In this episode of “Intelligence Matters,” host Michael Morell speaks with Sigal Mandelker, former under secretary for Terrorism and Financial Intelligence at the Treasury Department, about the intersection of financial technology and national security. Mandelker explains how incentivizing investment in financial technology is imperative for economic security in the global competition against China. Mandelker discusses her time overseeing the Treasury Department’s sanctions against North Korea and offers her suggestions on how the Biden administration can protect the U.S. from ransomware. Download, rate and subscribe here: iTunes, Spotify and Stitcher. Highlights Protecting the U.S. from ransomware: “Number one, the best way to protect our country from ransomware is to do what I know the Biden administration and the private sector are very focused on, which is to enhance our cybersecurity. The only reason ransomware hackers are able to successfully put these companies and entities sort of hostage, in a sense, is because there are vulnerabilities that have given them an in.” Treasury sanctions on North Korea: “The first week of my tenure at the Treasury Department, we were charged with keeping our country safe from the threat of North Korea’s weapons, the developments around North Korea’s weapons of mass destruction program. The thought was that the best way to do that was by using different levers of financial and economic pressure to keep them from having A. the ability to get access to the funds that they needed in order to continue to develop that program, and B. to put a tremendous amount of economic pressure on them to get them to change their behavior.” Why the U.S. should invest in FINTECH: “Without a doubt, I think that we really need to make it both a national security and economic security imperative priority to incentivize that kind of innovation out of the United States. I think that if we don’t do that, then we could find ourselves in a very different place with a different global financial infrastructure in not too many years.” INTELLIGENCE MATTERS WITH SIGAL MANDELKER TRANSCRIPT PRODUCER: Paulina Smolinski MICHAEL MORELL: Sigal, welcome to Intelligence Matters. It’s very nice to have you with us. SIGAL MANDELKER: Thank you. It’s really terrific to be here. MICHAEL MORELL: So we’re going to discuss a little later in the episode the responsibilities you had in your most recent job in government at the Treasury Department. But one of those responsibilities included financial sanctions, imposing them, monitoring them, a lot of different things with regard to them. And I know you have a story about the first sanctions that were ever imposed on another country by the United States. And it’s a story that intersects with your life story. And I’d love if you could share that with us. SIGAL MANDELKER: Yeah. Thank you so much. I think it’s a really remarkable story. And it’s actually one that I learned several months into my time at Treasury because we had an incredible speaker come in who was a historian at the Holocaust Museum named Rebecca Erbelding who wrote a great book called Rescue Board. Basically sanctions as we know them today, really started on April 9, 1940, when Henry Morgenthau, who was then the secretary of the Treasury, was looking at the morning paper or the morning cables, and he sees that Hitler has invaded Denmark and Norway. He has no executive authority really to do so, but he picks up the phone and he calls the head of the New York Fed and he says, ‘you know, all of those assets that you’re that you’re holding for Denmark and Norway, I want you to freeze them. Just freeze them.’ And the head of the New York Fed does it. And of course, the reason he wanted to freeze them was to keep Hitler from getting access to those funds. The very next day, Roosevelt signed the first executive order, really authorizing what we know today as sanctions. And in fact, during the course of the war, every time Hitler invaded a country, they did the same thing. They froze the assets that were held in the United States of that country. And ultimately they were able to freeze about eight billion dollars that way. Not all of it connected to Germany, but most of it. To think about that eight billion dollars in today’s money that’s about one hundred fifty billion. So obviously, it didn’t stop the atrocities of the Holocaust. But imagine what Hitler would have been able to do if he had access to those funds. The story then goes on. During the war, the only way to get access into Nazi occupied territory was by getting a license from the predecessor agency to OFAC, which was called the Office of Foreign Funds Control in the Treasury Department. It’s the predecessor agency to the part of Treasury that I oversaw, among other things, at Treasury. So during the course of the war, different organizations came in to try to get a license to be allowed to get assets into those countries. And there’s a lot of risk aversion. And repeatedly the answer was no until 1943. The World Jewish Congress goes to the Treasury Department to a man named John Pehle, who was relatively young, young 30s, who was heading up that office. And they said, ‘among other things, there are Jewish children in hiding in Nazi occupied France and we need to get assets in there in order to help them escape and ultimately survive.’ It was that request that really motivated John Pehle to say, ‘OK, we got to help. You’ve got to do something here.’ And it seems right to you and me, probably like something of a no brainer. But in order to actually effectuate the license, Treasury had to get approval from the State Department. And then there was a battle that ensued between the Treasury Department and the State Department over a period of months with the State Department not wanting to be helpful. Treasury started to get a bit suspicious of what was happening, what was going on at the State Department. Over a weekend, they snuck into the State Department through a friend and they ended up uncovering and getting access to a bunch of cables that had been sent to the State Department, documenting effectively what was happening in Europe with the concentration camps, among other things. Of course, they were stunned. They go back to the Treasury Department and they write an 18 page memo to Secretary Morgenthau going through all of the different points in time where the State Department hid what was happening and they titled the memo report to the secretary “On the acquiescence of this government in the murder of the Jews.” This is now around January 1944. Within a couple of days, Morgenthau takes the information. He takes it to President Roosevelt and said, ‘Mr. Roosevelt, you have to do something here. You have you have to help.’ And Roosevelt says yes. He ultimately decided to stand up something called the War Refugee Board. He picked actually John Pehle, who was in his young thirties from the Treasury Department, to run the War Refugee Board. Not a typical Treasury mandate, but I think he understood that you could not now put that in the hands of the State Department. They ended up saving tens of thousands, if not more, Jews, and others who were victims in the in the Holocaust. The remarkable part of that story for me was that at the very same time that those really courageous Treasury Department officials stood up to do the right thing because they found out that there were Jewish children in hiding. In Europe, my parents were Jewish children in hiding in Poland. So imagine this incredible circle of life, right, where you’ve got a child of survivors now leading this program at the Treasury Department that previously employed the really courageous people at the Treasury Department who were working to help save Jewish children in hiding. MICHAEL MORELL: I have to tell you, I’ve heard you tell this story before, and I get goosebumps every time. It’s really an amazing story. So, Sigal, could you briefly walk us through your career? And if you can, let us know what motivated you and who motivated you along the way? SIGAL MANDELKER: Well, what motivated me along the way fundamentally, really was my family history. I went into the Justice Department shortly after 9/11. I had clerked on the Supreme Court during 9/11, which was quite an experience. What I really wanted to do when 9/11 hit was to go and join the fight against al-Qaida and the fight to protect our national security. I was honored and humbled to be able to join the Justice Department in 2002. I went then to work for Michael Chertoff, who was head of the criminal division at the Justice Department We mostly worked on national security. From there, Chris Wray, who’s now the director of the FBI, was actually in the deputy attorney general’s office. He and Larry Thompson, who was then the deputy attorney general, recruited me to go up to that to that office, to the deputy attorney general’s office, to help fight the war on terror from the perspective of that office. I then went on to Manhattan to be a prosecutor in the southern district of New York. During that time period, Mike Chertoff was nominated to be Secretary of Homeland Security. He asked me to come back to be sort of part of this small office of people who are helping him manage the Department of Homeland Security. So I couldn’t say no and I did that. I was a counselor to the secretary. Then I went back to the Justice Department at that point after that to be a deputy assistant attorney general, where, by the way, remarkably, I supervised a number of different sections, including OSI, which was the traditional Nazi hunting section. My life kind of intersected. We also helped really stand up an effort to go after all kinds of human rights violators. I also supervised the computer crime section in the child exploitation section. In 2009, I went into private practice. I ended up being a partner at a law firm for eight years, wasn’t planning on going back into the government. Out of the blue in December in 2016 I got a call asking if I would be willing to be considered to be the undersecretary of the Treasury for terrorism and financial intelligence. And it was actually a difficult decision for me because as you know very, very well, there’s a lot of sacrifice to public service that so many people in public service go through. Ultimately, actually, it was a call that I had with one of my mentors. I’ve been very fortunate to have a lot of mentors along the way. This was a call that I had with Justice Thomas, who I had clerked for. I was asking him, should I do this? MICHAEL MORELL: Clarence Thomas on the Supreme Court. SIGAL MANDELKER: Yeah. And he said to me, ‘well, what would your mother say?’ My mom had passed away a number of years before. And I said, ‘well, she would have been proud.” And he said, “No. What would your mother say with what your family went through in World War Two?” He knew my family history. ‘You know, how they survived the Holocaust, how so many people in your family actually didn’t survive.” Because probably about I would guess that 95% of my family was killed. “And what your parents then went to. And struggled through ultimately to come to United States and give you and your brother a better life and pursue the American dream.” He said, “I’m not telling you what to do, but what would she say.” MICHAEL MORELL: I think he had you right there. SIGAL MANDELKER: Pretty much. He later said, ‘I didn’t tell you what to do.’ And I said, ‘oh, really? Because let’s go through that.’ But he was right. The ability to go back into public service to help our national security, to go after bad actors all over the world, to go after human rights violators and corrupt actors, to really help in areas like North Korea and Iran and Venezuela was really one of the one of the greatest honors. Also to lead a remarkable career force that we had, that we still have, at Treasury. People who are so extraordinarily dedicated. So it was a great honor. MICHAEL MORELL: What is an undersecretary, that’s kind of a strange term for most people, and what were your responsibilities in that job? SIGAL MANDELKER: Sure. So an undersecretary, let’s just say at the Treasury Department, there are plenty of undersecretaries all over the federal government. At the Treasury Department it’s one of the number three positions. So at Treasury, you have a secretary of the Treasury, you have a deputy secretary. I actually was also acting deputy secretary through a big, good chunk of my tenure at Treasury. And then you have three undersecretaries who are leading and managing the different components of the department. The components that I had were OFAC which is really sort of the heart of the US sanctions program, MICHAEL MORELL: What does that stand for, OFAC? SIGAL MANDELKER: It stands for Office of Foreign Assets Control. It, just like all of my sections, has an incredible role to play in the national security of our country. I also oversaw FinCEN. FinCEN is the primary regulator in the United States for anti-money laundering. They also do just remarkable, remarkable work, keeping our financial infrastructure in many, many different ways, safe from money laundering. I had a policy shop called TAFC that did a lot of work globally. All my components did, but they had a big focus on the global peace and also a lot of work with the National Security Council, as did I. Then I had an intelligence agency that I that I oversaw. In fact, the interesting piece of that about that is that the US Treasury Department, I believe, is the only finance ministry in the world that has its own intelligence agency. As you know very, very well, that’s a really an extraordinary tool for us to have within the Treasury Department to go after threat finance all over all over the world. MICHAEL MORELL: And that intelligence agency is actually part of the larger intelligence community, right? SIGAL MANDELKER: Yes. That’s exactly right. MICHAEL MORELL: Can you give us an example of an issue that you worked on during your time in that job? SIGAL MANDELKER: Sure. Early on, the first week of my tenure at the Treasury Department, we were charged with keeping our country safe from the threat of North Korea’s weapons, the developments around North Korea’s weapons of mass destruction program. The thought was that the best way to do that was by using different levers of financial and economic pressure to keep them from having A. the ability to get access to the funds that they needed in order to continue to develop that program, and B. to put a tremendous amount of economic pressure on them to get them to change their behavior. MICHAEL MORELL: I’d say C. which is send a message to other countries who might think about going down the same road that here’s what’s going to happen to you. SIGAL MANDELKER: Exactly. That’s that is exactly it. That if you engage in activity that threatens not only just the US national security, but really globally, then you’re going to find on the other side of that, you’re going to really, really have a very difficult time gaining access to that money and very difficult internal problems. MICHAEL MORELL: So when you do that, you’re trying to find ways of shutting off their access to money. SIGAL MANDELKER: It’s setting up not only their access to the US financial system, but we have lots of tools to shut their access off from all kinds of other financial systems. Part of that is through what we call sanctions and another tool that we have is called secondary sanctions. Part of that is identifying and disrupting the networks that we’re trying to operate sort of under the radar to get our funds and materials to North Korea. We had a lot of really incredible cases, for example, our sanctions that we were able to bring targeting the networks that were enabling, that had had been working, which we helped cut off, to make money in order to help to do commerce with North Korea. And banks. We had a very heavy lever really on banks, which is the biggest tool that we have. MICHAEL MORELL: Let’s shift gears a little bit here and let me ask you about ransomware attacks. So as everybody knows, by reading the paper and watching the news, they are growing in number and they’re growing in the amount of ransom that’s being requested. And, as you know, in many cases, paid. What I want to ask you is about the use of cryptocurrency, what seems to be the preferred method of payment for many of these attackers. From the perspective of someone who’s worked in overseeing stopping illegal money transfers from actually happening and somebody who’s interested in financial innovation, how you think about that? SIGAL MANDELKER: Sure. Well, I think a couple of things that we have to recognize with ransomware. Number one, the best way to protect our country from ransomware is to do what I know the Biden administration and the private sector are very focused on, which is to enhance our cybersecurity. The only reason ransomware hackers are able to successfully put these companies and entities sort of hostage, in a sense, is because there are vulnerabilities that have given them an in. The other piece, I think, that is really important to understand, as somebody who spent much of my career going after a wide range of bad actors or actors who are trying to get access to money to do bad things. Is that for the most part, those actors are technology neutral. They just want to find the best possible way to be able to get the funding that that they need. So whether that’s through trade based money laundering, whether that’s through shell companies at traditional financial institutions, whether that’s through walls or cash couriers or through cryptocurrency, they’re going to tend to be motivated to go for the thing that they think is going to get them the best ability to get them the money they are that they are looking for. While there’s no question, and we worked on this when I was at Treasury, that crypto has become the mechanism of choice for ransomware. I think that what a lot of these attackers are starting to appreciate and to realize is that when they try to use Bitcoin, for example. This is something that you’ve written on, Michael. When they try to use something like Bitcoin to get access to funding, they find that when they use Bitcoin, it all travels on a public ledger. It’s very traceable, it’s immutable and effectively because it’s a public ledger, it’s actually giving law enforcement an incredible tool to actually find them, identify them, disrupt them, seize their crypto, which is happening an increasing amount at very big numbers, and shut them down and arrest them. We saw that, of course, recently in Colonial Pipeline. You saw that. A great example of that was the Twitter hack that happened about a year ago where hackers were able to get access to a high profile Twitter accounts and put up a Bitcoin address, say, ‘hey, send money here and you’ll get some benefit.’ And then, of course, because they use crypto, within two weeks, law enforcement was able to trace them down and arrest them, which is really extraordinary. So, yes, crypto is used for ransomware. I think what we’re seeing with increasingly sophisticated tools like blockchain analytic tools from companies like Chainalysis, which by the way I’m an advisor to and we’re an investor in, is that those kinds of tools have really been fundamental to helping law enforcement go after bad activity. When you drive bad activity as we’ve also seen to great extent out of the ecosphere, you leave lots of room for super exciting innovation that we’re also seeing in that sector. We have to understand that innovation and take advantage of it. There’s a lot of really exciting stuff that’s happening in this in this space that I think warrants a lot of additional attention. MICHAEL MORELL: So great transition. As I mentioned in the introduction at the beginning of the podcast, you’re now working in this financial technology space. And maybe for the rest of the podcast, we can talk about the importance of financial technology, the importance of financial innovation to national security. And maybe the place to start is to define the term financial technology commonly referred to as fintech. What are people talking about when they use that term, Sigal? SIGAL MANDELKER: So they’re really talking about using technology to deliver a wide variety of financial products that can bring often much greater efficiency, transparency, security, simplicity, consumer protection and also things around AML and compliance rate. It’s the intersection between super interesting and exciting technology and financial services. The way I think about it is how we can use those to bring a much wider spectrum of products to a much greater number of consumers who have been traditionally served in the financial ecosystem, whether that’s lending, finance, personal finance, insurance, financial software, crypto. The list really just goes on and on. MICHAEL MORELL: Why did you decide to do this? Why did you decide to focus on this when you left government? SIGAL MANDELKER: So I decided to focus on this when I left government, because when I was at the Treasury Department, this was very much a global job. I was in twenty seven countries, many of them multiple times in two and a half years. I spent time in the developing world in emerging markets and met with lots of very senior government officials from those countries. I also met with CEOs of banks in a lot of those countries. Repeatedly, particularly in those markets, I would have senior officials, CEOs of banks come to me and say, ‘hey, we’re having problems getting access to U.S. correspondent banking. Can you help us?’ And in that role, I can’t tell a bank where to operate. It doesn’t work that way. We work with those countries to try to get help enhancing them from a compliance perspective. It became increasingly clear to me, and the numbers really bear this out, that the US banking presence in those regions had really significantly decreased. I think there are a lot of root causes for that, which we could talk about at length. But I came to the conclusion that the only way that we were going to change that picture was through financial technology companies who had a different operating model, who had the ability and the flexibility to operate in other regions without having sort of massive legacy risk systems that were keeping them from doing so while also having the ability to root out illicit activity, et cetera. I just came to the conclusion that this is a big problem for the US and not a problem that I thought in those regions that our banks were going to be able to solve. I came to the conclusion that we really needed innovation to solve it. By the way, this is not just a global issue, right. There’s a whole other conversation we could have about people who are underserved today in our country. MICHAEL MORELL: What are the links between fintech, financial technology, and national security? SIGAL MANDELKER: There are many and I’ll just focus on a couple. One is this issue, which I fundamentally believe, that if you don’t have a US presence, a financial presence in a number of different countries around the world, all those tools of economic leverage that I spoke about before, are going to be significantly diminished. I’ll give you a great example. When I was in Uganda, I had somebody say when I was at Treasury, ‘what do you do with these sanctions? You sanction people. They come out of the bush, they go back into the bush.’ He was saying that because when you sanction people who have no connection whatsoever to the US financial infrastructure, it really doesn’t make any kind of a difference. So from a national security perspective, I think it’s really important that we change that dynamic. I fundamentally believe that financial technology companies can really help us get there. The other piece of it is what I was talking about with respect to ransomware. If you look at companies that are in the block chain analytic space, like Chainalysis, they have the ability to detect and help in the process of disrupting the movement of illicit proceeds or illicit funding to Tibet to bad actors. It’s really incredible what they’re able to do today using block chain technology and blockchain analytics in a way that’s fundamentally that’s not as viable when you’re talking with about the traditional banking system. They have different methods to detect illicit activity. But crypto and block chain analytic tools give you the opportunity to detect and disrupt national security threats in a way that I think is very important. It’s those two pieces. Expanding the presence of the US. It’s thinking in a much more sophisticated way how you can use things like blockchain to help deliver humanitarian aid in countries where our banking system doesn’t currently allow for it. There’s all kinds of really sophisticated and fascinating ways that you can use those technologies to counter corruption because of the nature of the technology, the auditability, the fact that you can program the money potentially such that if it does end up in the in the wrong hands, you can get it to revert back. There’s just so many really interesting and exciting ways that fintech and crypto can, I believe, help enhance our national security and also help to bring a much greater number of people into the banking system then have access to it today. There are about over a billion people who have a mobile phone today who don’t have a bank account. Imagine the US, through you great US companies, enabling all of those people to get access to financial service. There are so many really exciting ways in which that can help from a humanitarian perspective, can help from a national security perspective, can help from an economic prosperity perspective. MICHAEL MORELL: So the Chinese seem to get what you just said. They seem to understand the implications of a fintech. And as you know, they’ve been investing heavily in it. How has it paid off for them and where are they on fintech compared to us? SIGAL MANDELKER: China has an unbelievable number of very smart and sophisticated engineers and product developers who fundamentally understand that nexus between mobile and financial services. You look at a company like Alipay, which is a Chinese company. Alipay, it’s a mobile payments network among other things has one point three billion users globally. They have more users than every other major fintech combined. If you combine not just the US, but all of the major fintech players globally, you’ll see that they are- let’s say we estimated about a billion, give or take. That’s less than Alipay has. MICHAEL MORELL: That’s amazing. SIGAL MANDELKER: Yeah, it’s quite extraordinary. China, in lots of different ways, they are doing a lot of work to develop their own state owned, state controlled digital currency through something called the ECNY, where they’ve actually developed a digital yuan using a variety of different technologies, but with a blockchain component to it to digitize their currency. With very few exceptions, with some small countries like the Bahamas, no other country, very few countries are even close to where they are in the development of that technology. MICHAEL MORELL: If they develop that technology and they’re able to actually use it for trade, then that cuts them completely out of the US sanction system, correct? SIGAL MANDELKER: Yes, it’s certainly- not completely. But yes, I think to a large extent it has the capability of doing so. And look, they’ve actually said that it’s a priority for them to cut what they call the US monopolization of financial infrastructure, and to expand the use of the of the yuan. MICHAEL MORELL: So you and I talked about this and you’ve heard me say that- and I think you agree with me- that when we talk about the key technologies where we are competing with the Chinese, whether it’s micro-electronics or synthetic bio or AI or radio communications or 5G, that fintech really belongs on that list for all the reasons you just talked about. SIGAL MANDELKER: Without a doubt, I think that we really need to make it both a national security and economic security imperative priority to incentivize that kind of innovation out of the United States. I think that if we don’t do that, then we could find ourselves in a very different place with a different global financial infrastructure in not too many years. MICHAEL MORELL: What do we need to do to make sure that we get this right? What are the big moving parts here? SIGAL MANDELKER: The biggest moving part is what I just said, which is we need to have a national strategy to incentivize that financial technology out of the United States. I think it should be something that’s really driven at the top of the government from the White House with the National Security Council and the National Economic Council. I know there are lots of people who are really thinking about this problem. I think that strategy has to be driven down throughout the federal departments and agencies to implement it. I think if that doesn’t happen, it’s going to be very difficult for us to reverse these trends because departments and agencies that do a ton of great work, but they can sometimes operate without infusing those kinds of principles that make up that sort of the bigger picture. You want the banking regulators, for example, to understand that when they take certain actions to really assess what that’s going to do, how that’s going to actually enhance financial inclusion, how that’s actually going to enhance the ability of US companies to operate all over the world. If they don’t do that, if they don’t play this out on the enforcement side, across the board, I think we may not get the incentives right. That doesn’t mean you don’t hold entities accountable to complying with regulatory obligations. Of course, that’s very important. But you have to do it in such a way that you advance the ball for financial inclusion, that you advance the very important national security implications of a continued diminishment of the of that US presence globally. MICHAEL MORELL: Sigal, thank you so much for a great conversation and thank you so much for joining us. And it sounds to me like what you’re doing today is just as important as what you did in the many jobs you had in the US government. Thank you. SIGAL MANDELKER: Thank you so much for a really interesting conversation and for inviting me, and it’s really a pleasure to always talk to you about these issues, Michael.