Success of U.S. Sanctions Regime Not Clear Cut, Says Prof

Success of U.S. Sanctions Regime Not Clear Cut, Says Prof June 18, 2015 U.S. officials are increasingly relying on economic sanctions as a tool of foreign policy, but the effectiveness of sanctions in achieving policy objectives is questionable, according to Bryan Early, political science professor at University at Albany and author of Busted Sanctions: Explaining Why Economic Sanctions Fail. While the U.S. has great leverage over financial institutions, most sanctions busting behavior comes from smaller entities and complicit jurisdictions, some of which are U.S. allies, Early said. In an interview with ACAMS moneylaundering.com reporter Kira Zalan, Early described the evolution of U.S. sanctions policies, the role of banks in achieving foreign policy objectives and the potential for unexpected consequences. What follows is an edited transcript of their conversation. Could you discuss the evolution in the use of U.S. sanctions to address everything from national security to human rights violations to cyberattacks on commercial entities? The U.S. government has employed economic sanctions more than any other country in the world in the post World War II era and reliance on economic sanctions has grown in importance since the end of the Cold War. The United States, as one of the largest economies in the world, an important market for foreign exports and a global financial hub, has a great deal of economic leverage that it can hold over other countries. These factors, combined with its ability to absorb the cost of imposing sanctions, have made economic sanctions the go to policy for both legislators and the president. Is it possible to estimate the effectiveness of sanctions both in applying economic pressure and in achieving the varying policy goals? When the United States is imposing sanctions against lesser developed countries they tend to be less effective than when they are employed against countries like Russia that have very large economies. Sanctions are a lot more effective when you employ very strong, harsh immediate measures that are shocking and disruptive as opposed to employing sanctions that gradually escalate over time. Also, our work has demonstrated that when the

targets of sanctions are able to receive foreign aid from other countries in the world, or form sanctions busting trade relationships with other countries and commercial actors, sanctions are rarely likely to succeed. The logic of sanctions is that by virtue of inflicting economic pain on the target country or individuals within those countries that their political behavior can be changed. You can have economic sanctions that on paper look effective since the countries are experiencing economic damages. But even so, that frequently doesn t result in changes of behavior. I think the Russian case is a very good recent example of that. Are the new, targeted sectoral sanctions against Russia more effective? In the 1990s, the comprehensive trade sanctions put in place against the Iraqi government had significant adverse effects on innocent populations within Iraq. This led to the emergence of the so called smart sanctions movement or targeted sanctions movement in which it was thought that an improved strategy for using sanctions could minimize the harm done to average citizens by only targeting leaders within countries or specific elites or agencies. I think that the track record for these types of sanctions is unclear. One of the problems is that freezing the assets of foreign officials, cutting off their ability to travel abroad and preventing them from engaging in international commercial transactions may actually strengthen their commitment to maintaining the regimes that they re a part of. In the case of leaders like [Muammar] Gaddafi in Libya, [Bashar al ] Assad in Syria and probably also [Vladimir] Putin and his close inner circle in Russia, sanctions increased the incentives to remain intransigent. The Gaddafi or Assad sanctions essentially took away the a golden parachute that would let them go to a foreign country that would accept them and let them live in relative comfort on the financial resources that they accumulated while in power. One of the other issues with targeted sanctions in places like Russia is that even though the sanctions might be selective in targeting elites, they have some fairly broad economic effects that harm the welfare of the broader population. Targeting Russian financial institutions, for example, has hurt the economy it s caused inflation there as it has in Iran as well. You brought up sanctions busting. How common is it for entities to get around sanctions? When sanctions do not include an extra territorial component or do not necessarily govern the activities of U.S. citizens or firms outside of the United States, some companies move their business activities to other countries or create foreign subsidiaries that allow them to continue to do business with the sanctioned entities.

Another strategy is when companies find third parties or middlemen who can serve as intermediaries in transactions. In my book I highlight the role that Dubai has played in helping Iranian companies circumvent U.S. and international sanctions. U.S. companies would sell their products to a trading company in Dubai and those companies would turn around and sell the products to Iran. And a third mechanism that I ve also seen is the use of places like free trade zones, which are administrative entities that governments create that allow businesses to operate outside regular customs jurisdictions and normal economic and financial regulations. There are much fewer bureaucratic restrictions and regulations. What has been the role of financial institutions in identifying such sanction evasion schemes? I think throughout the 1990s and first decade of the 2000s many international large financial institutions were playing a major role in facilitating sanctions busting transactions. Obviously there s been a slew of cases and settlements by the U.S government against major financial institutions that involve money laundering and sanctions busting activities for that period. I think the flipside of this discussion though is that if you look during the period in which many of these transactions were taking place the U.S. government had the laws on the books but was doing very little to monitor or enforce its laws. The turning point I would say came during the Bush administration in which there was an official in the U.S. Treasury Department, Stuart Levey, who began to rethink U.S. sanctions strategy in terms of the areas in which the United States has the most leverage to influence the behavior of not only U.S. companies but also foreign companies. We ve seen very large penalties recently against banks for sanctions violations. Have the penalties changed their behavior? The deferred prosecution arrangements that the U.S. government has made with major banks over sanctions violations have played a role in illustrating that the government has gotten a lot more serious about the enforcement of its money laundering laws and economic sanctions. They ve also had a significant effect on convincing major banks, particularly those in Europe, that they have to take into consideration U.S. sanctions and U.S. law related to money laundering and economic sanctions. I would say though that the strategy of making non prosecution agreements or settlements and not pursuing criminal penalties does potentially weaken the strength of U.S sanctions policies. What would a stronger message to international financial institutions look like?

Revoking the ability of international financial institutions to do business within the United States is the highest level of corporate penalties and also prosecuting individuals responsible for making the decisions that allow these sanctions busting transactions to take place. There are also [related] fraud activities that could be prosecuted. But the difficulties of criminal prosecutions has made the settlement strategy more attractive for the U.S. Politically, U.S. policymakers also had to be sensitive to the fact that if they went too far in targeting foreign financial institutions, that there could be a fairly strong pushback from countries like Great Britain or France or the European Union as a whole. Politically, it s challenging for the U.S. government to stop countries that are actively facilitating sanctions busting trade. One of the paradoxical aspects of this is that if the U.S. values its security and political relationships with a country that can place constraints on the ability of the U.S. government to use coercive measures and punishments. The U.S. has long been hesitant to try to compel or bully countries in Europe and U.S allies in the Middle East to abide by U.S. sanctions. The United Arab Emirates is particularly interesting because the Emirate of Dubai really became a regional trading hub when the U.S. first imposed sanctions against Iran in 1979. Dubai s growth was fueled by the fact it was the best place in the world to do business with Iran if you were prevented by sanctions to trade directly with the country. There was a point where that changed? Yes and I would say that what was interesting is that even after the United Arab Emirates became an ally of the United States in 1994 that you actually saw that relationship [with Iran] grow. It wasn t until the revelations that Dubai had played a major role in the A.Q. Khan proliferation network, which transferred a large amount of nuclear technology to Iran, that the U.S. government began to up its pressure on the UAE to put in place political controls that would make it harder for Iran to use the UAE as a place where it could get nuclear technology or other types of military technology. The UAE continues to be one of Iran s major trading partners and to be a place where Iran is able to get access to sanctioned products. But the United Arab Emirates has really enhanced its cooperation in blocking trade and financial services that are linked to Iran s nuclear program and related military programs. To that degree, the United Arab Emirates is actually a success story for sanctions. Was that a result of diplomacy as opposed to say cracking down on UAE? There was a combination of diplomacy backed by some level of coercion as well.

There has been a lot of discussion about so called snapback sanctions in case Iran does not maintain the terms of a potential nuclear deal. How realistic is that option? It will be much easier for the U.S. government to put back unilateral sanctions policies into place than it will be to have those new sanctions actually be effective. Once sanctions are lifted it s going to be much harder to get many of the European companies to disengage from Iran and once the UN sanctions are removed it is also going to become much harder to get the UN to re impose sanctions. You have veto players like Russia that are part of the UN Security Council and they might not want to have Iran sanctioned again. It s fairly unprecedented to have a sanction campaign go on as long as the U.S. sanctions against Iran did and to have countries that have been profiting from being able to exploit U.S sanctions agree to finally sign on and cooperate with them as the Europeans have done against Iran. Also, it will be very difficult to convince the governments of Europe to re impose sanctions if they think that the reason why the deal collapsed was because the U.S sabotaged it or that the U.S. government was responsible for the deal collapsing. Banks were instrumental in isolating Iran. Are they likely to be used as the front line to re impose sanctions? Yes. The U.S. government has the most leverage over financial institutions, even foreign financial institutions, as opposed to the foreign companies involved in trading goods or services. Many companies might be able to get away with being cut off from doing business with the United States and be able to survive and thrive just fine. In fact, many of the companies that are involved in sanctions busting trade are not large multi nationals but are small to medium sized enterprises. If there were going to be snapback sanctions put into place in which the U.S. wanted to force foreign companies to comply with the sanctions I think that financial institutions would be the targets of those efforts. What are some of the unintended consequences of increased sanctions enforcement? Sanctions policies can drive the targets of U.S. sanctions to form new political and commercial relationships that the United States might not find advantageous. Part of imposing much stronger sanctions against Iran is that it has become much more dependent upon doing business with the government of China. Another example would be the U.S. sanctions against Cuba helping to drive the Castro regime into a close relationship first with the Soviet Union and then Venezuela under Hugo Chavez.