House of Lords - Economic Affairs

Select Committee on Economic Affairs Written Evidence

Memorandum by Mr Jeremy P Carver, CBE,[81] International Lawyer

1. The Committee is concentrating its attention on economic sanctions; but it seems important to clarify what are meant by "sanctions", not least because the field is already fundamentally confused by misunderstanding of the measures that have been taken, and may be taken, under this rubric.

2. There are two very different measures available to States:

acts of war

3. Ignorance of this has contributed significantly to the ineffectiveness of almost all sanctions adopted by States, at least over the past 50 years. There is an historic reason for the confusion;[83] but the significance lies in the fact that national authorities, failing to understand that they are using different measures for different objectives, are simply failing to achieve the stated aims of the measures. This breeds both ineffectiveness in resolving the threat to international peace and security, and disillusion in the UN as a distinct actor. Because so many sanctions measures have failed in their stated aims, it has become much harder to reach consensus on the best means to deal with threats to security; which in turn has encouraged certain States to suppose that the use of force is the only available means—not under article 42 of the UN Charter; but by unilateral "coalition" intervention. It may be optimistic to suppose that the costly insecurity resulting from armed intervention in Afghanistan and Iraq will discourage similar adventures for the foreseeable future. Nevertheless, there is widespread concern over developments in Iran (risk of nuclear proliferation) and Sudan (humanitarian atrocities in Darfur), which has led to calls for the imposition of sanctions against the respective governments.

4. It is my firm opinion that sanctions, as currently conceived and employed, will be wholly ineffective to help resolve either of these issues. This is neither to belittle the importance of the issues, nor to advocate a policy of "do nothing". If we assume that the use of force against either State will not happen, all States who are concerned must re-double their efforts—individually and regionally—to find solutions. There is much to suggest that such efforts, if genuinely pursued, would succeed. This would be helped by a realisation that sanctions—at least those of the kind often mentioned[84]—are not an option. Thus removed, all sides (including a Western public that is half-convinced that sanctions might work) might appreciate the need to engage in responsible dialogue.

5. Sanctions could become an effective instrument to achieve the objectives set out in Chapter VII of the UN Charter. A long succession of failed or ineffective attempts to resolve threats to peace and security point to many weaknesses in the ways that sanctions are designed, implemented, administered and enforced. Moreover, analysis carried out during inter-governmental initiatives in the 1990s[85] was tested, to a limited extent, in the counter-terrorism measures that followed "9/11"; and offers States and the UN the means whereby the use of sanctions can be reformed.

6. Meanwhile, sanctions as currently deployed continue to have multiple negative impacts. On a long term basis, it can be argued—perhaps outside the USA—that the comprehensive US economic embargo against Cuba has achieved the opposite result to that intended, namely the entrenchment in power of the Castro regime. A similar result can be observed in the impact of UN sanctions against Iraq in 1990, which helped to perpetuate Saddam Hussain's hold on power after the severe weakening caused by the "Desert Storm" operation which liberated Kuwait. The imposition of sanctions has, over the years, all too often led to unintended consequences. Even where sanctions have been cited as quite successful in relation to Libya, the UN-imposed mandatory flight ban led to a high profile flouting of the ban by African leaders.

7. The main impact of sanctions, however, has seldom been felt within the targeted territory. The persons most directly affected are traders and business people operating within the countries imposing the sanctions. This is inevitable, given the limited jurisdictional reach of national laws. Both kinds of sanctions—multi-lateral and unilateral—penalise those who deal with the targeted State, many of whom are not deliberate law-breakers.

8. The complexities of modern banking and ancillary business services are such that much of commercial traffic involves no or minimal human intervention, eg cheque clearing systems and block insurance/reinsurance arrangements. Thus, banks and other business service providers have been compelled to install ever more elaborate compliance programmes in order to isolate transactions that may be prohibited or controlled by national regulation in a number of jurisdictions.

9. Sanctions were conceived at a time when people had to create commerce and it could be assumed that they were conscious of the laws controlling their activities. Information technology has marginalized human involvement in much modern business, certainly of a routine nature. Yet transactions that breach a specific national sanctions regulation can be identified using the same technology, and the readiness of law enforcers to penalise their nationals who discover that they have facilitated a prohibited trade has caused businesses to establish complex and very expensive systems to prevent breaches. Given that much of the sanctions regulation has been drafted in earlier days, and has uncertain effect in contemporary commerce, these systems err on the side of caution and "overkill", preventing business that may not be illegal at all.[86] The integration of global business by means of mergers and acquisitions now involves extensive research to discover which parts of a subsidiary's business can be undertaken (or not stopped) by a new parent governed by a different set of sanctions regulations.

10. There are thus three "losers" from such sanctions, only one of which was the intended target: first, the State or persons unable to trade and their counterparts; secondly, traders and businesspeople not strictly caught by the sanctions but prevented by the wider effect of compliance systems; and, thirdly, the customers of the service provider and general public bearing the extra costs of running of these systems.

11. The situation worsened significantly in the wake of "9/11". AT US urging, the UN Security Council had tried to introduce sanctions targeting specific suspected terrorists or terrorist groups in 1999 and 2000.[87] The 2001 attacks on New York and Washington DC provoked united action across the globe. The Security Council adopted unanimously resolution 1323 of 28 September 2001, setting out a comprehensive agenda to combat terrorism and creating the Counter-Terrorism Committee of the Council (CTC), with a mandate to monitor and assist States' compliance. The United Kingdom's Permanent Representative to the UN in New York became Chair of the CTC.

12. The early promise of the CTC to overcome some of the problems of worldwide enforcement of mandatory UN sanctions was not sustained. States were required to report, successively, on their achievements, and technical assistance was offered to solve problems. Patience, resources and, above all, confidence of the major States members were needed; and all soon ran out. Thus, although the CTC and its experts have done much useful preliminary work, little will be achieved unless and until responsible members of the Security Council so urge; and are willing to back such encouragement with the necessary resources.

13. Even before the CTC was established, the main focus of the US Administration was to reorganise and reinforce its agencies in Washington DC in support of combating terrorism. From reports published subsequently, it emerges that intelligence that might have identified the threat was not followed up. At the time, US officials were caught "blind"; and the first clues as to what had happened came from tracking credit card transfers made by some of those who had hijacked the four planes. A greater significance was thus placed on the ability of financial markets to combat terrorism than could be justified. Whereas analysis of electronic fund transfers can reveal past events, it will do very little to identify future activity; and prohibition of such transfers to named individuals will barely impede an actual terrorist from pursuing his criminal ambition. Nevertheless, the role of the Office of Foreign Assets Control (OFAC) was boosted, and seen in Washington as the vanguard of the "Global War on Terror".[88]

14. OFAC had been created to administer the various sanctions programmes introduced under the US Trading with the Enemy Act (TWEA).[89] These programmes were primarily protective: to conserve assets of the targeted State on behalf of US claimants. OFAC continued to do the same tasks under the International Economic Emergency Powers Act (IEEPA), which enabled like controls to be introduced and enforced whenever the President identified an economic threat to US interests. There was a small, but important, jurisdictional difference between the two statutes: whereas IEEPA gave powers to regulate all US persons (ie US residents, nationals and corporations), TWEA extended this to all persons subject to US jurisdiction, which was applied so as to include foreign subsidiaries of US corporations outside the USA.

15. The extra-territorial effects of this were soon felt in relation to Cuba, when the Cuban Democracy Act of 1992 was countered in the United Kingdom by an Order under the Protection of Trading Interests Act 1982 prohibiting UK companies and nationals from complying with the US extra-territorial measures. The risk of transatlantic tension grew after the "Helms-Burton Act" was passed in 1996. In response, the EU Council introduced blocking regulations prohibiting European nationals and companies from complying with both Helms-Burton and the Iran-Libya Sanctions Act 1996. Eventually, an uneasy modus vivendi was arrived at, which has discouraged both EU and US authorities from penalising companies caught in a "damned if I do; damned if I don't" situation. Again, this has an inhibiting impact on legitimate business, causing unnecessary losses.

16. This is compounded by the increasing tendency to identify individuals as the target of specific measures. This derived from OFAC practice, where individuals were identified as "Specially Designated Nationals" (SDNs) of a sanctioned State. This had little impact outside the USA until January 1991, when OFAC published a long list of Iraqi SDNs, which included the University of Liverpool and other bodies and institutions unaware of any Iraqi involvement. Notoriously, OFAC had simply adopted a list presented to them by a private security company on the basis of the most superficial research. It took many months to resolve even the most blatant errors.

17. International suspicion of sanctions deepened as Iraqi sanctions were maintained long after they had been expected to end; and the widespread dislike of "comprehensive"[90] sanctions led to the adoption of "targeted" measures. The targets tended to be individuals;[91] but no basis was ever given for the naming of such individuals. Such designations of persons outside the US could create difficulties for the SDN; but the measures adopted became increasingly penal in character. Only when, after "9/11", the United States designated a large number of Muslim individuals and bodies as "Global Terrorists", without offering any proof, and insisted that the Security Council target them specifically, was it appreciated that no due process had been followed, and that the UN had effectively condemned these individuals to starvation.[92] The Security Council has sought to introduce a mechanism whereby a designated individual can complain; but the burden rests on the "target" to counter information of which he may remain unaware.

18. Latterly, OFAC has aggressively extended the reach of its attempts to regulate non-US banks. OFAC requires all banks in the US to maintain interdiction software to control payments to bodies or persons designated under its various sanctions regimes. In December 2005, OFAC levied very large civil penalties against ABN AMRO, a leading European bank, for the involvement of its Dubai Branch in effecting payment instructions on behalf of Iranian bank customers. Although the relevant US sanctions do not apply to non-US banks outside the USA, the penalties were imposed on the basis that the currency of the payments was USD, which thereby had to be cleared through New York. In many jurisdictions, such a penalty would be challenged as beyond the powers of the enforcement agency; but the "political" dimensions of such a challenge in Washington DC operate so as to discourage responsible companies (whether US or non-US) from doing so.

19. By such means, US regulators are extending the reach of OFAC sanctions extra-territorially. Whereas, specific legislation such as Helms-Burton and ILSA has invoked specific legislative reaction from the EU, Canada and Mexico to deny effect to such sanctions within their own territories, an unchecked policy of interpreting and applying domestic regulation to operate externally can have similar results.[93]

20. The Global War on Terror is being cited as justification for many extra-legal practices, on both sides of the Atlantic. In relation to international sanctions, such practices are clearly counter-productive. Sanctions, or at least the measures available to the Security Council under article 41 of the UN Charter, are surely too important to be so abused.

21. As I have sought to demonstrate, there exists profound confusion over what these instruments are, and how they should be deployed to achieve the limited objectives set for them. They will do so only if all member States act consistently and cooperatively. The lack of real effort to complete the ambitious programme commenced by the CTC under UNSCR 1373 is particularly regrettable.

22. If sanctions are to become effective, those States—in particular the USA[94]—must rein in responsibly the unilateral measures employed by OFAC to achieve US foreign policy objectives. Within certain humanitarian limits, international law has nothing to say about a State's domestic legislation, however misguided and ineffective. When that legislation is deployed extra-territorially and applied to non-US persons, international law is broken, and the utility of sanctions is undermined.

23. In summary, based on this short account of current issues relevant to the Committee's enquiry, the following recommendations are offered:

(a) Renewed attempts should be made to bridge the gulf of misunderstanding and confusion over the scope and purpose of measures taken under article 41 of the UN Charter, in order to reconcile such measures with domestic regulation taken unilaterally for national policy purposes.

(b) The government should encourage, if necessary by providing necessary resources, acceleration of the work of the CTC to complete the mandatory aims set out in UNSCR 1373. Sanctions will never work unless the bulk of States apply them consistently and cooperatively.

(c) The government should spearhead a renewed attempt to create within the Security Council secretariat a means of pooling relevant and reliable intelligence which can help (i) design sanctions specific to each threat to peace and security presented and (ii) facilitate enforcement of the sanctions adopted.

(d) The Bank of England and the Financial Services Authority should as a priority consult with international banks operating in London and with other EU bank regulators in order to determine the extent of extra-territorial controls being asserted by OFAC. Representations based on such consultations must be made so as to eliminate extra-territorial effect of US (and any other) regulation, and to remedy the adverse consequences of past abuse.

(e) Pending such changes, the government should, in the light of the above findings on extra-territoriality, coordinate with the European Commission and member States to protect undertakings in Europe by neutralising the extra-territorial effects.

(f) Above all, the government should seek to ensure that sanctions are adopted only where the circumstances fall within Chapter VII of the UN Charter, and the specific measures adopted can realistically expect to resolve the threat to international peace and security.

September 2006

81 Although based on years of professional practice as an international lawyer, mainly as Head of Clifford Chance's Public International Law Group, Jeremy Carver makes these submissions personally, and not on behalf of any law firm, client or other organisation with which he has been associated. Back

82 UN Charter, article 39. Back

83 Great Britain's Trading with the Enemy Act 1915 was enacted after elaborate research and careful deliberation over a number of years, and was repealed as a strictly wartime measures after WWI ended. It was reinstated in 1939, and again repealed after 1945, retaining minimal powers, which were used against Argentina in April 1982. The United States had no such legislation when they entered WWI, and simply adopted the British Act in 1917, without appreciating its essentially wartime character. Instead of repealing it, successive US Presidents started to use it in the post WWII era, eg against Cuba in 1959. Indeed, they built upon it with the International Emergency Economic Powers Act in 1977, of a very similar character, which has provided the basis of most US sanctions since that time. Back

84 It is said that the Sudanese government places great value on its participation in the African Union (AU) and the League of Islamic States, which would suggest that the AU and the League could play an influential rule by proposing to suspend Sudan's membership unless certain conditions are met. The Commonwealth has achieved positive results by such means in the past. Back

85 The "Interlaken Process", initiated by the Swiss government, addressed the concept of "targeted financial sanctions"; followed by the "Bonn-Berlin" process, hosted by the German government, addressed travel and flight bans and arms embargoes; followed by the "Uppsala-Stockholm" process, hosted by the Swedish government, developed design of targeted financial sanctions. A number of complementary workshops and seminars were held, not least by the Watson Institute at Brown University, RI. The Security Council itself has convened committees to consider improvements to the efficacy of sanctions. Back

86 US banks discovered some years ago that many Cuban immigrants to the USA gave their daughters the name "Havana", causing considerable difficulties for them when they grew up and tried to open bank accounts, because the interdiction software required to identify prohibited payments invariably had "Havana" as a "stop-word". This phenomenon became even more acute when measures were taken against individual Muslims by reason of the relatively few Islamic names and the variability of transliteration from a differently scripted language. Back

87 UNSCR 1267 (1999) and UNSCR 1333 (2000). Back

88 Successive OFAC Annual Reports disclose minimal impact in tracking and freezing "terrorist funds", despite the considerable resources now devoted to this task. The bulk of the funds stopped are those of Muslim welfare or remittance organisations designated as "terrorist" on the apparent basis that some of their transfers have involved supposed terrorists. Back

89 See note 2 above. Back

90 UN sanctions against Iraq were never "comprehensive" in that exceptions to allow medical and humanitarian supplies existed from the start. Back

91 In many cases, it would be more effective to "target" particular activities or economic resources on which a regime critically depends: the aim in all cases being to distinguish the leaders from the general public and undermine their popular support. Thus, the "Gleneagles Agreement", made in 1977 without legal force among Commonwealth nations to exclude South Africa from international sporting events, was arguably the most effective measure to herald the end of apartheid there. Back