Chairman Nault and Vice-Chairs Allison and Laverdière, good afternoon. It is an honour to appear before you today.
My opening remarks will focus on two main issues: first, a few ways to think about the goals of financial sanctions; and second, some of the processes by which the U.S. government imposes financial sanctions.
When the government thinks about the imposition of financial sanctions, it likely has one or both of two goals in mind. Here, while I'm speaking specifically about the U.S. government, I believe the points generalize and in some sense echo the interventions of Professor Nossal. The first goal of financial sanctions is to engineer a change in behaviour in the ultimate target of the sanctions, and in so doing to advance the foreign policy and national security interests of the United States. The second is to protect the integrity of the financial system by preventing illicit capital from entering.
One prominent example of this first objective to change behaviour is the successful Iran sanctions program, where sanctions imposed by a broad coalition over many years incentivized Iran to negotiate a deal regarding its nuclear program. Other recent cases include Burma, where sanctions were recently lifted in response to important democratic reforms, and Côte d'Ivoire, where sanctions were removed in response to a successful presidential election, progress on arms control issues, and the removal of multilateral UN sanctions. There also have been important successes in the narco-trafficking context, where large numbers of individuals and entities have been delisted because of a change of behaviour.
On the preventive side, it is helpful to think about two intertwined goals. Sanctions can be used to help ensure that ordinary citizens and businesses retain their trust in the international financial system by targeting illicit conduct. Here, sanctions work in concert with other forms of preventive measures such as anti-money laundering regulations to keep illicit activity out of the global financial system. National and transnational sanctions regimes work in concert with national AML measures and guidance offered by non-governmental organizations such as the Financial Action Task Force and the Wolfsberg Group.
There is another preventive function that sanctions can serve—namely, to interfere with the ability of illicit actors to obtain the goods and services they need to function, to make it harder for them to raise, store, move, and use funds. This was another part of the rationale for the Iran sanctions program and for other successful programs, including counterterrorism sanctions.
Officials understand, of course, that sanctions alone will not cause an end to terrorism. They are not blind to some of the unintended consequences that Professor Nossal identified, but if terrorist groups are unable to gain access to the international financial system, it will be harder for them to engage in the financial activities necessary to sustain themselves. Individual attacks might not cost much, but sustaining a terrorist organization over time costs a great deal.
It is important to note that financial sanctions are preventive and not punitive. The goal is not to use sanctions in lieu of criminal prosecutions. Instead, sanctions can be a complement to indictments, but fundamentally have a different goal. Whereas criminal prosecutions are designed first and foremost to punish with respect to completed conduct, sanctions are regulatory measures designed to have broad systemic effects.
We saw an example of this complementarity in September, when the U.S. announced the indictment of Chinese industrialist Ma Xiaohong, a company she controls, and several of her associates for helping North Korean entities evade U.S. sanctions and provide support to its WMD program. At the same time as the indictment was announced, the U.S. government sanctioned some of those same entities in order to prevent them or entities they own or control from participating in the international financial system. Here, the two legal mechanisms worked side by side.
Sanctions operate through a range of legal mechanisms. Broadly, they are regulatory restrictions imposed on natural or legal persons. There are two basic types of schemes: some sanctions are directly imposed by legislation, while others rely on a grant of authority by Congress to the executive to establish sanctions programs that address particular national emergencies.
The main U.S. statute that follows this pattern is the International Emergency Economic Powers Act of 1977, or IEEPA. It authorizes the president to declare a national emergency with respect to a problem that originates wholly or substantially outside the United States. The president can then investigate, regulate, or prohibit and generally constrain a wide range of financial transactions in response to the problem. In practice, the president has adopted dozens of executive orders to address the financial dimensions of critical national security threats, such as nuclear proliferation, counterterrorism, the situation in Syria, and Russian activities that undermined democratic processes and threatened peace and stability in eastern Ukraine.
The executive orders allow the treasury department to target individuals or entities involved in illicit conduct. The Department of the Treasury can impose a range of restrictions, but most common are sanctions that block the property of designated persons subject to U.S. jurisdiction, and prevent U.S. persons from doing business with them. Other types of restrictions are also possible. For the Russia-Ukraine sanctions program, for example, the U.S. and its allies adopted creative restrictions on dealings in the debt and equity of a range of Russian companies. The objective was to target as precisely as possible the objectionable conduct and to spare, as much as possible, activities that would have a wide-ranging and unanticipated impact on the Russian economy.
The actual process of identifying targets for designation involves a number of steps. The U.S. government canvasses a wide range of information sources to develop targets and then compiles an administrative record that is subject to multiple levels of legal and policy review by different agencies before a final decision about a designation is made. Designations are then finalized with an administrative order and are made public via a press release and a public change to the relevant sanctions list on which the target will appear.
If they wish, designated parties can seek review and reconsideration of the designation by the Office of Foreign Assets Control, OFAC, the administrative agency that implements financial sanctions, or can challenge their designation in court. OFAC must make public sufficient information about the basis for designation such that the target can understand the conduct that led to the imposition of sanctions, but OFAC can use classified materials in compiling the evidentiary record, which a review in court can evaluate in camera ex parte.
Some statutes also directly impose certain financial sanctions, most prominently in the Iran context.
In the post-9/11 era, financial sanctions have taken on an increasingly important role in national security, foreign policy, and financial integrity discussions. Very few people believe that they are intended to have decisive impacts on their own. They are, however, a critical tool of risk management.
I look forward to answering any questions that you might have.
Thank you.