June 16, 2017
By: Saskia Rietbroek, Principal SanctionsAlert.com and Anna Sayre, Legal Content Writer,www.SanctionsAlert.com

The use of sanctions as an international means of effecting change has grown exponentially in recent times. As countries become less and less keen to use military force, the world has turned to sanctions implementation as a means of affecting international change, both politically and socially.

There are now many examples of sanctions initiatives whose aim is to, either directly or indirectly,combat corruption.It is undeniable that corrupt practices can gravely threaten the protection of human rights.  Accordingly, these initiatives demonstrate the importance that sanctions can play in attempting to stop such practices dead in their tracks.

In this article, we examine the significant role that sanctions hold today as a global punitive measure and how the U.S.employs sanctions, along with other tools, such as the Foreign Corrupt Practices Act (FCPA), and the USA Patriot Act,in the fight against corruption.

How and Why Are Sanctions Imposed?

Sanctions are imposed for a variety of reasons; most often in order to punish violations of international law, including acts of aggression, crimes against humanity, or human rights abuses. These can be imposed against individuals, entities, or even whole nations. Some countries, such as the U.S. and the U.K., also designate individuals or entities for sanctions for committing acts of or sponsoring terrorism.

Sanctions can come in many different forms. They can be diplomatic in nature, such as the removal of embassies or refusal to participate in an international sports event; they may include travel bans, blocking of assets, arms embargoes, foreign aid reduction, or trade restrictions.Sanctions programs can be sweeping, such as trade embargoes that prohibit virtually every type of transaction, whilst targeted sanctions are more limited in scope, blocking specified transactions or types of trade, or targeting specific people.

The effectiveness of U.S. sanctions in particular,stems from their ability to prohibit American individuals and entities from interacting with a designated individual or entity.Such prohibitions apply to a large variety of financial transactions, commercial dealings, imports, exports, insurance, and shipping, making it difficult for the designated individual or entity to carry out a transaction or conduct business within the global community. Corrupt persons who have been designated by the U.S. government can face travel bans, have their assets frozen, and other penalties.  Even the associates of designated persons can incur hefty fines and prison sentences.The intended result of such restrictions is the exclusion of the targeted person from the international financial system and economy.

Sanctions Designations as an Anti-Corruption Tool

The U.S. Treasury, namely the Office of Foreign Assets Control (OFAC), plays a key role in the implementation of sanctions initiatives and other corruption fighting tools.

In coordination with the U.S. Department of State, Department of Commerce and the Department of Justice, OFAC identifies corrupt individuals and other threats, placing them on a “do not touch” list. This information is subsequently communicated to U.S. financial institutions so that they may properly monitor their transactions, determine if they have any dealings with listed individuals or entities, ultimately freeze or block their funds, and actively assist in stopping corruption.

While lawmakers in the U.S. Congress have the power to craft sanctions legislation, for the most part, U.S. sanctions are imposed by Presidential Executive Order (E.O.). Unlike many European leaders, the U.S. President has the power to influence foreign policy with just the stroke of a pen.

Once an E.O. is signed by the President, any individuals or entities mentioned are designated and placed on one or more U.S. sanctions lists. These lists include:

  • OFAC’s Specially Designated Nationals and Blocked Person List (“SDN List”);
  • S. Department of State’s Directorate of Defense Trade Controls (DDTC) Debarred List; and
  • S. Department of Commerce’s Bureau of Industry and Security (BIS) Denied Person List.

Targeting Corruption with Designations

Several attempts have been made by the U.S government in recent times to curtail corruption in certain countries by using sanctions. Usually, this is done by designating a corrupt government official or business person as sanctioned on one or more of the above “do not touch” lists.

Recent actions involve countries like:

Venezuela: In 2015, E.O.13692 imposed sanctions on a number of Venezuelan individuals due to the Government of Venezuela’s human rights violations and abuses in response to anti-government protests as well as the presence of significant public corruption.The list includes a Venezuelan prosecutor, who the White House said had charged opposition members with crimes based on “implausible — and in some cases fabricated — information.” Also included is the Director-General of Venezuela’s Intelligence, who the White House described as being responsible for violence against anti-government protesters.

Russia: In 2012, the violent death of Russian whistleblower, Sergei Magnitsky, in a Russian prison gave rise to the U.S. Magnitsky Act, a piece of legislation allowing the U.S. government to impose targeted sanctions against Russian individuals involved in human rights violations related to his death. According to Section 402 ‘Findings; Sense of Congress’ “Systemic corruption erodes trust and confidence in democratic institutions, the rule of law, and human rights protections. This is the case when public officials are allowed to abuse their authority with impunity for political or financial gains in collusion with private entities.”

Syria: In 2008,E.O. 13460 targeted individuals and entities determined to be responsible for or having benefited from public corruption by senior officials of the Syrian regime. Among the persons designated was a powerful Syrian businessman and regime insider, who benefited from and aided in the corruption of Syrian officials.

Zimbabwe: In 2008,E.O. 13469 designated senior officials of the Government of Zimbabwe, and certain entities owned or controlled by the Government of Zimbabwe, in response to human rights abuses related to political repression and public corruption. In this action, OFAC designated a Zimbabwean government official, an Angolan businessman, a Singaporean attorney, and a Zimbabwe-based entity for their role in undermining Zimbabwe’s democratic processes and institutions,and/or facilitating public corruption.

Burma (Myanmar):From 1997 to 2016, through a multitude of E.O.s and Acts, the U.S. government initiated the Burmese Sanctions program, which prohibited engaging in transactions with government officials of Burma. Anyone who had engaged in human rights abuses, facilitated public corruption, or supported the Government of Burma, including the spouses and children of blocked persons,were designated on the sanctions lists. In October 2016,shortly after it held its historic democratic elections, President Obama lifted all sanctions against Burma.

Hefty Consequences: Travel Bans, Frozen Funds and Lengthy Sentences

Violators of sanctions laws are not simply given a slap on the wrist. Those who have been found responsible for or complicit in ongoing human rights abuses and corruption can be subject to a number of penalties and other harsh consequences. These punitive measures may range from a simple visa restriction, where the violator is no longer welcome in the U.S., to crippling asset freezes,fines and prison terms.

Any individual or entity placed on a U.S. “do not touch” list will have their assets within U.S. jurisdiction frozen, and are strictly prohibited from doing business with ‘U.S. persons’ in any capacity.

In addition, any person who violates sanctions can be liable for civil monetary penalties of up to $250,000 or twice the amount of the underlying transaction, whichever is greater. Often times, twice the amount of the underlying transaction is much more than $250,000. Criminal penalties on the other hand, carry a fine of up to $1,000,000, imprisonment of up to 20 years, or both.

Under OFAC regulations, U.S. persons include all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the U.S., as well as all U.S. incorporated entities and their foreign branches. In the case of certain sanctions programs, foreign subsidiaries owned or controlled by U.S. companies must also comply. Other sanctions programs require foreign persons in possession of U.S.-origin goods to comply.

Suffice it to say – the definition of a U.S. person is very broad, and with the U.S. as a leading global hub for financial transactions and business dealings, the consequences can be staggering.

It Takes Two to Tango

An act of corruption requires (at least) two to tango. First, there is an influential government official who receives the bribe (the ‘Receiver’), and secondly,one or more people who pay them in order to cash in on the corrupt act (the ‘Facilitator’).Because of this, not only do sanctions target the corrupt government officials themselves, but also those who influence them, pay bribes, or derive some benefit from the corruption.

Let’s take a closer look at two of the above-mentioned sanctions programs: Zimbabwe and Syria.

Under the U.S. sanctions program against Zimbabwe, Sam Pa, an Angolan businessman and a well-known supporter of the Mugabe regime (the Facilitator) was designated. Pa facilitated public corruption with the help of corrupt senior Zimbabwean officials (The Receivers)by way of illicit diamond deals, and provided financial and logistical support to the Government of Zimbabwe and SDNs. In addition, Pa gave more than one million dollars, as well as supplies and equipment, to Zimbabwean government officials in support of Zimbabwe’s state intelligence service, which has been linked with activities meant to undermine democracy.

Under the U.S. sanctions program against Syria, the U.S. Treasury designated Rami Makhluf, a Syrian businessman and regime insider (The Facilitator), who improperly benefited from and aided the public corruption of Syrian regime officials (The Receivers). As a powerful Syrian businessman, and the maternal cousin of President Assad, Makhluf used his influence to manipulate the Syrian judicial system and Syrian intelligence officials, as well as to intimidate his business rivals. These corrupt activities were employed as part of a scheme to acquire exclusive licenses to represent foreign companies and obtain contract awards in Syria.

As a result of the Treasury’s actions, any assets within U.S. jurisdiction owned by these two businessmen, Pa and Makhluf, are required to be frozen. Additionally, transactions by U.S. persons or with the U.S. involving these individuals are strictly prohibited.

Convergence between FCPA and Sanctions

In the U.S., an interesting trend has been observed in which prosecutors use a combination of anti-corruption laws and sanctions to tackle corruption.

In these cases, the FCPA, and/or sanctions including E.O.s administered by OFAC are being used as powerful anti-corruption toolsagainst financial institutions and other corporations.

As an example, in 2013, Weatherford International Ltd, an oil and gas company, headquartered in Switzerland, with offices in Texas, was determined by OFAC to have violated the Cuban, Iran, and Sudanese sanctions programs by making corrupt payments to obtain business deals in Algeria, Angola, Congo, Iraq and other countries. Weatherford was ordered to pay a combined penalty of $252 million to resolve the U.S. Securities and Exchange Commission (SEC)’s anti-bribery charges as well as export controls investigations conducted by the U.S. Attorney’s Office in Texas,Department of Commerce, and OFAC.

The USA PATRIOT Act’s‘Special Measures’

In addition to economic sanctions, the U.S. Treasury can also wield powers derived by the USA Patriot Act to isolate corrupt officials or countries.

One tool for battling corruption is found in Section 311 of the USA PATRIOT Act, as incorporated in 31 U.S.C. 5318A of the Bank Secrecy Act (BSA). It authorizes the Treasury to require domestic institutions to take certain “special measures” against foreign jurisdictions, financial institutions, international transactions, or types of accounts that the Secretary of the Treasury determines to be of “primary money laundering concern.”

When making this decision to designate a jurisdiction or financial institution of primary money laundering concern, 31 U.S.C. 5318A requires the Secretary of the Treasury to consider, among other things, political corruption;in particular,the extent to which the jurisdiction is characterized by high levels of official or institutional corruption.

Once identified, the Act provides for a range of up to five “special measures” that can be applied, such as enhanced requirements for reporting and customer identification, or prohibitions on the opening or maintaining of correspondent accounts within the U.S.

Using the USA PATRIOT Act to Fight Corruption

The first time the U.S. government used Section 311 against a country based on corruption was against the Ukraine on December 20, 2002, when it was designated as a jurisdiction of primary money laundering concern. In this case, the Ukraine designation was based on the conclusion that the country suffered from systemic corruption, in addition to other anti-money laundering concerns.

In a more recent example, on March 6, 2015, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN)designated Banca Privadad’Andorra (BPA), a private bank in Andorra, as a financial institution of primary money laundering concern.

FinCEN concluded that several officials of BPA’s high-level management in Andorra had facilitated financial transactions on behalf of money launderers. According to the U.S. Treasury, the launderers received assistance from a manager at BPA in Andorra whilst working for Russian criminal organizations engaged in corruption. BPA’s failure to conduct adequate due diligence on customer accounts and its provision of high-risk services to shell companies made it highly attractive to money launderers, who reportedly coordinated multi-million dollar deals related to Venezuelan corruption and claimed that BPA facilitated those transactions.

As a result of the designation and other investigations, the government of Andorra has now taken control of BPA.

The Growing Importance of a Global Partnership

As the world continues to shrink, the importance of connections and financial interactions becomes all the more important. Sanctions have become a common method for deterring global corruption as they carry an important message to corrupt officials: If you continue to flout international law, there will be consequences, including being cut off from the U.S. financial system.

At their best, using sanctions and similar restrictive measures can help governments advance respect for human rights, safeguard democratic institutions, and protect the financial system from illicit financial flows that stem from public corruption.The use of sanctions as well as other anti-money laundering and anti-corruption methods are essential tools employed by the U.S. government in order to achieve these goals and set an example for the world.

Nevertheless, in order to be most effective, sanctions must involve a global partnership. If the world is to realistically tackle corruption on a global scale, then the international community must work together towards a common goal by adopting a similar approach to sanctions implementation. Perhaps then, the international community will make even bigger advancements in fighting corruption in those countries that fail to tackle corruption on their own.

This article was published last month in International Compliance Association’s Anti-Corruption Week Initiative.

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