Select Committee on International Development Minutes of Evidence

Examination of Witness (Questions 720 - 737)



  720. Yes.
  (Mr Carver) This holding of assets is part of the problem I am referring to between different legal systems, and much of the difficulty arises because of the much more aggressive, muscular, and mature system for policing sanctions that exists in the United States. They base their administration of sanctions on something that they copied from the United Kingdom in 1917 when they entered the First World War, which was the Trading with the Enemy Act. That was itself a product of a very elaborate analysis conducted by the Committee for Imperial Defence in 1912-1913, simply to try to understand how to deal with the economic relations between two states that then find themselves in war. It is a simple piece of legislation because it addresses the issue: having identified an enemy, how do you effectively wage economic war while in contradiction to all the ordinary legal obligations that exist prior to the waging of war? So you have to break a whole lot of legal undertakings and obligations. Under the Trading with the Enemy Act, and its model, which still survives and is the basis of US sanctions, all the assets that are seized are assets of an enemy and are, therefore, held for the benefit of national claimants who have suffered loss by reason of what the enemy has done to those claimants. Peculiarly, this is still the view held in the United States and by the administrators of sanctions, for instance, in relation to Cuba, Iran, Iraq and they do not differentiate. They do not use their UN Powers Act of 1946, which is the equivalent of our United Nations Act; they use this identification of an enemy asset which, therefore, stands forfeit not for the use at all of the enemy. In the UK we have never done that except under the distinct regime of wartime. In the only post war situation which we have used this, which was Argentina in 1982, we simply said, "No, we cannot do that any more. These assets are frozen so you cannot have the actual enjoyment of them, but they still belong to the account holder, interest is still earned—and it should be—and if that account holder owes money to some creditor, those assets are available to pay it". In 1991-1992 the Americans were scandalised at the way in which creditors could come along to the courts and get a judgment against an Iraqi debtor and attach frozen assets and pay themselves off in that way. They were only slightly less scandalised when they realised this was not for some national interest. American creditors could come along to our courts and get the same result, and they did so, and that is why there are no Iraqi assets frozen left in this country, by and large. They were dissipated in that way. On the Continent they have not done this analysis at all; therefore, they are in some confusion as to whether or not these assets somehow are forfeit or whether they are still belonging to and owned by the original account holder. I do not understand the analysis that Mr Bruderlein is giving in saying that, because you hide assets, as it were, they stand forfeit. But, if you admit them, then you should enjoy the usual impact of having accounts even if you cannot use them; but there is a fundamental difference between the treatment that the Bank of England has always given in our huge and very busy financial centre that the United Kingdom is, and the attitude of the Office of Foreign Asset Control in Washington, which produces quite different results, quite different analysis. I am sorry, that is a long answer.


  721. That is fascinating. In relation to that, in the case of South Africa, it is said that the only real sanction which worked was, finally, the financial sanction of not allowing them to re-negotiate international loans, I believe, with Swiss banks. Is that your understanding and, if it is, why do we not use financial sanctions in that way at a much earlier stage to bring about the result, of course, that the international community wish, ie the ending of apartheid?
  (Mr Carver) Financial sanctions, in my view—I agree with the proposition—were far more effective in bringing South Africa to a change than what is often attributed in the press, for example, which is the Gleneagles Agreement and the cutting of sporting links. There are those who feel it was those that did more to undermine morale in South Africa. I do not accept it; I think it was the economic impact of the financial sanctions that were probably, on balance, more effective because they did hurt the economy directly. The whole debt—particularly Third World debt—situation which I think your Committee, sir, is already examining, as it were, differently is, you already know, extremely complicated. It is not easy to line up the necessary parties to accept that. It is a different set of officials and, sometimes, governments that are involved in the equation of how to deal with external sovereign debts than those that sit in the Security Council when there has been identified a threat to international peace and security. Relating those two sets may be quite complicated but, in principle, I accept the proposition that there is more that could be done. For example, as a result of the mutual testing of nuclear devices by India and Pakistan, the United States immediately slapped certain sanctions on both countries with regard to access to aid funds and so on. Now the assessment is that those probably were very painful indeed. Access to external funds and the treatment of loans, which means, of course, also re-negotiation of debt, is also terribly important for many countries.

  722. Yes. It seems to me that all loans to a sanctioned country should become immediately repayable to the bank or country that has lent them, or the international institution. That would bankrupt them pretty quickly.
  (Mr Carver) Well, you cannot bankrupt a country. We have realised that countries are in a situation of bankruptcy occasionally but you cannot literally bankrupt a country. There is no international liquidator that can move in in the way that, for instance, the IMF can under different circumstances. I would say that you can certainly provide in your loan instruments that all debts become repayable in the event of sanctions being imposed, and the London market has certainly seen an increasing number of such provisions written into loan instruments with this effect. I do not think that it is a necessary corollary simply of imposing sanctions, whether internationally or domestically, that that is the result. That is beyond, to my mind, the scope of certainly Article 41 of the UN Charter or of most domestic measures.

  723. So it would not be possible then legally to do it if it is beyond Article 41?
  (Mr Carver) Correct.

Ann Clwyd

  724. The Treasury told us in evidence that you need to be able to identify assets. If somebody has concealed the identity of those you will not be able to freeze them but they were not able to give us any examples of assets being successfully identified and frozen. Do you think the Treasury and the Bank of England could be doing more, or are they doing as much as they can?
  (Mr Carver) I must be prudent in my answer.

  Ann Clwyd: Why?

Mr Robathan

  725. Because he is a lawyer, that is why!
  (Mr Carver) I attended the giving of evidence by the Treasury and the Bank of England and my prudence is, perhaps, not ordinary lawyer's caution. The Bank of England does a lot but I was struck by the fact that the Bank of England representative said very little to you and most of evidence came from the Treasury and I am not sure that the Treasury really does know what is going on in the Bank of England. The Bank of England has a sophisticated and very intelligent, to my mind, view of the way in which sanctions have to be applied. The Bank of England understands the way the banking system works; I am not convinced that the Treasury does. Now, I think the Bank of England does much more than it was able to tell you when it gave evidence in July. They have been successful: they were much criticised internationally during the time when the UN itself was facing bankruptcy because it was unable to support the UNSCOM programme in Iraq, the UN compensation fund in Geneva, because there were no assets available. No oil was being sold; Iraq was deliberately not taking advantage of opportunities available and, therefore, there was a dramatic deficit of funding available to the UN which is classically always underfunded. Internationally a resolution was passed essentially empowering the Security Council to make use of frozen assets. This was done and a search was made for frozen assets and the United Kingdom was among those targeted specifically in order to identify all the accounts belonging to Iraqis that were frozen in this country. The Bank of England's returns, I have not seen them obviously, by report were very small and the explanation for it I have already given, which is, essentially, that creditors had already moved in and, with court judgments, had taken the assets away. The United States still had massive assets but they were not prepared to make them available for this cause other than—and they did this on a matched funding basis only if other countries would produce frozen assets for this purpose—to match them from frozen assets in the United States. The Bank of England could probably do more but it requires more sophisticated software and the implementation of a much wider and perhaps more creative policy with regard to money laundering and other fruits of crime.

Ann Clwyd

  726. Can I ask you about the situation in Switzerland where it is said that substantial Iraqi assets remain in Swiss banks? What is the law in Switzerland, and how does it relate to the UN sanctions regime.
  (Mr Carver) The Swiss adopted a law consistent with Resolution 661 in August 1990 along with most other countries and it was an effective asset freeze. In August 1990 the need was for freezing not just Iraqi assets, such as there were, but Kuwaiti assets, which were enormous, because of the concern over the fact that Iraq, in possession of Kuwait, could manipulate Kuwaiti assets, and this was the very lively concern in the first few days after the invasion. Swiss law has developed and refined and it is very tough. One of the characteristics of the international community, particularly at the interaction of economics and politics, is that everybody accuses every other country of being defective and deficient. One has seen this more recently in other spheres. My own experience of the Swiss law is that it is clear, clean; the Department of External Economic Relations has been very effective in policing it; there were funds in Switzerland belonging to Iraq which were the source of some confusion and they were held by the Bank for International Settlements which, although it is a Swiss entity, has total protection and immunity and its role as an international banking supervisor means that it cannot, as it were, cough up assets and it declined to do so and that, in some commentators' minds, was associated with the Swiss being difficult. The Swiss, to my mind, have behaved extremely well. In relation to another topic this Committee might address, the question of international corruption, the Swiss have just introduced new laws which make our own laws look very, very, ropey indeed.

  727. Can I just ask you about the situation of an Iraqi living in Switzerland representing his country who may have diplomatic immunity? Would that diplomatic immunity extend to his bank accounts if he was holding a considerable sum of money for the Iraqi regime?
  (Mr Carver) This is Mr Barzan, Iraq's former representative to the UN. I do not know the answer to the question so I should not try to answer it. It could be that the Vienna Convention on Diplomatic Relations, as it were, prevailed where you have these clashes between legal effects—and remember Switzerland is not a member of the UN and, therefore, it does not have the same Article 24 international obligations but it is bound by the Convention.


  728. Is what you are saying that the British law needs to be updated and tightened very considerably along the lines of recent banking legislation in Switzerland?
  (Mr Carver) I think, more broadly, I do agree with that. I do think that the UK law does need to be brought up to date and made less complicated because we do have a tendency to complicate our legislation and I think that we could look with some degree of respect to other newer laws that are passed elsewhere. But, in terms of the basic law to implement Security Council sanctions, we have the best, in my view.

Ann Clwyd

  729. You mentioned in your evidence that the sharing of intelligence between governments appears still to be rudimentary, an assertion also shared by the National Criminal Intelligence Service, who told us they did not have a significant role in sanctions at all. How do you think the role of the intelligence service could be enhanced in this field?
  (Mr Carver) Again, this is I think part of a broader phenomenon of a weakness of internationality. National authorities cling to what they know and hate the notion of trying to copy something that somebody else knows; and this is a phenomenon that makes international co-operation in fighting crime extremely poor. It makes money laundering access pretty weak, frankly. If you do not have this degree of co-operation between authorities, you are not going to be able to have a substantial contribution towards making sanctions effective. But that is another reason why the Interlaken process focused on financial sanctions—because you do not need these inherent weaknesses of national authorities stumbling to co-operate internationally. You can rely upon the much more efficient and effective international banking system, where there are very real incentives to abide by the law and to make sure that the reputation of banks is not sullied by getting into these problems. One international bank was threatened the other day because of participation in simply a cheque clearing scheme and it was threatened with fines of in excess of one hundred million dollars. These are real incentives to make sure that you do not break the law.

  730. Finally, do you have any reason to believe there are any significant Iraqi assets salted away in this country which have not been identified?
  (Mr Carver) I have no reason to believe that there are.

Mr Khabra

  731. In general, are UN procedures aimed more towards preventing the movement of physical goals because that takes weeks, rather than financial results which can move very quickly?
  (Mr Carver) Traditionally economic sanctions have been aimed at impeding exports and imports. Exports and imports are physical; they are also more complicated, and that is why you had the response of these enormous interdiction forces, very expensive, in the Gulf of Aqaba and then just in the Arabian Gulf, and in the Adriatic. The cost of these is simply prohibitive. They are also not terribly effective. For a country like Yugoslavia, of course, they depend significantly on physical trade using the Danube, rail links and others, and it is simply not conceivable that you can cut this very effectively. If, however, you can cut the external money—it is nothing to do with internal money within the country—but if you can cut access to funds—then the external goods cannot be paid for so that in a stroke, by concentrating on the financial sector, you actually police the physical goods. I agree with the proposition, however, that traditionally the UN has thought very much more in terms of interrupting physical goods as opposed to financial digital money.

  732. Both of them go together, you are saying?
  (Mr Carver) Well, if you target the finances, you will probably achieve a significant measure of success on the physical as well; but you cannot do it just by concentrating on the financial.

  733. Secondly, what changes are necessary to adapt UN procedures towards controlling financial assets?
  (Mr Carver) The language that the Security Council uses is not the language of the international banker. That is not a criticism of the UN at all—it uses a language that is the product of a quite complex drafting process in cobbling together something that will get a sufficient consensus within the Security Council. But it has not been terribly helpful in enabling the next stage which is to make sure that the countries who are obliged to give effect to these sanctions actually translate them into their domestic law intelligently and comprehensively, which many of them do not; and it is even less helpful to the international banker that is trying to manage its accounts according to the various legal obligations it has to its customers, its national bank regulators, its international regulators, and to the law. If you do not make the language of the resolution more effective, then it is harder to carry out the translation to relevant law. One of the suggestions that Interlaken came up with was not only whether we should try to introduce and use in Security Council Resolutions the type of language that immediately gets a response, because bankers know what it means and know how to operate that, but perhaps there was a case for trying to develop within the Security Council some sort of guideline as to what is meant by it so you can adopt, as it were, a code word within a resolution, but the explanation of the code is in a public document that has been carefully worked out by the UN Security Council members and perhaps the international banking community so it could be more effective.

  734. Can the UN ever be expected to have the capacity to deal with financial sanctions, or would this be better left to individual member states?
  (Mr Carver) I think the UN can and must be expected to deal with sanctions. That said, the first detailed financial asset control sanctions that were put in place after we reported at Interlaken last March was the EU regulation giving effect to the Contact Group resolution on Yugoslavia in the wake of Kosovo. That used much of the language that we had recommended for adoption at Interlaken and it has been more helpful but already there are beginning to be real problems. The Contact Group only numbers a few states: it leaves the vast majority of states out of the equation and you have a problem of administration and enforcement of sanctions in this way when you have only a part of—however important a part they are—the regulated banks and so on caught within them. That creates confusion. Therefore, if you are going to get financial sanctions working, you have to have a single source—and that is the UN.

  735. Can I ask you another question related to this one: that if a more powerful member state imposes its own sanctions, can those sanctions be overriding the sanctions which the UN is imposing?
  (Mr Carver) There is nothing in domestic law, probably, to prevent a state adopting more stringent sanctions than the UN requires, although that has been tested in certain jurisdictions and at one stage it was thought that the English courts would rule that, as it were, you could not be tougher than the UN required. Traditionally the Americans have gone further and you have, for instance, today a situation where US sanctions have remained in place against Libya, whereas the Security Council has resolved that all sanctions against Libya should be suspended. Now, the United States would say, "We are not in breach of that resolution: we are simply doing our national thing because this is one of the ways in which we exercise our national self-interest in foreign affairs". I think the short answer is yes, a state can be tougher than the international obligation demands. You cannot be less tough than the international obligation demands; but international law does, and should, operate to restrict certain things you try to do—as, for example, the justification for the blocking legislation under the Protection of Trading Interests Act and more recently from Brussels, has been that the United States is in breach of its international law obligations by imposing these external, extraterritorial laws.

  736. Next, I would like to ask a question personal to you, are you happy with the conclusions of the Government's review of sanctions policy? What more could the Government be doing to target sanctions so as to ensure that they are both more effective and less damaging in humanitarian governmental terms?
  (Mr Carver) Am I happy with the Government's review of sanctions? No, I do not think I am happy, because I have yet to see any real understanding of this distinction which I think is fundamental between sanctions as instruments of coercion and sanctions as Article 41 lays down which is as instruments of isolation. I think there is a real distinction between that and, until we understand that distinction, we are going to go on making mistakes with the way in which we view sanctions and the way in which we apply and administer sanctions. The way in which sanctions are administered in this country is, in large part, a product of our old, and I think quite cumbersome, licensing system for physical trade, and I think that is a bit cumbersome and I think they have tried to address it and improve it but I am not sure how successful that will be. So far as asset control is concerned, that I think is simpler and probably more effective and I do not think there is very much more that the Bank of England needs to do other than to make sure that the availability of technical means (interdiction software) is much more widespread throughout the banking community. The relationship between humanitarian deficit and sanctions is, I think, a very much more complicated one. A very glib equation seems to be made between the imposition of sanctions and humanitarian suffering and I do not think that equation is justified. If sanctions are, as I suggest, simply a product of Article 41, whose aim is the excommunication, the isolation of the target state, then they are not intended to be internally coercive. I think most of the suffering that has happened within Iraq and undoubtedly there has been monstrous internal humanitarian suffering within Iraq which actually preceded, as we know, 1990, has been entirely the responsibility of the Iraqi regime. It is not the result of sanctions. Sanctions are there to operate externally. I do think, however, that the Security Council's motives, or at least the motives of certain members of the Security Council, were quite complicated and some of them were quite plainly coercive and that coercive effect has come back and undermined the validity in general perception of the sanctions that were imposed. But I do think that, in terms of Article 41, those sanctions were justified and the maintenance of those sanctions had been justified—as, indeed, the Secretary General has successively recommended in his regular reports to the Security Council—that they are still justified.

  Mr Rowe: Mr Carver has really answered the question I was going to ask but I would like to ask another one briefly: is it not the case that the physical sanctions on most countries leads to an extraordinary explosion of illegal activity and is it your perception that that would, if it goes on long enough, distort the whole nature of the country's proceedings, or do you think, taking for example the huge smuggling that goes on between Turkey and Iraq, that that would come to an end if the sanctions were lifted? Do you think that is now a permanent and demoralising part of the situation?

  Chairman: Perhaps Mr Robathan could come in with his question and you could answer them at the same time.

Mr Robathan

  737. I agree entirely with what you say about Iraqi sanctions so I am not trying to trip you up in a legalistic manner, but could you develop slightly what you said about the complicated motives and the coercive element of the sanctions? I did not really understand what you were trying to say there. What were the complicated motives that led to some of the sanctions being coercive?
  (Mr Carver) Can I park coercion and deal with the effects of smuggling? I would have said that it was a feature of many states where sanctions get imposed that there is a degree of considerable instability around borders. Where you do have instability around borders, you have traditional smuggling. You only have to look, for instance, at the complexity of Yugoslavia and its component states at any time in history to see the extent to which smuggling was a feature of ordinary social life around the borderlands, and borderlands encourage this unless they are nice and simple and straightforward. I do not think the removal of sanctions is going to change very much the extent to which smuggling takes place. Yes, sanctions can encourage an increased degree of smuggling, but I do not think the Turkish—Iraqi smuggling is, relative to the size of the pre 1990 Iraqi economy, that significant. It is certainly very vigorous, but remember that the whole of the northern sector of Iraq is now without any effective Iraqi administration and it is a source of a quite different and dreadful human problem which is the plight of the Kurds. So all of this, as it were, is taking place in a situation of dreadful instability. I am not sure that sanctions actually have this dramatic effect. I think it takes place, increases and may decrease if the economic climate changes so that smuggling is not so attractive. On coercion, I read quite carefully the emanations from different foreign ministries around the world, particularly in Washington, particularly in London—perhaps also in other European capitals. There is a Babel of voices—a confusion, you could say—there is a significant degree to which it is said that the aim of sanctions has been to remove Saddam Hussein. It could not possibly be that that was the aim of Article 41; it is quite beyond Article 41 that that should be the result. To slightly answer the question differently, I was in Kosovo in August and interviewed the Serb orthodox Archbishop and he said, "What were your war aims? Were they to punish the Yugoslav people or to remove Milosevic?". I fortunately did not have to answer the question but the answer was given too glibly which was, of course, "Nothing against the Yugoslav people". "Ah, then you lost the war. The war was to get rid of Milosevic and, therefore, you have left us with him as a feature", as it were. Now, you get the same sort of mistakes being made over Saddam and the continuation of the Iraqi regime. In vain does the Security Council regularly recite its respect for the territorial integrity of Iraq. In vain do they say, as an institution, "We are not trying to undermine", because it is also reported and perhaps more regularly that there are those in Washington and maybe those in London too, who are energetically putting resources behind the undermining of that regime and they also sometimes equate those actions with the maintenance of sanctions. I think this is wrong.

  Chairman: Thank you very much indeed, Mr Carver. You have given us a great deal of food for thought as we brood over the report that we will be making on sanctions and the future, and you have helped us a great deal this morning. I would like to thank you on behalf of the Committee very much indeed for making yourself available this morning.

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