There is an emerging recognition in Western capitals that Russian strategic economic coercion and malign financial activity threaten to undermine the rule of law, weaken democracy, and meaningfully affect American and European politics. This understanding translates into demand for policy responses, which have typically fallen into two categories: transparency initiatives and economic sanctions. Transparency is critical and should be expanded. Yet it is fundamentally a defensive measure that tells policymakers what our adversaries are doing; it cannot stop malign activity in and of itself. Sanctions, of course, are a powerful tool that can bring great pressure to bear against a targeted government. Unfortunately, the Russia sanctions effort has run out of steam; although, new developments could quickly shift the political dynamic.
When it comes to pushing back against authoritarian influence and the undermining of democratic institutions, there is a third financial policy option. While offensive, it does not attack the Russian government or Russian interests head-on. If wisely executed, it will apply economic pressure and prevent and deter illicit activity, financial and otherwise. The policy is the disruption of third-country banks’ facilitation of large-scale illicit activity connected to Russia. The tool is Section 311 of the USA PATRIOT Act, an authority that allows the Treasury Department to boot foreign banks that it determines are “of primary money laundering concern” from the U.S. financial system.
Transparency and Sanctions
In the United States and the European Union, a raft of defensive measures, usually involving heightened financial transparency or improved financial regulation, has advanced. The United States is at last poised to ban the creation of anonymous companies after being one of the last major holdouts. Both the United States and EU have taken steps to strengthen the screening of foreign investments. And in early November, France, Germany, Italy, the Netherlands, Latvia, and Spain jointly proposed the creation of a central EU anti-money laundering supervisor to oversee financial institutions across the single market. That initiative comes in response to a spate of money laundering scandals at banks across the Union, many of which involved billions of dollars flowing out of Russia and the Commonwealth of Independent States (CIS).
On the sanctions front, there is still talk in Congress of prohibiting dealing in new Russian sovereign debt, and future developments could change the political dynamic overnight. But the United States has taken no significant Russia sanctions actions for a year and a half.
The Russia sanctions program targets Russian banks, energy companies, and select individuals. When Russia attempted to annex Crimea and invaded Eastern Ukraine in 2014,1 the United States and EU acted in unison, and the Russian economy experienced a sudden shock. As the initial shock has subsided, the effect has withered. The EU has been unable to muster the internal unanimity required to impose new sanctions. And the United States effort to increase pressure by targeting several Russian billionaires in April 2018 appears to have foundered amid market disturbances and partisan rancor stemming from the designation and subsequent removal of Oleg Deripaska’s EN+ and Rusal, a large aluminum company.
The Indirect Approach
The guiding philosophy behind positioning Section 311 at the heart of a strategy to counter illicit Russian financial activity can be found in the work of the British military strategist B.H. Liddell Hart. Hart was a proponent of the “indirect approach” to warfare, which called for pursuing political or military objectives by attacking an adversary in an unexpected way, at the point of least resistance, in a manner that dislocated or disoriented one’s opponent.
Treasury deploys Section 311 sparingly — too sparingly — and has used it to target only three foreign financial institutions since 2014. One target was a Chinese bank allegedly engaged in activity involving North Korea. The other two were banks in Cyprus and Latvia allegedly involved in illicit activity involving Russia and the CIS.
Despite the light touch, the February 2018 targeting of Latvia’s ABLV Bank, an institution subject to the direct supervision of the European Central Bank, helped spur the discussion that led to this month’s proposal for the creation of a central EU anti-money laundering authority. Thus, indirect offensive measures by the United States may yet bolster European defensive measures.
Section 311 Front and Center
Treasury’s Office of Foreign Assets Control (OFAC) sanctions hundreds of targets per year, while its sister bureau, the Financial Crimes Enforcement Network (FinCEN), has targeted 26 financial institutions and jurisdictions under Section 311 since 2001. Since Section 311 actions may target banks in countries with which the United States maintains an otherwise friendly relationship and outside of a broader pressure campaign grounded in the declaration of a national emergency (as is typically the case for the imposition of sanctions), it makes sense that the pace of Section 311 activity would pale in comparison with OFAC’s tempo. Nonetheless, greater use of Section 311, perhaps a few times a year worldwide against all types of targets, would be reasonable.
Recent steps taken by Treasury signal the intent to rely more heavily on Section 311 moving forward. In August, the unit that conducts Section 311 investigations was converted from an office to a freestanding division within FinCEN. That shift raises the seniority of the unit’s leader and brings more resources. Then, in October, FinCEN targeted Iran under Section 311 and issued an immediate final rule, dispensing with the formal rulemaking process that has previously preceded the effective date of Section 311 actions.
One does not need to support the United States government’s withdrawal from the 2015 Iran nuclear agreement or the “maximum pressure” campaign and designation of Iran’s Central Bank that followed2 to appreciate the bureaucratic savvy of the Iran 311 action. By asserting a national security exemption under the Administrative Procedures Act and going straight to a final rule, FinCEN significantly decreases the administrative burden to target a foreign bank under Section 311. With a national security exemption, FinCEN eliminates the notice and comment period and, presumably, the publication of an unclassified evidentiary record. The move brings Section 311 targeting into line with OFAC designations conducted under the International Emergency Economic Powers Act.3 FinCEN was wise to choose a Section 311 action targeting Iran as the moment to attempt the shift. Iran, as a country already subject to comprehensive sanctions, and not a commercial enterprise, will have a harder time raising a legal challenge.4
Even with more resources and the ability to avoid the rulemaking process, two other important hurdles limit FinCEN’s ability to target illicit activity under Section 311. First, the statutory language does not provide explicit authority for FinCEN to target facilitators or other actors who are not clearly defined as financial institutions. In other words, individuals and non-financial companies are currently off-limits. Second, Section 311 does not provide derivative targeting authority for those who act on behalf of or provide support to targeted institutions. OFAC currently enjoys both of these benefits. Making these changes would allow FinCEN to conduct more, and more effective, targeting of illicit financial activity. Congress should amend the law.
Why Third-Country Nodes Matter
Offshore banks that function as opaque channels for cross-border funds transfers by definition are national security threats because they can facilitate the conduct of all manner of activity that in itself threatens national security, from weapons proliferation and organized crime to public corruption and authoritarian interference operations. Section 311 targeting fills in the gaps when an institution facilitates large-scale bad activity but is not directly tied to sanctioned actors or sanctionable conduct. For that reason, Section 311 should be thought of as a natural complement to sanctions (direct offense), and transparency and supervision (defense).
Asymmetric authoritarian interference operations that exploit economic and financial channels have thrown Western governments off balance. Going after key third-country financial nodes that are critical to such influence operations will shift that balance and, with luck, put our adversaries on the back foot.
The views expressed in GMF publications and commentary are the views of the author alone.
- The sanctions were initially designed to deter Russia’s destabilization of Eastern Ukraine, but, in a predictable bout of mission creep, have increasingly been linked to a panoply of Russian malign activity, including election interference, human rights violations, and support for the Assad regime in Syria. While all of these policies are objectionable, the U.S. government must communicate clearly which behaviors are linked to which sanctions in order to incentivize behavioral change.
- That campaign, and the designation of the Central Bank of Iran in particular, have led Human Rights Watch to publish a report raising concerns that access to certain vital medicines in Iran may be in jeopardy.
- Peter Harrell, writing at Lawfare, makes important points about the overuse of sanctions and calls for increased Executive accountability to Congress, more impact assessments, and greater input from the public (including ex post notice and comment for certain regulations). Seen in the context of current OFAC practice, FinCEN’s move is reasonable, although Harrell’s concerns remain valid for sanctions and Section 311 alike.
- FinCEN’s position is further strengthened because there is already an old Section 311 finding against Iran from 2011 already on the books and because Iran’s anti-money laundering deficiencies are so obvious and widely recognized.