The unintended effects of financial sanctions
PROSANCT Bombs, Banks and Sanctions: A Sociology of the Transnational Legal Field of Nuclear Nonproliferation
Financial sanctions are a powerful foreign policy tool, restricting the activities of both states and individuals, but they can also have wider unintended effects. Financial sanctions are at risk of being over-used today, which poses significant challenges to global banks under pressure to comply fully with the rules, as Professor Gregoire Mallard explains. The world’s banks play an important role in interpreting and implementing financial sanctions targeted against both states and individuals. If sanctions are used for narrow and consensual objectives, then this will typically command wide agreement and the compliance of financial institutions. “For example the US and other countries may ask a global bank to screen their records for the names of suspected or confirmed terrorists, checking against a list provided by the UN Security Council. They will then freeze the transaction and make sure that they cannot move money around,” explains Gregoire Mallard, Professor of Anthropology and Sociology at the Graduate Institute in Geneva. The situation becomes more complicated for global banks if financial sanctions are imposed by a single nation in line with their own objectives at the time, while other countries take a different position. “President Trump withdrew the US from the Joint Comprehensive Plan of Action (JCPOA) on Iran in 2018, now the banks aren’t clear what to do. Should they follow European or US law?” asks Professor Mallard.
Digital photograph, 2016. Library of Congress Prints & Photographs Division
delivery of food and medicine. It is very challenging for international organisations to do this in a conflict zone like Syria and maintain neutrality,” he outlines. “The situation is different with Iran. The Iranian economy is not in good shape, and financial sanctions are having an impact, but it’s not a conflict zone.” The problem in supplying food and medicine to Iran emerges in arranging the finance. A European company may well be able to get a licence to export medicine to Iran, but Professor Mallard says it is difficult to then get a bank to deal with the transaction. “That’s where the banking exclusion may affect humanitarian supplies,” he explains. Regulatory bodies then have to reform the system to deal with these unintended consequences. “We essentially study these
We are interested in the unintended effects of targeted financial sanctions, and their impact when they are complemented by other banking regulations. This could mean anti moneylaundering regulations and transparency requirements.
PROSANCT project This topic is at the heart of the ERC-backed PROSANCT project, in which Professor Mallard and his colleagues are investigating the wider effects of financial sanctions, particularly those imposed unilaterally by the US. Much of this research is focused on sanctions against banks in sanctioned territories, like Iran, Venezuela and North Korea. “We are interested in the unintended effects of targeted financial sanctions, and their impact when they are complemented by other banking regulations. This could mean anti money-laundering regulations and transparency requirements, that push banks to reach quite a broad interpretation of what targeted sanctions mean,” says Professor Mallard. This research is built on analysis of sanctions, as well as interviews with bank compliance officers, diplomats and others. “How do compliance officers assess different categories of risk? Are they risk averse, or are they willing to take
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the risk of punishment for processing a transaction for someone who may be linked to a sanctioned regime?” outlines Professor Mallard. “When private financial institutions become very risk-averse, it can have effects on the general population.” Many banks in the US have decided to expel clients thought to have relations in Iran for example and chosen to cut any ties. Over the last decade or so a number of banks have chosen to interpret financial sanctions in an extremely strict way. “They have started to de-risk, to the extent of prohibiting accounts for people with Iranian origins, for fear that they would still have ties with their communities in sanctioned territories,” says Professor Mallard. This can have wider effects in these sanctioned jurisdictions, for example in the supply of food and medicine, an issue that Professor Mallard is exploring in the project. “The UN have to work with the Syrian government to administer the
cycles of what we call transnational rulemaking, which start with simple, targeted sanctions, such as to prohibit nuclear activities in Iran in the 2000s, or in the DPRK. We follow all the unintended consequences, and the new cycles of rule-making that have been created to deal with them,” continues Professor Mallard. “We aim to understand these recursive cycles of rule-making at the transnational level, we call it viral governance. We interview people involved in diplomacy, as well as people in the banking world, then use a technique called process tracing.”
Viral governance This means trying to map all of the events recounted by interviewees that are thought to have been important in these different cycles of rule-making. Analysis of these cycles shows that they are related to each other, in what Professor Mallard describes as
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Project Objectives
The project investigates the transnational field of sanctions from a sociological perspective by evaluating how sanctions are creating new rules for the banking sector. It assesses how the private sector is implementing policies to ensure financial transparency, which is, in turn, transforming the making of international law.
Project Funding
This project has received funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (Grant agreement No.716216 - PROSANCT).
Research Associates • Farzan Sabet • Erica Moret • Aurel Niederberger • Anna Hanson • Jin Sun
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a viral process. “This is why we call this new mode of governance viral governance,” he explains. The wider picture here is a general shift away from the multi-lateral model associated with the Bretton Woods system established in 1944, towards a model based on hegemonic rule-making. “It’s basically one country, the US, that changes the laws and then uses multi-lateral organisations, multi-national corporations and global banks, to put pressure on all private actors to apply their laws,” says Professor Mallard. “That goes against the norm of national sovereignty, and the idea that foreign law does not have extra-territorial effects. It really changes the fabric of rule-making at the trans-national level.” The US market is central for all global banks, so they are under pressure to comply fully with US regulations in order to retain their licence to operate in the country. This is particularly the case for those EuropeanAmerican banks which were essentially bailed out by US cash in the aftermath of the 2008 financial crisis. “In exchange for this direct US help, they became more open to accepting US regulations, so they started acting as US banks everywhere,” explains Professor Mallard. This means complying with financial sanctions imposed by the US, even where it creates headaches for bank compliance officials. “Previously financial
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sanctions were used on states like Iran and the DPRK, but now they’re increasingly used to threaten whoever disagrees with US foreign policy,” continues Professor Mallard. “The latest example is the declaration by the US that whoever helps the chief prosecutor of the International Criminal Court (ICC) in her investigation of alleged US war crimes in Afghanistan or Iraq, will be the target of US sanctions.” This is just one example of the way in which financial sanctions are being overused, believes Professor Mallard, which then creates problems for banks. If banks are not clear on which regulations they need to follow and which legal framework applies, then Professor Mallard says some may engage in deceptive practices. “This is what some Chinese banks are doing, they are in a sense continuing to participate in the oil trade between Iran and China. So they basically isolate some of their banks from the global system, which leads to a fragmentation of financial regulation,” he says. The project will make an important to the debate in this area, with Professor Mallard working on a monograph and several articles in which he will further explore how the US has changed the regulation of financial markets. “We’re in a way moving towards a position where one legal system over-rules the others,” he warns.
Project Coordinator, Professor Grégoire Mallard Department of Anthropology and Sociology Director of Research The Graduate Institute GENEVA E: gregoire.mallard@graduateinstitute.ch W: https://www.graduateinstitute.ch/ research-centres/global-governance-centre/ bombs-banks-and-sanctions W: https://cordis.europa.eu/project/id/716216
Professor Grégoire Mallard
Grégoire Mallard is Professor in the Department of Anthropology and Sociology and Director of Research at the Graduate Institute of International and Development Studies (Geneva). He is the author of Gift Exchange: The Transnational History of a Political Idea (Cambridge University Press 2019) and Fallout: Nuclear Diplomacy in an Age of Global Fracture(University of Chicago Press, 2014).
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