Why (and How) the US Should Use “Sanctions Money” to Help Victims of Corruption 

Individually-targeted sanctions pursuant to the 2016 Global Magnitsky Act (GMA) have been used to hold individuals responsible for acts of grand corruption and human rights abuse in places like Russia and the DRC (explained here and here). Yet more can and should be done to compensate the victims of those same crimes. Advocates should push the US to use the compensatory mechanisms of other US sanctions regimes to strengthen the power of the GMA to compensate victims.

GMA sanctions, like other individually-targeted sanctions, are administered by a division of the US Treasury Department called the Office of Foreign Assets Control (OFAC). When an individual is placed on the US sanctions list—known as the “specially designated nationals” (SDN) list)—that individual’s US assets are frozen in an interest-bearing account until either the individual is removed from the SDN list or the assets are seized. In the interim, any US-dollar denominated transaction with those accounts is blocked. Moreover, any person subject to US jurisdiction who does business with any individual on the SDN list can be hit with a steep civil fines for every transaction with the blocked assets, which can cumulatively run into the millions, sometimes billions, of dollars.

Those two pots of money—the frozen assets of the individuals on the SDN list, and the fines imposed on those who violate the sanctions imposed on those SDNs—could and should be used to compensate the individuals victimized by the corruption or other wrongful conduct of those SDNs. Here’s how these approaches might work in the US context, given precedent of other sanctions regimes:

  • First, Congress could amend the GMA to allow victims to claim frozen assets once those individuals receive a court judgement against a sanctioned individual or company. To illustrate, let’s say a victim of corruption in Ukraine brings suit under the Alien Tort Claims Act (ACTA, a US statute that allows a foreign national to sue a foreign defendant in a US court for damages resulting from a violation of international law or a US treaty) against a sanctioned Ukrainian official for an act of grand corruption. If the defendant is on the SDN list and thus has already had his US-based assets frozen, then if the court finds in favor of the ACTA plaintiff, the court should be able to use the defendant’s frozen assets to satisfy the damages claim. In this way, assets frozen in an interest-bearing account could be transferred to the victims without the US government ever taking title to those assets. Something like this is already allowed for victims of terrorism and narcotics trafficking, pursuant to a statute called the International Emergency Economic Powers Act, but current Treasury regulations bar the use of assets frozen under the GMA to satisfy judgments against defendants on the SDN list (absent a special license). I see no reason why the US should treat victims of terrorism or drug trafficking differently from victims of grand corruption or gross human rights violations on policy grounds. After all, terrorist attacks result in human rights violations while narcotics trafficking is often facilitated by corruption at the state level. What’s more, the opportunities for restitution under the GMA are significant, perhaps more significant than other regimes once you consider how many wealthy Russian oligarchs have recently been sanctioned pursuant it. Of course, there are some problems with allowing victims to initiate court proceedings to attach SDN assets prior to any government confiscation order. As I discussed in an earlier post, allowing someone’s assets to be taken upon freezing might reduce the incentive for the sanctioned individual to change his or her behavior or, relatedly, reduce US diplomatic leverage with respect to that countries’ officials. But this problem could be mitigated by requiring an individual to have been on the SDN list for a sufficiently long period of time (say ten years) before allowing those frozen assets to be used to satisfy judgments against that individual.
  • Second, and perhaps even more promising, Congress could authorize the Treasury Department to use the steep civil penalties imposed on persons who violate GMA sanctions to create a special victim compensation fund dedicated to remedying the harms caused by the bad acts that landed the sanctioned individuals on the SDN list in the first place. That is, Treasury might put all penalties for violating GMA sanctions into a “corruption and human rights” fund, with the Departments of Treasury and State jointly determining how to best use these funds to compensate the victims of the underlying crimes—perhaps by transferring money directly to victims (when individual victims can be identified) or perhaps by investing these resources in longer-term good governance programs in the relevant countries. While a US statute called the Miscellaneous Receipt Act (MRA) generally requires all civil penalties recovered by the US government to go directly into the general Treasury budget, Congress could easily amend the GMA to allow such a fund, following the precedents of the special victims’ compensation fund for 9/11 victims, as well as draft bills related to North Korea sanctions that have contemplated a similar fund. Alternatively, Treasury could avoid receiving the funds directly and instead facilitate the payment to a victim. As Professor Andrew Spalding has explained, the MRA only applies if the government “receives” the civil penalties, which means that if Treasury entered into a settlement with a sanctions violator in which that person paid a penalty directly to a victim or to an non-governmental organization acting on behalf of victims, there would be a plausible legal argument that the MRA did not apply.

Anticorruption advocates are right to celebrate the GMA, but it could be made to do so much more. What better place to start than by using the assets frozen and fines collected to compensate the victims?

6 thoughts on “Why (and How) the US Should Use “Sanctions Money” to Help Victims of Corruption 

  1. Hilary, thanks for this interesting article! I’m curious whether you think restitution should extend only to the GMA, or also to the FCPA. There’s also possibly lessons from how the UK is compensating victims of corruption under the Bribery Act. See https://www.sfo.gov.uk/2018/06/01/new-joint-principles-published-to-compensate-victims-of-economic-crime-overseas/

    What criteria would you suggest using to identify and compensate victims? Under the FCPA, US authorities have been reluctant to consider foreign governments victims entitled to restitution. Should restitution victims include foreign governments, that may not be entirely blameless, or be limited to individuals?

  2. Hilary, thanks as always for this great post. With regard to your first point, I’m wondering how big a class of plaintiffs might be able to satisfy their claims with frozen GMA assets under the Alien Tort Claims Act. I’m not familiar with the ins and outs of that particular U.S. statute, but I guess it’s less immediately obvious to me what actionable tort arises out of an act of grand corruption than, say, an act of international terrorism. Have foreign plaintiffs brought successful corruption-based tort suits in U.S. courts under the Alien Tort Claims Act? Is this a common thing and I’m just ignorant about it? If so, then your proposal seems like it would be an effective and appropriate way to provide relief.

  3. Great post, Hilary. Your proposal would give real teeth to GMA sanctions. Are you concerned at all that giving victim-plaintiffs a claim on frozen assets would lead to any kind of abuse? For instance, I know ATS/ATCA litigation often results in default judgments against foreign nationals when they don’t appear to defend themselves in U.S. court. Do you think that giving victim-plaintiffs easy access to foreign defendants’ frozen accounts would encourage suits hoping to take advantage of a defendant who may not appear in court (perhaps for legitimate reasons)? Relatedly, is there a possibility that the abuse of such suits could upset U.S. foreign relations at all? I imagine these concerns could be addressed, and I’d be curious to hear your thoughts.

  4. Thanks Hilary for the great post, I agree full-heartedly. Another advantage of your proposal is that it could achieve, in addition to the compensatory goal, an ex-ante incentive for victims to come forward in the first place with information regarding acts of grand corruption, potentially improving enforcement. This could work conditional on two assumptions: 1) Despite the enactment of the GMA there is still significant under-enforcement of acts of grand corruption; 2) In many undetected cases, there are victims with the power to expose the crime, but are reluctant to step forward without adequate incentives (perhaps due to fear of retribution, or the desire to protect business/working relationships). If these assumptions hold, then perhaps your argument should be extended not only to victims who suffered harm, but also to reward whistleblowers, the ones holding the incriminating information, who in different cases may or may not be the victims.

  5. This is an extremely interesting proposal which I intuitively want to support, because it sounds fair. My only reservation is that it is still problematic to define who the victim of corruption is in the first place – UNCAC Article 35 leaves a lot of ambiguity on the definition of a victim and who should receive compensation. There may be cases in different countries that develop this practice (and I would actually be grateful for examples), but the practice is very complex and applying it on an international level (as in your example for potential victims in Russia claiming compensation from funds located in the US) would add an additional level of complexity.

    I guess the practice should be taken further and developed, but I do see a lot of practical challenges along the way.

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