Supplementary memorandum submitted by
Claude Bruderlein, Research Fellow, Centre for Population and
Development Studies, Harvard University
TARGETING FINANCIAL SANCTIONS: A REVIEW
OF THE INTERLAKEN PROCESS
THE INTERLAKEN PROCESS The Interlaken Process on Targeting
of Financial Sanctions refers to a series of meetings and workshops
on financial sanctions offered under the auspices of the Swiss
Government to all the parties involved in the imposition of financial
sanctions. Its primary purpose has been to facilitate the exchange
of views on concrete proposals to improve the effectiveness of
financial sanctions regimes and limit the humanitarian impact
of comprehensive economic embargoes. Political authorities, in
particular the UN Security Council, have expressed considerable
interest in the development of more targeted sanctions instruments
that would increase the effectiveness and credibility of UN sanctions
regimes and limit their undesirable impact on the civilian population
and third countries. Among these tools, targeted financial sanctions
might offer significant potential to exert pressure on the political
elite of the targeted country, by freezing the assets and blocking
financial transactions of entities and individuals linked to the
targeted government. The purpose of the Interlaken Seminars was
to elaborate, in this context, on the specific requirements of
financial sanctions as an alternative to traditional economic
embargoes. In March of this year, experts from 22 countries met
in Interlaken once again to further develop these new approaches
towards United Nations financial sanctions. These experts included
representatives from governments and several central bank authorities,
the United Nations Secretariat, various international organisations,
the private banking sector and academia. Their observations, findings
and conclusions are the objects of a report to be published in
the Spring by the Swiss Federal Office for Foreign Economic Affairs.
TARGETING FINANCIAL SANCTIONS The development of targeted
sanctions is based on the observation that targeted governments
or political elite perceived differently the impact of sanctions
on specific sectors. The effectiveness of sanctions could, therefore,
be enhanced by targeting sanctions towards the most sensitive
sectors of the government's political elite, such as the import
of arms and other military equipment, luxury goods, fuel, communication
equipment, or its access to its financial assets. More importantly,
it appears that the humanitarian needs resulting from the imposition
of comprehensive economic embargoes may even run counter to the
objectives of sanctions. It may result in strengthening the targeted
government at a domestic level, triggering international support
for the targeted state and transforming its international image
from one of a transgressor to one of a victim. At the present stage,
the financial assets of the political elite of targeted countries
have often been left unaffected by UN sanctions regimes. In the
case of Iraq and Serbia-Montenegro, personal accounts of the political
elite, eg, Presidents Hussein and Milosevic, remained untouched.
These assets have been allowed to circulate and fructify almost
unhindered on international markets while the civilian population
of the targeted country has had to bear most of the economic burden
of the comprehensive embargoes on national economic activities.
Traditionally, the targeting of sanctions has been understood
as identifying specific goods and services to be put under a limited
embargo, such as weapons, fuel, luxury goods, travel, cultural
and sport exchanges. The objective of the Interlaken Process has
been to develop new options, more targeted and more effective,
driven by finance rather than trade and aimed at specific individuals
and entities of the targeted country. Its basic assumption has
been that trade embargoes are likely to affect only in a limited
way the targeted elite and may even strengthen its control over
the country's resources and markets. Targeted financial sanctions
represent in fact the first tool developed to exert pressure directly
on the targeted country's decision-makers by localising and freezing
their wealth on the world financial markets. However targeted,
financial sanctions may not be sufficient to force governments
into compliance with international demands. They offer additional
valuable tools to demonstrate the determination of the international
community and to support a growing sense of individual accountability
of targeted elite for the unlawful acts of states by seeking control
over their financial assets and transactions. Financial sanctions
are not a stand-alone measure. The targeting of sanctions must
be integrated in an overall strategy to induce political changes
within targeted states, and be part of other targeted measures
such as arms embargoes, visa and travel restrictions, etc. Strategic
choices regarding the types of sanctions to be imposed and their
modalities depend on a thorough analysis of the vulnerabilities
of the targeted country and of its elite, as well as of the political
will necessary to maintain such measures over time. Moreover, the
imposition of targeted financial sanctions unavoidably faces serious
technical difficulties. Such sanctions require blocking not only
the movement of assets into and out of the targeted country, but
necessitate also the freezing of all assets managed for the benefit
of the targeted country all over the world. Considering the fungible
character of financial assets, their propensity to be moved around
the world in a matter of seconds, and the various possibilities
to conceal the true identity of their owner, the imposition of
financial sanctions involves a dramatic expansion of the reach
and capacity of sanctions regimes.The targeting of sanctions regimes
raises a number of important institutional and technical issues
that need to be addressed in each instances, including:
the need for technical expertise in the elaboration, monitoring and
implementation of targeted sanctions;
the need for improved co-operation between implementing states and a greater harmonisation of their approach in legal and technical terms; the need for
clear and consistent resolution texts from the Security Council;
and
the need for new institutional arrangements to facilitate
the introduction of this expertise in the work of the Security
Council, the Sanctions Committees, the UN Secretariat and implementing
states.
Despite the significant achievements in improving our understanding
of the implications of targeted financial sanctions over the recent
years, much more work needs to be done in ensuring the necessary
cohesiveness and credibility of financial sanctions tools. It
implies the development of new techniques to locate financial
assets and monitor financial transactions, the creation of new
institutional mechanisms both at the international and domestic
level, and the elaboration of proper legal and administrative
frameworks to ensure an adequate and harmonised implementation
of financial sanctions. We will review here some of the debates
on these issues over the past two years.
TECHNICAL ASPECTS OF TARGETING FINANCIAL SANCTIONS The
technical aspects of targeting of financial sanctions appear to
be the most difficult area arising from the development of financial
sanctions. The elaboration of such sanctions is confronted with
complex technical obstacles that only banking and financial experts
appear to be in a position to deal with. Among these issues, we
will focus on the questions of:
information-gathering on the target and analysis of its vulnerabilities; the establishment of a list of targeted individuals and entities; the relevance of the speed of money and the role of off-shore centres; and
Institutional requirements for imposing financial sanctions and the need for
technical assistance.
—Information-gathering on the targeted
country's economic and financial profile and analysis of its vulnerabilities An
essential aspect of targeted financial sanctions is the capacity
to discern and evaluate the vulnerabilities of the target, so
as to be able to exert pressure effectively. Whereas comprehensive
sanctions need only limited knowledge about the target, targeted
financial sanctions significantly increase the need for qualitative
information and analyses of the target's financial and economic
profile.The types of information required include specific knowledge
about traditional trading partners and practices of the target,
principal correspondent banks and other banking relationships,
typical exports, export routes and schemes to finance trade operations.
Experts at the Interlaken Seminars were of the opinion that responsibility
for collecting such information belongs largely to UN Member states
and that the UN Secretariat should primarily act as a depository
of such information. The Secretariat could also compare this information
with information available from independent sources. The experts
noted that the UN Secretariat does not have, at the present stage,
the specialised expertise, the capacity, or the mandate to implement
such information management.
—Creation and maintenance of a list
of targeted individuals and entities The
targeting of financial sanctions towards specific individuals
and entities implies the ability to identify clearly the targets
of the sanctions. Experts in Interlaken concluded that the task
of identifying the targets and maintaining such lists should be
left with UN Member states. In any case, it was believed that
the final decisions regarding the targeting of individuals or
entities should not be left with banking institutions considering
the contradictory interests involved. Moreover, Member states
will need to ensure the privacy and confidentiality of the sources
used to establish their lists. The UN Sanctions Committees should
monitor the discrepancies between the national lists as they occur
over time and disseminate any relevant information to Member states. It
appears that a number of countries do not have the necessary legal
framework to establish and maintain a list of individual targets
of financial sanctions. In the case of the European Union, it
was suggested that the Commission should examine the possibility
of creating an overarching authority that would permit Member
states to establish such a list.
—Speed of money transfers and the
role of offshore centres
Interestingly, most of the experts gathered in Interlaken considered that the
speed of money transfers does not affect substantially the effectiveness
of financial sanctions since the identity of the ordering bank
and the beneficiary is attached to each money transfer. They observed
that any funds transfer (SWIFT or Telex based) destined to a participating
state whose banking system employs interdiction software can be
scanned for possible sanctions violations. The core issue in the
evasion of financial sanctions remains the capacity and willingness
of states to enforce measures with regard to the concealment of
the true identity of financial assets owners. Regarding offshore
centres, experts in Interlaken were of the opinion that there
was a great variety in offshore centres' attitudes with respect
to sanctions implementation (as well as implementation of anti-money-laundering
measures). Some offshore centres are being as strict as onshore
centres in this regard, while others are much more lenient. The
ability of offshore centres to act as loopholes for the evasion
of financial sanctions depends on a series of factors, including: their
economic, administrative, legal and regulatory environment; the
applicable criminal laws and standards of criminal evidence; the
clarity and consistency of the text of sanctions resolutions in
identifying the target and the assets of the targets; and the
level of international co-operation to secure consistent implementation
of financial sanctions.The participants came to the conclusion
that a consistent implementation and monitoring of financial sanctions
over most of the major financial centres would limit considerably
the ability of offshore centres to shelter concealed assets. Experts
recalled that financial assets are not, technically, maintained
in the offshore centres proper (with some exceptions), but in
corresponding hard currency bank accounts in a few of the major
financial centres, making them accessible for monitoring and control.
Such monitoring mechanisms could become compulsory when doubts
are raised as to the control measures implemented in specific
offshore centres. In cases where an offshore centre can demonstrate
credible efforts to track the identity of its banks' customers
and co-operate with the UN Sanctions Committees to locate concealed
assets, such control measures by the corresponding banks may become
redundant.
—Institutional requirements for imposing
financial sanctions and the need for technical assistance Participants
reflected on different options to enhance the capacity of the
UN system to elaborate, implement and monitor financial sanctions.
It was agreed that expertise and financial resources should be
made available to the UN Secretariat, the Sanctions Committees
and, when needed, implementing states to strengthen the ability
of the UN system in this area. Expertise could be made available
to the UN Secretariat once the UN Security Council has decided
to develop such capacity. Meanwhile, Member states interested
in pursuing the implementation of the measures proposed at Interlaken
could meet regularly on an informal basis and benefit from the
expertise of a focal point on financial sanctions.
CONCLUSION The primary purpose of the Interlaken process
was to provide a platform for technical exchanges between government
representatives and experts from the financial sector to elaborate
concrete measures to improve the effectiveness of financial sanctions.
For the first time, the Interlaken Seminars brought together the
different actors involved in the elaboration and imposition of
financial sanctions. To a large extent, the experts in Interlaken
have established the feasibility of targeted financial sanctions.
Although serious difficulties remain in the tracking of financial
transactions and localisation of financial assets, targeted financial
sanctions appear to be technically workable. Major efforts will
need to be devoted to further expand this necessary expertise
in the technical aspects of such sanctions. Moreover, international
co-operation among Member states will need to be formalised to
ensure the proper implementation of sanctions resolution over
all the major financial centres. In this context, the promulgation
of national legislation should help to ensure cohesiveness in
the implementation of the sanctions. The adoption of more consistent
UN sanctions resolutions with the appropriate technical guidelines
should also facilitate a more harmonious implementation of sanctions
measures by Member states. Model legislation presented at the
Interlaken Seminar is available to assist Member states in the
drafting of their own legislation. Options and technical definitions
for sanctions resolutions have been also proposed. More importantly,
the basis of an expert dialogue between Member states, the United
Nations, and the financial sector has been firmly established,
as the foundation of an international co-operation mechanism for
the implementation of financial sanctions.
Claude Bruderlein
22 April 1999
| 
