Financial sanctions – U.S. policymakers’ holy grail?
Traditionally, sanctions usually targeted other countries’ trade or economic activity abroad. Although this certainly has the advantage that it allows leaders to react in defense of their countries’ interests without having to resort to physical force, there are some apparent downsides as well. For instance, they are hard to implement, usually don’t create a comfortable situation for the leaders of the sanctioned countries to compromise but rather strengthen them politically, can feel humiliating and stir nationalist sentiment, are often felt more by the people than the political elite and can cause disputes between allies on the intensity and the scope of the measures. Economic sanctions can moreover be circumvented by “sanction busters” such as China, which continued to buy Iraqi and Iranian oil and conduct business with blacklisted Russian and North Korean entities, unimpressed by the U.S. and its allies’ isolation efforts. Therefore, ‘traditional’ sanctions have become less in fashion as a foreign policy tool in the recent years.
The trend has been a shift to more financial sanctions. As a part of the PATRIOT Act, the US required banks to reveal customers’ identities, implement AML compliance programs, and report suspicious transactions, threatening with potentially devastating sanctions in case of noncompliance. Especially the US is in a privileged situation, as it controls the world reserve currency, the U.S. dollar, meaning that all dollar transaction must pass through Manhattan’s clearing institutions. The U.S. control over the nodal points of the international finance provides the country with significant leverage as it can impose financial sanctions unilaterally, making it independent of agreements with other countries, such as China, or even allies such as the EU, particularly on the stance to Iran and Russia, or the rarely occurring consent of the UN Security Council. Another benefit is that these types of measures can be targeted more precisely against the ruling elite or specific hostile entities, avoiding the collateral damage of the more comprehensive economic sanctions.
While – at a first glance – it seems like there is no room to circumvent these “smart” financial sanctions, some barred entities have still found their way through New York’s channels of finance. In 2009, Lloyds was the first bank convicted of actively bypassing U.S. sanctions, by processing dollar payments in Manhattan in the interest of a blacklisted Iranian client. Over time, the British bank had developed mechanisms to fool the electronic filters that were used by U.S. authorities to detect links to sanctioned countries and entities. After the Lloyds case, New York attorneys screened other banks too and soon discovered that many of the world’s leading financial institutions maintained a whole network to hide transactions with sanctioned entities from the U.S. Department of Justice’s (DOJ) vigilant eyes. Amongst the convicted were names that were highly reputable by all standards, such as Credit Suisse, ABN Amro, Barclays, ING, Standard Chartered, HSBC, BNP Paribas, and Commerzbank. Since a potential revocation of the banking license for the U.S. market would probably force any large bank into bankruptcy, until 2016 they settled with the authorities on penalties worth 17 billion USD, an amount unprecedented anywhere in the world. Nevertheless, what at a first glance is definitely a striking victory of rule of law, as usual, in fact, is a two-edged sword.
These painfully high penalties have certainly conveyed a clear message to the banks that noncompliance with U.S. sanctions comes at a high cost. However, critics have observed that relative to the scale of money-laundering, terrorism financing, and other facilitated crimes, the fines were still modest, as they were not even close to the double amount of the illegal transactions – the DOJ’s guideline.
Others argued that levying astronomically high fines on banks will trigger significant negative consequences. Especially the French government strongly opposed the U.S. settlement against the country’s largest lender, BNP Paribas. After pleading guilty to conspiracy against the US by circumventing sanctions against Sudan, Iran, and Cuba, the bank was ordered to pay close to a staggering 9 billion USD, causing a significant political cool down between the two countries. French officials argued that while the bank violated U.S. laws, they acted according to French and EU laws and that the U.S. should not superimpose their laws beyond their borders by exploiting their dominant position.
Another concern with high penalties is whether big banks might not just be “too big to jail”. Large banks are crucial to the stability of the whole financial system as such and when the financial standing of large banks is threatened, this might impact the whole global economy. So while from a point of view of justice, it might seem necessary to convict banks for their noncompliance with the law, from an economic point of view this could trigger a set of undesirable consequences.
Lastly, the question remains, whether the U.S. unilateral action might not finally harm its dominant role in the international political economy. The case of BNP Paribas has already exposed that hefty fines can stir waves of anti-American sentiment, even in culturally and politically non-hostile countries. Even worse, political opponents will seek the chance to rally support for an alternative financial system, independent of the US. The growing concern about the so-called “weaponization” of the dollar poses a threat to its attractiveness as the world’s foreign reserve currency. So far, especially China, Russia and Iran have heralded efforts to process payments in Chinese Renminbi, for instance for oil deliveries from Russia’s Far East to China, mostly as a response to Russia’s increasing isolation from the West. As these agreements are currently not economically viable and can be rather treated as a political response, the greenback is far from being replaced by any other currency. Nevertheless, the growing voices and steps towards alternatives need to be closely monitored by U.S. policymakers.
Generally, financial sanctions have many benefits over standard economic sanctions. While sanctioned entities will always find ways to bypass the strict compliance regimes, financing has for many definitely become significantly less accessible. However, with every innovation come new, unforeseeable challenges. As a Chinese proverb goes: “May you live in interesting times”.