01 May 2020
Sanctions are intended to exert economic pressure on targeted groups of persons and countries to either prevent conducting business as usual or, at the very least, make it more expensive to do so. It is hoped that such impediments will cause sanctioned parties to reconsider their course of action and change it. When the scope of a sanctions program moves beyond targeting the assets and financial dealings of specific parties to trying to undermine a nation’s economy, ordinary citizens often bear the brunt of the impact. Part of that effect is a calculated one; reducing popular support for a targeted government can provide the incentive for behavioral change. To the casual observer, however, it can seem arbitrarily cruel and inhumane.
In the face of the global coronavirus pandemic, one must consider whether or not the sanctions imposed on Iran, North Korea and other targeted governments are inappropriate and excessive. In the recent past, representatives from China, Russia, India and Iran (among others) have all made the case that sanctions restrictions should be lifted as a humanitarian measure. In fact, a Russian official stated that all sanctions programs not instituted by the United Nations should be terminated—a step which would, unsurprisingly, encompass the sanctions imposed on Russia and its allies Iran, Syria and Venezuela.
Such self-serving considerations aside, whether or not sanctions programs provide sufficient leeway in times of acute need is an area for legitimate exploration.
How extensive are sanctions?
There is wide latitude in the scope of U.S. economic prohibitions for the sanctions programs with the most far-reaching and punitive measures: Iran, North Korea, Cuba, Syria, Venezuela, and Russia (including the parts of the Office of Foreign Assets Control’s program relating to the Crimea region annexed in 2014). In all of these programs, there are restrictions or prohibitions in dealing with significant elements of the government and industry, yet the extent of those restrictions vary widely. For example, while all dealings with the Iranian petroleum and petrochemical industry are prohibited, only certain types of exploration projects with specific Russian firms (as well as dealings in longer-term debt instruments of other designated companies) are off-limits.
It should be noted that OFAC’s Iran, Syria, Cuba and North Korea programs (and the Crimea-specific elements of the Russia sanctions program) prohibit all or almost all trade with those nations, while the others do not. The other elements of the Russia sanctions program and the Venezuela program do target specified firms in specific sectors of those countries, such as the asset freezes imposed within Venezuela’s financial, oil, and defense and security industries. Similarly, OFAC’s sectoral sanctions, by definition, are designed to restrict the strategic growth of companies in specific industries within the Russian economy.
While the bulk of the U.S. North Korean sanctions have actually been derived from a series of United Nations Security Council resolutions (making those restrictions and prohibitions incumbent on all U.N. Member nations to impose and enforce), the others are less globally-adopted. Most notably, the OFAC’s Iran and Cuba sanctions programs are, with minor exceptions in the case of Iran, not adopted by any other country. Additionally, for all of these programs, the breadth of sanctions is significantly more extensive in the United States. How, therefore, does a country like the U.S. make their sanctions more effective when not aligned with those other potentially like-minded countries?
One tool of United States sanctions policy that can be used to incentivize or coerce greater international cooperation is that of secondary sanctions, which is a unique feature of the U.S. regulatory framework. Unlike primary sanctions, for which only persons and organizations under the regulator’s legal jurisdiction can be monetarily penalized for violating sanctions requirements, foreign parties (parties not subject to U.S. jurisdiction) can be penalized by their dealings with sanctions targets for whom secondary sanctions are applicable. There are a number of different penalties that can be imposed as a secondary sanction (some of which, such as prohibitions on dealings with Russian firms designated under Section 231 of Combating America’s Adversaries Through Sanctions Act, or CAATSA, may be made by offices other than OFAC). These vary depending on the nature of the violating firm’s business (there are specific penalties that are only applicable to banks, for example), and on the nature of the violation.
For example, parties that facilitate “deceptive transactions” that aim to thwart OFAC’s Iran or Syria sanctions can be sanctioned by the Secretary of the Treasury to “prohibit all transactions or dealings, whether direct or indirect, involving such person, including any exporting, reexporting, importing, selling, purchasing, transporting, swapping, brokering, approving, financing, facilitating or guaranteeing, in or related to … any goods, services or technology” intended for, or provided by U.S. persons.
In 2019, a manager at a Turkish subsidiary of Kollmorgen Corporation was designated under this authority. He was placed on OFAC’s Foreign Sanctions Evaders (FSE) List for transactions with Iran that he compelled his staff into executing, even after the parent company had directed them, post-acquisition, to reject any such new business and terminate related existing business.
Secondary sanctions currently can be imposed under OFAC’s Iran program, Syria program (for sanctions evasion) and, due to changes made under CAATSA, its Ukraine/Russia-related program, but not under the North Korea and Venezuela sanctions programs. It should be noted, however, that the CAATSA changes have not yet been reflected in the Ukraine-Related Sanctions Regulations (URSR) in the Code of Federal Regulations (CFR).
Recently, OFAC has also shown no compunction in placing primaries sanctions on parties that have conducted business with sanctioned parties under its Iran, North Korea and Venezuela programs. In that regard, the presence of secondary sanctions may represent a distinction without a difference, since the effect of being placed on the OFAC Specially Designated Nationals (SDN) List would not only cut off commerce with the United States, but also with any party that fears their potential designation by OFAC. The threat of being sanctioned by OFAC could, for firms which already conduct significant business in the United States, represent a deterrent significant enough to reconsider their planned business dealings with those sanctioned parties.
It should be pointed out that the focus on sanctions imposed by the United States here is intentional. While all Member States are expected to implement and enforce sanctions adopted at the United Nations, the U.N. itself cannot enforce sanctions compliance. Additionally, other than the United Kingdom, the U.S. is the only country which can impose penalties for actual violations of these requirements. Therefore, the consequences of running afoul of OFAC focuses other countries on blunting U.S. sanctions in particular.
Aren’t there humanitarian exceptions?
This being said, there are mechanisms by which food, medicine, medical devices and other humanitarian assistance can be provided to these sanctioned countries and regions, although the means of achieving these under each program differs. Due to the comparatively limited scope of the sanctions imposed on Russia, however, no such set of licenses or exemptions have been instituted for that program, outside of those for Crimea.
The problem that underlies all these humanitarian exceptions is that the sanctions targets tend to include the financial sector, which would be needed for most commercial transactions (as opposed to donations), and/or the government, which would typically be involved in some of the process of receiving and/or distributing any aid (e.g., customs clearance, administrative dealings with non-profit humanitarian groups). Further complicating matters is the history of each government demonstrating a lack of credibility in holding to any stated commitments, as well as a willingness to divert assets for their own purposes.
Mechanisms by which these countries and regions can receive humanitarian aid do exist. They are more involved and complex than equivalent transactions with other countries, and the specter of primary sanctions being imposed by OFAC (much less secondary sanctions) make potential providers of needed goods and services leery of becoming involved.
The primary hurdle to conducting such transactions, however, is more likely fear of improperly understanding and interpreting OFAC’s regulations and guidance. After all, one of the ten “root causes” of compliance program failures resulting in OFAC enforcement actions documented in 2019’s A Framework for OFAC Compliance Commitments is “Misinterpreting, or Failing to Understand the Applicability of, OFAC’s Regulations.” The complexity of OFAC sanctions is a common complaint from compliance officers outside the United States, as well.
To that end, OFAC has recently published a “fact sheet” of humanitarian mechanisms for these programs. This document lists, and explains at a high level, the applicable general licenses, specific licensing policies and other exemptions (some of which are embedded in the body of regulations rather than maintained in separate guidance documents), as well as any relevant Frequently Asked Questions (FAQs), other advisories and guidance. In addition, it includes a short mention of the Swiss Humanitarian Trade Arrangement (SHTA), which is a mechanism for providing humanitarian aid to Iran while providing the documentary assurances that the U.S. seeks in keeping the aid out of unwanted hands. Lastly, the document provided specific clarification of Executive Order 13902, part of the Iran sanctions program, that OFAC perceived as possibly impeding certain humanitarian activities:
E.O. 13902 – For the purposes of evaluating sanctions pursuant to E.O. 13902, persons in Iran manufacturing medicines, medical devices, or products used for sanitation, hygiene, medical care, medical safety, and manufacturing safety, including soap, hand sanitizer, ventilators, respirators, personal hygiene products, diapers, infant and childcare items, personal protective equipment, and manufacturing safety systems, for use in Iran and not for export from Iran, will not be considered to be operating in the manufacturing sector of the Iranian economy. Note that persons conducting or facilitating transactions for the provision, including any sale, of agricultural commodities, food, medicine, or medical devices to Iran will not be subject to sanctions under E.O. 13902.
As we have seen, even in the most comprehensive sanctions programs administered by OFAC, there are mechanisms that can be used for the provision of humanitarian aid. It is equally true that the U.S.’s unique ability to investigate and punish violations of its regulations has made firms unwilling to risk its oversight and wrath. The United Nations High Commissioner for Human Rights recently lamented the “over-compliance with sanctions by banks” as impacting aid to Iran, as well as possibly affecting aid provision to Cuba, Venezuela, North Korea and Zimbabwe. And anecdotal evidence suggests that a number of large global banks, including one from the United States, currently reject all transactions involving Sudan, despite the sanctions restrictions imposed on the country being much less extensive than the other countries mentioned here. In an environment where OFAC’s published guidance directs U.S. persons to err on the side of caution by reporting potential sanctions violations (e.g., if you have a belief that sanctions regulations will be violated) rather than assuming innocence until proven guilty (as is the case in the U.S. justice system), sanctions regulators are getting the results they reward.
Closed fists, or outstretched hands?
To the average person, temporarily suspending or dialing back the extent of sanctions restrictions would appear to be the compassionate thing to do in the face of the current global medical crisis. However, to ascribe total innocence to the affected governments would be a mistake. If one considers a few of the points made by the U.S. State Department in its April 6, 2020 Fact Sheet on Iranian rhetoric and actions surrounding the pandemic:
- On April 1, 2020, Iranian President Hassan Rouhani said that the U.S. sanctions “have failed to hamper our efforts to fight against the coronavirus.” Iranian documents show their healthcare companies have been able to import testing kits since January.
- In 2018, Iran withdrew an estimated $2.5 billion from its National Development Fund for increased defense spending. In 2019, Iran withdrew $1.5 billion from the fund for other military expenses.
- On March 9, 2020, five Iranian parliamentarians requested that the government transfer assets from these funds for the coronavirus response, and on March 26, President Rouhani requested that Khamenei approve a one-billion-dollar transfer from the National Development Fund.
- While sitting on the request for coronavirus relief, Iran reportedly transferred $400 million from the fund to pay for government salaries. Khamenei also found the time to intervene in the parliamentary budget process and on March 19 increased funding for the Islamic Revolutionary Guard Corps (IRGC) by 33% over Rouhani’s original budget request.
- In 2018, an Iranian “humanitarian” company was sanctioned by the United States for masking payments that provided hundreds of millions of dollars to Hizballah and Hamas through the IRGC’s Qods Force.
And the fact that the U.S. government itself provided over $368 million in humanitarian aid through a wide variety of programs across Latin America in fiscal year 2019 to support the humanitarian needs of Venezuela and its refugees who have dispersed throughout the region, and supports ongoing relief efforts despite obstruction by the Venezuelan government, according to a February fact sheet issued by the United States Agency for International Development (USAID):
- The 2020 Global Humanitarian Overview, released by the UN in December, requests $2.1 billion to support the humanitarian response for the Venezuela regional crisis in 2020. The appeal includes $750 million for humanitarian efforts in Venezuela to reach 3.5 million of the estimated 7 million people in need, and $1.35 billion to reach approximately 4 million crisis-affected individuals across 17 countries in Latin America and the Caribbean, as outlined in the 2020 Regional Refugee and Migrant Response Plan for Refugees and Migrants from Venezuela (RMRP).
- The International Solidarity Conference on the Venezuelan Refugee and Migrant Crisis—held in Brussels, Belgium, on October 28 and 29 and attended by approximately 120 international delegations—highlighted the severity and far-reaching impact of the Venezuela crisis and underscored international commitment to the regional response, including continued assistance to Venezuelans and affected host communities, as well as efforts to support sustainable integration of Venezuelans in host countries. International donors announced more than $110 million in assistance at the conference, including approximately $10 million in U.S. Government (USG) health and development assistance.
- On October 7, Clement Nyaletsossi Voule, UN Special Rapporteur on the Rights to Freedom of Peaceful Assembly and of Association, and Michel Forst, UN Special Rapporteur on the Situation of Human Rights Defenders, published a letter calling on the administration of former President Maduro to rescind the suspension of NGO registration in the country. The letter notes that the indefinite suspension of NGO registration violates established human rights principles and the International Covenant on Civil and Political Rights, ratified by Venezuela in 1978, among other rights-related agreements. The Special Rapporteurs cite the measure as an excessive restriction on the right to freedom of association and have requested a response from the former Maduro administration regarding the motivation behind the suspension, steps taken to ensure registered and unregistered organizations can operate in a safe environment, and efforts to address the allegations described in the letter.
And the alleged embezzlement of funds from Venezuela’s food program:
“Alex Saab engaged with Maduro insiders to run a wide scale corruption network they callously used to exploit Venezuela’s starving population. Treasury is targeting those behind Maduro’s sophisticated corruption schemes, as well as the global network of shell companies that profit from the former regime’s military-controlled food distribution program,” said Treasury Secretary Steven Mnuchin. “The corruption network that operates the CLAP program has allowed Maduro and his family members to steal from the Venezuelan people. They use food as a form of social control, to reward political supporters and punish opponents, all the while pocketing hundreds of millions of dollars through a number of fraudulent schemes.”
Some of the criticism seems not fully-informed. In addition to all this evidence justifying the United States’ caution in relieving sanctions pressure on these countries, some of the current situation needs proper context. For example, the North Korean humanitarian mechanism has been in place for many years; there has been no significant change in the trade-related sanctions imposed on the DPRK since the imposition of a total export ban of goods, services and technology under Executive Order 13722 in March 2016. The current humanitarian situation, of which there is no reliable evidence of coronavirus-related distress, should therefore not be looked upon as a cause for a recent deterioration of conditions. In fact, multiple U.N. resolutions over the years have included findings noting the poor conditions in which the average North Korean citizen lives.
Similarly, given the well-documented substantial amounts of humanitarian aid being provided by both the European Union and the United States, Venezuela’s cries of sudden distress ring hollow. Not only that, there is no evidence, even anecdotal, of trade with Venezuela (outside of the restrictions on its petroleum exports) being impeded by OFAC’s sanctions. The E.U. has no trade restrictions on Venezuela and has not felt the need to expand its Blocking Statute to include violations of U.S. Venezuela sanctions, as it has with Iran over pressure from the U.S. to comply or be penalized.
Additionally, the designation of Alex Saab and his network, for profiteering from humanitarian aid intended for Venezuela’s citizens, appears to be an isolated case. There has not been the drumbeat of bellicose rhetoric about corrupt abuse of humanitarian aid from the U.S. State Department, similar to what has been issued regarding Iranian officials and actions, which would impede others from providing such goods and services to Venezuela.
Finally, unlike the SHTA mechanism created for providing aid to Iran, the General Licenses issued by OFAC authorizing the provision of food, medicine, medical devices and related services under the Venezuela program are broad and straightforward. The humanitarian transactions of a broad range of well-known, funded and organized NGOs, as well as humanitarian transactions more broadly, are authorized with the government, its central bank and the banks designated explicitly by OFAC. It is hard to identify the hardship encountered by potential aid providers under these circumstances. The humanitarian mechanisms for provision of aid to the other countries subject to broad trade restrictions (other than Iran) more closely follows the Venezuelan model. It should be noted, however, that aid to North Korea, under OFAC’s regulations, is only permitted through the activities of NGOs.
Closed fists, and outstretched hands?
There is no denying, however, that providing aid to Iran through the SHTA mechanism involves a level of due diligence and documentary rigor (documented in an October 2019 guidance paper, and implemented in SHTA in February 2020) that exemptions and licensing for the other countries don’t appear to require. Supplying aid may thus require capabilities and processes that aid organizations may not have had in place previously. At best, such exports will be delayed in reaching the people in need of the food, medicine and medical devices, because of the more involved and time-consuming process involved.
The lengthy history of poor relations between the United States and Iran, and the extensive history of firms across the globe taking extraordinary steps to evade OFAC’s oversight, both prior to the E.U. restrictive measures on Iranian oil exports that were imposed in early 2012 and in recent years, clearly colors the U.S. desire for tighter controls. Nonetheless, the fact that the United States acted unilaterally in backing out of the JCPOA, reimposed secondary sanctions, and significantly increased the scope and severity of the sanctions regime, undoubtedly contributes to the chorus of calls for loosening the apparently onerous requirements in order to respond to urgent, comparatively time-sensitive needs for aid.
Wherefore art thou, Syria? (and Cuba)
Generally absent from the statements made in support of lifting far-reaching sanctions on entire countries is the humanitarian needs of the Assad regime in Syria. While China and Russia have made such requests in recent days, the number of such calls pales in comparison to those made for Venezuela and Iran. News sources also note that, as of that timeframe, only two persons had apparently died due to COVID-19—a figure that pales in comparison to most countries where the virus has spread.
There are likely very practical reasons for Syria’s relative absence from the conversation. Like North Korea, Syria is not a significant energy producer, so the global thirst for oil and gas does not lead to calls for enabling that trade. Additionally, while Syria has geopolitical importance to Russia, there are neither significant trade nor cultural ties with Russia similar to those that China has with North Korea. In that regard, calling for relaxing sanctions on Syria appears to be more an attempt to appear consistent, while thwarting Western nations’ geopolitical agendas, than an expression of true concern or economic self-interest.
And the same geopolitical calculus applies to Cuba. While there have been some mentions of lifting the US’ decades-long embargo, they appear to be almost an afterthought, as Cuba’s geopolitical importance pales in comparison to other sanctioned countries.
Do the ends justify the means?
In the 1967 Paul Newman movie “Cool Hand Luke,” the prison warden tells the members of the chain gang “what we’ve got here is failure to communicate” as a way of highlighting the cause of the consequences that Newman’s character may face as a result of his refusal to conform. In the case of the need for humanitarian assistance to sanctioned countries, similarly, the overwhelming majority of nations have different priorities than those that have imposed and enforced sanctions.
United Nations sanctions are imposed as part of a shared global security policy. Other sanctions that target governments and countries, imposed autonomously by individual countries or country blocs, are typically an expression of foreign policy goals and priorities. However, the number of countries who have enacted such sanctions are a relative handful; those that attempt to enforce those regulations (not to mention the U.N.-enacted sanctions) with any level of rigor are fewer still.
The reasons for this situation are not hard to fathom. There are few countries whose enforcement of sanctions creates more severe economic consequences for the sanctions targets than it does for their own citizens and companies. Attempting to require compliance with policies where the negative consequences for individual firms and the national economy (through lower levels of economic activity caused by lesser trade volumes) outweigh the dissuasive economic leverage that might be achieved is simply not in most nations’ best interests. In such an environment, advocating for reversing policies which one is not really following in the first place has no downside, yet makes one’s government officials and citizens seem compassionate.
Additionally, removal of sanctions would increase the general level of international trade, which has been suppressed due to fear of losing access to U.S. and, to a lesser extent, the European market. Having greater oil revenues in Venezuela and Iran would raise the standard of living in both countries, not to mention those of the nations with which they would be able to increase trade.
Lastly, most countries have no vested interest in constraining the behavior of sanctioned countries. Israel and Saudi Arabia may be concerned about any potential Iranian nuclear ambitions but, outside of the general vicinity of the Middle East, most countries would not consider themselves to be in the line of fire. Similarly, with the exception of South Korea (and maybe Japan), few countries would feel threatened by the DPRK’s proliferation activities. Venezuela’s ambitions seem mostly aimed at maintaining domestic control by the current regime of Nicolas Maduro; there is little perceived threat to surrounding nations of letting his government stay in power. The same can also be said for Cuba and Syria, as well as the Russians’ interest in retaining dominion over Crimea (except in Ukraine). In such an environment, there is little benefit, other than having a sense of moral and ethical superiority, to going along with imposing sanctions on any nation, for the overwhelming majority of countries.
So, the cruelty of sanctions is in the eye of the beholder. If one believes in achieving the goals that sanctions aim for, and has the economic leverage to make them effective, then they are not overly burdensome (as long as there are ways to make exceptions for special situations like humanitarian crises). After all, the targeted government always has the option to change course in order to have sanctions reduced in severity or terminated. However for countries with no real stake in achieving those goals, then sanctions appear to be cruel, because effective sanctions that impact a national economy through trade restrictions always involve pain for common citizens.
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