Sanctions: Guilty until proven innocent

Rebecca LoweMonday 10 November 2014

As tensions between Russia and Ukraine trigger travel bans and asset freezes, Global Insight reports on the secretive world of sanctions where the normal rules of justice and accountability have been turned on their head.

Gennady Timchenko has felt the full force of America’s economic might in recent months. The co-founder of oil trading company Gunvor Group is assumed to be a member of Russian President Vladimir Putin's inner circle. On this basis, the US not only imposed sanctions on the billionaire in March, but subsequently targeted 14 businesses connected to him, including his Luxembourg-based investment vehicle Volga Group (see box: OFAC’s Russia and Ukraine sanctions).

Volga Group signalled its frustration in a statement on 20 March: ‘The justification which the US Treasury has used for including Gennady Timchenko on the list of people on whom economic sanctions are being imposed looks, to put it mildly, far-fetched and deeply flawed.’ A spokesman added in a later comment: ‘None of the companies mentioned by the US Department of the Treasury has any connection to events in Ukraine.’

The businesses’ relationship to the conflict may well be oblique, but the US is not obliged to prove direct involvement. Timchenko’s web of assets, worth an estimated $15bn, are seen as valuable leverage simply because of his assumed ties to the Kremlin – and suspicions his companies harbour Putin’s private funds. Indeed, the reasons supplied by the US were typically vague: the entities were targeted because of their involvement ‘or significant risk of becoming involved, in activities contrary to the national security and foreign policy interests of the US’.

In contrast, no companies have been targeted by the European Union, and all listed individuals have alleged involvement in the crisis. While such relative restraint is largely due to concerns about potential damage to the Russia-dependent European energy sector, this is not the only factor. Unprecedentedly, legal considerations have also played a significant role. ‘We in Europe are bound to having an obvious connection to Crimea – ie, the offence that is at the base of the sanctions,’ German Chancellor Angela Merkel said in March. ‘That’s a different legal situation from the US.’

Such concerns are not misplaced. Unlike US sanctions, measures implemented by the EU have been increasingly overturned in court over recent years. For those used to complete autonomy in matters of economic statecraft, the rulings have come as an unwelcome shock, undermining the delicate balance of justice and security traditionally controlled by government.

Yet for people targeted unfairly or in error, the balance has long felt skewed. Asset freezes and travel bans imposed by the Council of the European Union (EU Council), US Office of Foreign Asset Control (OFAC) and United Nations Security Council (UNSC) have historically been imposed with minimal explanation for maximum effect. The systems provide very little information about the processes behind blacklisting decisions and the evidence relied upon, while means of challenging those decisions are severely limited.

‘Essentially, sanctions are a quasi-criminal measure that prevent you from doing anything with your assets anywhere in the proscribed area,’ says Peters & Peters head of business crime Michael O’Kane, who has represented dozens of sanctioned individuals and businesses in the EU courts. ‘Imposed in a mostly opaque process, there is little oversight and the complete absence of a recognised evidential threshold. If you get to court, you’re lucky if you get a hearing within two or three years. In the meantime, your business is destroyed, your personal life is destroyed, your reputation is destroyed. In terms of justice, it’s woeful.’

As defence budgets shrink and the appetite for sanctions grows, it is not just those on blacklists who are bearing the brunt. Increasingly complex regulations and hefty fines for non-compliance have had widespread repercussions for the public and private sectors alike. Over the past six months, Peters & Peters has taken on more clients whose bank accounts have been closed than they have over the past decade, according to O’Kane, with growing numbers of lawful transactions denied. ‘You have to deal effectively with wrongdoing, but banks are becoming incredibly risk averse and there are knock-on effects,’ he says. ‘Some aid agencies are now unable to get goods into Syria or Somalia. There are levels of compliance hysteria out there that are completely unjustified.’

Global jurisdiction, but no court

While public sympathy for billionaires like Timchenko with a hotline to the president might be limited, blacklists extend far beyond the rich and powerful. UNSC, EU and OFAC sanctions are imposed on thousands of individuals and companies across the world for a wide range of activities, from terrorism and nuclear proliferation to the undermining of democracy and human rights.

The fundamental problem, according to barrister Philip Moser QC, who has won several Al Qaeda delisting cases at the European Court of Justice (ECJ), stems from the decision in the 1990s to start sanctioning individuals rather than states. ‘You’re using the might of the state against one person, so you have this core imbalance,’ he says. ‘It’s a new idea under international law […]. The concern with this strange new world is that we’ve created a global jurisdiction without a global court to control it.’

This ‘strange new world’ began with noble motives. The appalling humanitarian consequences of the Iraq sanctions in the 1990s, which decimated the country’s economy and caused a widespread food and health crisis, prompted a global backlash. State-wide sanctions were unfair and had a disproportionate impact on the general population, it was argued, and should be replaced by ‘smart’ sanctions focused on people and entities.

Nowadays, targeted sanctions are used almost exclusively. At the UN level there are currently 14 sanctions regimes, each overseen by a separate committee. Most relate to a specific region, covering Iraq, Côte d’Ivoire, Liberia, the Democratic Republic of the Congo, Sudan, North Korea, Iran, Eritrea, Somalia and Libya. However, the majority of names – 409 out of 754 – appear on the two transnational terrorist lists, for those with alleged connections to Al Qaeda and the Taliban.

With the exception of the Al Qaeda list, anyone sanctioned can only be delisted with the consensus of all 15 committee members. No evidence is provided for the listings and no records are held of meetings. Anyone who believes they have been unfairly targeted can send their objections to the committee – and wait. There is no hearing, no disclosure, no appeal.

The same used to be true of the Al Qaeda list too. After 9/11, the US added hundreds of names with minimal explanation and almost no opposition. However, in 2008 a controversial Saudi Arabian businessman, Yassin Abdullah Kadi, not only challenged the core framework of the UNSC’s sanctions system, but the entire legitimacy of its mandate as global arbiter of peace and security. Accused of illicit dealings with Osama bin Laden, who he admitted to meeting in the 1980s, Kadi was placed on the OFAC and UN Al Qaeda blacklist in October 2001, the latter of which was automatically implemented by the EU. For years, he was viewed as a terrorist by 193 countries, unable to access funds or travel. Without a remedy available at the UN level, he took his case to the ECJ – and, incredibly, won.

The ruling was ground-breaking: all EU terrorist sanctions, even those implemented automatically following a UNSC resolution, had to follow basic principles of fairness, and be based on solid reasoning and ‘substantive’ evidence.

Forced into a corner, the UNSC in 2009 created the Office of the Ombudsperson, which could receive and assess petitions for delisting: a remarkable achievement for a system historically unaccustomed to supervision or control. Since 2011, ombudsperson Kimberly Prost has had the power to make recommendations for delisting that are binding unless all committee members disagree. Incredibly, since this date she has recommended the delisting of 40 out of 49 petitions she has received: a staggering 81 per cent. To-date, none of her recommendations have been refused by the committee.

The figures are impressive, but unsettling. Prost is clearly undertaking her job effectively and independently, but her success underlines in stark terms the fallibility of the system. Assuming her assessments are correct (she is only able to base her judgments on evidence provided by member states), at least 15 per cent of the people on the Al Qaeda register were listed in error. The register currently lists 211 individuals and 61 entities, many of which have been there for more than a decade. If the other 13 blacklists were similarly flawed, 71 people would currently be facing global asset freezes and travel bans in error.

Indeed, those who have investigated the listings process reveal a surprising lack of due diligence. ‘My biggest surprise was that the sanctions committees are not deliberative bodies,’ says Thomas Biersteker, former Director of the Watson Institute for International Studies, whose reports on UN sanctions have led to a series of reforms, including the Office of the Ombudsperson. ‘Evidence is rarely discussed. The chair will say that the following designations have been proposed and ask if there is any reason to oppose them. If not, the designations stand.’

The non-deliberative nature of the process ‘has raised concerns that the regime is open to misuse as a means of targeting individuals and entities in order to advance national political goals essentially unrelated to Al Qaeda’, according to Ben Emmerson, UN Special Rapporteur on the Promotion and Protection of Human Rights and Fundamental Freedoms while Countering Terrorism. In his September 2012 report to the UN General Assembly, Emmerson’s criticisms go further: the ombudsperson system, while a step in the right direction, must be overhauled to bring it in line with ‘minimum international standards’ of due process, he says. Prost’s reports remain confidential, he points out, and she cannot compel states to disclose evidence.

For Prost, however, the issue is far from black and white; due process can be a moveable feast, she tells Global Insight. ‘It is one of the fundamental questions: what is a fair process in this very special context? The kinds of protections you have at criminal proceedings are far different from what you’d get an administrative proceeding […]. But I think the fundamental components are the same, and we’re getting those through my process: that you should know the case against you and have a chance to answer that case.’

Security versus Freedom

While Kadi himself has joked about the personal impact of being blacklisted – ‘I have [even] been accused of playing golf with Tony Blair,’ he said in a November 2013 interview – the potentially destructive consequences of such allegations and the frustration of his predicament can hardly be overstated. For 12 years, until winning his final appeal in July 2013, he and his lawyers were forced to grapple blindfolded, never informed of what he was supposed to have done or what evidence was held against him.

Defence officials may protest – and vehemently have done – but for the ECJ, the line between the ‘anxieties of the many and rights of a few’ was very much askew. The point in the Kadi case was not innocence or guilt, the court stressed, but that some form of redress must be provided. ‘The fact that the measures at issue are intended to suppress international terrorism should not inhibit the court from fulfilling its duty to preserve the rule of law,’ the EU court’s Advocate General Poiares Maduro wrote. The lack of a forum to answer the allegations, he said, ‘is anathema in a society that respects the rule of law’.

Since Kadi, the ECJ has wrestled with how to apply the new principles to non-terrorist sanctions regimes. Overall, 60 cases have gone to court to date, 14 of which have related to terrorism and 28 of which have concerned Iran and nuclear proliferation (see box: Blazing a trail). While more than 80 per cent of the Iran cases have proved successful – perhaps because, unlike some sanctions regimes, they involve a specific allegation of misconduct that is easier to refute – the others have enjoyed mixed success.

Sanctions: a brief history

Carter Ruck partner Guy Martin, who represented Kadi, is hopeful the rulings might mark a change in how EU sanctions are implemented. ‘The same principles that were established in the Kadi case will apply to Ukraine and elsewhere,’ he says. ‘One hopes the EU has learnt its lesson and will start being more rigorous with the evidence and reasons they supply.’

Despite Angela Merkel’s comments, however, there has been little indication of such rigour so far. Blacklisting decisions by the EU Council follow a similar pattern to those at the UN, and are rarely debated. They can sometimes be based on little more than unsubstantiated printouts from websites, according to Martin.

‘Sometimes it seems the EU just rubber-stamps proposals from member states without subjecting the underlying evidence to any proper scrutiny,' he says. 'These can be based on the weakest of rumour or hearsay without any substantive basis at all.’

Leading EU sanctions barrister Maya Lester, who also represented Kadi, agrees. Abuse of the decision making procedure is particularly problematic when sanctions are aimed at the alleged misappropriation of funds by former leaders, she says. ‘We saw it with Egypt and Tunisia after the Arab Spring, and more recently with Ukraine. It can be the new guard versus the old guard. Regimes in partnership with the EU have in the past sent across the names they want included and they go on the EU list two days later. It’s incredibly easy. It can just be on the basis of the opening of an investigation, which could be totally spurious.’

In a response provided to Global Insight, the EU Council denied that sanctions decisions were ‘based on hearsay’ or ‘without any substantive basis at all’. It stated: ‘The Council will discuss listing proposals in relation to the criteria for listing applicable to the sanctions regime concerned and in relation to the information or evidence available to the Council for underpinning the listing, in line with the standards set by the EU courts […]. Substantiation and sufficient legal soundness are constant themes in sanctions discussions in the Council.’ All meetings must be held in private, the Council added, ‘due to the political sensitivity of these issues’.

Despite its professed scrupulousness, the EU Council rarely overturns a listing on request, meaning the vast majority of cases end up in court. Yet the ECJ’s newfound judicial zeal - while a step in the right direction - is no due process panacea. An average case lasts around two to three years, with no interim relief. Costs can run into hundreds of thousands of pounds, with under 50 per cent recoverable, while claims for damages have so far proved unsuccessful .

A further concern is secret evidence. At present, there is no provision for classified material in court, prompting complaints from states who say they are unable to argue their case. Under new proposals, judges could review such material, but the applicant and their lawyer could not. While some see this as an acceptable compromise, others are unconvinced. ‘In the UK, there are special advocates who can represent claimants and make submissions,’ says Lester, ‘It is not the best system, but it’s fairer. It’s very difficult to answer allegations when you don’t know what they are.’

Answering such allegations is arguably even more problematic in the US, where judicial claims against OFAC sanctions are rare. The few cases that reach the courts are often dismissed following a motion by OFAC or - more rarely - settled early by OFAC through a delisting. No applicant has ever won a case on the grounds that OFAC’s information was flawed. US lawyers representing sanctioned individuals say this is due to judges’ historical deference to national security agencies, as well as OFAC’s low standard of evidence: a test of ‘reasonableness’, far below the criminal standard of 'beyond reasonable doubt'.

OFAC sees the situation differently. Judicial deference is not unfounded, it stresses, but is due to OFAC’s ‘airtight’ cases and the robustness of its internal legal review, which involves lawyers from both the Treasury and Justice Department. Evidence packages often comprise 30 or 40-page memoranda, it says, with 100-plus pieces of evidence from multiple sources.

Outside the courts, the only way to get delisted is to write to the Director of OFAC directly. However, the process is far from easy. Discussions on who to sanction are held in closed meetings and very little of the evidence is made public. Petitioners are therefore obliged to counter evidence they haven’t seen, inverting the traditional standard of proof, and there is no time limit for OFAC’s reply. Costs can also prove prohibitive, rising to millions of dollars with no prospect of damages.

‘It’s very much a one-way street,’ says Steptoe & Johnson sanctions specialist Edward Krauland, based in Washington DC. ‘The target has to try to learn as much as they can about why they’re on the list. It can be extremely difficult; it’s principally done on paper; it’s rare to get meetings; there’s no deadline; there’s no structured process.’

OFAC strongly contests that it lacks transparency. It releases ‘at least enough unclassified material to tell the story […] and explain why a person has been designated’, according to a US Treasury official speaking to Global Insight. ‘If we don’t have enough unclassified material to explain why the person has been designated, we do not move forward. For every designation, we come out with a statement of case, which can be in the form of a fact sheet or press release.’

Every delisting request is carefully considered, according to OFAC. Last year, 200 people were removed from the 6,000-strong ‘Specially Designated Nationals (SDN) and Blocked Persons List’, it points out, most because they withdrew from the sanctioned activity. ‘Sanctions are not designed to be punitive, they are designed to change behaviour,’ says the official. ‘So the more dynamic the list is, the more it serves its ultimate goal […]. People see this is not a forever thing and it encourages others to come in and say, listen, I’ve severed my bad behaviour.’

Critics concede that OFAC may be as rigorous and fair as its officials maintain. The concern, however, is that without greater transparency and an independent agency to assess its actions, its claims of robustness cannot properly be judged. For OFAC specialist Erich C Ferrari, founding partner at Ferrari & Associates, OFAC’s lack of disclosure is frustrating and unnecessarily obstructive. ‘I believe, and so have a few different courts, that they can provide unclassified summaries of what is contained in classified evidence, as well as the unclassified memorandum underlying the designation immediately upon the designated party requesting a reconsideration,’ he says. ‘They can also allow counsel with the appropriate clearances access to the classified evidence, just as they would in a criminal case.’

Despite being delisted by the EU and UN, Kadi remains on the OFAC terrorist blacklist. For his lawyers, this is evidence of US hostility to evolving norms of justice and due process in the security sphere; for many inside that sphere, it is an acceptable price to pay for the maintenance of global law and order. Interestingly, Prost is unconcerned about the decision to ignore her delisting recommendation. ‘The US might have information that they use domestically and there are all sorts of other factors,’ she says. ‘I respect entirely each state’s decision on domestic listings.’

Risk vs restraint

Blacklisted individuals are not the only ones impacted by the lack of transparency surrounding sanctions. Banks and corporations across the world must contend with an ever-expanding smorgasbord of asset freezes, travel bans and trade restrictions, with limited guidance – and limited sympathy when things go wrong.

OFAC rules prohibit business with any company over 50 per cent owned by a sanctioned person, but provide no list of such companies and very little assistance on disclosure and due diligence requirements. European rules are even murkier. EU guidelines suggest a ban on dealings with companies in which listed individuals have a ‘significant interest’, but decline to define what such an interest my comprise.

‘Compliance is now far more burdensome than you could ever imagine,’ says Nigel Kushner, Chief Executive at W Legal, based in London, who advises EU businesses on their sanctions obligations. ‘It’s not sufficient to check that counterparts aren’t on the sanctions list; you can’t do business with any company with ownership rights or control. But there are no set definitions. It plays havoc for exporters, who have no idea what due diligence is necessary.’

Without explicit guidelines, companies are being forced to draw their own shaky line between risk and restraint. Getting the line right is of particular concern as sanctions increase against Russians and Ukrainians with ownership stakes in vast numbers of business operations across the world. ‘There are lots of situations arising where ownership is not clear and companies are taking a conservative view,’ says Krauland. ‘Unless they can confirm lack of ownership or interest, they are taking action.’

The ‘chill factor’ is particularly acute in Iran, where extensive US sanctions effectively force countries to choose between doing business with Iran’s banking or energy industries and accessing the US financial sector. Following a rigorous clampdown by US regulators on sanctions busting – five UK banks (Barclays; HSBC; Lloyds; RBS; Standard Chartered); Swiss bank Credit Suisse; French bank BNP Paribas; Netherlands bank ING; Intesa SanPaolo of Italy; and US bank JP Morgan have faced fines ranging from $3m to $700m – corporations are now shying away from any kind of business with the country, even that which is unquestionably legal.

‘Even smaller fines can damage a company’s reputation, as it could be seen as doing business with illicit actors and supporters of terrorism,’ says Judith Lee, Chair of Gibson Dunn’s International Trade Practice Group, based in Washington. ‘The result of these fines is that companies are very sensitive to any transactions that could violate sanctions regulations – and, indeed, are sensitive to any transactions that, while not technically violating such regulations, might appear inappropriate.’

Those that continue trading with Iran will have a tough time staying on the right side of the law, according to leading Slaughter and May partner Nigel Boardman, who represented Standard Chartered Bank in its $667m settlement with the US over sanction violations. ‘We’ll see a lot more [violations] because the rules are so difficult to police,’ he says. ‘Every payment goes through a filter that has thousands of names on it. But Iranian shipping lines change the names of their vessels all the time, and if you get it wrong you’ve breached the law.’

According to Paul Lomas, former head of Freshfields general industries group and the global commercial disputes team, part of the problem is the growing power of US financial authorities. Institutions have to strike deals with regulators on flimsy evidence due to the expense and potential reputational damage of battling the case out, he says. ‘You need to punish wrongdoing, but the current obsession with ever larger fines on ever slimmer evidence takes no account of the impact on behaviour or the economy. If people overcompensate for risk, we chill legitimate behaviour.’

While some may question the alleged weakness of US regulators’ case against the banks – many of which had been found to have wilfully removed information from wire transfer statements to avoid reference to sanctioned states – it is clear the fines are packing a heavy punch, impacting everyone from consumer to corporate exec. The 'chill' has affected no-one more severely than the Iranian people, however, whose economy has been brought to the brink of collapse. Inflation is now at 18 per cent and unemployment is soaring. Queuing at petrol pumps can sometimes take hours, and stories of formerly affluent families pawning jewellery and other possessions are common.

For many Iranians, the cost is too high. ‘Targeted sanctions are very useful, but when you have comprehensive sanctions, these become tools of collective punishment and I think they are actually counterproductive,’ says Ali Vaez, Director of the Iran Project at the Federation of American Scientists. ‘More than anyone else, they will hit the middle class in Iran, the ones demanding a better democratic system, while the Revolutionary Guards benefit from smuggling activities.’

Nobel Peace Prize winner and human rights lawyer Shirin Ebadi agrees. Having left Iran in 2009, she is now living in exile due to fear of arrest if she returns. ‘Targeted sanctions that weaken the government are good,’ she says, speaking to IBA Global Insight via a Farsi interpreter. ‘But any sanctions that are detrimental to the people should be avoided.’ For example, she says, the West could target Iran’s 13 foreign language channels, which ‘broadcast its lies around the world’.

Ironically, however, while much of the world is retreating from Iran due to fear of US reprisal, American exports are on the rise. Agricultural, medical and humanitarian goods are all permissible under licence, and US banks have no problem accepting payments for such products, according to Kushner. ‘US banks will happily receive money indirectly from Iran for US exporters,’ he says. ‘But banks outside the US are closing accounts of anyone who simply has an Iranian sounding name because they are afraid of the US. So there is a definite imbalance.’

In 2010, it was revealed that the US had granted around 10,000 export licences to its own companies, permitting billions of dollars in business with blacklisted countries. Most were permitted under exemption rules, but some may question how vital Wrigley’s gum and the American Pop Corn Company are to the beleaguered populations of Iran and Sudan. When questioned on the merits of popcorn as a form of humanitarian relief, food products export manager Henry Lapidos reflected that its fibres could potentially be ‘helpful to the digestive system’ – though conceded this may be ‘pushing the envelope’.

Indeed, while vast numbers of ordinary people are affected, and potentially destroyed, by sanctions, those with wealth and power seem to be able to find convenient loopholes. The likes of Timchenko simply move assets or sell shares before US and EU sanctions are imposed. Meanwhile – despite the enveloping ‘chill’ – some businesses are known to employ a complex array of circumventing measures to avoid sanctions laws, often through regulatory-light regions such as Dubai, comparable to sophisticated tax avoidance schemes.

‘There’s lots of side-stepping,’ says leading corporate crime barrister Jonathan Fisher QC, who advised one of the sanctions-busting companies in the UK’s Serious Fraud Office’s investigation into alleged sanctions breaches and corruption in relation to the UN’s Oil for Food programme. ‘You can’t deliberately circumvent, but the line between committing a criminal offence and staying on the right side of the law is a thin one.’

Gaining legitimacy

It is clear that sanctions can serve a useful purpose, bridging the thorny gulf between words and warfare [see timeline]. It is not for corporations unilaterally to decide to bypass sanctions laws due to ‘over-burdensome’ compliance regulations, nor for terrorists and money launderers to clog up the courts with spurious claims about abuse of process. As Miller & Chevalier partner Homer Moyer, former General Counsel of the US Department of Commerce, points out: ‘From a government point of view, dealing with money flows is one of the most effective ways of dealing with the underlying issue, be it terrorism or arms trafficking or international adventurism.’

Yet sanctions are, ultimately, a power game: a show of economic and political might against a weaker adversary, without the requisite judicial oversight demanded by a democratic society. Serious flaws in procedure, oversight and guidance need urgent attention, or the legitimacy of sanctions regimes will continue to be undermined. If the process is abused and the wrong people targeted, states and companies are less likely to support the system – a system that relies on multinational cooperation and compliance to be effective. Indeed, a dash of humility on the part of current world powers may be wise, as China and fellow emerging nations grow in stature and start fashioning impactful sanctions regimes of their own.

Absolutist ideas of due process and open justice may be problematic in the craggy terrain of international security and terrorism. But certain fundamental reforms are long overdue: clearer rules and standards of evidence; swifter and more transparent redress; independent assessment of cases; and full disclosure of unclassified material, with sensitive documents disclosed to a court or special advocate.

In a book to be published later this year, Biersteker proposes the innovative idea of establishing a separate, independent body at the UN level to deal exclusively with terrorist sanctions in the mould of the International Atomic Energy Agency. The world powers are unlikely to be ready for such a step, he concedes – but never say never. ‘When we initially broached the idea of reforms in 2006, nobody thought we’d get as far as we did,’ he says. ‘If you don’t articulate the idea, it will never happen.’