Follow the Money

The United States and its partners are increasingly employing financial sanctions as an instrument of national power. The U.N. Security Council requires member states to impose sanctions on terrorist groups; financial sanctions are the centerpiece of resolutions dealing with Iran, Libya, and North Korea; and, while they may garner less attention in the media, the Security Council also has targeted sanctions in place related to Ivory Coast, Liberia, Libya, Somalia, Sudan, and the Democratic Republic of the Congo.

The targeted financial sanctions implemented by the United Nations have gained greater acceptance among governments and the private sector than the full-scale embargoes of years past, and they have had considerable success in advancing their goals. While these measures cannot be a policy in and of themselves, they have the tangible benefit of disrupting illicit networks and pressuring intransigent regimes by making it far more difficult for them to access needed financial services. But even these more powerful targeted sanctions could be dramatically more effective.

At present there are no real consequences, beyond the civil and criminal penalties that the United States imposes, for those who violate U.N.-mandated sanctions. The United Nations lacks enforcement mechanisms with real teeth — a reality that is unlikely to change given the attitude of some Security Council members. There is, however, one step that could make a significant difference: The world’s premier standard-setting body for combating terrorist financing and money laundering, the Financial Action Task Force (FATF), should develop and enforce standards for sanctions implementation.

FATF is well positioned to take on this mission. This organization, created by the G-7 in 1989, already has developed standards used by countries around the world to combat terrorist financing and money laundering; the expansion of its work to broadly cover sanctions implementation would be consistent with its mission of protecting the international financial system from abuse. Furthermore, more than 180 countries — notably including China and Russia, which have often been difficult or reluctant partners on sanctions — have committed to follow the group’s standards and voluntarily subject themselves to evaluations by their peers. Finally, and perhaps most importantly, the private sector pays close attention to FATF’s assessments and its identification of jurisdictions that pose a risk to the financial system.

These facts mean governments have a strong economic incentive to meet FATF’s standards and respond meaningfully to its evaluations. If the United States and other concerned countries are serious about using financial tools to help solve some of the world’s most intractable problems, enlisting FATF in the effort may be the single most effective step they can take to make sanctions work.

Countries or groups that face U.N. sanctions will inevitably try to evade the restrictions, often by enlisting the help of people and companies not on the sanctions list. Punishing or deterring such actions depends on imposing tangible consequences on violators. But at the moment, that almost never happens — except in the United States.

The Security Council has set up committees, sometimes with the assistance of panels of experts, to report on sanctions implementation — but there is little to no follow-through on the council’s part in terms of punishing violators. The U.N.’s usual action, even in cases of notorious sanctions busting, is to send a letter to the relevant country seeking an explanation. Such letters are, as one might imagine, easily ignored and therefore reinforce the notion that there are no consequences for violations.

On a national level, most governments do not have the capacity to detect sanctions breaches. Even when governments are aware of violations and report them to the relevant Security Council committees, they typically do not crack down on violators. Banks and companies operating in most countries therefore have no incentive to voluntarily disclose violations, because their transgressions will likely never be found out. By contrast, in the United States, banks and companies that discover they have accidentally violated sanctions often will report what they have done to the Treasury Department in part because they understand that doing so will mitigate the penalty they will ultimately pay.

The United States, of course, has the world’s most far-reaching and complex sanctions programs, so it has the greatest need for an organization to implement them. That role is filled by the Treasury Department’s Office of Foreign Assets Control. For the United States to implement its 20 sanctions programs and accommodate the fact that a significant percentage of global commerce is processed through the United States, it needs this kind of organization to provide detailed guidance, issues thousands of licenses each year to deal with a variety of special circumstances that come up, and, most importantly, credibly enforce the rules and punish violators. No other country has a similar organization or capability.

The sad fact is that the United States has, for all practical purposes, become the world’s sanctions enforcement police. But there is nothing inevitable about this situation: Now that sanctions have become an obligation of all states in so many circumstances, steps should be taken to ensure that each country builds the capacity it needs to implement and enforce those obligations.

This is where FATF comes in. The organization has successfully changed the international landscape on financial controls for combating money laundering and terrorist financing. By publishing standards — embodied in its "40+9" recommendations — FATF has incentivized countries to continually improve. Most countries seek to be part of this process and gain FATF’s seal of approval, or at least not warrant its disapproval. Its efforts are viewed as nonpolitical and therefore are treated with respect.

FATF’s evaluations are the key to its success. Governments understand that the results of their evaluations will be made public and will have a direct impact on their ability to do business in the global marketplace. Financial institutions in particular closely monitor the evaluations, which they use in their decisions about where and how to do business, and in their customer risk assessments. That means a negative evaluation can make it more difficult for banks, companies, and even individuals in a country to access needed financial services.

This process has inspired something of a "race to the top" dynamic in which governments want to be positively evaluated. Countries that have significant deficiencies identified in their mutual evaluations are referred to a special committee, which works with them to develop action plans for improving. Countries that cooperate with this process and make a high-level political commitment to implementing the action plan are placed on a publicly released "gray list," which provides them with a strong incentive to continue to cooperate. That list has most recently included countries such as Argentina, Morocco, and Pakistan.

Countries that are deemed uncooperative after a year are given a public warning and, if no effort is made to improve after that, they are moved to the black list. As of this June, the list included Bolivia, Burma, Cuba, Ethiopia, Kenya, Sri Lanka, Syria, and Turkey. Being on this list matters; it is an important factor that will contribute to banks’ decisions about the extent to which they will do business in a particular country. In cases where countries have such great deficiencies that they pose a risk to the international financial system, FATF can also publicly call for other governments to implement countermeasures to protect their financial systems from the risk — it has done so recently in the cases of Iran and North Korea, two countries that now find it nearly impossible to secure legitimate banking and business partners. Most countries put forth significant effort to avoid being singled out by FATF, and especially to being put on the black list.

FATF has promulgated standards for implementing one U.N. sanctions program: the prohibition on funding terrorism embodied in Security Council Resolutions 1267 (regarding al Qaeda and the Taliban) and 1373, adopted after the 9/11 attacks. FATF added nine special recommendations for combating terrorist financing in 2001 and 2004. These recommendations provide a model for the steps that should be taken with respect to all U.N.-mandated sanctions.

Two of FATF’s counterterrorist financing recommendations are particularly relevant because they address countries’ U.N. sanctions obligations. First, FATF recommends that countries criminalize the financing of terrorism, terrorist acts, and terrorist organizations. The purpose of this recommendation is to ensure countries have the legal capacity to prosecute and apply criminal sanctions to people who finance terrorism. Second is a recommendation that each country "should implement measures to freeze without delay funds or other assets of terrorists … in accordance with the United Nations resolutions" and that each country "should also adopt and implement measures, including legislative ones, which would enable the competent authorities to seize and confiscate property that is the proceeds of, or used in, or intended or allocated for use in, the financing of terrorism, terrorist acts or terrorist organizations."

There is no logical reason to limit FATF’s sanctions standards to counterterrorism. Promoting adherence to all U.N.-mandated financial sanctions is fully consistent with FATF’s mission to protect the integrity of the financial system from illicit conduct. An expanded set of recommendations would need to address a variety of questions: Is there any way for financial institutions to screen against past sanctions violators as they consider whether to accept or reject business? Does the country have a mechanism for ensuring that its financial institutions (and others) are aware of new sanctions programs? Are the financial institutions required to include sanctions compliance in their internal controls? Can the government investigate or otherwise detect violations? Are consequences imposed on violators, such as civil or criminal penalties? Similar questions are currently asked about money laundering and terrorist financing — why not about sanctions compliance?

Expanding FATF’s mandate to cover all financial sanctions would dramatically improve the potential of international sanctions regimes by creating incentives for governments to more fully implement and enforce them. Governments would understand that failure to develop such capabilities would risk a negative evaluation and, in the worst-case scenario, result in being deemed a risk to the international financial system. Of course, no one expects the countries targeted by sanctions or those considered international pariahs to attempt to honor the standards. But almost all of the rest will — because being branded as a risk to the financial system is a black mark that almost no country can afford.