The Past, Present, and Future of U.S. Sanctions Enforcement

0
8


For U.S. presidents, economic sanctions are the foreign policy equivalent of a Swiss Army knife — a dangerous, multifunctional tool that looks capable of solving many more problems than it actually can. Reflecting sanctions’ attractiveness, President Donald Trump’s administration issued over a thousand new sanctions designations a year — a rate almost double that of his predecessor. Yet, even as the number of parties sanctioned by the U.S. government ballooned, the Trump administration took significantly fewer formal actions to punish sanctions violators. While the overuse and under-enforcement of economic sanctions during the Trump administration were problematic, the U.S. government also made some constructive changes to how it enforces sanctions. Given that President Joe Biden has called for a comprehensive review of U.S. sanctions policies, it is critical that policymakers fully understand the trends that shaped sanctions enforcement during the Trump administration before overhauling U.S. sanctions policies.

The U.S. Department of Treasury’s Office of Foreign Assets Control plays a lead role in implementing and enforcing the U.S. government’s sanctions policies. Congress has empowered this office to wield an enormous amount of discretion in enforcing U.S. economic sanctions. It has the power to impose financial penalties on sanctions violators amounting to hundreds of millions of dollars. While the Office of Foreign Assets Control is staffed with career civil service professionals, our research shows that presidential foreign policy prerogatives influence its enforcement of U.S. economic sanctions. Our scholarship also shows that the office’s strategies for enforcing sanctions have evolved over time, adapting its approach toward punishing and deterring sanctions violations to make U.S. sanctions policies more effective.

 

 

Data the Office of Foreign Assets Control has made publicly available about its sanctions enforcement actions since 2003 offer insight into how the agency’s enforcement strategies have evolved over time. Trends in the data show that the office took enforcement actions involving a broader set of sanctions regimes during the Trump administration and gave greater attention to sanctions violators outside of the financial sector. The share of its enforcement actions stemming from self-reported infractions (also known as voluntary disclosures) also grew substantially. This finding illustrates companies’ increasing willingness to comply with U.S. sanctions but may also suggest that the Office of Foreign Assets Control lacked the resources it needed to independently investigate global sanctions violations. If the Biden administration wants to recalibrate the U.S. approach to sanctions, the Office of Foreign Assets Control is a critical place to start.

Sanctions Enforcement by the Numbers During the Trump Administration

In total, the Office of Foreign Assets Control took 62 sanctions enforcement actions against U.S. and foreign parties (61 against entities, one against an individual) for violating U.S. sanctions during the Trump administration. This constituted a 20 percent decline in enforcement actions compared to President Barack Obama’s second term. So, despite imposing sanctions designations at a record pace, the agency cut back on the actions it took to enforce U.S. sanctions. The first figure below shows that the average size of the financial penalties the Office of Foreign Assets Control imposed also declined by 15 percent relative to the average across the whole Obama administration. As our analysis reveals, the increased attention given to penalizing firms outside of the financial sector helps explain this trend.

Figure 1: Average penalty against entities across the Bush, Obama, and Trump administrations (2003 to January 2021).

Source: Chart generated by the authors.

The targets of the Office of Foreign Assets Control’s sanctions enforcement actions were more diverse during the Trump administration than in previous administrations (see Figure 2). During George W. Bush’s presidency, the office devoted substantial resources to enforcing U.S. economic sanctions against Cuba, Iran, and Sudan. The Office of Foreign Assets Control pursued far fewer sanctions against Cuba during the Obama administration, but Iran and Sudan remained priorities. Rather than concentrating on pursuing enforcement actions against particular targets, the office spread its attention across a more diverse set of sanctions regimes during the Trump administration. Another notable trend from the data is that, despite North Korea’s prominence as a global sanctions target and its large-scale sanctions evasion campaign, the Office of Foreign Assets Control has rarely taken enforcement actions involving the country.

Figure 2: Violations across sanctions programs and U.S. administrations (2003 to January 2021).

Source: Chart generated by the authors.

The data on enforcement actions also illustrate a significant shift in the agency’s focus toward taking sanctions enforcement actions against firms outside of the financial sector. During the Obama administration, the Office of Foreign Assets Control emphasized pursuing major sanctions cases against large banks — and especially foreign ones — that had engaged in egregious sanctions violations. In previous research, we argue that foreign financial institutions were perfect targets for the office’s enforcement actions given the high-volume of infractions some of them committed, their dependence upon continued access to the U.S. financial system, and the fact that they could afford to pay major penalties. The office’s “whale hunting” strategy resulted in penalties that totaled tens and even hundreds of millions of dollars against two dozen foreign financial institutions and turned the agency into one of the world’s most feared regulatory bodies.

Figure 3: Sectoral distribution of the Office of Foreign Assets Control’s enforcement actions (2003 to January 2001).

Source: Chart generated by the authors.

During the Trump administration, the Office of Foreign Assets Control shifted its focus away from the financial sector to firms involved in the trade, manufacturing, travel, and technology industries. Of the 61 entity-based enforcement actions the office took during the Trump administration, 26 percent involved the financial services sector versus 30 percent for the Bush administration and 37 percent for the Obama administration (Figure 3). Even considering that Trump served only one term, the total number of enforcement actions the Office of Foreign Assets Control took against financial service entities is significantly lower than those of his predecessors. And, whereas the Office of Foreign Assets Control gained periodic attention from imposing record-shattering penalties against sanctions-violating banks during the Obama administration, the agency only announced two cases involving massive penalties against banks during the Trump administration. Both enforcement actions taken against UniCredit Bank and Standard Chartered Bank resulted in civil fines of over $600 million (in 2019 U.S. dollars), constituting high-profile, publicity-generating cases. These were exceptions rather than common occurrences during the Trump administration. An optimistic take on this trend is that the Office of Foreign Assets Control’s sanctions implementation and enforcement efforts have been effective at promoting sanctions compliance in the financial services industry. If most banks are taking sanctions compliance and related anti-money laundering obligations seriously, there are fewer major violators to hunt down.

The Office of Foreign Assets Control’s focus on non-financial firms placed pragmatic constraints on the size of the penalties it could impose on violators, given that firms in other sectors cannot readily engage in the volume of violations that major financial institutions can. Notably, the office’s enforcement actions have involved a greater mixture of cases against smaller-sized firms, along with some larger companies with global brands, like Apple, Stanley Black and Decker, and Amazon. Comparing the average penalties for non-financial sector entities across the past three administrations reveals that the Office of Foreign Assets Control imposed significantly higher civil penalties against non-financial entities during Trump’s presidency (see Figure 4). The dearth of major enforcement actions against sanctions violators in the financial sector explains why the office’s average civil penalties were lower during the Trump administration despite the higher fines that the Office of Foreign Assets Control imposed against entities outside the financial sector.

Figure 4: Average penalty against non-financial services entities across U.S. administrations (2003 to January 2021).

 

Source: Chart generated by the authors.

Given the Office of Foreign Assets Control’s progress in promoting sanctions compliance within the financial sector, it makes sense for the office to focus more attention on other sectors in which compliance has lagged. A 2019 report by newly appointed counselor to the deputy secretary of the Treasury Elizabeth Rosenberg and Jordan Tama argues that the office should target sanctions violators from a broad array of sectors and mix moderate penalties with larger-sized ones. This suggests that the diversification of the agency’s enforcement actions represents a natural progression in promoting compliance with U.S. sanctions across a broader array of sectors. The larger penalties that the agency imposed against sanctions violators outside the financial industry during the Trump administration appear to be a step toward creating a larger deterrent effect. However, it remains to be seen whether the inability to impose blockbuster fines against sanctions violators outside of the financial sector will hamper its ability to deter violations in non-financial sectors.

Our last major trend relates to how the Office of Foreign Assets Control’s sanctions enforcement cases originated. Over the past several years, the office’s industry outreach strategy has strongly encouraged companies to cooperate with sanctions and adopt more robust sanctions compliance programs. The office also has had a longstanding policy that encourages parties to voluntarily self-disclose sanctions violations and adopt sanctions compliance programs to prevent future violations in return for lighter civil penalties. Together, these policies are designed to reduce the number of accidental or unintentional sanctions violations that take place and free up the agency’s resources to focus on cases involving deliberate violations or willful negligence.

During the Trump administration, the percentage of enforcement cases that involved voluntary self-disclosure accounted for 67 percent of all cases. This more than doubled from the Obama administration, where voluntary disclosure accounted for 32 percent of all cases. A dramatically larger percentage of the Office of Foreign Assets Control’s enforcement actions came from offenders revealing their infractions to the agency rather than from its own self-started investigations.

This trend has two potential interpretations. The first is that the Office of Foreign Assets Control’s sanctions enforcement efforts over the past decade have been so effective that many companies may prefer to take their chances with assured, but smaller-sized, penalties — as opposed to risking larger penalties if they fail to self-report violations. An alternative explanation is more pessimistic. During the Trump administration, various news stories reported that staff have left the agency at unprecedented numbers. The availability of corporate jobs in the burgeoning sanctions compliance sector provided the agency’s employees with lucrative opportunities. Informally, some former high-level employees at the Office of Foreign Assets Control referred to the agency’s departures as a “generational loss of talent.” Notably, these losses occurred as the rate at which Treasury-imposed sanctions designations sky-rocketed and amidst a broader hollowing out of Treasury Department personnel over the past four years. Given that the overall number of sanctions enforcement actions were down during the Trump administration, the trend toward a greater reliance on self-reported cases suggests that the Office of Foreign Assets Control’s ability to conduct independently launched investigations has suffered from a deficit of personnel and expertise.

Turning the Page: Lessons Learned for the Biden Administration

Economic sanctions represented one of the Trump administration’s signature foreign policy tools, but the leading body responsible for enforcing U.S. economic sanctions was stretched thin under the weight of so many additional sanctions designations and the loss of so many personnel. International opposition to the Trump administration’s use of sanctions also increased the importance of unilateral enforcement for promoting compliance with U.S. sanctions. The Office of Foreign Assets Control remains the world’s most powerful sanctions enforcement body and is armed with substantial powers to punish domestic and foreign sanctions violators. The sheer number of individuals, entities, and countries subject to U.S. economic sanctions poses a significant challenge for the Office of Foreign Assets Control in ensuring U.S. sanctions are properly enforced and for well-intentioned firms seeking to comply with them. The Biden administration should do a better job of balancing the number of sanctions designations it imposes with the investments it makes in enforcing those sanctions.

The Office of Foreign Assets Control’s pivot to focusing more on penalizing violations outside of the financial sector makes sense and should continue. However, we also recommend that the agency, along with counterparts at State and Commerce, lobby Congress to pass legislation for a new penalty structure that determines penalties based on the industry type of the violator. Large fines associated with “whale hunting” have been possible because of the magnitude of the sanctions-violating transactions financial institutions conduct — sometimes in the thousands. Non-financial service entities rarely engage in that volume of individual transactions, so the current method of penalizing sanctions violations is not an effective deterrent against them. Berkshire Hathaway’s apparent violations of the Iranian Transactions and Sanctions Regulations reported in October 2020, for example, involved 144 violations and a penalty just over $4 million — a drop in the bucket for a company whose revenues topped $254 billion in 2019.

The Office of Foreign Assets Control engaged in fewer blockbuster sanctions enforcement actions during the Trump administration, but the agency should make the pursuit of such cases a renewed priority during the Biden administration. Major sanctions enforcement actions constitute valuable deterrents to sanctions violations, as they raise awareness about sanctions obligations, discourage deliberate violations, and encourage well-intentioned entities to invest in sanctions compliance programs. Reforming how sanctions infractions are penalized is one way the Office of Foreign Assets Control can adapt its “whale hunting” strategy to promote enforcement outside of the financial sector. Otherwise, the agency should cast its attention more widely in hunting down international financial institutions that have violated U.S. sanctions.

We also recommend that the Office of Foreign Assets Control reassert its commitment to pursuing independent investigations into sanctions violations instead of relying so heavily on cases involving voluntary self-disclosures. The calculus of potential sanctions violators will change if they do not think U.S. regulators have the resources to catch them. We suggest that Biden and newly confirmed Treasury Secretary Janet Yellen should make equipping the Office of Foreign Assets Control with robust resources a top priority. One valuable step would be luring former employees back to the agency from the private sector.

In sum, the Biden administration should invest as much effort in addressing how U.S. economic sanctions are enforced as it does in recalibrating the nature of the sanctions themselves and against whom they are used. By working with Congress to craft a new penalty structure for sanctions violations, coupled with an infusion of resources, the Office of Foreign Assets Control can continue improving compliance with U.S. sanctions outside of the financial sector. Rearming and revitalizing the agency’s enforcement capabilities will help ensure that one of the sharpest tools for promoting U.S. national security does not dull from overuse and neglect.

 

 

Bryan R. Early is the associate dean for research and an associate professor of political science at the University at Albany, SUNY’s Rockefeller College of Public Affairs & Policy. He founded and directs the Project on International Security, Commerce, and Economic Statecraft (PISCES) at the Center for Policy Research.

Keith Preble is a Ph.D. candidate in the Department of Political Science at the University at Albany, SUNY and a graduate research associate with the Center for Policy Research’s Project on International Security, Commerce, and Economic Statecraft.

Image: Flickr (Photo by 401(K) 2012)

 





Source link

LEAVE A REPLY

Please enter your comment!
Please enter your name here