Vital Interests: You are an expert on international financial networks from the security side of things, tracing terrorist networks and other questionable financial operations. Before we get to that, however, we need to assess the impact of the novel coronavirus pandemic. We are talking at a time when this pandemic is raging around the globe. At this point is there any way to gauge the impact?

Juan Zarate: It's hard to come to grips with what's happening. We're all experiencing various forms of dislocation. Social dislocation, economic dislocation, financial dislocation -- the likes of which we're just beginning to feel and to come to grips with. The good news is we're all trying to adapt to a situation where the world recognizes we have to contain the spread of this virus and its effects. The sooner we can do that, the better we're going to be able not only to manage the effects but also get back toward a more cohesive social and economic order.

The real challenge here is how we collectively deal with the dislocations and adapt in a way that allows us to continue to operate our society and economy in a relatively effective way, understanding there are going to be longer-term disruptions. We're just beginning to adapt, and I'm certainly seeing this from the business perspective - from a telework perspective everyone is adapting relatively well. Our clients are adapting, we're using video conferencing and teleconferencing more aggressively, and everyone is trying to adapt to a new normal.

VI: Central Banks seem to be trying to get on the same page as well and coordinate their efforts so that there is a global response.

Juan Zarate: I think that's right. It's a moment of crisis, but it's also a moment of opportunity for collective global action -- and you are beginning to see that from the G7 Central Bank Governors and Finance Ministers. They seem to be getting their act together, beginning to work in unison, realizing they have to work together to ensure financial resilience and stability. Ultimately, that's going to help stabilize the global financial system because the markets take great comfort from that collective action.

Again, more broadly, this is a moment for not only the global health community to mobilize together, but also for financial authorities to act in unison.  We're beginning to see that.

VI: Certainly, there are lots of variables, which nobody knows at the moment, basically the intensity and more importantly, the duration of contagion of this novel virus.  How vulnerable is the international financial market as this shock is expanding? Back in 2008 there were lots of vulnerabilities in the market because of the mortgage crisis and dodgy financial instruments. What is the strength and resiliency of the international financial community at this challenging moment?

Juan Zarate: The good news is the financial system is stronger than in 2008. No less complex and no less subject to potential bubbles in different parts of the market but certainly financial resilience has grown systemically, especially with stress testing that has been instituted and demands on systemically relevant institutions. These requirements have been really important. That said, we did recognize and have recognized that there continue to be vulnerabilities in the financial system.

You could have a shock like this that creates vulnerabilities and exposes weaknesses that were in the financial market. Regulators around the world recognize that there were cyber vulnerabilities that existed in the system that were not diminishing but were growing in scope -- and those are still present. In fact, cyber risks could easily be exacerbated in the current environment, and you still have the inherent vulnerabilities of illicit financial activity and fraud that were bedeviling the system and exacerbated by state and non-state actors willing to use virtual assets and new technologies to defraud and engage in illicit activity.

Those are vulnerabilities that are still present and may get amplified in the current environment, if we're not careful.

VI: An article recently in the New York Times by Ruchir Sharma, the chief global strategist for Morgan Stanley Investment Management, described the vulnerability of “ Zombie” companies around the world that are carrying huge and unsustainable debt loads. Can the failure of these companies further impact the instability of the global economy?

Juan Zarate:  This could be an example of one of the leading vulnerabilities in the markets that gets exacerbated in a moment of stress like this. I think the level of corporate debt is certainly one of the issues that raises concerns. The vulnerabilities in shadow banking likely another, overexposure on particular kinds of debt. You've certainly seen concerns about how companies have used their cash surplus in recent months for stock buybacks, which has affected their cash reserves.

There's probably a set of factors and vulnerabilities in the system that will emerge and will get amplified in this period. It doesn't mean they're not manageable, but it does mean that some of those excesses or vulnerabilities are going to be exposed now in ways that could be challenging.

VI: Low interest rates provided an incentive for banks and venture capitalists to lend to marginal companies. These low rate policies of Central Banks and the U.S. Federal Reserve means the monetary policy tool box is nearly empty. Is this going to make coping with this market shock more difficult?

Juan Zarate: There is a potential for Central Banks to exhaust their monetary options. The limits of monetary options puts an enormous amount of pressure on fiscal policies and other safety-net policies that governments will deploy beyond what the Central Banks can do. You see this with stimulus packages passed by Congress, and the relief measures requested by President Trump. No doubt you're going to see this balance around the world. Everyone will be looking at fiscal and economic arrows in the quiver and will likely not hesitate to take them all out.

The tricky part here is how to sequence them in a way that allows for sustained stability given the fact that we don't know what the longevity of this looks like and what the ultimate disruption will be. Certain things are easily seen and forecasted -- the disruptions in the cruise line industry, to the airline industry -- but we are obviously going to see disruptions on small and medium-sized enterprises of all sorts, and to other major industries like the sports and entertainment sectors. There are a whole host of externalities and effects we have yet to see as a result of this crisis. At the same time, you're going to see certain industries flourish, for example, in the digital economy and industries that enable remote learning, entertainment, and commerce. 

VI: Do you think the current market dislocations will exacerbate tensions between the United States and China? 

Juan Zarate: The current dynamic can cut both ways. Relations between China and the United States are defined currently by distrust and contained tension. The challenge from the Chinese model and Communist Party predated this crisis, and the tensions could be exacerbated. Frankly, I think there's an opportunity here. Anytime we have a global health issue it's been an opportunity for the United States and China to cooperate and coordinate. What I worry about is that the origins of this health crisis in China and their government’s initial suppression of the facts has added to the suspicion and tension. I worry about this devolving, now with the Chinese and the U.S. blaming each other. I think that's probably the more challenging part of the current crisis. Can we look at global health security as a collective action opportunity or will it become a point of greater division and an accelerant of tension. Right now, the answer is not clear.

VI: You mentioned  irresponsible actors. For example, at this challenging time for the global economy, Saudi Arabia and Russia are engaging in an oil price war that is adding to turmoil in international markets. How should this be interpreted? 

Juan Zarate: One has to wonder whether or not the Saudis and Russians fully thought this through given the unfolding health crisis. That is to say, you could imagine the wisdom or not, or judge the wisdom or not of this decision in isolation. Whether or not they fully thought this through in light of the economic downturn that was to come because of the coronavirus situation, I am not sure. Certainly, when they started this, we were already concerned about the effects of coronavirus, but the full implications I think weren't being felt and weren't being seen. 

It is an important point because this is a moment, I think, for actors in the international system, be they state or non-state, not to throw further fuel on the fire -- injecting more variables into the system or contributing other elements of instability. It is an opportunity for nefarious actors certainly to take advantage of dislocation -- whether it's low-end nefarious actors engaged in fraudulent activities to take advantage of health-care vulnerabilities or the high-end of sophisticated actors like the North Koreans taking advantage of cyber-economic vulnerabilities or Russians using information warfare or illicit activity in the financial system at a moment of vulnerability.

I would hope that everyone in the global system understands that we're in this together and that this isn't a moment to play high stakes poker and exacerbate potential conflicts or exacerbate a sense of economic instability. I think we are where we are with the oil price war, but hopefully, the key decision-makers can begin to walk that back in light of other economic headaches ahead.

VI:  In terms of the illicit financing of non-state actors or terrorist groups, are manipulations of cryptocurrencies and other high tech operations part of the threat?

Juan Zarate: I don't think the current environment will slow illicit actors from trying to access capital in the system or ways to circumvent controls. In fact, the creative actors will find new ways in this current environment to raise money, or to hide and house it and to preserve their value in whatever they've raised. I don't think the current environment will make angels out of demons.

My bigger concern is one that I've written about in the past: state and non-state actors, who frankly don't care about the stability of the system; are willing to take systemically destructive actions, like a cyber-action to destroy data or to collapse payment systems; and doing this in a way that undermines faith and confidence in that system can create enormous instability. That to me is the greatest worry at this moment. Do you have a sophisticated actor willing to take some action that disrupts the financial system and raises greater uncertainty at a time of great vulnerability?

VI: Are there watchdogs still in place? Is the Financial Action Task Force, for example, able to function in these difficult times? Or are they going to be overwhelmed by extreme market disruption?

Juan Zarate: I think the mechanisms, the safeguards, the checks in the system still exist. They are going to still operate. I think the challenge is really that the guardians of the financial system have largely been the financial institutions in concert with authorities. To the extent the financial institutions are under stress, that stress reverberates internally in ways that restrict either resources or capabilities -- for example, compliance teams, financial Intelligence units finding it difficult to operate. That's really where you run the risk. The risk isn't necessarily to the Financial Action Task Force to continue its work on establishing or assessing anti-money laundering and counter the financing of terrorism norms and standards. Their work will continue to evolve, whether it’s on the regulation of digital assets or on how to think about dealing with wildlife trafficking on a global basis, or even its mutual evaluations of jurisdictions.

All that work will proceed, it may be slowed a bit. I think it's at the operational level, where the rubber meets the road, where there will be tension and risk of disruption. Where you have financial institutions having to monitor who's in their systems, what transactions are happening, who's taking advantage of those systems. That's really where you get some vulnerability if there's a lack of attention or resources at a moment of crisis.

VI:  Will the United States' use of economic statecraft, some term it economic warfare, - the use of sanctions, export controls, and tariffs - for foreign policy objectives be of less focus in the new economic realities created by the pandemic?

Juan Zarate: I think the focus is going to be on those policies and measures that generate stability rather than instability. I think the challenge with the mechanisms targeting terrorists and trade tools that have been used in the past, those have been used both from a position of strength from a U.S. perspective, but also in a period where there is general economic stability globally, and the ripple effects of those trade measures could be managed and accounted for. I think those trade measures are going to be harder to take in a period of greater instability, of slowing growth and where the exponential ripple effects are harder to both predict and manage. I think that will temper some of the more aggressive measures that the U.S. or others would take.

I don't think that will impact how the U.S. is thinking about the use of essential tools and national economic security arenas like investment security, or how it's thinking about export controls, especially on new technology. The requirements that have been put in place already as new rules of the road for both investment and export controls will continue to be implemented. 

I also think that the use of sanctions, as they've been aggressively used by this administration, won't slow and will prove effective. The goal of those measures to target rogue actors, to unplug them from the financial system, to find those that are working in concert to evade sanctions - for example, you've seen this in recent Russia-Venezuela designations and targets. 

These measures will continue in part because they will not be seen as overly disruptive to the global economy. In fact, they'll be seen as important to preserving and protecting the integrity of the financial system at a time of vulnerability. Those are measures that I think will continue apace. In fact, these actions will be pretty aggressive in this period, especially where we see a convergence of nefarious activity -- a continued targeting of financial rogues.

VI: What about the “maximum pressure” campaign on a country like Iran, which is experiencing severe societal disruption and deaths from widespread contagion from this virus? Should this be an opportunity for the United States, for humanitarian reasons, to say, look, we understand that your society is under enormous pressure, and we want to help you out somehow by lifting some of these sanctions?

Juan Zarate: It's a great point and question. I think this pandemic exposes the challenge of a maximum pressure campaign when the policy is not to affect the livelihoods of ordinary Iranian citizens or citizens of any targeted jurisdiction. The reality is that if you have a maximum pressure campaign, it will, in some ways, by definition impact key branches of the economy of the target, but also the lives of the individuals who are impacted. A moment like this really does stress that policy tension. What I think it results in is an opportunity, as you said, for the U.S. government to try to make a distinction between the pressure campaign that's intended to isolate elements of the Iranian government and system that are engaged in malicious activity, or corruption or human rights abuses, versus other parts of the Iranian economy, and in particular the health sector. What I'm imagining and hoping will happen is further signaling by the U.S. government as it's tried to do with some of the OFAC licensing to signal that medical goods, devices, food, and other humanitarian goods necessary to help the Iranian people, especially now, can and should be provided.

In fact, it's an opportunity for the U.S. to lead those efforts, to signal to the market that this is not only permissible, but that it's preferable, right? This is something we need and want to do. I do think it's an opportunity for the U.S. government to not only deal with that tension, but also to make clear that we want to help the Iranian people and this is not a moment where we are trying to strangle the Iranian economy in order to hurt the people but instead we're trying to strangle the malicious activity, and we're trying to help the Iranian people in a moment of crisis. The barrier to this approach will likely be the Iranian regime itself, which seems uninterested in accepting U.S. help.

VI: This brings us to the whole point of leadership, national and international. How do you see American leadership manifesting itself during this crisis? Is it a global leader that is involved in helping the rest of the world? How do you see American leadership in six months, a year?

Juan Zarate: I think unfortunately, American leadership has been questioned by some of our allies and is being challenged by others. The criticism results in part because what we say and do can often appear to be unilateral or American-centric. I think some of that criticism is fair, some of it is unfair. But regardless, I think there's a perception that America has ceded its role as a global leader in part because it has taken a more selfish American-centric worldview. I'm hoping that what we see as a country, both the government and the private sector, is not just an opportunity to demonstrate American leadership, but that there's an opportunity and need for others to lead along with us in dealing with this crisis.

Again, this is an opportunity for American and Chinese cooperation versus a moment of further division. I am hopeful that once we are past the immediate period of shock and dislocation, that we're finding our sea legs to lead the global community, to lead the G7, to lead on health security in a way that puts America back at the center, not alone but at the center of driving global solutions.

This is also an opportunity, frankly, for the other elements of American leadership, our corporations, our technology firms, our scientists and our health industry to continue to be at the fore: whether it's on developing the vaccine, whether it's on coming up with interesting new ways of maintaining community at a time of isolation, or whether it's on supply chain security at a time of some instability - -- all these things are things America can lead even absent the federal government or the president leading.

I think there's an opportunity again for us to think creatively about what leadership means in the 21st century global economy.

VI: We have to move beyond “America First” to “We are all in this together.” Let's try to create a world where that has some true meaning.

Juan Zarate: Regardless of political slogans, we are in this health crisis together as a country and globally.

Juan Zarate is the Chairman and Co-Founder of the Financial Integrity Network, and as of September 2019, the Global Co-Managing Partner and Chief Strategy Officer of the combined firm of K2 Intelligence and FIN. He also serves as the Chairman and Senior Counselor for the Foundation for Defense of Democracies’ Center on Economic and Financial Power (CEFP), Senior National Security Analyst for NBC News, and a Senior Adviser at the Center for Strategic and International Studies (CSIS). He served as Deputy Assistant to the President and Deputy National Security Adviser for combatting terrorism (2005-2009) and the first-ever Assistant Secretary of the Treasury for terrorist financing and financial crimes.