The Financial Weapon: Expanding Magnitsky Sanctions to Attack Corruption

Economic sanctions targeted at individual wrongdoers can be a potent weapon in the fight against global corruption. The United States’ 2016 Global Magnitsky Human Rights Accountability Act (GMA) authorizes the President to impose targeted sanctions on corrupt foreign officials and their associates. And the GMA has had successes in deterring corruption: As earlier posts on this blog have highlighted, the GMA has prompted countries to strengthen their anticorruption laws and has prompted businesses to cut ties with corrupt individuals. Yet despite these successes, Magnitsky sanctions remain a relatively underused anticorruption tool. The U.S. Treasury Department’s Office of Foreign Asset Control (OFAC) has only sanctioned around 200 people as part of its Magnitsky programs, and most of these individuals have been sanctioned for human rights abuses rather than corruption per se.

GMA sanctions can and should be scaled up by an order of magnitude, with a greater focus on targeting corrupt actors. The U.S. should be imposing GMA sanctions on several thousand people, not just a couple hundred. As the Biden Administration has recognized, global corruption increasingly threatens national and international security. In light of this, the Administration should use the GMA to impose sanctions on not only the most egregious of kleptocrats but those who engage in more modest—but still significant—forms of corruption.

More aggressive and wide-ranging use of GMA sanctions would make both engaging and enabling corruption far less attractive. Sanctions bar both Americans and American businesses, as well as nearly all foreign parties that transact in dollars, from dealing with individuals subject to GMA sanctions. Businesses or financial institutions that violate sanctions can face multi-billion dollar fines, prosecution, and secondary sanctions. And because the U.S. sanctions apply to indirect transactions, firms must also avoid dollar transactions with third parties, such as suppliers and customers, that have links to sanctioned parties. In short, sanctioning more corrupt individuals would force Western businesses to closely scrutinize their business relationships and cut off sanctioned individuals from the global financial system. 

GMA sanctions’ efficacy in deterring corruption is limited if only a handful of individuals—generally the “worst of the worst”—are targeted and if violators are not aggressively pursued. For most corrupt individuals and those who do business with them, the risk of being hit with GMA sanctions is likely so low that they do not even consider it. And ultra-rich kleptocrats sanctioned under the current system may be the least susceptible to deterrence and the best-positioned to evade sanctions through the use of complex vehicles like shell companies and offshore trusts. For GMA sanctions to achieve their full potential, they need to be deployed against a much larger set of individuals—senior figures who are involved in serious, destructive, high-level corruption, even if they are not (say) heads of government or ministers, and those sanctions need to be effectively enforced.

Scaling up the number of individuals targeted by GMA sanctions from a few hundred to a few thousand, with a greater emphasis on corrupt actors, does entail some significant challenges, but these can be overcome:

  • First, accurately identifying corrupt officials and the entities they control will require a significant investigative and diplomatic effort. To this end, OFAC should create a task force dedicated to identifying individuals engaged in public sector corruption and bribery. The task force would work not only with federal law enforcement, the State Department, and the intelligence community, but also with foreign governments and anticorruption organizations. For those governments inclined to fight corruption, U.S. sanctions offer an opportunity to target those who facilitate corruption in the West. Indeed, Magnitsky sanctions have already been used cooperatively in Gambia, Mexico, and Latvia. Although the United States should proceed cautiously lest opportunistic regimes exploit its anticorruption efforts to target dissidents, the State and Treasury Departments can develop diplomatic mechanisms for identifying corrupt individuals and entities that warrant sanctions. 
  • Second, employing sanctions against corrupt individuals and entities on a large scale exacerbates due process concerns. As noted above, the consequences of being subject to GMA sanctions are severe. These sanctions effectively deprive their targets of access to a substantial portion of the global economy without any sort of hearing. Moreover, as Hilary Hurd previously observed on this blog, OFAC has been less than transparent about how it adds and removes names to the sanctions list. Given this lack of process, there’s a risk that significantly increasing the number of people sanctioned for corruption will—like the American government’s no-fly list—increase the number of people wrongfully sanctioned and that private parties will mistake innocent people for sanctions targets. Although as a strictly legal matter foreign individuals who allege they have been wrongfully sanctioned not be able to assert a Due Process claim under the U.S. Constitution, the larger concern about mistakes is significant. But this is not a reason to reject the expansion of the GMA sanctions list. Rather, it is a reason to increase the transparency around sanctions designations. OFAC should make clear its sanctions criteria, should require the use of robust internal procedures for identifying corrupt individuals, and should provide opportunities for sanctioned individuals to lodge formal objections to their designations. These measures would mitigate the risk of sanctioning innocent people, while strengthening the legitimacy of U.S. sanctions abroad. Undoubtedly, some information shared by law enforcement and intelligence agencies must remain secret, but wherever possible OFAC should be clear about both the rationale for its sanctions and the evidence upon which it relied in designating individuals.
  • Third, sanctioning thousands of corrupt individuals poses practical challenges. The more individuals are sanctioned, the more sanctions violations—including arguably unintentional violations—are likely to occur. This raises the concern that the U.S. might find itself in the position of attempting to penalize an unmanageably large number of otherwise legitimate businesses. Additionally, foreign businesses may decide that ensuring compliance with U.S. sanctions is prohibitively expensive, and might therefore avoid dollar transactions by turning to alternative currencies like bitcoin or renminbi. Although these risks are substantial, they are manageable. The U.S. has already sanctioned more than nine thousand individuals and entities under various sanctions programs. (The GMA is only one such program.) If the financial system and the global economy can adapt to the current targeted sanctions regime, it can likely accommodate a longer list of targets. Indeed, many businesses have already invested in sanctions compliance, reducing the marginal cost of severing ties to additional sanctioned individuals and entities. And while some firms may start to move away from dollars, the response to America’s recent sanctions against Russia suggests that most foreign businesses will jettison their sanctioned clients rather than risk their access to the U.S. dollar and U.S. markets.

U.S. economic sanctions are a powerful weapon in the fight against corruption, one that offers a means of overcoming many of the tools bad actors have used to hide their wealth and enjoy the trappings of the West. Expanding their use to identify and target a far wider array of bad actors won’t be easy, but if done in a considered way, it would make both corruption and its enablement a far less attractive proposition.

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