by Dr. Bryan R. Early and Keith A. Preble
U.S. Economic Sanctions Policy
Economic sanctions are coercive foreign policy tools that work by disrupting otherwise profitable commerce between the governments imposing them and their targets. In order to be effective, governments imposing sanctions must obtain the compliance of their constituents, or the sanctions will not harm their targets as intended. Complying with sanctions is costly for companies not only in terms of the commerce they disrupt, but also with respect to the investments required to prevent unintentional violations. Thus, as policy tools, economic sanctions inherently create costly compliance obligations for companies. Given that employing sanctions appears to run counter to U.S. President Donald Trump’s goal of reducing regulatory burdens on U.S. firms, it is surprising that he has heavily relied upon threatening and imposing sanctions as part of his administration’s foreign policy.
Two years into the Trump Administration, we can begin to see evidence of how this tension in President Trump’s policy preferences has affected the implementation of U.S. sanctions. Despite the fiery rhetoric directed at the targets of U.S. sanctions, our research indicates that the U.S. Department of Treasury’s Office of Foreign Asset Control (OFAC) has adopted a softer stance on sanctions enforcement during the Trump Administration than during his predecessors’ administrations. The major area in which OFAC’s recent enforcement policies have been more stringent is in punishing foreign sanctions violators. This suggests that OFAC has resolved the tension between reducing regulatory burdens on U.S. firms and President Trump’s sanctions preferences by focusing more of its attention on punishing foreign firms instead of American ones for violating sanctions.
Enforcing Sanctions via Fishing and Whale-Hunting Strategies
Drawing on data released by OFAC on its enforcement actions from 2003-2018, our research shows that OFAC’s enforcement of U.S. sanctions has evolved significantly over time. We found evidence that OFAC employed a “fishing strategy” of pursuing a large number of enforcement actions that resulted in small fines against many individuals and entities during the presidency of George W. Bush. In contrast, Barack Obama’s administration adopted a “whale-hunting strategy” of pursuing a small number of major enforcement actions that resulted in substantial fines. Evidencing the difference in sanctions enforcement strategies from the Bush to Obama Administrations, OFAC pursued an average of 90 enforcement actions per year from 2003-2008 and 20 per year from 2009-2016. Whereas the Bush Administration’s enforcement strategy focused on catching a higher percentage of violators, the Obama Administration’s approach emphasized imposing enormous fines to create far-reaching deterrent effects.
Figure 1 shows the total fines imposed via OFAC enforcement actions against entities from 2003-2018 (Note: The figure only includes fines directly imposed by OFAC). The figure illustrates the dramatic uptick in the financial penalties associated with sanctions violations that occurred during the Obama Administration. A major reason for the uptick in total penalties was the passage of the International Emergency Economic Powers Enhancement Act (IEEPEA (PDF: 123 KB)) in 2007, which dramatically altered the regulatory environment for sanctions. The IEEPEA legislation amended Section 206 of the International Emergency Economic Powers Act (IEEPA (PDF: 59 KB), 50 U.S.C. 1705), increasing the penalty ceiling to $250,000 USD or “an amount that is twice the amount of the transaction that is the basis of the violation with respect to which the penalty is imposed.” Since OFAC penalties are assessed based on the number of offending transactions, the law allowed fines to accrue sharply when violations were associated with a larger number of transactions. This made financial institutions particularly susceptible to huge penalties for large-scale sanctions violations. The massive penalties assessed against Credit Suisse (2009), ING Direct (2012), and BNP Paribas (2014) reflect how IEEPEA empowered OFAC to adopt a whale-hunting strategy during the Obama Administration. From a governmental perspective, the whale-hunting strategy represents a more efficient and cost-effective approach for enforcing sanctions.
Figure 1: Yearly Penalties from OFAC Enforcement Actions by Administration in 2018 USD[1]
Figure 1 also reveals the practice of imposing larger fines against foreign companies for violating sanctions, which began under the Obama Administration. The average fine against foreign entities during the Bush Administration was $2,637,402, whereas during the Obama Administration the average fine against foreign firms was $139,000,000. The average fine against domestic firms during the Bush Administration was $31,658 versus $2,275,100 during the Obama Administration. Additionally, OFAC began engaging in enforcement actions against foreign firms at a significantly higher rate during the Obama Administration. Whereas 4% of OFAC’s enforcement actions targeted foreign entities from 2003-2008, that percentage climbed to 20% from 2009-2016.
Sanctions Enforcement under the Trump Administration
Since the Trump Administration assumed office, OFAC has pursued far fewer enforcement actions against entities as compared to the Bush and Obama administrations, and the fines imposed by OFAC have dramatically declined. The Trump Administration appears to be backing away from the aggressive whale-hunting strategy employed by the Obama Administration. In 2017 and 2018, OFAC only engaged in 16 and 7 enforcement actions, respectively, against corporate entities. Compared to the Obama Administration, the average penalties imposed on foreign and domestic entities for violating sanctions have been 71% lower during the Trump Administration. Furthermore, most of the fines imposed by the Trump Administration against U.S. firms for sanctions violations have been relatively modest. The average fine against U.S. firms was $934,932, as compared to an average of $2,275,100 during the Obama Administration. Taken in context, OFAC’s softer approach towards sanctions enforcement is consistent with the Trump Administration’s goals of reducing regulatory burdens on U.S. firms and policies such as Executive Order 13771.
The area in which OFAC has continued Obama-Era sanctions policies is in increasingly targeting foreign firms with enforcement actions and penalizing those firms more severely. During Trump’s presidency OFAC has pursued enforcement actions against foreign firms 43% of the time, roughly double the rate of the Obama Administration. The Trump Administration has also continued to impose significantly higher financial penalties on foreign entities as compared to domestic ones. In both 2017 and 2018, OFAC imposed its largest fines against foreign firms. China’s ZTE (PDF: 271 KB) was penalized over $100 million (along with a much larger fine imposed by the Department of Commerce for strategic trade control violations), and the French bank Société Générale S.A. (PDF: 285 KB) was penalized $53 million in 2018. Whereas OFAC has been more restrained targeting U.S. firms, it is still willing to impose whale-hunting style penalties against foreign corporations for sanctions violations.
In sum, OFAC has undertaken fewer enforcement actions and imposed smaller penalties during the Trump Administration, but it has continued imposing substantial penalties against foreign sanctions violators. Our research has shown that OFAC’s enforcement strategies change when new administrations take over in ways that reflect presidents’ policy preferences. While we only have two years of data, we can tentatively conclude that OFAC’s sanctions enforcement strategy reflects the Trump Administration’s prerogatives of reducing costly regulatory burdens on U.S. firms. OFAC’s enforcement strategy against foreign sanctions violators also coincides with the Trump Administration’s aggressive rhetoric aimed at compelling foreign compliance with U.S. sanctions efforts. We have every reason to expect that these trends will continue during the second half of the Trump Administration.
Footnotes
[1] The x-axis is the year from 2003 to 2018. Under the x-axis are three categories for the three presidential administrations studied in our paper: Bush (2003-2008), Obama (2009-2016), and Trump (2017-2018). The y-axis begins at $0.00 with a maximum value of $1.2 billion US dollars and indicates the total yearly penalties imposed by OFAC in 2018 US dollars in increments of $200 million dollars. The bars on the graph are further divided into two types, a light gray for foreign firms and a dark gray for domestic firms. Each year has two bars except for 2011, which only has a bar for domestic firms since no foreign firms were targeted by OFAC in 2011 during the Obama Administration. Foreign firms (the light gray bars) have higher yearly penalties in almost all cases except for 2011 (where no foreign firms were targeted) and 2013 (where domestic firms were targeted with higher penalties than foreign ones).
Bryan R. Early is an Associate Professor of Political Science and the Director of the Center for Policy Research at the University at Albany, SUNY. Keith Preble is a PhD student in the Political Science Department the University at Albany, SUNY.
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