Examination of Witnesses (Questions 60
- 79)
TUESDAY 4 JULY 2006
DR KERN
ALEXANDER
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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