Methinks Thou Dost Comply Too Much
There’s a new word circulating in the sanctions world that you can count on spell check to flag every time: overcompliance. It recently appeared in a Bloomberg article, and it refers to the growing concern at the Treasury Department that financial institutions may be going too far in complying with government sanctions, and as a result, avoiding legitimate transactions that provide necessary services.
This may be a new word, but I can tell you from my experience lobbying on sanctions when I ran the National Foreign Trade Council (NFTC) that it is not a new concept. It was something we ran into frequently. Explaining it calls for a bit of context. Until the George W. Bush administration, sanctions tended to be generalized blanket affairs where exports or imports of categories of items were blocked, generally to an entire country, although there usually were humanitarian exceptions for food and medicine. While there was occasionally an argument about whether an item fit within the concept of humanitarian assistance (one interesting one was whether tobacco fit within the definition of food), for the most part, the rules were fairly clear.
The Bush administration, however, following the basic rule of going where the money is, undertook sanctions that were focused on the financial sector—bank loans and financing, and denying access to financial institutions that enabled the movement of assets from country to country. In addition, the administration began targeting specific entities, both individuals and corporations, who were deemed to be engaging in unacceptable behavior.
Initially, the business community welcomed this targeted approach because it narrowed the focus to a relatively small group of individuals who were identified by name rather than covering an entire economy or big chunks of it. Experience, however, showed that the approach had as many problems, if not more, than the earlier policy. One was identification. A named person or corporation could easily change their name and get off whatever bad list they were on—at least temporarily until the U.S. authorities caught up with the change. This produced a constant cat and mouse game that put companies in the position of frequently having to check government lists to see if their customers had been named. This made the cost of due diligence much higher. Another was clarity. The regulations became increasingly complex and difficult to interpret, and government advice has often been ambiguous.
This was particularly true in the financial sector, where institutions were under constant pressure not to send money to or accept deposits from bad actors. Over time, that led to banks and other institutions deciding simply not to engage in transactions with people in countries like Iran or, now, Russia, whether the transactions were legitimate or not. The amount of money the institution would earn was simply too small to justify the amount of proper due diligence it would require. It was easier to just abandon that piece of their business.
This was brought home to me by one of my NFTC members, who was heavily engaged in humanitarian trade with Iran and had a stack of licenses from the Office of Foreign Assets Control (OFAC) at the Treasury Department to prove it. Notwithstanding the licenses, which constituted official government approval of his proposed transactions, he found himself increasingly unable to get financing for them. The banks had decided not to do that business because they thought it was too complicated to sort through which transactions were permitted and which were not, and the money they would make was too little to justify the effort. This problem surfaced publicly at one point when a major U.S. newspaper did a story about Iranians who were dying of cancer because they couldn’t get their medicine from U.S. vendors.
While that particular problem was dealt with, it is apparent that the larger issue did not go away, and, if anything, has gotten worse. It is also currently impacting U.S. foreign-born residents attempting to send money back to their relatives in sanctioned countries like Russia. Banks are not helping because they are afraid of bad publicity as well as potential liability and heavy fines if the recipient turns out to be a sanctioned party. That often prompts the U.S. party to resort to unregulated and potentially illegal activity to get the money to its intended recipient.
The ironic result of all this is that Treasury officials, who spent the George W. Bush and Obama administrations traveling around the world twisting banks’ arms to comply with U.S. sanctions, are now on a travel circuit telling them not to overcomply. Though that may be awkward, it is a welcome development for family remittances and for businesses who want to maintain trading or financial relationships in sanctioned countries but want to do it consistent with U.S. law and policy. It is unfortunate that it has taken the government this long to figure it out—and there has been no shortage of people telling them about it for at least 15 years—but the Biden administration deserves credit for recognizing the problem, the harm it is doing, and trying to do something about it.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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