On July 23, the New York Times published a full-page editorial titled “Fixing Sanctions.” A major theme is that U.S. sanctions laws strike indiscriminately at governments as well as at ordinary citizens, causing unnecessary harm to innocent people, which is contrary to U.S. interests. The piece urges the United States to calibrate sanctions laws much more carefully, to keep the goals of sanctions in focus and to minimize the damage to those who are not being targeted.
While well-intentioned, the editorial fails to distinguish between collateral harm at the macro and micro levels. At the macro level, the unfortunate reality is that certain countries blessed with natural resources are cursed with deplorable leaders and governments. Imposing embargoes (or other government-wide or sector-based sanctions) can adversely affect not only the populations of such countries but also world commodity markets. The editorial mentions the sanctions on Venezuela’s oil sector, which have severely impacted the people of that nation. But sanctions can also have unintended ramifications on world markets. Though not cited in the editorial, examples include the imposition of (since-revoked) sanctions on Rusal, the Russian aluminum producer, which roiled world aluminum markets, and the imposition of sanctions on Belarus, one of the world's leading suppliers of potash, a critical fertilizer needed throughout the world, including in developing countries. These are just some examples of the serious collateral damage that can result from sanctions, with far-reaching ramifications well beyond the corridors of power of the particular sanctioned country. Because the sanctioned government directly or indirectly controls these natural resources, sanctioning that government necessarily results in punishment of innocent parties dependent on those resources. At the same time, allowing the offending government to transact freely in world markets enables the wrongdoers to continue to profit from their country’s resources with impunity. That is the dilemma at the macro level. The editorial floats the idea of automatic expiration dates on sanctions, but there are no glib solutions to this intractable problem.
At the micro level, however, there are concrete steps that can be taken that would at least ameliorate collateral harm without the need to implement radical policy reforms or even make hard choices. U.S. sanctions laws are riddled with ambiguities, and obtaining clarification from sanctions-enforcement agencies is a very drawn-out process. This chronic problem leaves law-abiding, risk-averse companies without clear direction, leading generally to overly-compliant behavior and foregone economic opportunity. The editorial makes reference to this phenomenon, but not to the underlying cause: ambiguity in the rules, and the lack of resources to provide timely clarification. A 2021 U.S. Treasury Department Sanctions Review (mentioned in the piece) points out that “U.S. small businesses may lack the resources to bear the costs of sanctions compliance,” which “could unnecessarily lead them to turn down business opportunities in order to avoid these costs.” That is true, but does not go far enough in describing the problem. Even major financial institutions often refuse to participate in lawful transactions because of some attenuated sanctions taint that does not rise to the level of a prohibition. The fear is exacerbated by a handful of spectacular cases in which billions of dollars in penalties were imposed on major banks for violating sanctions rules. While those extreme cases involved repeated willful and flagrant evasion of sanctions prohibitions by corrupt bank employees, coupled with deficient institutional controls that enabled the misconduct to continue unchecked, the risk of simply guessing incorrectly about an ambiguous rule has had a powerful in terrorem effect on businesses large and small.
The Office of Foreign Assets Control (OFAC) has a mechanism that allows a member of the public to apply for interpretive guidance (i.e., advance clarification), with regard to a contemplated transaction where there is ambiguity in the rules, or for a specific license in a case involving an unambiguous prohibition. Unfortunately, it takes many months, and sometimes a year or more, for OFAC to process these applications. In the commercial world, that time frame is typically not realistic, and the opportunity is often lost.
OFAC staff members are hard-working professionals, but there are not enough of them to handle the volume of applications for interpretive guidance or specific licenses. OFAC is underfunded and understaffed. The editorial mentions that “over the past two decades, economic sanctions have become a tool of first resort for U.S. policymakers, used for disrupting terrorist networks, trying to stop the development of nuclear weapons and punishing dictators.” The authors do not ask why, then, is OFAC underfunded? Funding OFAC should be a high priority.
At the micro level, a properly funded agency can help reduce the collateral damage by enabling its staff to respond promptly to applications for interpretive guidance or specific licenses. In tandem with that, more statements of licensing policy -- pronouncements regarding the types of transactions that the agency is predisposed to licensing -- would provide guidance to the public and would help filter the license application process to make it more self-selective.
While the macro issue will continue to bedevil government policymakers, the micro issue has a practical solution: better funding, which will lead to hiring more staff, shorter response times, and less collateral harm.
