On May 31, 2014, the White House issued a cryptic press release, a brief letter from President Obama to Congress. The letter announced that the US government had decided to levy economic sanctions against Victor Cerrano, Jose Umana, and Francisco Barros, three foreign individuals from Colombia, El Savador, and Cape Verde, respectively.
Thomas Jefferson: Sanctions Pioneer
For some of us, it may be surprising to learn that the United States sometimes declares what amounts to an economic war [1] against individuals. If we survey the history of economic statecraft [2] from the Peloponnesian War, to Thomas Jefferson’s 1807 embargo, [3] to the growing popularity of economic coercion since the 1970s, it’s clear that sanctions against non-states actors are a relatively new development (Baldwin 1985, Hufbauer, Schott, & Elliott 2007; Drezner 2003).
Today, such economic restrictions against individuals and entities (e.g. businesses, charities) are rapidly outpacing embargoes against states, and US non-sovereign targets currently number in the thousands. In the War on Terror, non-sovereign sanctions have also emerged as a critical instrument of non-military aggression in the form of the Specially Designated Nationals (SDN) list. [4] Those listed—either as SDNGT (global terror) or as a SDNK (global narcotics trafficker)– quickly find that they are essentially ‘locked out’ of the American economy and that their US assets are “frozen.” All US persons and organizations are prohibited from economically transacting with a SDN.
The concerted use of non-sovereign sanctions was pioneered in the War on Drugs, and not in the War on Terror. [5]
From a war studies point of view, these two ‘conflicts’ are structurally similar: enemies are usually non-sovereign, private, often highly mobile individuals or entities. Because these “wars” bridge the structural gap between domestic police action and traditional warfare, they can invite a diverse and derivative policy response drawn from both worlds.
So, what are non-sovereign sanctions, why should we care, and what are some possible problems?
Sadly, Spiderman is not involved with the KDA
Non-sovereign sanctions: Foreign Narcotics Kingpin Designation Act of 1999 (KDA)
Traditional anti-state sanctions preceded the development of non-sovereign ones, and they share some key similarities. Intuitively, it is easy to see the logic of state-targeted sanctions: consider the current discussion concerning how to best signal US displeasure to Russia regarding its interference in Ukraine, or about how to pressure states like Iran or North Korea into dismantling a nuclear program. Paradoxically, despite copious research critiquing the efficacy of economic statecraft, such coercion increasingly became a ‘first policy of choice,’ leading to a ‘sanctions exhaustion’ in the 1990s. [6] Critics noted that, at one point, “two thirds of the global population” was subject to one type or another of US sanctions (Nancy Dunne 1998). If economic statecraft—the efficacy of which was thought to be correlated to economic size and might—didn’t work that well for the United States, the largest economy in the world, it seemed possible that sanctions were inherently poor policy instruments. Therefore, “smart sanctions,” or economic action targeted precisely at individuals or groups, seemed to offer a response to accusations of oversaturation and inefficiency.
The KDA is an example of such “smart” policy. The sanctions watchdog, OFAC (The Treasury Department’s Office of Foreign Assets Control), catalogues concerned individuals and entities on a list of Specially Designated Nationals (SDN). [7] OFAC’s description of the KDA describes its targets as those that:
“Materially assists in, or provides financial or technological support for or to, or provides goods or services in support of, the international narcotics trafficking activities of a specially designated narcotics trafficker;
Owned, controlled, or directed by, or acts for or on behalf of, a specially designated narcotics trafficker; or
Plays a significant role in international narcotics trafficking.”
Penalties for conducting business with any SDN—terrorist or drug trafficker—can involve jail time, fines, and for financial institutions, suspended contact with the US banking system.
How are non-sovereign economic sanctions supposed to work?
1996 Chevy Impala SS, the car in which we shall not ride dirty
Let’s say I am a SDN drug trafficker who would like to buy a fancy car. Since music videos suggest that a Chevy Impala may be the stylish kingpin’s vehicle of choice, I might go to a GM dealership to choose the newest model. Sadly, under the KDA, I would discover that despite my excellent credit history, a loan would not be forthcoming. In fact, my cash payment would also be rejected, as the act of receiving payment for the vehicle would constitute an economic transaction.
Aha! You might say. OFAC’s enforcement power is limited to US persons and entities, so why don’t kingpins buy their cars outside of the US? Why would foreign banks care?
Well, this brings us to why sanctions against individuals have become a choice instrument. Old school sanctions against states were generally concerned with the transfer of technology (circuit boards, missile parts) and commodities (oil), but the enforcement of non-sovereign sanctions has come to focus on financial transactions. [8] The 2013 OFAC settlements for KDA violations indicate two penalized parties for that year, Toyota Motor Credit Corporation and Wells Fargo. Although financial institutions are not what might come to mind when we think about drug traffickers, they were fined under the KDA for transacting with Claudia Aguirre, a kingpin SDN.
But still, why should foreigners and foreign banks care? Many of these transactions occur in countries that do not necessarily see eye to eye with the US when it comes to international drug control and may not have signed on to the same sanctions. And wouldn’t US demands that others privilege American laws over their own country’s concerns constitute extraterrioriality? How are US non-sovereign sanctions enforceable at all?
Much of the world’s money has to come into contact with the US banking system at some point because the structure of the global financial system currently demands it. Very broadly and briefly: what the US government realized in the last decade was that if a person in Japan wanted to send money to their sister in South Korea, it had to go through a US intermediary bank. Furthermore, for the first time in history, the intensification of financialization in daily life and new media technologies make it possible for regulators to leverage the global hegemony of the dollar at a global level.
OFAC’s SDN list is coded so that any institution that engages in commodified exchange—basically, any business by definition—can incorporate sanctions review into each transaction, regardless of whether you’re paying student loans or buying trafficking supplies. Treasury documents reveal that OFAC usually requires financial institutions—both domestic and multinational—to institute and maintain sanctions compliance programs as part of a settlement agreement.
So in sum, the intersection of two phenomena makes non-sovereign sanctions extraordinarily powerful: a) the near-real time technological panopticon that we call our hyperconnected 21st century and b) the status of the US dollar as a key and a primary intermediary currency. [9]
Multinational banks are particularly vulnerable to US sanctions pressure because the ability to conduct dollar transactions is a major pressure point: losing the capacity to deal in dollars can undermine their very existence. [10] (For example, the current debate over the BNP Paribas settlement over global terror sanctions has drawn the ire of French officials. The officials are far more alarmed about the US threat to suspend the bank’s ability to do dollar business than the proposed 10 billion dollar fine) [11]. Unless global financial infrastructure shifts against the dollar—an unlikely proposition in the near future—the use of non-sovereign sanctions as a tool of international drug control will probably continue to grow.
Possible complications:
The KDA has been criticized for limiting civil liberties, and for diminishing the right of private property. Here are some associated issues–
The process for listing and delisting for the various SDN directories is not transparent to varying degrees. However, delistings have occurred in the past decade, which does suggest an improvement.
The majority of successful non-sovereign sanctions results do not end in the finding of a SDN. Rather they involve the investigation and fining of secondary parties–who are not on the SDN lists. However, these entities cannot defend themselves by contesting the legitimacy of a SDN listing. In other words, “Show us that Claudia Aguirre is a drug trafficker, because we think she’s a retired granny and we should be able to sell her some cottonballs” is not a possible argument.
The financialization of our day-to-day lives is pervasive. Your ability to do simple things like pay bills, buy a car, and buy life insurance often requires contact with a financial institution. Foreign persons and entities that theoretically find themselves incorrectly listed as a SDN usually have to seek ultimate redress with US courts and institutions, to great cost.
Those named as a SDN are often suspects, and are usually listed prior to a definitive legal finding of responsibility or guilt.
An examination of OFAC settlements suggests that there may be a cumulative asymmetry in penalties when divided up among domestic and non-domestic entities.
Given the problematic reality that supply-side logic still dominates much of US policymaking on international drug control, economic statecraft arguably seems to be a lesser evil than militarized, more invasive tools in the foreign policy arsenal. On the surface, economic coercion offers numerous advantages over old school, militarized “boots on the ground” enforcement tactics. It appears less risky, costly, and less likely to cause collateral damage.
But are non-sovereign sanctions effective? This is difficult to say. A brief analysis of OFAC settlements suggests that non-sovereign sanctions are quite good at extracting rents from secondary parties—in particular, financial institutions—in the name of enforcing coercive economic policies against traffickers and terrorists. However, whether the ability of actual traffickers and terrorists to conduct their business is impaired is unclear.
Although these non-sovereign sanctions are relatively new, there may be unanticipated externalities. Proponents of the American imperium—to paraphrase Peter Katzenstein–may be cheered to find an unfettered proliferation of US regulation across the globe. But for those who champion nation-state sovereignty and a diversity of ideas about privacy and state scrutiny, a sanctions-driven convergence of international drug control (and counter-terrorism) may be less palatable.
What is clear is that the halcyon days of having only two-thirds of the world’s population subject to US sanctions is over. No longer will the population of a country suffer the sanctions directed against just that state. Now, a UK citizen or entity could be penalized for a transaction that is legal according to domestic laws but– because the transaction involved a US intermediary– found in breach of US sanctions against a growing list of thousands of individuals. Concomitantly, it is unclear as to the degree that international implementation of non-sovereign sanctions may degrade local privacy rights. In other words, your local financial institution has been conscripted as a soldier in the Wars on Terror and Drugs* and is under pressure to scrutinize your transactions.
Regardless of where we live, the financialization of our lives now means that we are all increasingly subject to non-sovereign sanctions.
And for our musical ode to sanctions and the 1996 Chevy Impala:
*Assuming the financial institution engages in dollar transactions. —
[1] The way we understand conflict today is still governed by ideas of traditional military warfare.
[2] In the interests of readability, the terms economic coercion, economic statecraft, and economic sanctions are used interchangeably. They can be distinct. See Baldwin 1985.
[3] Doron Ben-Atar, The Origins of Jeffersonian Commercial Policy and Diplomacy (1993); Burton Spivak, Jefferson’s English Crisis (1979).
[4] I’m simplifying matters substantively and focusing on the KDA, which represents an escalation to a global scale from EO 12978. The intersection of financial regulation, counter-terrorism/international drug control is messily complex. Traffickers named under E.O.12978 [SDNT] and all persons named in the Kingpin Act. OFAC SDN-counter-terrorism: see George W. Bush’s E.O. 13224 issued under IEEPA and the SDN. Also see the 2001 USA Patriot Act.
[5] See the 1986 National Security Decision Directives (NSDD) No. 207 and 221 under Ronald Reagan.
[6] A popular argument for sanctions, despite their dismal failure rate, lies in the proposition that sanctions pose a substantively smaller risk and cost to the “sender” of the coercion, vis a vis military aggression or police action. To this author, this argument seems to be a beautifully simple, compelling, and content-free dichotomous claim that presumes no other options besides war or sanctions.
[7] There is also a separate, but overlapping FTO list managed by the State Department with different provenance.
[8] True, but note that tactics of economic coercion are highly imbricated and do not operate in a policy vacuum. The financial violence at the heart of these non-sovereign sanctions draws on BSA/AML as well as a host of associated statutes and procedures.
[9] The asymmetries of power produced by the USD as a key and as an intermediary currency overlap, but are not the same. See the work of R. I. McKinnon as well as B. Eichengreen, R. Hausmann, & U. Panizza.
[10] OFAC is not a state or federal regulator of financial institutions; the suspension of a license is a possible result in cases where regulators work in concert with OFAC and FinCEN, and such cooperative investigations have produced the record-breaking sanctions settlements in the last decade.
[11] Tom Schoenberg Jun 5, 2014 BNP Paribas Fine Seen Eclipsing Past U.S. Sanctions Cases. BNP Paribas reported as of December 31, 2013 that its market capitalization was 70.5 billion euros (~97.1 billion USD). A 1:9 ratio fine for sanctions violations would be unusual.