fell upon Treasury, giving its housed agencies with daily touchpoints of commerce such as customs, Coast Guard and IRS. The Coordinator of all Treasury law enforcement, Elmer Irey was tasked to ensure these investigations proceeded with efficiency and proper coordination.    

CAMOUFLAGING ACTIVITY

In June 1940, Hoover sent a report directly to the White House pertaining to Nazi money laundering. The report summarized information obtained from a “newly developed informant” living in the U.S. that spent several years as the representative of a large American bank in Germany. According to the informant, “most of the large German interests in the United States are camouflaged as Dutch, Swiss or Swedish corporations.”[1]The informant suggested that, “if this country could find some way of going behind these corporate screens to halt them, with the resulting loss of income, it would be a tremendous blow to the Nazis.”[2]The White House forwarded the letter to Treasury.  

Treasury had also developed intelligence on the abuses of front companies by Axis powers. After Al Capone’s tax evasion conviction, smart gangsters began using front companies to launder ill-gotten gains. As taxes increased to fund the war, some unpatriotic wealthy Americans partook in the practice of using shell companies to shield income from the IRS.

In July 1940, Treasury received intelligence that the Germans were planning to use Credit Suisse bank as their principal base of operations to liquidate pilfered securities. Secretary Morgenthau called Hoover to relay this information. Morgenthau told Hoover that Treasury was already monitoring the financial transactions but would appreciate intelligence on the bank personnel. Hoover responded, “we’ll concentrate upon the personnel and it might be well to put a technical check[3]over their conversations for a while.”[4]  A “technical check” was a softer term for tapping phone lines.  

BECOMING FIT FOR DUTY 

Toward the end of 1940, Treasury agents were actively seeking financial intelligence and developing reports independently from Hoover’s team. By then, the Federal Reserve was providing Treasury with summaries of banking transactions associated with Axis powers—a precursor to today’s suspicious activity reports. Treasury determined that close to half of German-related funds in the U.S. were transferred to Switzerland to avoid the freezing order. Hoover also alerted Treasury to large transfers of funds to Haiti. Irey’s agents identified other means of Nazi money laundering including the German embassy converting $1,000 bills to smaller denominations which cut off Treasury’s ability to trace the future currency transactions.    

In June 1941, the freezing order was significantly expanded to include aggressor nations, conquered nations and any neutral nation. This included Switzerland, which Treasury determined was becoming the piggy bank of choice for Nazis. The order established that Treasury would oversee the enforcement of the freezing order, not the FBI. Furthermore, the order allowed Treasury to place individuals tied to Axis powers on a proclaimed list to freeze their funds as well. With the added responsibility, Morgenthau assigned Irey’s boss Assistant Secretary of the Treasury Edward Foley to oversee FFC.   

Upon transferring enforcement authority to Treasury, Hoover sent a letter to Morgenthau stating, “this Bureau assumes that the functions previously performed by it in connection with the monitoring of foreign funds will no longer be necessary, and we are accordingly discontinuing this work.”[5]Hoover was no longer willing to provide intel on foreign financial activity including information pertaining to Switzerland, Sweden, Soviet Russia, Japan and Latin America.   

With no more reports from Hoover and the increased mandate, Treasury established a specialized investigative branch called the Foreign Funds Control Investigative Unit (FFCIU). Foley tasked Irey to determine the new division’s form. Irey recommended that the newly created unit be staffed with seasoned Treasury agents and fall under his coordination as chief coordinator. Several intelligence unit agents were assigned to the new unit given their acute ability to follow the money no matter the complexity. In highlighting the benefits of the FFCIU, Foley told Morgenthau that Treasury would now “determine what form investigations should take, thereby, avoiding forms of snooping and witch hunting which we all dislike.”[6]  

By the end of summer in 1941, FFC oversaw close to $7.5 billion of controlled assets from 32 countries.   

A month after the creation of FFCIU, Morgenthau received an intelligence report that indicated Hoover was tapping Treasury phone lines. During a staff meeting discussing the matter, an assistant to Morgenthau described the activity as, “it is the kind of thing that Hoover does.”[7]

In July of 1941, FDR appointed Colonel William Donavan (who years later became the founding father of the CIA) as coordinator of information. FDR established the position to provide a central point in the government for analysis of information and data concerning national security. Morgenthau sent a congratulatory letter to Donovan pledging his office’s support.[8]Donovan responded with a letter stating, “you have already evidenced your helpfulness and I am going to rely on it.”[9] 

THE LEAD UP AND ENTRY INTO WAR

Treasury relied significantly on banks to identify and block accounts in accordance with the freezing order. In October of 1941, Foley reported to Morgenthau that banks, "had given only a sight consideration to the test by which to determine whether accounts should be blocked.”[10]In response, FFC launched a public relations campaign to educate financial institutions (FIs) on their responsibility to freeze accounts and notify Treasury. The campaign stressed to bankers that FFC is an "essential, integral part of national economic defense, that the banks are in the front line of such defense, and their cooperation is needed.”[11]The campaign was well-received by bankers and led to significant increases in compliance.     

December 7, 1941 marked the entry of the U.S. into WWII following the bombing of Pearl Harbor. The next day, Treasury agents under Irey’s supervision were placed in Japanese businesses and banks to ensure assets and funds were properly controlled.  Interestingly, in relatively short time, Treasury determined the more concerning financial threat was not Japanese domiciled in the U.S. but individuals and businesses sympathetic to the Nazi cause.   

On December 11, 1941, FFC conducted the largest seizure of a business in U.S. history when they took control of General Aniline and Film, a sprawling manufacturing and film development complex and the first to invent colored film. FFCIU established that the company was owned and controlled by a German conglomerate sympathetic to the Nazi cause.   

In Januaryof1942, the FFCIU’s work led to the indictment of Werner Von Clemm, who used his U.S.-based business to sell diamonds by falsely claiming to have originated from Germany. However, the diamonds were actually confiscated by the Nazis when they invaded Holland and Norway prior to Pearl Harbor. 

FOLLOWING THE MONEY GLOBABLY 

In May of 1942, Donovan asked Morgenthau to lend one of Irey’s financial sleuthing agents temporarily to help follow the money. FFCIU and Donovan had been collaborating on identifying funds of French citizens that pledged their allegiance to the Nazi cause. Donovan told Morgenthau that the agent requested had already assembled valuable material on the matter and "as you are doubtless aware, his qualifications are unique."[12]

Two months prior, FFCIU had uncovered and froze $6.5 million held in accounts tied to French bank Banque Worms based on intelligence of Nazi collaboration. From the amount seized, $4 million of the funds were held in a front business operated by a Professor George Doriot who coincidentally was a lieutenant colonel in the U.S. Army. Doriot admitted he was serving as a front agent.  

Given Swiss banking was integral to world commerce, three Swiss banks with branches in New York were allowed to operate under a FFC general license as long as Treasury representatives remained on premises to monitor current operations. FFCIU agents were also placed in these branches to review their files from the past decade that pertained to companies with European connections. FFCIU had “reason to believe that negotiations and transactions in connection with the transfer of ownership from German and Italian firms to Swiss or American names were, in many cases, conducted through the Swiss banking agencies.”[13]Furthermore, the FFCIU learned that the a top executive of the Swiss Bank Corporation resigned because “certain high officials of the Swiss Bank were allowing themselves to be unduly influenced by Germany’s apparent success establishing a new European order.”[14]

TREASURY FIGHTS ON

In September of 1942, the FFC officially became a separate Treasury agency and Randolph Paul was appointed acting secretary. By then, FFCIU agents were dispatched throughout Europe to follow Axis power money trails. During this time, it became apparent that Panama was being used by Axis powers to hide assets and launder funds. Thus, FFCIU agents were sent to Panama but the state department balked at giving the agents diplomatic status. Unable to convince the U.S. Department of State to reconsider, Morgenthau requested that the two agents leave without diplomatic status.     

By April of 1943, there were clear indications FCC was succeeding in its mandate. The U.S attorney general reported that there had been no active instances of sabotage. Hoover indicated in a report that the widespread Treasury controls on currency movement have “resulted in placing considerable difficulty in the path of Axis agents.” Hoover further stated that “the rigid control which has been exercised by the United States Government over the funds of individuals and corporations in the United States which might reasonably be used for purposes inimical to the internal security of this country has been strictly maintained.”[15]Boasting of their success, Paul told Morgenthau, “the eight would-be saboteurs who came to this country from Germany found it necessary to bring their money with them since any individual or business likely to be sympathetic to enemy interest is regulated by Foreign Funds Control.”  

Hoover received considerable media praise for capturing “the eight would-be saboteurs.” What the media failed to point out was the financial desperation of saboteurs who had to carry in currency. It was a stark contrast from WWI where the Imperial German government used $27 million, provided to them by individuals and businesses in the U.S., to conduct foreign espionage and sabotage.

In July of 1943, the U.S appeals court upheld the conviction of Von Clemms and paid a rather high compliment to the FCCIU agents. The court stated, "Rarely have we seen a case where illegal conspiracy was so clearly inferable from the proven facts or where the accused were so completely enmeshed in awe of their own making."[16]

By the end of 1943, FFC turned its focus on Argentina, which continued to have diplomatic ties with Germany. The country had become a refuge for Axis funds and a fencing operation for looted currency and securities. It was the Axis powers base for financial operations—the country even allowed German nationals to conduct financial subversive activities within its borders. Moreover, its FIs were a cloak for Axis’ financial transactions. For a year and a half Morgenthau strongly recommended that the entire country be included under a general freezing order but Secretary of State Cordell Hull opposed the idea. Hull feared that such strong action against Argentina may provoke pro-Nazi revolutions in other South American countries. FFC was able to apply a freezing order on two Argentina banks.   However, Morgenthau was unsuccessful convincing the FDR administration to approve a general freezing order on Argentina.  

In January of 1944, the FFCIU’s work led to the indictment of Chase National Bank for violating the Trading with the Enemy Act of 1917. The investigation disclosed that a few days after Dutch and Belgian assets were frozen, Chase unblocked certain accounts despite knowing they were controlled by Axis power agents. Moreover, Chase provided false representations to Treasury on their rational for unblocking the accounts. On the day of the unblocking  for France, Chase permitted the South American branches of Bank Francaise  to open accounts at Chase and transfer more than $1 million to the U.S.   

UNSUNG HEROES PREVAIL

By August of 1944, the Allied forces liberated France and in May of 1945, Germany surrendered. The public gave much credit to Hoover as the man they believed protected the homeland from saboteurs. His popularity grew and he garnered public support in his renewed commitment to rid the country of communists.  

Irey never had his own public relations department to promote the T-MEN and Hollywood never made movies about the FFCIU. The public never learned of their harrowing work including the efforts of FFCIU agent James Saxons who initiated a "financial scorched earth operation carried out under enemy gun fire."[17]During Saxons’ North Africa assignment he was subjected to enemy bombardment and in route to the United States his plane was shot down while crossing the Channel.

Hidden to the public in the all-encompassing shadow of J Edgar Hoover’s image campaign was the fact that FFC had a chilling effect on Axis’ ability to wage war and commit subversive acts.  A wildfire cannot conflagrate without fuel to burn.  Saboteurs need money to conflagrate terrorist acts.   

Like in The Wizard of Oz, in the mist of foreboding Axis power evil, Treasury found its brain, heart and courage and there was indeed a happy ending to WWII.  

FIs were also unsung heroes. Without their loyal commitment and significant resources dedicated to the compliance of the freezing order, the success of the FFC would have never be achieved.   

After the war, the FFC became the Office of Foreign Asset Control (OFAC) and it still plays an indispensable role today by financially debilitating those that wish to do harm to the U.S.    

[1]FBI director letter to the secretary to the president, White House, June 17, 1940.

[2]Ibid.

[3]A “technical check” was a softer term for tapping phone lines.  

[4]Transcript of telephone conversation between Secretary Morgenthau and FBI Director Hoover, Morganthau Diaries, July 11, 1942.   

[5]FBI director letter to Secretary Morgenthau, June 23, 1941.

[6]Letter from Assistant Secretary Foley to Treasury Secretary Morgenthau, Department of Treasury Interoffice Communication, June 30, 1941.

[7]Transcripts of Morgenthau’s staff meeting, July 10, 1941. Morganthau Diaries, p.344.

[8]Letter from Henry J Morgenthau to William Donovan, July 14, 194.

[9]Letter from Willliam Donovan to Morgenthau, July 19, 194.1

[10]From Assistant Secretary Foley to Treasury Secretary Morgenthau, Department of Treasury Interoffice Communication, October 31, 1941.

[11]Ibid.

[12]Letter from the office of Coordinator of Information to Henry Morgenthau, May 6, 1942.

[13]Letter from Assist Secretary Foley to Treasury Secretary Morganthau, Treasury Department Inter Office Communications, June 2, 1942.

[14]Ibid.

[15]Letter from Randolph Paul to Secretary Morgenthau, Treasury Department Inter Office Communication, April 6, 1943.

[16]Letter from Secretary Randolph Paul to Secretary Morgenthau, Treasury Department Inter Office Communication, July 26, 1943.

[17]Letter from Secretary Morgenthau to James Saxon, January 1, 1945