Financial Crime and Sanctions
Thank you, John, for the gracious introduction and for inviting me to Las Vegas to speak today.
It’s a pleasure to be here for ACAMS’ 13th Annual AML and Financial Crime Conference. It’s especially nice to see so many friends and colleagues in the room.
I particularly want to thank all of you who are here from the private sector. Without your knowledge and hard work, our sanctions and AML tools wouldn’t be such a potent part of America’s toolkit.”The U.S. Government and the American people owe you a big thank-you for your commitment and your diligence. Your work underpins the integrity of our financial system and directly contributes to our national security.
As John mentioned, I work for the Bureau of Economic and Business Affairs – the part of the State Department that’s charged with promoting economic prosperity at home and abroad. Most of my colleagues in the bureau work on trade agreements, investment pacts, and other measures aimed at increasing economic activity. Consequently, colleagues have taken to calling my office – which handles sanctions and counter-terrorist financing – the odd man out of the bureau.
But I have to admit that I look at things differently. Just last year, businesses across the country added hundreds if not thousands of new jobs in compliance divisions. Foreign banks threw unprecedented business to some of our biggest consulting and law firms. If that’s not a jobs recovery act for the U.S. economy, I don’t know what is.
All joking aside, there’s a reason companies are hiring so many new compliance officers: sanctions and AML regulations are proliferating and growing increasingly complex. They have emerged as a leading tool for American foreign policy. With the country confronting a vast array of international challenges, this trend is likely to continue. Whether you’re in the government or the private sector, there has never been a more interesting time to work on financial crime and sanctions issues.
For many of you in this room, our growing use of these tools has meant a significant increase in workload, whether it is screening transactions involving the Russian banks on OFAC’s new SSI List – something that didn’t even exist three months ago – or trying to understand how ISIL might be able to launder money into the international financial system. Reviewing an individual transaction may seem detached from events in Ukraine or Syria or Iraq. But taken in aggregate, your work is vital to American national security. As my colleagues in the military would put it, those of us gathered here in this room today are increasingly the pointy end of the spear when it comes to protecting the U.S. and our allies.
I thought I’d use my remarks to explain where the U.S. government is coming from in our decision to implement more – and more complex – sanctions. It is my hope that you leave today with a better sense of how current policymakers think about these tools.
But first, a bit of history is in order. Although sanctions haven’t always dominated the news as they have in the past few years, their use dates back to the beginning of recorded history. In fact, the first known use of sanctions was in 432 B.C., when Athens imposed a complete embargo on the neighboring state of Megara. Athens’ goal was to inflict damage on Megara without inciting Sparta, which had pledged to defend Megara in the event of invasion. Sanctions, Athens hoped, were a means to punish Megara without instigating a fight with Sparta.
But, within a year, Athens and Sparta were at war. And when the Peloponnesian War ended 27 years later, the golden age of ancient Athens had come to an end.
So, for at least the past 2,500 years, sanctions have been used as a tool of statecraft – and they haven’t always produced their intended consequences.
But in the past couple of millennia – and particularly over the last decade or two – we’ve made substantial progress in targeting our sanctions programs to achieve desired outcomes.
Consider the differences between our sanctions on Saddam Hussein’s Iraq and our Iran program today.
After Saddam’s army invaded Kuwait in August 1990, the UN imposed comprehensive sanctions on Iraq. These sanctions had major economic impact, decimating Iraq’s economy. But in the end they neither persuaded Saddam to retreat from Kuwait nor moderated his behavior after the Gulf War ended. Still, they remained in force all the way until Saddam’s removal from power in the spring of 2003.
We learned a number of lessons from the Iraq sanctions – and those lessons help to shape the current Iran program. Today’s Iran sanctions target the main revenue streams of the Iranian government, such as its energy sales and its access to the global financial system, in addition to its acquisition of sensitive technologies and components for its nuclear program.
We’ve also taken steps to ensure that the Iranian people are not unduly harmed by our actions. OFAC has issued 11 general licenses that enable the export of food, medicine, communications technologies, and other civilian goods to Iran. The EU has similar exceptions in its sanctions regimes. And as part of the Joint Plan of Action, which froze progress on Iran’s nuclear program earlier this year, we helped establish a financial channel for Iran to pay for humanitarian products, medical expenses, and tuition for students abroad. I can attest that these channels are functional and available for use by Iran today.
In short, we’ve come a long way in the past couple decades to ensure that our sanctions achieve desired political outcomes. We’ve worked hard to maximize the impact of sanctions while minimizing their costs on innocent civilians and private businesses at home and abroad.
This is the primary reason the U.S. government has been using sanctions so frequently – they’re more precise, more tailored, and more effective today than they’ve ever been before.
Still, sanctions are not a panacea. And to be candid, they never will be. Sanctions are not a strategy in and of themselves. They almost always need to be integrated with economic incentives, diplomacy, and military options in order to be effective. Moreover, sanctions are never free of risks and costs.
But the progress we’ve made in recent years has been substantial. Sanctions have become a viable and potent tool – and they will only grow more viable and more potent in the years to come.
So, how are we using our AML and sanctions tools as instruments of American policy? Those of you gathered here in this room today know the answer to that question better than most. It would probably be impossible to assemble a group of people with more knowledge on the intricacies of these issues.
But I’d like to take a few minutes to discuss some high-profile cases and explain why we’re using sanctions and what we’re trying to accomplish.
Let’s start with Iran. For nearly two decades, we’ve been working to curb Iran’s nuclear program through a dual-track strategy of diplomatic engagement and economic pressure. And since the first “secondary” sanctions – on investments in Iran’s energy sector – came into force in 1996, the pressure track has evolved substantially.
After the election of Mahmoud Ahmadinejad in 2005, Iran accelerated the development of its nuclear program. We responded by imposing strong but appropriate and targeted sanctions and other measures, like the Section 311 designation of Iran as a jurisdiction of primary money laundering concern. These measures constrained the Iranian regime’s access to the international financial system and targeted Iran’s energy, shipping, insurance, automobile, and other sectors.
Diplomacy was essential. We worked with partners across the globe to significantly reduce Iran’s oil exports and to make our financial sanctions multilateral. All the while, we kept the door open to a relaxation of sanctions if Tehran took steps to ensure that its nuclear program is entirely peaceful.
By 2013, sanctions had taken a significant toll on Iran’s economy, but just as important, the sanctions highlighted for the Iranian people their country’s isolation from the international community. The Iranian people chose a new path and elected Hassan Rouhani as their president, who vowed to reverse Iran’s economic fortunes.
As you know well, within a few months of Rouhani’s election, the P5+1 and Iran agreed to the Joint Plan of Action, which has imposed sharp limits on Iran’s nuclear program for the first time in over a decade.
We have been very clear about the choice that Iran is facing, and that now is the time to seize this historic opportunity to prove the peaceful nature of its nuclear program. And we have been just as clear that we will not reach an agreement if Iran proves unwilling to reduce the scope of its nuclear enrichment program—as our chief negotiator, Wendy Sherman, says, “No deal is better than a bad deal.” The ball is largely in Iran’s court. But if we do reach a comprehensive solution, it will be a landmark achievement. The economic tools we have deployed and diplomacy will have resolved a major international standoff without recourse to military force.
Meanwhile, in Burma – a half a world away – our use of sanctions and AML tools has already helped produce major positive changes.
For decades, the United States had a comprehensive regulatory regime on Burma, which was being run by an oppressive military junta. These measures rendered Burma a pariah state entirely isolated from the rest of the world.
But in 2011, we began to see a major wave of change in Burma. Political prisoners were released. Media controls were alleviated. The military started loosening its grip on politics.
We recognized these positive developments – and encouraged more of them – by easing most of our sanctions. Broadly speaking, Americans can now invest in Burma, import Burmese goods, and engage in financial transactions with Burmese nationals.
We’re also actively helping to re-integrate Burma into the global economy, including through financing from the Ex-Im Bank and OPIC. Just last week, my bureau’s assistant secretary, Ambassador Charles Rivkin, gave a keynote speech at a Burma investment conference in New York. And in June, Penny Pritzker became the first-ever Commerce Secretary to visit Burma. Meanwhile, to give banks and companies confidence to re-enter the market, we’ve emphasized repeatedly and publicly that cross-border transactions with Burma are now allowed.
I was in Burma last year and the progress was obvious: I could use a credit card to pay for my hotel, which would not have been possible just a few months before. I met with dozens of U.S. businesses that are active on the ground exploring market opportunities, and a group of civil society leaders in Burma told to me about how excited they are about the potential impact U.S. investment can have in transforming their country. And of course, the capital, Rangoon, is well on its way to having the all-day traffic jams that seem to be a guaranteed part of booming economic growth in Asia.
The history of our Burma sanctions demonstrates the Untied States’ willingness to ease sanctions when we see positive developments. Our efforts to responsibly roll back the Burma program provide an example to countries like Iran of the benefits of changing behavior for the better.
Over the past few months, however, two other issues have consumed the majority of my time: ISIL and Russia. Although very different, both present complicated challenges from a sanctions and threat-finance perspective.
Unlike al-Qaeda, which largely relied on deep-pocketed donors to finance the 9/11 attacks, ISIL derives much of its funding internally from criminal activities. In other words, it raises much of its money through extortion, looting towns and villages, and selling stolen oil in territory under its control.
But ISIL also makes use of external sources of funding – through oil smuggling to neighboring countries, kidnapping for ransom, and other sources.
President Obama and his newly-appointed Special Envoy for Combatting ISIL, General John Allen, have identified countering ISIL’s financing as one of the five lines of effort of our strategy to combat the terrorist group – a strategy that also includes conducting a military campaign in Iraq and Syria, preventing foreign fighters from traveling to the region, de-legitimizing ISIL’s ideology, and providinghumanitarian relief to the people of Iraq and Syria. I was at a meeting with General Allen this past weekend and he repeatedly emphasized that countering ISIL’s financing is absolutely central to our national objective of destroying ISIL and ensuring that it cannot attack the U.S. or our allies. In his view, all of us here today have our work cut out for us.
While our strategy to counter ISIL’s revenue is still taking shape, it is clear that our financial tools will play an important role. We will be working with the states bordering Iraq and Syria to prevent ISIL from smuggling oil outside of its territory or from bringing cash into its territory. We will be using designation authorities, not only in the United States but with our partners and allies around the world, to sanction people and companies doing business with ISIL or giving it money.
Already, an impressive array of countries is joining us in this effort and is making significant contributions to this work, and we expect to build an international coalition to share information and develop joint approaches to combating ISIL’s financing.
But as with our efforts to cripple al-Qaeda’s revenues after 9/11, all of the companies represented here will have at least as important a role to play as governments around the world. We will need your help to make sure that ISIL has no ability to access the global financial system, and we will need your help to identify and cut off potential avenues for ISIL’s illicit financial flows.
Put simply, private-sector cooperation will be critical. So thank you in advance for your help.
The other major foreign policy issue of the day is Russia. Since the Russian regime began its aggressive activities in Ukraine in February, we have gradually increased the financial costs to President Putin and Russia. We started by targeting Putin’s inner circle and those directly involved in the destabilization of Ukraine, but we’ve progressed to Russia’s banking, energy, and defense sectors.
The purpose of our Russia sanctions is three-fold.
First, they aim to impose costs on Putin’s regime for its illegal annexation of Crimea and its destabilization of eastern Ukraine. They demonstrate that America will not stand idly by when one country threatens the territorial integrity and stability of another.
Second, sanctions aim to deter Russia from further aggression in Ukraine and other neighboring states. Over the past several months, as Russian aggression has escalated, we have steadily increased the costs. We’ve shown clearly and irrefutably that we’re determined to impose harsher sanctions if Russia continues its present course.
Third, sanctions aim to persuade the Russian regime to change its behavior. If Russia fully implements all of its ceasefire commitments, then our European allies and we will consider rolling back certain sanctions. But until we reach that point, the pressure will only increase.
From a practical standpoint, deploying effective sanctions on Russia presents a number of challenges. Russia is the eighth-largest economy in the world – larger than the combined GDPs of all of the other countries where we have significant sanctions programs – and a major energy exporter that is deeply enmeshed in the global economy.
Consequently, in sensitive sectors such as energy, we’ve tailored our measures to constrain future production, not current supplies.
We’ve also taken pains to minimize the second-order effects of our actions. In addition to the traditional blocking penalty – under which entities are added to OFAC’s SDN List – we’ve enacted capital-markets restrictions, creating a new Sectoral Sanctions Identification, or SSI, List.
I know that the SSI List has created new and complex compliance challenges for many of your banks; I’ve heard that very directly from several major banks. But it has proven a powerful tool that lets us choke off Russia’s ability to get access to the capital it needs to promote economic growth without prohibiting the financial transactions related to ordinary trade that we want to continue to allow.
Meanwhile, we’ve engaged in diplomacy and outreach across the world to multilateralize our sanctions and ensure that U.S. companies are not simply backfilled by firms from other jurisdictions. The EU has been a particularly important partner in this regard. As you have seen, we have moved in parallel with the EU in ramping up sanctions on Russia. We’ve also reached out to other countries around the world, including Japan, Canada, Singapore, Korea, and Australia, to ask them to join.
And the results of our work are palpable.
According to official statistics, $75 billion of capital has fled Russia since the beginning of this year. But some analysts estimate that the number is closer to $110 billion, nearly double the volume of capital flight for all of 2013. The ruble has reached new lows, and liquidity is drying up, forcing Russian companies to ask for financing from the government. Rosneft, Russia’s largest oil producer, requested approximately $40 billion from the Kremlin following the imposition of U.S. and EU capital-markets restrictions.
The future of Russia’s oil sector has also been cast into doubt. With U.S. and European companies barred from providing technology and services to Arctic, deepwater, and shale oil projects in Russia, the Kremlin’s most lucrative sector will find it difficult to grow in the years ahead.
And unless Moscow changes course – with actions, not words – the economic costs will only grow steeper.
Regardless of what happens in Ukraine, the Russia sanctions offer a hint at where policy may be headed. I anticipate that policy makers will continue to seek more nuanced ways to maximize costs for our targets while minimizing the risks for the global economy.
Innovations such as the capital-markets restrictions of the SSI List – while challenging from a compliance perspective – offer an attractive tool for accomplishing our national objectives. Just as the U.S. military constantly adds more weapons to its arsenal, the U.S. government is poised to expand the range of economic levers it can deploy to achieve discrete policy outcomes.
In a similar vein, as sanctions grow increasingly complex, they will affect areas well beyond the financial sector. We may well reach a point at which sanctions compliance is a major priority not only for financial institutions, but also for companies involved in energy, insurance, transportation, technology, the Internet, and a wide variety of other sectors.
On the whole, this will be a positive development. We are learning to use our sanctions and AML tools more effectively, and they offer us a way to protect our national security without necessarily turning to military force.
But it will also present challenges. You are already focused on the implementation challenges, like the need to develop appropriate screening mechanisms for SSI List entities. And I know that my Treasury Department colleagues want to have open lines of communication with you about how to address those challenges.
There are new policy challenges as well. As you all know, it is normal for banks to stay well-clear of prohibited activity, and I know that everyone in this room gives that advice to your companies. That’s usually a smart approach to take. But we are also aware of the fact that our growing use of sanctions and AML tools is beginning to have some unintended consequences. Some large banks are deciding – for entirely understandable and legitimate business reasons – to cease most or all business with certain markets.
From a policy perspective, however, this is never our desired outcome. We want U.S. banks to play an active role around the world and to be at the center of the global financial system. We want global financial channels to be open, including in areas that can be challenging from a compliance perspective. For example, we want people who have immigrated to the United States to be able send remittances home to family members abroad. But for this to work, we need banks willing to handle those financial flows. We want to make sure that humanitarian transactions – involving food, medicine, and medical devices – can still be done, even in countries like Iran.
That’s why we’ve made it a top priority to ensure that these transactions can actually happen. My colleagues at the U.S. Treasury Department and I have taken a number of steps to facilitate some of these kinds of transactions, like OFAC’s publication of guidance for foreign banks on permissible humanitarian transactions with Iran. We have begun to hear from banks and development experts about ways to make sure that remittances continue to flow freely. But we want to do more of that – we’re actively looking for ideas from the private sector about how to make this goal a reality.
So, in the years ahead, sanctions and AML tools are poised to continue assuming a preeminent role in U.S. foreign policy. They’ll become a stronger and more precise tool of statecraft, and they’ll present us with new policy and compliance challenges.
As always, your work will be the critical piece of the puzzle. We all share a common mission to protect national security and promote economic growth.
I imagine that this may be good for your job security.
I know that this will be a good thing for our national security.