Select Committee on Economic Affairs Minutes of Evidence

Examination of Witnesses (Questions 60 - 79)



  Q60  Lord Macdonald of Tradeston: This then raises the question of how effective the signalling is. Clearly it is a very crude system because people do not seem to understand what is going on inside the opposing countries.

  Dr Alexander: It is certainly very difficult to measure what the political leadership is thinking and doing, especially in authoritarian regimes, and whether or not the sanctions are having an actual effect, other than to make guesses on the economic growth and output and whatever the World Bank can tell you.

  Q61  Lord Macdonald of Tradeston: Does this not therefore strengthen the idea that sanctions, albeit often ineffective, are a very important diplomatic tool because they put other options into play, which allow elements inside the targeted country or indeed the targeting country to marshal arguments which might change the diplomatic realities and effect settlements?

  Dr Alexander: Certainly, I think it has been the case that broad-based economic sanctions have had a tremendous impact on certain countries and regimes. We look at Libya as an example. Gadaffi was finally brought to the table to negotiate. In every country I think it is different; they have different vulnerabilities economically. I do not think we should just say that economic sanctions do not work and that we should not use them. I think we can strategically apply them to a country's vulnerable target, and every country will be different.

  Q62  Lord Powell of Bayswater: I wanted to come back on that point and your four objectives of sanctions and suggest to you that there is at least a fifth, which is self-indulgence on the part of those employing the sanctions, in the sense that they do it in order to demonstrate that they are doing something rather than nothing, and that this helps appease angry populations, other countries, international organisations and so on. I am not suggesting that is a worthless motive. I think it is actually quite a good motive, but it should be added shortly to your objectives that one applies them simply because something has to be done.

  Dr Alexander: I think that is a very good point. You might even expand the definition of signalling to include signalling to your domestic constituents that the government is doing something. Certainly that is the case with the US trade embargo with Cuba, that the Cuban-American lobby is very strong in Washington and they are very well organised. So US foreign policy is not just simply trying to bring about regime change in Cuba but also signalling to their own domestic constituents that they are doing something regarding Fidel Castro.

  Q63  Lord Powell of Bayswater: I might add that when we have made this suggestion to the Foreign Office that self-indulgence might be a motive, they gathered up their skirts in great distaste and said it was a most improper suggestion!

  Dr Alexander: I understand.

  Q64  Lord Oakeshott of Seagrove Bay: You have talked particularly about the UK and the US sanctions policies. Can we come on to the European Union? How far does the common commercial and foreign policy either undermine or reinforce our own British sanctions policy and can we effectively do a separate sanctions policy, or is it going to be worthless without the EU?

  Dr Alexander: As a practical policy matter, it is very good to have the EU on board because that way you get full effect throughout the 25 Member States, and that is very useful. So it is a very useful exercise to engage in the political negotiation process. I think that has happened in Zimbabwe. The UK was very effective in getting the EU to adopt financial sanctions and freeze assets against the Zimbabwean regime. As a legal matter, the UK is not prohibited from using financial sanctions unilaterally, unless there is an EU directive or regulation that specifically proscribes the UK from using such financial sanctions.

  Q65  Lord Oakeshott of Seagrove Bay: A negative power?

  Dr Alexander: Exactly, and so if the EU has not expressed a policy position on this or has not adopted a binding legal instrument like a regulation or a directive, then the UK can apply unilateral economic or financial sanctions, but I think the UK policy is much better to engage in diplomacy with EU Member States and say, "Let us try to have the whole EU adopting sanctions". It has been pretty effective in that regard. If you look at all the UK economic and financial sanctions that have been adopted in the last four or five years, they have been recognised throughout the European Union, at least since 1999, and so you have got all the various sanctions regimes that are either coming from the international level at the UN, or, if they are not internationally inspired, like the Zimbabwean sanctions, there has been at least political recognition by other EU Member States.

  Q66  Lord Oakeshott of Seagrove Bay: Has the EU ever passed a directive like that banning a Member State from using a form of sanctions, or is that theoretical?

  Dr Alexander: It is possible, but in my research I have not found a case where that has occurred.

  Q67  Lord Macdonald of Tradeston: On EU sanctions policy, do you see any significant weaknesses and measures that might be taken to correct these?

  Dr Alexander: I think the UK has been fairly robust in implementing economic sanctions in Britain, and Britain expects other EU Member States to do the same. If we look at the other regulatory regimes across Europe, we see a lack of uniformity in the implementation of economic sanctions, and some governments do it more successfully than others. Some of them do not succeed because they do not have the capacity, the technical skills. Others do not succeed because they do not have the political resolve to do it. I think that is a major problem because you have certain countries in the EU where it has been stated that they are not really correctly implementing the financial sanctions orders that have been adopted. I think this poses a problem because Britain wants to ensure, obviously, that the rest of Europe is on board. There could be some reforms of this. I mentioned earlier that economic sanctions in Britain do not apply extra-territorially. So a British bank is not compelled to require its branch bank in Spain to apply the sanctions. I think that there should be a change to the EU regime that allows EU Member States to apply the principle of home country control for financial sanctions. If you have a British business or British bank or British firm that is operating throughout the EU, the home country of that firm ought to monitor and supervise its implementation of sanctions throughout the EU and not rely on the host state where that firm is operating. This is done in banking regulations. It is done in many other areas of financial regulation in Europe today, in insurance regulation, securities and banking. We see that in banking and securities regulation the EU has established committees of regulators to oversee implementation of EU directives, like the Committee of European Banking Supervisors, the Committee of European Securities Regulators. One suggestion might be that we should have something for sanctions on that. There is nothing like that for sanctions in which you have the regulators of all the countries coming together, sharing notes, monitoring each other and performing surveillance to see whether or not sanctions are being effectively implemented, because right now they are not across the EU. We should have an equivalent type of committee set up in the UK.

  Q68  Lord Paul: Does it not follow, because unfortunately we end up playing cricket and the others play football in Europe, that businessmen in this country end up losing? Sometimes I wish we had played better football last week! It does make difficulties for British business to be taking part when the others do not carry out the same sanctions.

  Dr Alexander: Economic sanctions impose a cost, certainly. There are criticisms in the financial sector that the anti-terrorist financing sanctions are imposing a disproportionate compliance cost on British banks, on British financial service firms, and that the cost involved is disproportionate, that it is not adequately offset by the benefit of freezing these several hundred terrorist accounts and that the due diligence, the suspicious activity reports that have to be filed by British financial service firms, is an onerous cost of regulatory compliance, and this is the case in money laundering as well. I would say it also applies with economic sanctions. Therefore, there needs to be an assessment of the cost involved, the cost of compliance. That is why it is important to be able to assess whether or not the benefits and the objectives are being met.

  Q69  Lord Paul: I can just ask the contrary question. Has the Export Control Act 2002 improved effectiveness and are there any weaknesses in the Export Control Act which need to be corrected, in your view?

  Dr Alexander: I think the Export Control Act is a tremendous improvement in the regulatory regime for controlling exports certainly, as it applies to military items, dual-use items, technology, and software programmes. However, I think the enabling legislation was enacted in May 2004, so it is probably too soon to make a judgment on whether or not it has actually been effective in achieving objectives. Certainly in the statute there are clearly stated statutory objectives: to promote global security, to comply with international law, to promote Britain's national security objectives. I think the statutory framework and the regulatory framework looks very clear. It has been designed and implemented, I think, correctly. Whether or not it is achieving its objectives, I think time will tell.

  Q70  Lord Vallance of Tummel: Can I bring you back to the financial institutions and the banks for a moment? Leaving aside compliance costs, which are probably quite high, the point that you made about extra-territoriality and how useful it would be if subsidiaries in other countries could be at the back end of blocking all this, what are the other practical problems for UK banks and financial institutions in successfully applying targeted financial sanctions and what could be done to overcome them? Do the policy makers, when they decide to pursue targeted financial sanctions, take these practical problems into account?

  Dr Alexander: I think that when the policy makers adopt sanctions regulations or when they enact statutes to regulate the financial sector, the policy makers often do not take into account the regulatory costs that are involved. It is left to the regulator really, who is on the front line dealing with the bank, to deal with the bank and try to work out a workable solution. Generally, the policy makers basically ship the compliance off to the banks. They say, "Here is a list of designated terrorists. Freeze their bank accounts" and you have to show the regulator that you are doing due diligence and that you are reporting suspicious transactions. It is up to the bank to work with the regulator to come up with a method to do this. I think that the policy makers do not take into account the substantial costs that are involved in that regard.

  Q71  Lord Vallance of Tummel: To push it slightly further beyond cost, are you aware of any studies that have gone into examining what precisely the practical problems for the banks and financial institutions are?

  Dr Alexander: The British Bankers' Association has done some studies on anti-money laundering compliance in the UK. I do not know of any regarding British banks complying with UK sanctions legislation, but there are studies done regarding US banks', compliance with US Treasury sanctions.

  Q72  Lord Vallance of Tummel: Has anything been done on a global level, given that we are talking about global financial markets and there is always a danger that things move from one country to another or elsewhere? Have any studies been done about the practicalities of making binding financial sanctions at a global level?

  Dr Alexander: No, not that I know of on financial sanctions. On money laundering, the Financial Action Taskforce engages in peer review. They do studies of different jurisdictions implementing anti-money laundering and anti-terrorist sanctions. So there are some FATF reports and studies, and some work the OECD has done regarding the cost that developing countries incur when they have to implement terrorist financing sanctions and money laundering controls, but I do not know of any studies regarding financial sanctions and trade embargoes.

  Q73  Lord Layard: Could I ask you about the effect of sanctions imposed by the UN or other countries on UK individuals and businesses? Does the UK provide effective procedural safeguards for individuals and businesses in the UK who may be targeted by sanctions imposed by other countries or the UN?

  Dr Alexander: I think that is a real problem. That is a gap in the regulation now. One of the problems is that the US has identified tens of thousands of alleged terrorists and tens of thousands of supporters of terrorists that supposedly are providing commercial and financial services to terrorists. The US is very assertive in trying to get other countries to recognise the US terrorist designations. I think that the regulators, when implementing the UK financial sanctions, have not implemented sufficient regulatory safeguards or they have not made them clear enough for the financial services community to know what to do when someone comes to the bank and says, "I am not a terrorist. I am not involved in this activity that the Treasury says I am or that the US says that I am". There have been some concerns raised throughout Europe that the application of financial sanctions in the European Union is in violation of the European Convention on Human Rights because it does not provide sufficient safeguards for those whose assets are frozen to contest that in a court of law. There is certainly no judicial review under US law. I do not think there has been a case in the UK on this yet, but my understanding would be that someone could probably contest it under the Human Rights Act, under Article 6. I do not think it is clear. Banks and financial service compliance officers will tell you that they get a list of names whose accounts they are supposed to block but what if they come to them and say, "I am not a terrorist. What do I do?" So the bank does not really have a clear procedure to follow. In fact, they cannot say anything at all in some cases because they will be guilty of a tipping-off offence, as in money laundering or terrorist financing. So they cannot tell the person anything. They can just say, "No, your account is blocked. That is all we can tell you". I think there needs to be more adequate regulatory procedures put in place to give people a chance to contest asset freezes and other types of economic controls.

  Q74  Chairman: Is it not even worse than that, that they leak it to the police, there is a raid in the middle of the night, and it is in all the newspapers and then, several months later, it is proved it is a total and complete utter nonsense. There are examples of that happening.

  Dr Alexander: Exactly, there are.

  Q75  Lord Skidelsky: I have not quite worked it out in my mind but what problems are you creating when you move from sanctioning a state to sanctioning individuals? In a way, you are really saying that you are sanctioning a whole lot of people who are potentially guilty or actually guilty of criminal activity, including heads of state. In other words, you are bringing the whole issue of relations between states, which start with high-minded principles about breach of peace and threat to international security, under a criminal law, which is actually completely undeveloped. Is that legitimate? In the end, you end up thinking of Cuba or Libya as a criminal state or run by criminals who are money laundering or are guilty of money laundering in the same way as people are producing drugs in Bolivia. I do not know what concept of international relations arises from that view of things. I have not thought this through clearly but I wonder if you have any views.

  Dr Alexander: It is an excellent point. The US would argue that they are not imposing criminal sanctions; they are imposing civil sanctions—blocking accounts and freeze orders are civil measures—and that they are not actually confiscating the bank account; they are merely telling the bank to block it so that the person cannot have access to it indefinitely.

  Q76  Lord Oakeshott of Seagrove Bay: What is the difference if the money is frozen?

  Dr Alexander: Exactly. That is US policy and US courts have held that that is not a deprivation of property because the bank still has the money and you are still a creditor of the bank but you just cannot have access to the money until the US regulator lifts the control. So the US has always said that these are civil sanctions, not criminal; that this is part of national security; it is different. Also, of course, under the Antiterrorism and Effective Death Penalty Act of 1996, the State Department in the US can designate state sponsors of terrorism, and about eight of these have been designated. These states lose their sovereign immunity in a US court and can be sued for civil damages for terrorist acts. If they are implicated in supporting a group that causes a terrorist attack and damages are involved, anyone, not just US citizens but foreign nationals, can come to the US court and sue that state. Syria, Cuba, North Korea, Iran, and recently Belarus are designated state sponsors of terrorism and they are on the State Department list. The US will say that is not criminal, it is civil damages, civil sanctions. The US has a very comprehensive system of civil sanctions, which I think calls into question the very meaning of inter-state relations and international relations. It raises a number of important international legal issues.

  Q77  Lord Sheldon: Do the extra-territorial United States economic sanctions affect United Kingdom or European Union business? Do any of these problems affect UK and European Union policy, and, if they do, what are they?

  Dr Alexander: I think there are a number of US economic sanctions laws that potentially affect Britain. One that has been law since 1996 is the Helms-Burton Act. It is not being effectively used at the moment but more directly the Terrorist Sanctions Regulations that the Treasury Department has adopted involve designation of thousands and thousands of alleged terrorists or supporters of terrorists. Businesses, company directors, and heads of charity organisations are designated under these Treasury Sanctions Regulations and their accounts can be blocked. Most of them do not live in the United States; they live abroad, they live in Europe, they live in the United Kingdom. So they have accounts with US banks and their accounts can be blocked. In addition to that, the US, through the Security Council Resolutions 1373 and 1267, can get the names of these individual terrorists recognised at the international level, so that they are then implemented domestically in other jurisdictions. The UK, of course, has designated certain terrorist individuals who were the subject of extra-territorial US financial sanctions. The UK has implemented those regulations in Britain. I think there is a real problem because to some extent there are two sets of UN sanction regimes. There is the Security Council Resolution 1267 that has a counter-terrorism committee; they provide an international list of terrorists. Then there is the 1373 Sanctions Committee, which basically does not have an international list, but countries domestically designate terrorists that are then mutually recognised by other countries. The problem with the British regime is that they are giving mutual recognition to the terrorist designations of the US without having possibly done a thorough background check of the intelligence involved that relates to its designations. This could be a big problem. A recent problem of extra-territoriality we have read about in the papers involves the NatWest Three, the Extradition Act 2003 and the Extradition Treaty of 2003. One of the requirements of extradition is that you have dual criminality in both jurisdictions. The Terrorism Act 2000 and the Anti-Terrorism, Crime and Security Act of 2001 in Britain criminalises support of terrorists. It criminalises the financial support of terrorists. US law also criminalises third party support of terrorists. You could have a third party businessman or a company that is involved in providing support to a terrorist organisation in Britain; the British may not think that it is worth prosecuting, but under the Extradition Treaty, the US could possibly extradite him to the US to stand trial.

  Q78  Lord Skidelsky: On criminal charges?

  Dr Alexander: On criminal charges, exactly, if they decide to lay criminal charges. Most of the US sanctions are civil sanctions, but if a prosecutor gets enough evidence that they think they can bring a criminal case, they will do so. The financing of terrorism is a criminal offence in both the UK and the US. It is subject to civil sanctions and criminal sanctions. If a US prosecutor decides to prosecute a British business for providing support to a home-grown terrorist in the UK, and the UK authorities have decided not to do so, they can be extradited under the 2003 Extradition Act.

  Q79  Lord Powell of Bayswater: I want to return to the question of actual damage to British and other interests by extra-territorial application of American sanctions and go back, for instance, to when the United States imposed sanctions against the Soviet Union at the time of Soviet intervention in Poland and proposed sanctions against the pipeline of the Soviet\Union to Europe. That led to an almighty diplomatic row, particularly about whether existing contracts could be affected. The British Government put up a strong defence of allowing existing contracts to be repeated. I think I am right in saying that a fast notification gave immunity to the company John Brown against prosecution by the US in order to complete a contract. There have been, surely, some pretty specific cases where British business at least has been badly affected by the extra-territorial pretensions of the United States.

  Dr Alexander: Certainly in the 1980s in the case of anti-trust law enforcement, competition law enforcement, and Parliament enacted the Protection of Trading Interests Act of 1980, which is a blocking statute which tries to neutralise the extra-territorial application of US economic sanctions in the area of anti-trust law as well as the Cuban embargo. However, it does not apply to anti-terrorism legislation. My understanding would be that the Secretary of State for Trade and Industry could probably issue an order to try to add some of the US sanctions legislation regarding terrorism to that list. That would be a big move politically. They have certainly done it in the case of the Cuban trade embargo and the Iran and Libya Sanctions Act. There are legal measures that Britain can take to repel the application of US economic sanctions if Britain wants to do it. In terrorism it is a very difficult issue because there is a war on terrorism, of course, and everyone has signed up to it. If you are not going to implement extra-territorial US measures against alleged terrorists, then it makes the UK seem as though they are not being a good partner in the war on terrorism. That would be a very difficult political movement. They could do it legally, however.

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