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.

This process had important strategic effects: terrorist groups were forced to devote more of their energies to obtaining the resources necessary to stay viable; the trusted networks used to move money, men, and materiel were publicly identified and disrupted; and potentially unwitting donors or witting participants were deterred by the public attention that accompanies the imposition of targeted financial sanctions.

Similarly, in the Iranian context, targeted financial sanctions have made it very difficult for the Islamic Republic to openly use reputable international financial institutions to obtain the financing and material it needs to further develop its nuclear program. Instead, Iran is forced to devote time, attention, and resources to creating front companies, masking transactions in support of its WMD programs, and even engaging in trade transactions directly in gold in order to evade sanctions. These measures have the effects of slowing Iran’s acquisition of proliferation-sensitive material, and buying time for the international community to use diplomacy and other measures to resolve its nuclear dispute with Iran.

Sanctions are, however, a significant deprivation for the person on whom they are imposed. And it is in recognition of those difficulties that significant reforms have been made to the sanctions system in the last several years to protect the rights of those who have been designated. In the United States, for example, before a person is designated, the government must assemble a detailed administrative record describing the reasons and evidence—both classified and unclassified—supporting the sanction. This administrative record undergoes several layers of legal review to ensure that it meets the evidentiary standards required by American due-process jurisprudence.

While prenotification of the target is not required, so as to prevent the dissipation of assets, persons that have been designated have several ways in which they might challenge their designation and assert that they were uninvolved in illicit conduct. Indeed, after his designation by the United States in 2001, Yassin Kadi, for example, engaged in a lengthy process of trying to persuade the U.S. government to reconsider its decision. His attorneys had at least four face-to-face meetings with the government, Kadi submitted three witness statements with numerous exhibits, and he engaged in a robust exchange of questions and answers about his activities with the Treasury Department. By the time the process was complete, OFAC had considered an administrative record of over 2,800 pages. After Kadi engaged in this robust (but ultimately unsuccessful) postdesignation review process, he then challenged his designation before a judge, who, after reviewing both the unclassified and classified records, upheld the decision.

At the United Nations too, the system has been progressively improved over the past decade. Partly in response to the Kadi litigation, the Security Council’s sanctions committee began publishing narrative summaries of the reasons for listing targets. And in 2009, the Council established an ombudsperson to assist it in considering delisting requests.

This is not to suggest that the system for imposing targeted financial sanctions is perfect. Rather, it is to argue that designated persons often have a meaningful opportunity to challenge the basis for their designation. Crucially, courts in the United States have the ability to review sensitive intelligence information in the process of determining whether or not a designation is warranted. This is important because governments that impose sanctions often possess a wealth of information about the activities of designated persons, only a small portion of which can be made public.

In order for sanctions to be just, there must be some opportunity for this sensitive intelligence information to be reviewed and assessed to determine whether the designated person has in fact done what he or she is alleged to have done. While the judicial systems of western democracies have devised various approaches to this problem, the explosion of post–9/11 legal issues that involve classified national-security information is a particularly difficult problem that transcends the sanctions context.

U.S. courts have embraced closed review of classified information in sanctions-related and other contexts, while the UK has in some circumstances adopted a regime of security-cleared Special Advocates who are able to challenge the government’s use of classified information. The European Court of Justice, by contrast, has no mechanism for accommodating the need to review classified information in national security cases.

While each approach has benefits and drawbacks, in order to preserve the global targeted sanctions system, it is necessary to find some way to accommodate the competing concerns at issue—an individual’s right to be heard and the state’s obligation to protect its citizens—however imperfectly.