Benched: The Slow Erosion of Sanctions

A string of recent European court rulings threatens to weaken an essential tool in fighting terrorism, crime and proliferation.

This summer, European courts have invalidated targeted financial sanctions imposed in both the counterterrorism and counterproliferation contexts. In June, the Supreme Court of the United Kingdom quashed sanctions imposed on Bank Mellat, a bank controlled by the Iranian government and designated by the United States in 2007 as providing services in support of Iran’s nuclear entities. Just a few weeks later, in July, the European Court of Justice affirmed the annulment of sanctions imposed on Yassin Kadi, a Saudi national identified by the United States, EU, and UN shortly after 9/11 for providing material support for terrorism.

Unless measures are taken to reform the way that courts handle review of sanctions cases, and in some respects the sanctions regimes themselves, these decisions will likely have deleterious effects on the global framework for targeted financial sanctions.

Specifically, they will imperil the very concept of targeted financial sanctions, a method of imposing financial restrictions that has succeeded in putting significant pressure on terrorist networks, WMD proliferators, narcotraffickers, and other illicit actors. Additionally, they put at risk the comprehensive global nature of the sanctions framework, which has galvanized far-reaching international coalitions to clamp down on a broad range of illicit conduct, making it significantly more difficult for people to provide financial support for terrorism, WMD proliferation, or other proscribed conduct.

The United States should therefore make it a high priority to work closely with its allies to achieve the necessary changes. Unless it does so, the availability of an important strategic tool that lies between uses of force and diplomacy will be imperiled, at significant cost to the international community’s ability to effectively manage a wide range of threats.

The first of the significant sanctions cases to come down this year is the British Supreme Court’s decision to quash sanctions imposed on Bank Mellat. The UK Supreme Court held that sanctions were improperly imposed on Mellat for two main reasons. First, the sanctions were “irrational” and “disproportionate” because the UK government did not provide adequate reasons or justification for “singling out” Mellat for sanctions while leaving other Iranian banks to operate in the UK. Second, sanctions were inappropriate because Bank Mellat did not receive advanced notice of the government’s decision to designate it, leaving it without any opportunity to contest the government’s decision before sanctions were imposed.

In parallel, in July, the European Court of Justice affirmed a lower court ruling annulling sanctions imposed on Mr. Kadi essentially because that court found that neither he nor the judicial system had access to sufficiently detailed information about the reasons he was designated.

These two decisions, taken together, may lead to potentially significant limitations on the international community’s ability to impose targeted financial sanctions on wrongdoers.

In many respects the most important story in international sanctions over the last two decades is the evolution of “targeted financial sanctions.” Targeted financial sanctions impose measures like asset freezes, travel bans, arms embargoes, and transaction restrictions only on persons that governments can demonstrate are involved in illicit activity, such as terrorist financing. Targeted sanctions were developed in response to criticisms of country-based sanctions programs like those imposed on Iraq in the early 1990s, which were grounded in the humanitarian costs of such broad-based programs. Country-based sanctions programs limit the trade and commerce of entire nations in order to affect the decision-making of a small leadership cadre, imposing significant hardships on many people uninvolved in the conduct that brought about sanctions in the first place.

Targeted financial sanctions, by contrast, were a significant improvement over country-based programs because they imposed restrictions only on individuals or entities that were individually involved in specified illicit activity. UN Security Council resolution 1373, adopted in 2001 shortly after the 9/11 attacks, was a significant milestone in the development of the world-wide targeted sanctions regime. That resolution required states to criminalize the provision of financial support for terrorism and to freeze the assets of those who participate in, or provide support to, terrorism.

The purpose of targeted financial sanctions is to make it more costly, risky, and resource-intensive for terrorist groups and other illicit actors to raise, move, and use funds. They accomplish this goal by effectively closing off the formal financial system to designated persons and those who would transact with them. Whereas before 9/11 and the rapid expansion of the targeted financial sanctions system, terrorist groups were able to use the international banking system to effectively transfer funds, it is now nearly impossible for terrorist groups to use banks to transfer value on any significant scale. Instead, they must rely on less efficient and higher-risk means of moving money like cash couriers, hawalas, smuggling or other informal value-transfer systems.

Pages