Causes and Impacts of Over-Compliance with Sanctions

Causes and Impacts of Over-Compliance with Sanctions

Economic sanctions have become a common foreign policy tool used by countries and multilateral organizations to influence the behavior of targeted states, entities, and individuals. However, sanctions often have unintended consequences, including over-compliance by third parties who are not directly targeted.

Over-compliance refers to when actors restrict business and financial transactions beyond what is required by the sanctions in order to avoid any potential risk of penalty. This excessive risk aversion can negatively impact human rights, humanitarian aid, and the global economy.

What Is Over-Compliance?

Over-compliance involves going above and beyond the legal requirements for sanctions implementation in order to minimize risk. It may include:

• Refusing any transactions with a sanctioned country, even if they are permitted
• Blocking financial services to entire sectors of a country’s economy
• Denying essential goods and services to ordinary citizens
• Avoiding any business that could be linked to sanctioned individuals or entities, even indirectly

Over-compliance often arises from legal uncertainty, excessive penalties, and lack of guidance around sanctions rules. Financial institutions and corporations may find it easier to take an ultra-cautious approach rather than risk being accused of sanctions violations.

Causes of Over-Compliance

There are several key factors that contribute to over-compliance with economic sanctions:

Complex and Vague Rules

Sanctions regimes often have complex, frequently changing, and ambiguous rules that leave compliance officers unsure of permitted activities. For example, U.S. sanctions on Iran have evolved over time with various executive orders, legislation, and regulatory guidance interpreting the rules in different ways.

Harsh Penalties

Violations of U.S. sanctions can lead to massive fines, reputational damage, and even criminal prosecution. Banks have been fined billions for sanctions violations. This encourages risk-averse over-compliance.

Limited Government Resources

Agencies like the U.S. Treasury’s Office of Foreign Assets Control (OFAC) have limited resources to provide clarification and advice to sanctions compliers. This lack of support promotes uncertainty.

Reputational Risk

Banks and corporations are eager to avoid any public association with sanctioned entities that could hurt their brand. They may cut ties to avoid negative media coverage.

Industry Practice

As more companies and banks adopt over-compliance, it becomes an industry norm. Competitors and partners expect conservative compliance policies.

Impacts of Over-Compliance

While motivated by caution, over-compliance with sanctions can have detrimental effects:

Humanitarian Harms

Over-compliance obstructs humanitarian trade, financing, and assistance to sanctioned countries. For example, over-compliance has restricted COVID-19 aid to Syria and made food imports difficult in Venezuela.

Economic Damage

Excessive sanctions avoidance hurts economic development and global trade flows. Over-compliance has made international purchases of food and medicine extremely difficult for Iranians.

Financial Exclusion

Over-compliance leads financial institutions to deny basic banking services to ordinary citizens in sanctioned countries, impairing their economic rights.

Reinforcing Authoritarianism

By broadly restricting trade and finance, over-compliance can cut off sanctioned countries from the outside world. This enables authoritarian regimes to further consolidate economic and political control.

Violations of International Law

Overly broad sanctions implementation may infringe on human rights, humanitarian law, and treaty obligations beyond what is permitted under international law.

Promoting Proportionate Compliance

How can over-compliance be mitigated so sanctions have their intended targeted impact without excessive spillover effects?

Clearer Guidance and Support

Governments imposing sanctions should provide extensive guidelines, FAQs, and responsive advice services to aid compliance officers with implementation.

Training and Capacity Building

More resources are needed to help compliance professionals, particularly in developing countries, understand sanctions rules and perform due diligence.

Increased General Licenses

Expanding authorization for categories of permitted transactions, like for humanitarian goods, would provide greater legal certainty.

Regulatory Changes

Reforms could require regulators to consider over-compliance risks when designing sanctions and provide exemptions from penalties for certain good faith errors.

Targeted Sanctions

Narrowly designed sanctions focused on regimes and malign actors reduce compliance uncertainty.

Multilateral Coordination

Common sanctions regimes among allies coordinate expectations for business compliance.

Over-compliance is an unintended side effect of complex sanctions policies. While caution is understandable, over-compliance can violate rights and enable authoritarianism. Policy changes emphasizing guidance, flexibility, and multilateralism could help ensure sanctions target the intended actors without undue spillover.

References

[1] Guidance Note on Overcompliance with Unilateral Sanctions and its Harmful Effects on Human Rights

2
Over-compliance with secondary sanctions adversely impacts human rights of millions globally

3
Over-compliance with unilateral sanctions hurts human rights

4
Sanctions Overcompliance: What, Why, and Does It Matter?

5
The Impact of Over-Compliance with Sanctions

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Sanctions Overcompliance: What, Why, and Does It Matter?

[7] The Impact of Over-Compliance with Sanctions
Over-compliance had a significant impact in Afghanistan, where sanctions targeting the Taliban have led to difficulties bringing humanitarian aid to the country, and the situation may be repeated in Russia and Iran as many financial institutions choose to adopt blanket bans on all transactions for fear of a misstep that may invoke the wrath of the US and its rigorous sanctions regime.
An Informed Approach… Taking a risk-averse approach to sanctions compliance is understandable, especially when it comes to new and developing sanction regimes (as was the case with Russia), where multiple restrictions were rapidly imposed and evolved considerably from month to month. However, where an industry has clear guidance or automated sanction checking tools that they can rely on, the risk of breaching sanctions is reduced considerably….
The complexity of sanctions regimes, burdensome administrative processes as well as the threat of business penalties for breaching sanctions is just a few of the factors that contribute to over-compliance.
Sanctions Overcompliance: What, Why, and Does It Matter?
Overcompliance is a rational response to uncertainty in sanctions rules, which is itself a rational response by policymakers to the costs of specifying sanctions in precise legal terms. However, overcompliance can also frustrate policy goals and cause unintended harms. Enforcement practices should account for compliance realities, especially the limited guidance and risk tolerance of the private sector. Clearer rules, increased government advice, calibrated penalties, and multilateral coordination could help deter excessive sanctions avoidance.
Guidance Note on Overcompliance with Unilateral Sanctions and its Harmful Effects on Human Rights
Over-compliance is a form of excessive avoidance of risk. It may involve blocking all financial transactions with a sanctioned country, entity or individual irrespective of whether they are prohibited, as well as refusing to engage in any trade that might indirectly benefit designated persons or entities.
Over-compliance disproportionately harms vulnerable groups as essential goods and services become more difficult to access in sanctioned countries. It also negatively impacts human rights globally by enabling authoritarian practices and contributing to economic crises.
Over-compliance with secondary sanctions adversely impacts human rights of millions globally
Secondary sanctions and their ensuing civil and criminal penalties are illegal under international law. However, the threat of such penalties still coerces governments, companies and financial institutions into over-compliance, restricting trade and financial flows even when not required. This violates the economic rights of citizens worldwide.
The expert urged States to eliminate or minimize over-compliance with unilateral sanctions through legislation, regulation, and financial or other incentives. Clearer rules and guidance around sanctions are needed.
Over-compliance with unilateral sanctions hurts human rights
The UN expert said some individually imposed sanctions are having a widespread detrimental impact on people’s rights to food, health, employment, and development across the world. She called on countries to assess sanctions’ spillover effects and warned that over-compliance violates international law.
Targeted humanitarian exemptions and clearer sanctions guidance could help prevent over-compliance. But fundamentally, unilateral sanctions themselves are inconsistent with a rules-based global order.