Foreign Affairs Committee on Nov. 2nd, 2016

[Maya Lester]

From my perspective [Technical difficulty—Editor] I don't have any such grid. I'm a mere litigator, I'm afraid. I'm very responsive to the individual questions of clients, but I don't study or pretend to study sanctions imposed by different entities overall. I follow it. I have a blog called europeansanctions.com in which I try, personally, to track sanctions developments around the world.

Actually, one comment I would make is that I also practise in the field of antitrust where there are very well-established networks of agencies internationally that share information. I think there is a lack of similar interaction on a sanctions level, but I suspect Mr. Drezner will be more familiar with matrices for measuring sanctions.

I have just one comment before I hand over. You can ask me about the way the European Union imposes its sanctions, but actually the people you should ask are the European Union officials and perhaps officials from the U.K. Foreign & Commonwealth Office. They could tell you from the horse's mouth, as it were, how they go about gathering evidence, and whether they think that's a good system or not. We can follow up afterwards. If anyone would find it useful, I'd be happy to provide the names of people I think might be useful to you. As I say, I'm in private practice, and I can give my personal views, but I wouldn't pretend to be someone directly involved in the system.

[Robert Aubin, NDP, Trois-Rivières, QC]

Thank you.

Mr. Drezner, what do you think?

[Prof. Daniel Drezner]

Thank you for your question.

I want to make sure I understand. To clarify, are you asking me whether or not there's sufficient data to determine the degree to which different countries that impose sanctions feel the effects of them, or the way in which different countries develop criteria for how to target the sanctions on specific individuals?

[Robert Aubin, NDP, Trois-Rivières, QC]

My question was not about the effectiveness of the measures we want to impose on certain countries. Instead, I want to know whether the economic sanctions also affect the imposing country.

[Prof. Daniel Drezner]

Okay.

Right. That makes sense.

In terms of the costs on the imposing country, it gets complicated. There have been far fewer studies on the costs of sanctions on the sender country, the sanctioning country. The few studies I have seen on these are not all that good, frankly, mostly because what they tend to measure at this point are trade effects. They usually don't take into account the notion that if, let's say, the United States sanctions Russia, which then leads to a decline in trade between the United States and Russia, it's possible that the United States compensates for not trading with Russia by trading more with Ukraine or Belarus or what have you.

I would say that in fact there is actually a fair amount of data that one could try to use to study the systemic effects of sanctions on the sender country, but not a lot of research has actually been done. Part of this might be due to the fact that an overwhelming number of the sanctions that are imposed are by large economies, such as the European Union or the United States, on relatively small economies. As a result, usually the effects on the sanctioning country are negligible.

That said, if you're talking about a case like Russia, I think it would be appropriate to talk about some general equilibrium effects of those sanctions. There are a few studies that I believe the government accountability office has tried to do in the United States on the effect of those sanctions on the Russian economy, but I'm not actually sure there have been any studies done on the effect on the U.S. economy.

[Robert Aubin, NDP, Trois-Rivières, QC]

Thank you.

My second question is for Ms. Lester. It's probably more applicable to your area of expertise.

Once a person or entity is included on a sanctions list, what steps—for example, at the European Union—can the person or entity take to be removed from the list, if there is a case of mistaken identity or if the situation has changed? How can a name be removed from one of the lists?

[Maya Lester]

In the case of the European Union, you write to the European Council and you make observations explaining why you think you should not be on the list. As I said in my opening remarks, the response, in my experience, is very frustrating, because it will be very slow and it will usually not really engage with the substance of the observations. That is a failing, in my view, and it's why there are so many court cases. You only have a two-month time limit to get to the European Court to challenge the lawfulness of your listing.

Usually what happens is that people write to the European Council. They don't hear back, and they have to then make an application for judicial review in the European Court. That's the point at which they will see the evidence that is said to support their designation. They have to go through a lengthy court process, including appeals and possible re-listings. So I think the answer to your question is that it's very unsatisfactory.

In the case of the U.S., the administrative process with OFAC for delistings is more effective in the sense that there is a real administrative process that doesn't involve going to court, but I think anyone dealing with OFAC delistings would say that it's extremely difficult to be delisted from an OFAC list unless you can in some sense say that things have changed since the original designation. You might be able to be delisted administratively. The courts in the U.S. are much more deferential to OFAC than the European courts have been in the sense that the standard for overturning an OFAC decision is extremely high.

In the case of the United Nations, finally, the only process for delisting is one that's known as the “focal point”, which in my view is not an effective way of dealing with delisting requests, and requires the support of one's own country, which very often is not forthcoming. The only sanctions list in the United Nations that has a proper degree of due process, in my view, is the al Qaeda and ISIL sanctions list, which has an ombudsperson process that does provide real due process. They review all the evidence underlying listings and make a recommendation to the Security Council as to whether there should be a delisting. But the ombudsperson process is only for one of all of the UN's many sanctions lists.

[The Chair, Liberal, Bob Nault]

Thank you very much, Ms. Lester and Mr. Aubin.

Mr. Saini is the last questioner for our witnesses this afternoon.

[Raj Saini, Liberal, Kitchener Centre, ON]

Thank you very much to you both.

Mr. Drezner, my question is for you. You've written extensively on comprehensive and targeted sanctions. One of the drawbacks of comprehensive sanctions, you say, is the rent-seeking opportunities that governments create for some of their supporters. If we look at targeted sanctions, I believe you said in your testimony that they work 40% of the time. In the last three decades, 80% of sanctions were conveyed upon non-democratic countries. When you target sanctions to an individual, in most cases that person would be in a non-democratic country, so in many cases that person would have state support to in some way avoid sanctions. I'm wondering if there is some way we can make our sanctions regime more effective.

On top of that, you said that after the Iraq situation, the targeted sanctions regime worked better when the Americans were involved because of the financial access to capital. If we put someone in Canada, for example, on a list, but the Americans don't put them on a list, or the EU doesn't put them on a list, how effective is it in targeting that individual?

[Prof. Daniel Drezner]

I'll answer your second question first. If Canada were to sanction an actor without the support of either the United States or the European Union, the effect would be pretty negligible. Obviously, that person would presumably still be able to do business in most of the major financial centres of the world. It wouldn't necessarily alter their behaviour all that much.

In terms of sanctioning individuals within authoritarian countries, you're correct that most of the targeted countries where sanctions have been imposed have been authoritarian or totalitarian. You're also correct to infer that most of these targeted individuals presumably have the support of the state. Indeed, that's usually the idea of it. The idea behind a lot of these sanctions is that in some cases you're trying to prevent corrupt or criminal liability, but in other cases, what you're trying to do is, in fact, pressure the very people who presumably have influence over an authoritarian government, which is sometimes a relatively murky question, as opposed to presumably a more open democracy.

That said, I should also point out that one of the drawbacks, even in the cases of these kinds of targeted sanctions over the last few decades, is that there is significant evidence that when they are imposed against an authoritarian state, one of the responses of the authoritarian state is to repress even further, which is to say that usually the authoritarian state becomes even more authoritarian in nature in response to any sort of external acts of economic coercion. That doesn't necessarily mean that, alas, you could eventually potentially hope for regime change, or once the sanctions end, that could ease up, but that is without question an important negative externality to consider.

[Raj Saini, Liberal, Kitchener Centre, ON]

Thank you very much.

Ms. Lester, I have one quick question for you. You mentioned in your opening comments about the ombudsperson system in the United Nations. There's also another system in the United States. The intra-executive legal and policy review is part of the government process, so if someone has been designated to be on the sanctions list, they have the opportunity to exchange information with the government to provide evidence of their innocence prior to being on a list. The ombudsperson process is when someone has been listed. You're talking about delisting, which is a difficult process from what I understand of the United Nations, as opposed to the American system where they are trying, once a person has been designated, to give that person the opportunity to provide evidence.

How do you see the system work? You've seen it working at the United Nations. If we are to consider some form of judicial review in Canada, how do you think we could put together a regime where we could have the ability to make sure that you don't have to go through this whole process, and at the end, delist someone, as opposed to getting the evidence beforehand?

[Maya Lester]

I think the difficulty with evidence beforehand is that most, if not all, imposing authorities will say that, because of the risk of asset dissipation, they can't let someone know that they're going to have sanctions imposed on them before they're going to be imposed. The whole point, really, is to have a surprise effect to stop people channelling funds out of the European Union or out of Canada, or whatever it is. I'm not aware of a system that provides due process, if you like, in advance of a sanctions listing.

To me, the two key factors are, as quickly as possible after a listing, someone should be notified that they've been listed and why, and they should have some meaningful opportunity from a responsive, swift, efficient decision-maker to know the case against them and be able to challenge it. I don't necessarily subscribe to the view that it must be a full court providing full judicial review. The ombudsperson process, for example, can be very effective, as long as it provides a real substantive review of the underlying evidence to a transparent, consistent, and appropriate standard of review. The important thing from a target's point of view is to feel that someone has actually reviewed the evidential basis for their listing in detail and has heard what they have to say, explain whether they agree with it or not, and then have the ability to recommend delisting or not.

If I were designing a system, I would try to have a very responsive administrative system and I would also have a layer of judicial review, but not one that, with respect to the European court, takes two or three years. Hopefully it would be some sort of swift court procedure. In the U.K. where we have domestic judicial review as you do in Canada, one can have a pretty swift hearing particularly in cases of urgency, and it doesn't have to take years and years.

To me, there are two components: administrative review, and judicial review based on some kind of appropriate evidential threshold.

[Raj Saini, Liberal, Kitchener Centre, ON]

Let me understand you clearly because you're talking about the timing of instituting the sanctions. If someone has been designated, are you suggesting that sanctions should be put on right away, that their assets should be frozen, and the travel ban should be put in place and then have the judicial review afterwards?

[Maya Lester]

I know of no system that doesn't do it that way, because I think anyone would say of course there are some penalty-type decisions where the only fair process is to give someone a warning in advance that you're going to impose a penalty and have the process in advance. Certainly the European system, and I'd be surprised if it was not also the UN and U.S. and Canadian systems, is that the due process has to come afterwards with an opportunity to be delisted swiftly if that's the right result. Otherwise, if someone tells you tomorrow that you're going to have your assets frozen next week but it hasn't happened yet, if this is someone who really should be sanctioned, then why wouldn't you simply remove all your assets from that jurisdiction? I think it's very difficult to provide process in advance but I think the key is swift and efficient due process as soon as possible after the event.

[The Chair, Liberal, Bob Nault]

Thank you very much, Mr. Saini.

Ms. Lester and Professor Drezner, thank you for your testimony and thank you very much for your patience at the beginning of the meeting with our being a bit late. It's much appreciated. I think your testimony does go a long way in our getting a better sense of the different structures in the European Union, the United Kingdom, and of course, the United States, which are the key areas we are focusing on, trying to get a better understanding of their jurisdictional structure versus our own.

If there is any information and/or reports that you think would be useful to the discussion we're having, please feel free to pass them on. We'll distribute them to the members of the committee.

[Maya Lester]

Thank you for asking us. If there are particular topics of interest to the committee, I'd be very happy to provide notes in writing, and I will think about whether there is useful material to send now. But please don't hesitate to ask for particular items of information.

[The Chair, Liberal, Bob Nault]

Thank you very much.

[Prof. Daniel Drezner]

Thank you.

[The Chair, Liberal, Bob Nault]

Colleagues, we're going to take a two-minute break and then we're going to hook up Mr. Halvorssen, the president and chief executive officer of the Human Rights Foundation. He will be speaking from London, I understand.

[The Chair, Liberal, Bob Nault]

We'll recommence our committee hearings. I understand that Thor Halvorssen is in front of us and can hear us.

Mr. Halvorssen is the president and chief executive officer of the Human Rights Foundation. He will be making a presentation to the foreign affairs committee here. Then we'll get into questions. We have a good 45 to 50 minutes, so we have plenty of time for the presentation and discussions with Mr. Halvorssen.

With that, Mr. Halvorssen, I'm going to turn the floor over to you for your presentation. I understand you've been briefed on our process, and what we're looking to chat with you about.

[Thor Halvorssen, President and Chief Executive Officer, Human Rights Foundation, As an Individual]

Thank you very much.

I appreciate the opportunity to tell you a little bit about my knowledge on the subject of corruption, and specifically what your committee is doing.

I would like to underline something about the modern authoritarian state. Whether we speak of elected autocrats, like Nicolás Maduro in Venezuela, Vladimir Putin in Russia, or of dictators like Teodoro Obiang in Equatorial Guinea or Nursultan Nazarbayev in Kazakhstan, all of these are almost pathological kleptocrats. To achieve their aims of accumulation of illegally gotten wealth, they typically rely on significant natural resources that range from gold and diamond mines, oil and gas exploitation, vast forests, or even water to secure the funds that they want to hide in distant jurisdictions. Just as important, kleptocrats in power rely on domestic or foreign henchmen who operate in excellent terms domestically and through unhinged joint ventures with western companies and are ready to take a significant share of the spoils in return for silent complicity and for acting as fixers. The proxies and cronies of corrupt rulers are usually free to travel to the west, to own luxury mansions and apartments, to open bank accounts and invest in the stock market, and to make significant investments elsewhere.

I'm here to make two general points, and then to provide an important, current, and developing example. First, as currently constituted, your sanctions system lacks any teeth to punish corrupt officials, who are also gross human rights violators, or their cronies, who are also key enablers in dictatorships. My second general point is that passing a Canadian version of the U.S. Magnitsky Act would be a step in the right direction.

On the first point, if we consider the way the modern dictator operates, the Freezing Assets of Corrupt Foreign Officials Act, or FACFOA, sanctions come into place too late: when the corrupt dictatorship has already been removed from power and the new democratic or authoritarian government requests Canada to go after the assets of the most recent set of thieves, such as in the cases of Tunisia or Ukraine. Because of the way your law is written, FACFOA may even serve as a political tool for one set of corrupt officials to settle problems with another set of the same type of official that preceded them. Furthermore, FACFOA requires a foreign state actor to initiate a process.

Unless there are exceptional situations where the UN urges, through the UN Act, or the Canadian government determines that a serious threat to international peace and security exists, the Canadian sanctions system does nothing to deal with corrupt cronies and individuals who act as enablers of corrupt government officials who are also dictators. Both may be laundering their money in Canada. Essentially, a discussion of a Canadian Magnitsky Act has stalled after it was first introduced in 2015. To the extent that it targets specific government officials and cronies closely connected to gross human rights violations by the regime in question, I believe this act would be an excellent first step in the right direction. In this case, Canada should heed the advice of former member of Parliament and human rights champion Irwin Cotler.

With regard to FACFOA's and SEMA's deficiencies, let me provide one example. A group of Venezuelan businessmen formed a criminal association that operates under the name Derwick Associates. The principals of this company are in their twenties and thirties, and they had no prior experience whatsoever in government contracting, yet, in the space of one year, the Government of Venezuela provided them with 12 construction and procurement contracts for power plants. The businessmen, Venezuelans who also hold foreign citizenships for countries like Spain, Italy, and Germany, subcontracted all of the work to a second-rate company inside the United States. Derwick Associates then overbilled the Venezuelan government by almost $2 billion, and carried out an exchange rate fraud. The total amount stolen by these men exceeds $4 billion Canadian. If you consider the size of other well-publicized scandals around the world, if you consider the FIFA scandal, this scandal is multiples of that.

They paid kickbacks to Venezuelan government officials at the highest level, and then they set about laundering their money. They laundered part of this money by using U.S. banks, and they also laundered it by using the Royal Bank of Canada. They then invested hundreds of millions of their ill-gotten gains into numerous ventures, including two oil companies. One is a Texas company called Harvest Natural Resources. They also bought 20% of a publicly traded Canadian company by the name of Pacific Rubiales Energy. Incidentally, thanks to their ownership of this Toronto-based company, they blocked the acquisition of that company by a Mexican business group. Having stopped that merger, the shares of Pacific Rubiales tumbled to historic lows, causing losses in the hundreds of millions of dollars in value for shareholders.

In Canada, these men don't operate under the name Derwick Associates. They operate under the name O'Hara Group. The names of these men are Leopoldo Alejandro Betancourt, Pédro José Trébbau, Francisco Convit, Orlando Alvarado, and Francisco D'Agostino Casado. This last individual is the brother-in-law of the president of the Venezuelan legislature. I'm familiar with the actions of these individuals, because I am one of the two plaintiffs in a lawsuit against them, where we include in our verified complaint detailed allegations of bribery, kickbacks, money laundering, and predicate acts that reveal them to be engaging in racketeering.

Distinguished members, any act of corruption in conjunction with an authoritarian government is by necessity an action that empowers the government and enables it to continue to violate human rights with impunity. It is an action that entrenches these authoritarians. In the case of Derwick Associates, to give one very clear example that involves Canada, they've carried out smear campaigns against whistle-blowers in four different countries, and they have corrupted the financial systems of Spain, Andorra, the United States, and Canada.

Authoritarian governments would be powerless if they didn't have enforcers willing to arbitrarily arrest, torture, and execute innocent people, but just as importantly, they need individuals willing to whitewash and launder dirty money and pay them kickbacks. Governments often target individuals who choose to become enforcers of brutality, injustice, and oppression; however, enablers of corruption, the clearly corrupt cronies like these men have remained largely spared from any sanctions.

The Canadian sanctions under the Special Economic Measures Act jointly with FACFOA is a program that should be strengthened to cover not only corrupt cronies in Tunisia, Ukraine, Russia, Burma, North Korea, Iran, Libya, South Sudan, Syria, and Zimbabwe, but also the corrupt cronies of Nicolás Maduro's government and many other governments around the world. Simple, targeted sanctions like visa denials and asset freezes, such as the one being discussed here today, have the potential to change the mindset of the financial enablers of the authoritarians and motivate them to abandon the oppressive political structures that they currently prop up.

Thank you.

[The Chair, Liberal, Bob Nault]

Thank you very much, Mr. Halvorssen.

We're going to go right into questions. I understand Mr. Kent will start off.

[Peter Kent, Conservative, Thornhill, ON]

Thank you, Mr. Halvorssen, for clear and concise testimony today, and for adding quite honestly and frankly this new Venezuelan dimension to our study and the links you suggest with Canadian financial institutions and private companies.

We've been told in our testimony that the United States represents the high watermark, or the gold standard, for enforcement at all stages for determining targets, for detecting movement of financial transactions, and for action. We've also been told that, in Canada, we have significant gaps on the enforcement side because of the many government departments and agencies that are responsible for detecting and enforcing. We also have a heavy financial burden levied against the private sector in trying to comply with any sanctions regulations.

I'm wondering whether, given your insight and expertise, you would suggest that a single regulatory body, something like the U.S. Treasury's office of foreign assets control, is most effective in applying sanctions and enforcing sanctions, but also having the financial investment that would need to be made to have an effective sanctions regime.

[Thor Halvorssen]

It's not a surprise that part of the skepticism people in the human rights field have with regard to the lack of Canadian enforcement has a lot to do with the fact that so many natural resource companies are based in Canada, particularly gold mine companies and companies that exploit natural resources in some of the world's worst places. By worst places, I mean not just the standard of living which in great part results from the sort of government they have there, but also the conditions that these governments impose on their people. It's no surprise that so many gold mining companies based in Canada are engaged in, if not outright bribery, bribery of a different kind. Let me just start off by saying that.

I am certainly no fan of the United States government in respect of sanctions, because they often are extremely slow and they begin things either when people are out of power or at the tail end of it. However, it's better than what currently exists in Canada and certainly better than what exists in the European Union. OFAC can be a rather effective unit, but OFAC already has a considerable amount of experience, and it is certainly not the only regulatory body. OFAC will cover things like people violating sanctions with regard to Cuba or Iran, but with regard to freezing the assets and going after any number of people, I believe in a wider approach. Law enforcement in general should be counted on and should be empowered to do this at the municipal, federal or provincial levels, however you wish, depending on what specific structure we're speaking about in Canada.

My view is that more is better, not less. As long as someone is also watching the watchers, I think we will all be happier. In the end, the media are a key component of blowing the whistle, but once the whistle has been blown, someone needs to be there to make sure there is follow-through, and Canada at present has structures that are lacking.

I'm also very surprised that the Magnitsky Act is still stalled. Obviously, realpolitik comes into play, but it is rather pitiable that you folks have not yet carried the Magnitsky Act.

[Peter Kent, Conservative, Thornhill, ON]

That was to be my next question. The House of Commons unanimously supported the Magnitsky Act last year, but an election intervened and there has been a change in the support for that by some members of the government. There have been some criticisms of the Magnitsky Act in that it is limited to Russian oligarchs, Russian criminals and human rights abusers, and there have been recommendations that it should be reshaped to be more global in its nature. Would you agree with that, or do you think the Magnitsky Act should stay framed on Russia and the targets that have been identified by the U.S. Congress?