Tightening the Screws

Tightening the Screws

Mini Teaser: Staunching the flow of funds to terrorist organizations take more than issuing exective orders. An inside look at a broken process, and how to fix it.

by Author(s): Peter L. Fitzgerald

Short of the actual use of force, economic sanctions are among the U.S. government's most powerful tools in the war on terrorism. They seek to deprive terrorist organizations of the financial wherewithal to support and conduct operations such as the September 11 attacks on Washington and New York. Well before those events, however, the U.S. government had targeted Osama bin Laden and his Al-Qaeda organization with financial sanctions as part of three separate anti-terrorist programs established since the mid-1990s. This pre-existing anti-terrorist sanctions framework has now been bolstered by a new Presidential Executive Order on Terrorism, as well as by UN Security Council Resolution 1373 calling for similar sanctions by other nations. These new measures add another layer to an already complex system of financial regulations with relevance to U.S. diplomacy.

The government's anti-terrorist sanctions are neither isolated nor unique regulatory programs. Rather, they are but a small part of 21 similar, yet ostensibly separate, economic sanctions programs currently administered by the Treasury Department's Office of Foreign Assets Control (OFAC). The Terrorist Sanctions Regulations, promulgated in 1996, require "U.S. persons" (i.e., U.S. citizens or residents wherever they may be located, and U.S. business entities including their overseas branches) to block or "freeze" the assets of those who threaten the Middle East peace process, and they prohibit unlicensed transactions with such parties. Presidential Executive Order No. 13,224 of September 2001 then expanded the controls to cover global terrorism. The Foreign Terrorist Organizations Sanctions Regulations, published in 1997, criminalize the provision of support or resources to foreign terrorist organizations designated by the Secretary of State. Additionally, a broad range of U.S.-affiliated financial institutions and businesses providing financial services are required to block funds in which terrorist organizations or their agents have an interest. Bin Laden and Al-Qaeda are among the targets of both programs.

Moreover, unlicensed financial dealings with the governments of states that have been designated by the Secretary of State as supporters of terrorism pursuant to the Export Administration Act-Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria-are criminalized under OFAC's Terrorism List Governments Sanctions Regulations issued in 1996. The Treasury Department also maintains separate stand-alone economic sanctions programs targeted at each of these countries, with the exception of Syria. Among its other country-specific sanctions programs, OFAC prohibits unlicensed dealings with Afghanistan and requires that U.S. persons block any assets in which the Taliban has an interest under the Taliban (Afghanistan) Sanctions Regulations.

The obvious question, then, is if these financial controls have been in place since as far back as 1996, why have they not worked better at preventing terrorism? Moreover, how can we have any confidence that new sanctions will accomplish what the old controls evidently failed to achieve?

Among the key structural and institutional impediments to more effective sanctions are the relatively meager resources devoted to supporting these programs. OFAC is a small office, with a staff of roughly one hundred and a budget of less than $20 million-although it recently received a further $6.5 million to operate the new interagency Foreign Terrorist Asset Tracking Center. With these resources OFAC currently manages the staffing, licensing, compliance, and enforcement aspects of more than a score of sanctions programs. OFAC is easily overwhelmed when either the Congress or the Executive Branch imposes new sanctions programs, or a change in policy direction occurs. Additionally, as policymakers tend to look at sanctions programs individually rather than as part of a whole set of controls, some changes in policy direction call for a disproportionate use of OFAC's resources. For example, in 1994 when Congress mandated that "family remittances" to Cuba must be individually licensed, OFAC was required to draw down sharply the resources devoted to other programs. There is general agreement among those who deal with these sanctions programs on a practical level, both within government and in the regulated community, that insufficient resources are being allocated to administer properly the increasing number of programs OFAC is asked to manage.

However, achieving more practical and effective sanctions will take more than simply coming up with additional personnel or funding. A change in how OFAC employs its resources, and in the agency's basic regulatory approach, is also necessary. As the institutional successor to the World War II-era Office of the Alien Property Custodian, OFAC has labored in relative isolation from both other government agencies and the regulated community. The Director of OFAC has publicly declared that his office is a law enforcement agency engaged in "economic warfare", not a "trade control" agency. The combination of this self-image, a lack of resources, and a lack of integration with the other government agencies that control financial and trade transactions, means that OFAC has not developed a working partnership with the regulated community-those who must implement the dictates of its programs into their business practices.

The effectiveness of OFAC's regulatory programs, not unlike the tax code, is much more dependent upon voluntary implementation and compliance with its rules than on OFAC's enforcement actions. For the financial and trading communities to support the government's anti-terrorist efforts-or any other sanctions-the controls must be commercially practicable and attuned to the demands of business. This is especially important in an era of rapidly developing e-commerce technologies and new online business practices. However, as a result of its past isolation and lack of resources, OFAC's institutional culture tends to regard the regulated community as an adversary rather than a potential ally. Accordingly, the lack of a good working partnership with those who must comply with its rules-OFAC's "stakeholders", to use corporate jargon-is a fundamental flaw in the way these sanctions are currently formulated and administered. OFAC's usual mode of operation is simply to "command", without considering whether its orders make sense in the 21st century business environment, rather than enlisting the regulated community in a cooperative effort to achieve a common goal-in this case, winning the war against terrorism.

There are still other problems associated with the actual administration of OFAC's anti-terrorist and other sanctions programs. The basic structure of regulatory controls contributes to many of these problems. Many of the 21 self-contained regulatory programs that OFAC administers are driven by divergent policy objectives. Each time a new set of sanctions is ordered an entirely new set of regulatory controls is created. With so many programs there are often delays in promulgating the detailed regulations implementing the new controls. For example, it took nearly 18 months for the Taliban (Afghanistan) Sanctions Regulations to appear in the Federal Register. Additionally, similar provisions in separate sanctions programs may be applied differently. Rather than issuing new regulations for each and every target, OFAC should restructure its controls into a single menu of sanctions, and then selectively invoke those appropriate to the policy objective at hand. By so doing, greater speed, simplicity and uniformity of approach would be achieved without any real loss of flexibility.

Publicizing the controls associated with the various sanctions regimes is also problematic. Historically, OFAC focused most of its attention on providing "actual notice" of its wishes to the U.S. financial community through the Federal Reserve Bank's Fedwire system and a number of similar vehicles. But it largely eschewed timely publication of its actions in the Federal Register. There was even a time when OFAC resorted to what became known as the "radiator distribution system", where the only way for those not in the financial industry to learn of OFAC's actions was to check for hardcopy handouts on the radiator in the entry vestibule to the Treasury Annex building where OFAC is located. In recent years, OFAC has made extensive use of its web page and the Internet to distribute information, but continues to place less emphasis on timely publication in the official Federal Register. In essence, the Internet has become a "virtual radiator distribution system" for the agency.

While use of Internet technology is an improvement over the old system, it does not comport with the requirements in the Administrative Procedure and the Federal Register Acts to publish official actions in the Federal Register. Additionally, failure to use the Federal Register-which provides "constructive notice" of official actions-can also complicate or undermine OFAC enforcement activities. Although OFAC sometimes asserts that it is too time-consuming to publish in the Federal Register, urgent material has occasionally been published very quickly. The Iraqi blocking orders promulgated following the invasion of Kuwait and the new Executive Order on Terrorism, for example, both appeared in the Federal Register within 24 hours of their becoming effective.

On a practical level, having multiple official and unofficial means of distributing differing information greatly complicates the task of those who are trying in good faith to comply with OFAC controls. This is particularly critical with "smart" sanctions because of the vital importance of knowing who is or is not blacklisted. For example, "Usama Bin Ladin" was first identified as a sanctioned terrorist in an August 22, 1998 Executive Order, and formally added to OFAC's blacklist of "Specially Designated Terrorists" in a Federal Register notice on July 1, 1999. However, his name did not appear in the "changes list" to the blacklist available on OFAC's web site until October 12, 1999, when the spelling was changed to "Bin Laden" and the "Al-Qaeda" organization was added-along with multiple spelling variations and aliases. This updated web site information, in turn, did not appear in the Federal Register until eight months later, on June 23, 2000. The cycle continued as other changes to the terrorist blacklist in the June 23 Federal Register notice did not appear on OFAC's web site until August 18, 2000.

Moreover, following the publication of the President's Executive Order on September 25, 2001, OFAC used its web site to post important additional "descriptor information" clarifying its terrorist blacklist entries, created a new blacklist category of "Specially Designated Global Terrorist" (SDGT) for those identified in the new Executive Order, and made a variety of other changes to over 200 terrorist blacklist entries that did not appear in the Federal Register until October 26, 2001. On November 2, 2001, the regulatory controls applicable to the Foreign Terrorist Organizations were effectively expanded by their redesignation as SDGTs, and five days later 62 additional parties were blacklisted as SDGTs by means of simple entries in the "What's New" file on OFAC's web site. Interestingly, the "What's New" file merely noted that these changes "will be reflected in OFAC's [blacklists] and Terrorism brochure the next time names are added to the list." This divergent content, spread across multiple sources of information, highlights the difficulty facing those who seek to comply with the government's anti-terrorist blacklist controls. Clearly, these practices substantially undermine the ability of the financial and trading communities to help achieve the government's objective of blocking access to the terrorists' assets.

Moreover, the effectiveness of smart sanctions is further limited by their inherent dependency upon the quality and extent of the information contained in the blacklist. For example, despite the imposition of sanctions aimed at bin Laden in 1998, the spelling "Osama Bin Laden" currently being used in most reports was not found in either the list appended to the President's Executive Order or in OFAC's official blacklist as published in the Federal Register until this past October 26. That spelling did not even appear on OFAC's web site until October 1, 2001, with a notation that it should be applied retroactively to the date of the new Executive Order. Thus, until very recently, an automated screen run against the official version of OFAC's terrorist blacklist might well have missed the name altogether, as would a screen conducted prior to October 1 that included the additional information OFAC posts on its web site.

In addition to sometimes being under-inclusive, blacklisting may also be over-inclusive. The more common the name of the blacklisted party, the more likely unproductive false matches will occur. If a name such as Ahmed or Muhammad is as common in Arabic as Jones or Smith is in English, the number of false matches could easily overwhelm those administering blacklist compliance processes. To enable practical and effective controls, more is called for than simply promulgating a list of names. The nature and amount of information provided in the government's blacklist is crucial in determining the commercial practicability of the control. It is with processes and problems such as these that a cooperative partnership between the regulated community and government might be particularly useful in devising more effective controls.

Nonetheless, it is also true that terrorists are unlikely to use their correct name when dealing with any U.S.-affiliated business. Thus, multilateral support for pursuing those at the heart of these controls is crucial to their effectiveness, extending the reach of the sanctions to other jurisdictions that terrorists use to conduct their dealings. As less than 60 percent of the funds attributed to Osama bin Laden or his network blocked since late September were actually frozen by the United States, the value of the cooperation of more than 112 other governments in this effort is clear. Where the domestic blacklists associated with smart sanctions have their real value as a control, however, is in blocking assets and transactions with parties in the "second tier", that is, those who launder or front for terrorists. This conceptual distinction is implicit, but not self-evident, in OFAC's blacklists.

One case that highlights the extraordinary power vested in OFAC's blacklisting authority is that involving Salah Idris, the owner of the al-Shifa pharmaceutical plant in Sudan that was bombed in 1998, along with bin Laden's camps in Afghanistan, in retaliation for the attacks on the U.S. embassies in Kenya and Tanzania. Intelligence sources originally thought that the al-Shifa plant was owned by bin Laden and was producing chemical weapons precursors. Idris was believed to be acting for bin Laden, and OFAC ordered the Bank of America to block roughly $24 million of Idris' assets in the United Kingdom "pending a decision" on whether to add his name to the terrorist blacklist as a second tier party. Idris sued, challenging OFAC's authority to take such an action in the absence of being named in any published blacklist. Idris' assets were voluntarily unblocked in May 1999, when the government declined to fight the suit, in part to protect its sources. Establishing post-blacklisting administrative review procedures could afford parties like Idris basic due process of law without seriously affecting the government's control objectives. Additionally, legitimate concerns for protecting intelligence sources and methods are perhaps best handled on a case-by-case basis, rather than by the current blanket denial of the right to review the basis for OFAC's blacklisting decisions. These are especially important points given that the master OFAC blacklist already contains several thousand names, and can be expected to grow dramatically as the war on terrorism proceeds.

The effectiveness of OFAC's sanctions is further undermined by a lack of publicity regarding the agency's enforcement actions. The letter of the anti-terrorist sanctions, like most other OFAC sanctions programs, imposes strict liability for any unlicensed dealings with blacklisted parties. Nevertheless, hundreds of thousands of transactions are processed daily by various U.S.-affiliated parties. The New York-based Clearing House Interbank Payments Company handles a staggering 200,000 payments worth $1.1 trillion through its funds transfer system on an average day. Given the breadth of the regulatory controls, inadvertent violations of the sanctions are presumably common, but there is little public information regarding OFAC's enforcement activities. For example, there are only eight readily available press releases concerning OFAC enforcement actions since 1990, all concerning the Cuban or Libyan programs. The "Departmental Offices Performance Report for FY2000" indicates that during the last fiscal year over 7,300 banking transactions were blocked affecting just under $500 million, and that OFAC's Compliance Division sent out close to 1,000 inquiries and generated over 500 warning letters regarding questionable transactions. During the same period "over 1,000 compliance cases [were instituted]-the majority of them concerned with OFAC's terrorism-related programs, with 132 ultimately referred for civil penalties and 73 referred for criminal investigation." Testimony by the Director of OFAC before the Senate Appropriations Subcommittee on the Treasury further indicates that this ultimately resulted in six criminal prosecutions. However, little of this information reaches the regulated community, much less the general public. The lack of publicity regarding particular cases is perhaps understandable, as no business wants to be seen as being or having been associated with terrorists or other blacklisted parties. Nevertheless, the combination of the sweeping scope of the controls and the lack of publicity regarding their enforcement combines to create an impression-rightly or wrongly-that the controls are generally unenforced.

The controls are not, in fact, enforced as strictly as they are written. To help define its enforcement practices, OFAC has developed a series of internal policies regarding the use of warning letters, establishing de minimis levels below which enforcement actions are not taken as a matter of prosecutorial discretion (for a first offense), and specifying both aggravating and mitigating factors to be considered during settlement negotiations. However, prior to its production to the Judicial Review Commission on Foreign Assets Control chaired by (now Deputy Attorney General) Larry D. Thompson, none of this guidance was available to the public. Additionally, OFAC typically refuses to release any information concerning the imposition of civil penalties or settlements, adverse licensing decisions, or its general policies regarding the exercise of its prosecutorial discretion. This actually exacerbates the public perception problem as the literal breadth of the controls makes compliance appear to be overly burdensome and commercially impracticable.

Such an appearance feeds into a more fundamental issue. Most companies will not knowingly become involved in terrorism or other sanctioned activities. In a competitive marketplace, however, legitimate businesses will be skeptical of the need to screen all of their dealings against a blacklist in order to catch those few transactions that are prohibited-unless they believe that their competitors are also required to do so. The lack of visible enforcement activity by the agency thus contributes to the impression that, for legitimate businesses, ignoring OFAC controls is a low-risk proposition. The problem is further exacerbated when the sanctions themselves are not perceived as being commercially reasonable or attuned to modern business demands-such as the shift to online business transactions conducted at "Internet speed." Here again, a stronger partnership with the regulated community might help formulate controls that are seen to be more practicable, which would in turn promote greater compliance and effectiveness in blocking prohibited transactions. A stronger relationship would also provide new avenues for the government to communicate its enforcement practices and successes.

Congress and the Executive Branch must work together to produce a more coherent approach to sanctioning those engaged in terrorist activities. Otherwise, policies and legal measures that may appear sound in theory will fail in practice. The confusion over what to do with the funds that get blocked pursuant to these sanctions highlights some of these difficulties. For example, in 1996 Congress amended the Foreign Sovereign Immunity Act to permit civil suits against state sponsors of terrorism for damages arising from terrorist acts. Congress believed that subjecting such states to civil liability would bolster the pressure being brought to bear against them to renounce their support for terrorism. Since that time nearly $1 billion has been awarded in various suits, primarily against Iran and Cuba. However, the assets available to satisfy these claims are either blocked pursuant to OFAC's sanctions or are beyond the reach of U.S. processes. Accordingly, faced with plaintiffs who suffered terrible harm but were unable to collect their awards, Congress passed the Victims of Trafficking and Violence Protection Act. This Act authorizes paying these plaintiffs' awards from the U.S. Treasury in exchange for subrogating their claims against foreign states to the U.S. government. This, in turn, raises questions over whether the government's payments of civil awards directed against foreign terrorist states defeats the purpose of permitting such suits to be instituted in the first place. Similar issues can be expected to arise concerning the victims of the attacks in Washington and New York.

The war on terrorism will not be won by military action alone. Smart sanctions and economic controls specifically directed at those who conduct or support terrorist activities will be an integral part of the effort. But these sanctions must be designed to have a practical and substantial impact in the commercial marketplace; they cannot be allowed to function solely as political statements. The details of the implementing regulations, and OFAC's administration of those regulatory controls, is of vital importance in creating more effective anti-terrorist sanctions. In order to develop more effective controls, the regulated community must become a full partner with the government in this effort, and that will require a conscious and perhaps difficult change in approach. Unless the government's anti-terrorist sanctions are supplemented by far more effective practices and procedures, the new controls are unlikely to be more successful than the sanctions that have been on the books for years.

Essay Types: Essay