Select Committee on Economic Affairs Second Report

CHAPTER 5: TARGETED FINANCIAL SANCTIONS ON INDIVIDUALS AND GROUPS

The rapid growth of targeted financial sanctions

62.  Targeted financial sanctions are directed at named private individuals, non-state actors (political, business and front organisations) and state officials. In contrast, financial sanctions on an entire country fall into the category of general sanctions. Sanctions aimed at blacklisting particular state banks or private banks providing financial services to states are sometimes called targeted sanctions: notable recent examples have involved North Korea and Iran. However, their wider economic impact (especially when they are aimed at discouraging the global financial sector more generally from working with the target state) leads us to categorise them as general rather than targeted sanctions. The United States and the EU have extensive lists of targets, as does the UN Security Council's Counter-Terrorism Committee. Mr Kovanda indicated in evidence that there are approximately 1,050 individuals and around 430 entities, groups or companies on the EU list of those subject to financial sanctions for a total of some 1,480, with half of that figure drawn from the UN list (Q 253).[31]

63.  The costs to a target of financial sanctions include not only the amount of money frozen but also the opportunity cost associated with the prohibition of financial transactions. The former is easily quantifiable, and has turned out in most cases to be small in relation to the probable resources of non-state targets. The costs arising from the prohibition of financial transactions are almost impossible to quantify, but they are likely to be much larger than those associated with freezing funds, because the flows of funds through accounts over time are much greater in value than the total amount held in an account at any particular time.

The inadequacy of efforts to improve targeting

64.  There are numerous studies of the legal, technical, political, economic and normative issues related to the imposition and administration of asset freezes and travel bans on named individuals and non-state entities.[32] We received a great deal of evidence on the need for improvements to financial sanctions targeted on individuals and entities and on how improvements might be secured.[33] We note that just because financial sanctions are labelled as targeted, this does not necessarily mean that they are hitting their targets, and every effort should be made to reduce the number of cases in which asset freezes and financial restrictions are wrongly applied and to improve humanitarian exemptions and rights of appeal.

65.  There are several high-profile cases in which individuals appear to have been wrongly targeted. Professor Peter Fitzgerald, of the Stetson College of Law in Florida, informed us of the case of Somali-born Swedish national Ahmed Ali Yusuf (p 155). He was blacklisted and his assets were frozen by the EU in November 2001, because of his inclusion on a UN list at the request of the US authorities. Despite representations from the Government of Sweden, the US refused to reveal the basis for the blacklisting of Mr Yusuf and it took until August 2006 for the US to de-list him.

66.  The evidence we received indicates that, due to the interdependence of the EU, UN and US lists, UK and EU citizens are almost certainly affected by the deficiencies in and the excessive secrecy surrounding the US financial sanctions list. The FCO emphasised the legal processes available through the European Court of First Instance and the European Court of Justice (p 8). However, this does not overcome US refusal to justify its decisions and the reluctance of the courts to act in this realm. Professor Fitzgerald emphasised the following points with regard to Mr Yusuf and EU citizens more generally:

"even if the practical and procedural hurdles to judicial review are overcome … the deference given to the exercise of executive authority in the area … of foreign policy combined with the traditional regard for sanctions as temporary measures is likely to preclude a re-examination of the blacklisting action. As a result, unless the sanctions programs themselves provide for a review mechanism, these programs are effectively devoid of the procedural and substantive due process protections that would be associated with … similar actions if they were taken pursuant to civil or criminal law." (p 156)

In our view, efforts to improve targeting and de-listing procedures are inadequate. The existing procedures appear to violate EU sanctions principles, which emphasise that there should be due process and clear criteria for the listing and de-listing of individuals. We urge the Government to look for ways in which proper degrees of transparency and due legal process can be incorporated into targeting procedures.

Assessing the effectiveness of targeted financial sanctions

67.  In contrast to the literature on targeting procedures, there is a dearth of assessments of the effectiveness of targeted financial sanctions in achieving their stated objectives. Dr Colin Rowat, of the University of Birmingham, referred in his evidence to "a lack of evidence about very basic aspects of the [effectiveness of] targeted sanctions". He quoted Mr Anthonius de Vries, the EU's sanctions coordinator in the late 1990s, who wrote in 2002 that evidence of their effectiveness is "unavailable" (p 166).

68.  One of the objectives of targeted financial sanctions is to confiscate or freeze existing assets of targets before they can move them. This appears usually to meet with almost negligible success. Targeted individuals or organisations can easily anticipate or respond to financial sanctions by the use of false names, collaborators and alternative front organisations. The FCO reported in their evidence that the UK had frozen the following sums of named individuals and entities of the following countries in support of EU and UN sanctions: Burma £3,500, Liberia £267,000 and Zimbabwe £160,000. It also reported that it had frozen £27,000 in relation to terrorism and $628,000 in relation to the al-Qaeda, the Taliban and their associates (pp 5-6). The evidence suggests that the amounts of money frozen are so small, both in absolute terms and relative to the probable resources of the targets, that it is doubtful whether asset freezes are effective as a means of inhibiting or changing the behaviour of those who are targeted.

69.  Although it may not be possible to quantify the resources that are denied by a freeze on transactions, it is clear that the effectiveness of the action depends on the quality of intelligence and the identification of front organisations and collaborators. Particularly in view of the problematic management of lists suggested by the evidence, we conclude that, in the context of the technology of modern banking and the networks of informal banking based in the Middle East and Asia, "targeted" financial sanctions are likely to hit few targets. While this does not mean that they should be abandoned, such sanctions will at best be a secondary tool for action against terrorists. They may however be effective, even if they impose few costs, when the target wishes to avoid the stigma of illegitimacy.

70.  Mr Vines argued that the key to the effective use of targeted financial sanctions is high-quality information on very small numbers of people. He gave an example of the effective use by the UN of such measures combined with a travel ban:

"In early 2006 in Côte d'Ivoire the imposition of targeted sanctions on three individuals had a calming effect on others and there was a noticeable decline in hate speech for some six months". (p 109)

Dr Howells suggested that "they can be disruptive, and in individuals they highlight the personal cost that is involved". He also indicated that there are companies in Colombia which are very concerned not to be blacklisted by the US (Q 294). We agree that salutary effects are possible, but only for targets who seek to be public and legitimate. Others are likely to experience targeted financial sanctions as a minor inconvenience at worst.

US extra-territorial sanctions

71.  Although we are primarily concerned with the UN and EU contexts of UK sanctions policy, we note that there has been an increasing tendency for the US to apply its own legislation in an extra-territorial manner and that this has potential consequences for UK citizens and businesses. This problem is particularly pertinent in the context of targeted financial sanctions, which is the area in which sanctions policy is developing most actively.

72.  The Confederation of British Industry (CBI) expressed concern about the USA PATRIOT Act of 2001 due to its assertion of the right of US authorities to "seize funds in non-US banks" (p 72). The Act states that:

"For the purpose of forfeiture … if funds are deposited into an account at a foreign bank, and that bank has an interbank account in the United States with a covered financial institution … the funds shall be deemed to have been deposited into the interbank account in the United States".[34]

Mr John Cridland of the CBI gave evidence on US extra-territorial sanctions, including the extradition of British business people to stand trial in the US:

"There are indeed practical implications and those are significant but it is the principle that business in Britain finds offensive; that the US administration should seek to apply through congressional law requirements on non-US companies operating in third countries outside the US administration." (Q 224)

Mr Cridland expressed the view that such sanctions "have been policed by the US authorities in quite a sensitive way", reflecting strong views in Congress and the executive seeking to moderate their effects, especially in relation to companies from friendly countries. Nevertheless, he said that extra-territoriality is "a strong concern" among business people, and Mr Gary Campkin, also of the CBI, thought that US extra-territorial application of its sanctions legislation was increasing. (Q 224)

73.  While recognising the urgent need to take vigorous action in response to the terrorist threats facing the EU and the US, we endorse the condemnation by the EU of the extra-territorial application of US sanctions legislation as a violation of international law.[35] The question that follows is whether sufficient action is being taken to counter this practice.

74.  The EU's Council Regulation 2271/96, or "Blocking Statute", as it is known, passed in November 1996, requires those affected by the extra-territorial application of sanctions to notify the Commission within 30 days and not to cooperate with them actively or by deliberate omission or through a subsidiary or intermediary.[36] However, those affected can be authorised to comply if non-compliance would seriously damage their interests or those of the EU. The Blocking Statute indicates that those affected are entitled to claim damages from those applying extra-territorial sanctions. It makes specific reference to US sanctions legislation, including the Cuban Liberty and Democratic Solidarity Act of 1996, and the Iran and Libya Sanctions Act of 1996. Prior to the passage of the EU's Blocking Statute, the UK enacted an Order under the Protecting of Trading Interests Act (PTIA) of 1980 which prohibited UK companies and nationals from complying with US extra-territorial sanctions. (p 6, p 131)

75.  The existing measures available under EU and UK law appear to us to provide a sufficient legal basis for an effective response to US extra-territoriality: what is required is the political will to address this issue.

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31   However, the following EU list contained 3,603 entries on 2 November 2006: "Electronic List of Persons and Entities Subject to Financial Sanctions On the Day 25/10/2006", accessed 2 November 2006. Back

32   For example: Peter L Fitzgerald, 'Managing "Smart Sanctions" Against Terrorism Wisely', New England Law Review, vol. 36, no. 4 (2003), pp. 957-983), Watson Institute Targeted Sanctions Project, Strengthening Targeted Sanctions Through Fair and Clear Procedures, 30 March 2006, supported by the governments of Switzerland, Germany and Sweden; and Centre on Global Counter-Terrorism Cooperation, Report on Standards and Best Practices for Improving States' Implementation of UN Security Council Counter-Terrorism Mandates, September 2006, prepared for The Netherlands Ministry of Foreign Affairs. Back

33   Principally written evidence from the FCO (pp. 1-12), Peter Fitzgerald (passim), Rachel Barnes (passim), Jeremy Carver (passim), the European Banking Federation (passim), British Bankers' Association (passim) and HSBC (passim). Back

34   US Senate, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, HR 3162, 24 October 2001, Section 319. Back

35   Council of the EU, Guidelines, p. 16. Back

36   Council Regulation (EC) No 2271/96, 22 November 1996. Back