The Evolution of Sanctions in Practice and Theory

Introduction 

The failure of comprehensive economic sanctions in Iraq during the 1990s attracted the ire of a wide range of political actors: neo-conservatives in the United States included this failure in their indictment of the United Nations and of multilateralism in international diplomacy, while humanitarian organisations excoriated the United Nations and its Security Council for causing grievous harm to the people of Iraq. Yet there have also been impressive successes. Indeed, sanctions evidently did help end the nuclear-, biological- and chemical-weapons programmes in Iraq. In South Africa, comprehensive economic sanctions were apparently effective in bringing about the end of the apartheid regime after many years of struggle. Libya did everything asked of it in order to get out from under sanctions in 2004, including handing over its citizens for trial by international tribunal in the Pan Am Flight 103 bombing case, and giving up its nuclear-, chemical- and biological-weapons programme.

The major powers are now trying to come to agreement in the UN Security Council over additional sanctions against Iran, to compel it to cease enriching uranium and satisfy all the open questions about its nuclear programme with the International Atomic Energy Agency. This effort takes place against the backdrop of what looks to be another successful sanctions regime: North Korea, having suffered severe financial sanctions thanks to the comprehensive US influence over the international banking and finance industries, seems to be shifting towards the shutdown and elimination of its nuclear-weapons programme.

The United States appears to have come full circle from its harsh criticism of the 1990s sanctions regime against Iraq to rely now on UN Security Council sanctions as the major means of pressuring Tehran. Other members of the Security Council, especially Russia, have been less enthusiastic, recalling the Iraq experience. The new-found US enthusiasm seems to flow from the bitter lessons of the military debacle in Iraq - but it is more complex than that. American disappointment with unilateral 'regime change' strategies is one facet, but another relates to the legal and policy actions taken since the 11 September 2001 attacks on the United States. Washington has used anti-terrorism financial measures developed under the USA Patriot Act to improve sanctions theory and practice. America's partners, especially Russia, have responded with an enthusiasm that seems related to the degree to which US sanctions proposals move outside the UN Security Council to intersect with the new anti-terrorism initiatives.

Sanctions as policy refuge  

Sanctions have long been an important stage between the 'talking therapy' of diplomacy and the use of military force. Athens applied a trade embargo against its neighbour Megara 2,400 years ago, although it was eventually defeated by Corinth, Megara's ally, after 27 years of conflict. Nevertheless, 'sanctions may feel better than nothing: they are less feeble than scolding an ambassador and less bloody than sending in the marines. They provide a frisson of moral satisfaction.'1

Certainly sanctions have been popular in recent decades. Analyst David Lektzian reported that 'since 1990 alone, economic sanctions were used by the United States, Greece, Russia, the United Nations and the European Union, China, Germany, Belgium, France, Saudi Arabia, England, the Netherlands, Spain, Japan, the OAU and ECOWAS, Mercosur, and Turkey to take on both internal and external problems'.2 The United States alone applied 85 new sanctions on foreign states between 1996 and 2001.

One reason sanctions became so popular in this period was their perceived success in bringing about the end of apartheid in South Africa. Pretoria faced comprehensive sanctions extending from a 1977 arms embargo to restrictions on trade in oil and a wide range of other products as well as, in 1986, financial sanctions. When apartheid came to an end in the early 1990s, sanctions were hailed as an important contributor, but not the only factor. Many observers noted how sanctions would not have worked unless there had been a determined black liberation struggle.3

Experts in sanctions theory have also, over the years, noted a number of different factors that have been important to success or failure of sanctions. Countries with functioning multiparty systems, for example, changed their behaviour in response to sanctions much more frequently than authoritarian leaders. This is to be expected if voters have no refuge in other parties, but the control authoritarian leaders can exercise over the media and opinion formation is also important.4

Recognition of this might have been useful in Iraq, where the UN was trying to implement comprehensive sanctions after the 1991 Gulf War. In the latter half of the 1990s, these sanctions began to fail decisively. The failure of the oil-for-food programme is a particularly dark chapter. Begun in an attempt to relieve civilian suffering in Iraq after the UN imposed sanctions, it became a means to circumvent the sanctions and enrich Saddam Hussein's elites. It descended into scandal when it became evident that oil traders were kicking back to Baghdad a portion of the premium they received for selling the oil. The steps the UN Security Council took to resolve this problem in turn greatly reduced the funds available for the humanitarian relief programme.5

The Iraq experience showed why sanctions often fail. They often fail when they are directed against an authoritarian regime, and when they are poorly implemented. Comprehensive sanctions that are widely targeted against an entire economy and society bear a heavy moral burden, because they impact vulnerable groups - women, children, the poor and elderly - but leave the political elites largely untouched. In fact, in Iraq and in Serbia before it political elites enriched themselves by engaging in black marketeering to circumvent the sanctions regime.6
The failure of comprehensive economic sanctions in Iraq led the United Nations to abandon them in further international crises.7 Long before this, however, theorists and practitioners of sanctions policy had turned increasingly toward the notion of 'smart sanctions', supposed to address the shortcomings of comprehensive sanctions by targeting political elites in a way that closes off escape routes for them and forces them to bear the pain. Smart sanctions are also designed to protect vulnerable groups, preventing 'collateral damage' by exempting products such as food and medical supplies.8

Smart sanctions received a great deal of attention in the late 1990s as the expert community sought correctives to the experiences of Iraq and Serbia. The 'Interlaken Process', sponsored by the Swiss government, worked to improve the targeting of financial sanctions through two major conferences held at Interlaken in 1998 and 1999. A German-sponsored process carried out by the Bonn International Centre for Conversion focused on improving the targeting of arms embargoes and travel sanctions. The UK Department for International Development and Brown University in the United States also sponsored major projects to try to improve the targeting of financial sanctions. A considerable body of new ideas and approaches began to build up, based on the experience of practitioners both in governments and in non-governmental organisations.9

When the Bush administration arrived in Washington in 2001, the sanctions community had already undertaken a serious effort to correct the problems that had emerged in imposing comprehensive sanctions on Iraq and Serbia. Nonetheless, the failure of the UN in Iraq was a significant element of the Bush critique of the organisation, which in turn provided a rationale for the administration's emphasis on unilateralism and regime change through military force as keystones of its security policy.

Unenthusiastic about the Bush approach, many countries embraced sanctions as a way to resist the US drive toward invasion of Iraq after Bush declared it part of his 'axis of evil' in January 2002.10 By this time, the view of how sanctions should be implemented had begun to change radically, with the policy and expert communities recognising that sanctions had to become smarter. UN Secretary-General Kofi Annan articulated this view:
I have in the past underlined the need for a mechanism that renders sanctions a less blunt and more effective instrument. Therefore, I welcome the fact that the concept of 'smart sanctions', which seek to pressure regimes rather than peoples and thus reduce humanitarian costs, has been gaining support among Member States.11

The United States took its military forces into Iraq at least partly on the basis that other instruments of policy, including the sanctions regime against Saddam 's government, had failed. Recent enthusiasm among US policymakers for sanctions against Iran might seem surprising, except for one fact: the Bush administration has itself embraced the notion of smart sanctions. This epiphany did not come about as a result of the experience in Iraq, but rather the experience of dealing with the tragedy of 11 September.

The Bush sanctions epiphany

As it became clear that the men who carried out the 11 September attacks were sustained and financed through the business empire associated with Osama bin Laden,12 the White House began to work with the US Congress on better ways to track and get at bin Laden's sources of wealth. The legislation they developed, the USA Patriot Act, contains a specific section addressing the financing of terrorist acts: Title III, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. This law was instrumental in criminalising the financing of terrorism.13

Title III emerged from a long line of US legislation designed to go after the proceeds of criminal activity such as narcotics trafficking, where large flows of money are involved. The Bank Secrecy Act of 1970 is the basic law on money laundering.14 It was followed in 1986 by the Money Laundering Control Act, in 1992 by the Annunzio-Wylie Anti-Money Laundering Act and in 1994 by the Money Laundering Suppression Act. Following on these laws, Title III of the Patriot Act was significant because it strengthened the penalties that banks and other financial institutions might face to the level of criminal activities. It also forced them to increase their due diligence with regard not only to domestic transactions, but also with regard to their foreign customers. Specifically, it prohibited them from undertaking transactions with foreign shell banks.

Banks and financial institutions ranging from insurance companies to casinos came to face considerable legal and operational risks if they did not put in place adequate institutional safeguards against money laundering and did not perform adequate due diligence, sharing the resulting information with the US government. They also risked considerable damage to their reputations. These measures are overseen not by US law-enforcement organisations but by the US Department of the Treasury, which administers foreign sanctions through its Office of Foreign Assets Control. The office's authority to impose controls on transactions and freeze foreign assets under US jurisdiction rests not only on legislation such as Title III, but also on presidential wartime and national emergency powers invoked in the 'war on terror' declared after the 11 September attacks.

These measures were further bolstered in Section 311 of the USA Patriot Act, under which the US treasury secretary, in consultation with the secretary of state and attorney general, acquired the authority to impose one or more of five new 'special measures' against foreign jurisdictions or foreign financial institutions determined to be a 'primary money-laundering concern' to the United States.15 In essence, the United States acquired the legal means to freeze monetary assets anywhere in the world that it deems threatening to its national-security interests.
The success of the measures relies on the strength of US financial institutions. If they did not play such a dominant role in transfers of wealth around the globe, the Treasury Department's influence would not be so decisive. As James Wilkinson, the Treasury chief of staff, put it, 'our financial tools are sometimes the most powerful weapons our government has to help change behavior. At the end of the day  the diplomacy is moving forward and the world sees just how powerful Treasury's financial tools really are.'16 Russian Deputy Foreign Minister Losyukov was more blunt in his assessment: 'The system is powerful, and no one wants to quarrel with it'.17

The Bush administration went after the financiers of the 11 September attacks in a precisely targeted manner. The USA Patriot Act, for all its faults, was the path through which Washington came to embrace the notion of smart sanctions. As the regime-change strategy flagged in Iraq and the use of military force began to come under question, the US administration became more enthusiastic about smart sanctions. In particular, it became adept at developing the mechanisms that flowed from the Patriot Act to target the financial resources of its opponents. These tools were now turned on the other members of the 'axis of evil', North Korea and Iran.

The North Korea and Iran cases 

In September 2005, the US Treasury Department designated the Banco di Macao a 'primary money-laundering concern' pursuant to the Patriot Act, referring to its links to North Korean government agencies and front companies involved in criminal activities such as narcotics and cigarette smuggling. The particular ire of the United States, however, was directed at North Korea's counterfeiting of US dollars by methods such as cleaning dollar bills and reprinting them as $100 bills (so-called 'supernotes').

The money-laundering designation froze $25 million in North Korean financial assets held by the Banco di Macao. A US State Department official underscored the effectiveness of the measures in Congressional testimony: 'North Korean illicit actors have been deprived of an important financial hub they once used to facilitate criminal activities and launder the proceeds therefrom, and other banks in the region have been put on alert as to the risk of taking on this type of business'.18 Indeed, in short order banks and financial institutions around the world were unwilling to handle the funds of the North Korean regime, concerned about attracting one of the new 'special measures' enacted under the Patriot Act.19

These financial measures against North Korea were strengthened after Pyongyang's nuclear test on 9 October 2006. The United Nations, acting under Chapter VII of its charter, moved that 'all Member States shall, in accordance with their respective legal processes, freeze immediately the funds, other financial assets and economic resources which are on their territories at the date of the adoption of this resolution'. These measures were particularly focused on North Korea's nuclear and other weapons programmes as well as its ballistic-missile programme.

The pressure on North Korea was focused at two types of behaviour: the Patriot Act measures were targeted at the regime's criminal activity, and were designed to deny North Korean political elites the luxury goods and access to ready cash they seemed to enjoy. The UN sanctions imposed after the nuclear test were more conventional in that they sought to punish the regime for proliferating nuclear weapons. Even though North Korea had noisily withdrawn from the Non-Proliferation Treaty two years previously, its status under the treaty has been viewed as ambiguous by other UN member states, and on that basis the sanctions were fully justified according to UN practice.

The combined pressure brought North Korea back to the negotiating table, and on 13 February 2007, the six parties to the talks - the United States, Russia, China, South Korea, North Korea and Japan - concluded an agreement under which Pyongyang would begin nuclear disarmament. Within hours of signing the agreement, Pyongyang's negotiators announced they would not begin to implement it until the United States lifted the sanctions against Banco di Macao, unfreezing the $25m. Four months of negotiations ensued, and in spring 2007 the United States announced it had reached agreement with North Korea. Washington would unfreeze the $25m, in return for which Pyongyang would begin the shutdown and closure of the Yongbyon plutonium-production reactor. But international banks were reluctant to handle the transfer even after the government-to-government agreement was reached, because they feared further sanctions under the Patriot Act. Another two months of negotiations ensued, at which point Russia came to the rescue.

Russian Foreign Minister Sergei Lavrov gave one account of the affair: 'The Americans appealed to us, we said we would help on a number of conditions: If North Korea is ready to have its funds transferred via a Russian bank and the U.S. provides full guarantees that Russian banks will not face any negative consequences. Those guarantees were given.'20 Shortly thereafter, the Dalcombank, based in Khabarovsk in the Russian Far East, received the funds from the US Federal Reserve, passed via the Russian Central Bank. They were then passed to North Korea's Foreign Trade Bank.21 North Korea thereafter returned to the matter of shutting down the Yongbyon reactor.

US anti-money-laundering sanctions, born out of the 'war on terror', thus became linked to a top priority of US nonproliferation policy, ending North Korea's nuclear-weapons programme. The United States did not make the initial link, North Korea did. However, once the difficult negotiations were completed, the United States began to hail the use of these financial measures as an important tool to gain North Korea's cooperation on nuclear disarmament. Although Russia did not itself impose financial sanctions against North Korea, and in fact is an economic partner of the Pyongyang regime, it was willing to play the role of a risk-taking partner in this case.

The question today is whether similar success is possible with Iran. Iran's evident drive toward nuclear weapons is the other major proliferation crisis the international community has been grappling with for well over a decade. The matter was placed before the UN Security Council in February 2006, after Iran had resumed uranium-enrichment activities in contravention of its agreement with the International Atomic Energy Agency. In the UN Security Council, in contrast to the North Korean case, the United States and Russia descended into rancour about how, and indeed whether, to sanction Tehran. The first UN sanctions resolution, UNSCR 1737, was passed on 23 December 2006 after weeks of angry debate, with the Russian delegation particularly resistant to taking firm measures, citing again the failure of the sanctions regime against Iraq in the 1990s.

Iran had long been the focus of unilateral US attempts to force behaviour change through sanctions. The Iran Sanctions Act, originally known as the Iran-Libya Sanctions Act, was introduced during the Clinton administration, when the United States was trying to counter both the rapid development of the nuclear programme and Iran's support for terrorist organisations like Hizbullah, Hamas and Palestinian Islamic Jihad. Both the executive branch measures taken at that time and the sanctions act were targeted at Iran's strategic petroleum sector, designed to prevent Iran from developing the domestic capability to exploit its vast gas and oil reserves by threatening to sanction foreign firms wishing to invest there.22

These measures were highly controversial with US allies, many of whom had major energy companies intent on investing in Iran. They viewed the act as an extraterritorial application of US law and a contravention of US World Trade Organisation commitments. The Clinton administration ended up waiving sanctions during that period, allowed under the act on 'national interest' grounds. Companies such as Total of France, Petronas of Malaysia and Gazprom of Russia were able to continue their operations in Iran.23

The Iran-Libya Sanctions Act was due to expire in August 2006, but the US administration and Congress were in no mood to allow that to happen, given rising concerns about Iran's uranium-enrichment programme. The law was renewed in September 2006 with some modifications. In particular, Libya was dropped, thanks to its more cooperative behaviour, and some flexibility for the executive branch to waive sanctions was removed.

This trend toward tighter sanctions against Iran accelerated in 2007 as Congressional concerns about Iran's nuclear programme continued to heighten. For example, HR 2347, a bill sponsored by Congressman Barney Frank, proposed highly directed measures to create a list of companies investing more than $20m in Iran's energy sector, and to facilitate efforts by investors to divest themselves of investments in such companies. The bill was designed to encourage 'terror-free international investment options'. Another law, HR 957, would sanction a parent company for activities by its foreign subsidiary in Iran, and Senate bill 970 would impose sanctions on Iran and other countries for assisting Iran in developing its nuclear programme.
These and several related bills have been under active discussion throughout 2007, and it is difficult to tell whether any of them will eventually be passed and signed into law. However, they have several themes in common: anti-terrorism and anti-nuclear programme measures intersect throughout the drafts, the flexibility that the president and executive branch have to work within the laws is constrained, and other countries seen as 'facilitating' Iran's nuclear programme are especially targeted. This last is directed particularly against Russia.
Paradoxically, Russia and the United States have been working better in the UN Security Council on further sanctions resolutions against Iran. In response to Iran's further defiance of the International Atomic Energy Agency and increasing enrichment activities, Russia and the United States, together with other members of the council, adopted UNSCR 1747 on 24 March 2007. This resolution tightened sanctions against Iran, in particular targeting the Revolutionary Guard Corps, including both entities controlled by the Guard and commanders of the organisation - the essence of smart sanctions. The resolution demanded Iran suspend enrichment by 23 May 2007.24

That date came and went without Iran responding to sanctions, and the United States began pursuing a third resolution against the Tehran regime. At the same time, the International Atomic Energy Agency put in place a process to broker Iranian compliance with the previous resolutions. Iran has promised to respond fully to questions about its suspicious nuclear activities, and on that basis Mohamed ElBaradei, director-general of the agency, has asked the parties involved in the negotiations - the United States, Russia, France, the United Kingdom, China and Germany - to give him some 'elbow room'.25 The United States, however, remains sceptical that the process will produce any results.

Sanctions synthesis

Anti-terrorism and nonproliferation sanctions, which have always operated in close proximity, intersected in the North Korea case. The Patriot Act and US banking laws designed to fight terrorism have now been expressly applied to help resolve a major proliferation issue. The United States seems to be extending this lesson to the Iran case, for international banks and financial institutions are becoming increasingly unwilling to take on Iranian banking transactions, again for fear of attracting US Treasury Department penalties.

To what degree will other major powers be willing to join this squeeze play on Iran? The history of Security Council sanctions has been one of almost constant disagreement about speed and depth. Although Russia and China were more willing to impose sanctions in March of this year, when Iran was at the height of its defiance of the international community, recent discussions in New York have again been plagued by argument. The International Atomic Energy Agency and its director-general have asked for more time for its process to work, and Russia and China have tended to agree. The United States, for its part, has been impatient to proceed with a third resolution in the Security Council. The European Union, guided by its leading troika of Britain, France and Germany, has so far sided with the United States.
The experience with North Korea seems to indicate that the major powers might be placing too much emphasis on the Security Council process and not enough on the improved instrument of sanctions policy represented by the new US financial laws and procedures. These measures have been historically controversial, as the criticism of the Clinton administration for attempting extraterritorial measures with the Iran-Libya Sanctions Act showed. Nevertheless, the US legislation adopted after 11 September has done much to improve banking due diligence and other procedures in pursuit of a common good, the fight against terrorism.

This sense of the common good, in turn, has attracted what would earlier have been some unlikely partners to the effort: in the case of North Korea, the Russian Federation and its Central Bank. Across the board, counter-terrorism measures have been popular with the leadership in the Kremlin, one of the only areas in which they are willing to cooperate with the United States without complaint or controversy.26

The United States and Russia, therefore, might be more willing to work together in the realm of anti-terrorism financial measures to pressure Iran than they have been at the UN Security Council. Such an approach could indeed be more effective, since it would provide yet another opportunity to play 'good cop-bad cop' with Tehran. The United States need do no more than continue to raise the pressure against Iran in the banking sector, while Russia could remind Iran of the helpful role it was able to play in North Korea once Pyongyang became willing to cooperate with the international community. The concept of smart sanctions introduced after the humanitarian crisis in Iraq in the 1990s has been honed through the 'war on terror', and sanctions are hitting their targets among corrupt elites more often. For policymakers, the main question is whether the global powers can work together on implementing such sanctions, or whether the dominance of the US financial system will again create tensions and disagreement. Russia's willingness to work with the United States on the North Korean case seems to bode well for the chances of cooperation.

Notes

1. 'Sanctions: History Lessons', Economist, 19 October 2006.
2. David Lektzian, Making Sanctions Smarter: Are Humanitarian Costs an Essential Element in the Success of Sanctions? (Oslo: International Peace Research Institute and Norges Rode Kors, 2003), p. 4.
3. See for example Lucy Komisar, Journal of Commerce, 24 September 1991, p. 8A.
4. Lektzian, Making Sanctions Smarter, p. 21.
5. For one point of view on this issue, see 'Iraq Sanctions: Humanitarian Implications and Options for the Future', Global Policy Forum, 6 August 2002, at http://www.globalpolicy.org/security/sanction/iraq1/2002/paper.htm.
6. 'In Slobodan Milosevic's Yugoslavia, Sanctions Virtually Fused the State with the Criminal Class', Economist, 19 October 2006; see also Lektzian, Making Sanctions Smarter, p. 12.
7. See 'Iraq Sanctions', Executive Summary, section 2.
8. Arne Tostensen and Beate Bull, 'Are Smart Sanctions Feasible?', World Politics, vol. 54, April 2002, pp. 373-4.
9. Ibid., pp. 379-80.
10. 'Iraq Sanctions', p. 6.4.
11. Kofi Annan, Annual Report on the Work of the Organization (New York: United Nations, 1998), available at http://www.un.org/Docs/SG/Report98.
12. This story is well told in Lawrence Wright, The Looming Tower: Al Qaeda and the Road to 9/11 (New York: Alfred A. Knopf, 2006).
13. This section is drawn from the very thorough discussion of Title III in the testimony of Herbert A. Biern, senior associate director, Division of Banking Supervision and Regulation, 'The Bank Secrecy Act and the USA Patriot Act', Before the Committee on International Relations, US House of Representatives, 17 November 2004.
14. Ibid.
15. Peter A. Prahar, director of the Office of Africa, Asia and Europe Programs, Bureau for International Narcotics and Law Enforcement Affairs, Department of State, Statement before the Subcommittee on Federal Financial Management, Government Information and International Security, Senate Homeland Security and Government Affairs Committee, 25 April 2006, p. 12.
16. Steven R. Weisman, 'The Ripples of Punishing One Bank', New York Times, 3 July 2007, http://www.nytimes.com/2007/07/03/business/worldbusiness/03bank.html.
17. 'North Korean Accounts to Remain Frozen for Long', Kommersant, 18 May 2007.
18. Prahar, Statement, p. 12.
19. For a useful discussion of the North Korea case, see Ruediger Frank, 'The Political Economy of Sanctions against North Korea', Asian Perspective, vol. 30, no. 3, 2006, pp. 5-36.
20. 'U.S. Assumes Financial Risks in N. Korea Money Transfer-Lavrov-1', RIA-Novosti, 20 June 2007.
21. 'N. Korea Agrees to Start Talks on Closing Nuclear Reactor', RIA-Novosti, 25 June 2007.
22. For an excellent review of US legislation and the intended investment targets, see Kenneth Katzman, 'The Iran Sanctions Act (ISA)', Congressional Research Service, Order Code RS20871, US Library of Congress, updated 9 July 2007.
23. Ibid., p. CRS-2.
24. A full description of the sanctions negotiations in the UNSC through 15 May 2007 can be found in Kenneth Katzman, 'Iran: U.S. Concerns and Policy Responses', CRS Report for Congress, Order Code RL32048, The US Library of Congress, updated 15 May 2007.
25. Elaine Sciolino, 'Atom Work Expanding in Iran, UN Agency Says', International Herald Tribune, 31 August 2007.
26. One example of this phenomenon is the 'Global Initiative to Combat Nuclear Terrorism', which was launched by Presidents Bush and Putin at the time of the St Petersburg G8 summit in July 2006. The United States and Russia are co-leaders of this initiative, which has since attracted 51 partner nations. Media Note, 'Global Initiative to Combat Nuclear Terrorism: Joint Statement', Office of the Spokesman, US Department of State, Washington DC, 12 June 2007.

Rose Gottemoeller