Is the Global Magnitsky Sanctions Program Working?

The 2016 Global Magnitsky Human Rights Accountability Act (GMA), inspired by the imprisonment and death of Sergei Magnitsky in Russia after his discovery of $230 million in tax fraud orchestrated by the Russian government, stands as the boldest authorization of U.S. economic sanctions in the fight against corruption. Executive Order 13818, issued in December 2017, designated the first sanctioned parties under GMA, enabling asset freezes and travel bans.

Since then, approximately 150 individuals and entities worldwide have been sanctioned for corruption under the GMA. (The GMA also allows for sanctions against human rights violators, and such authority was exercised to target 75 more individuals and entities.) The list includes current and former government officials—or those acting on their behalf—in Cambodia, China, Cyprus, Democratic Republic of the Congo, Dominican Republic, Equatorial Guinea, Gambia, Iraq, Latvia, Lebanon, Mexico, Nicaragua, Serbia, South Africa, South Sudan, Uganda, and Uzbekistan, among others. The designations include familiar names in the anticorruption community such as Gulnara Karimova, former Uzbek first daughter convicted of embezzlement and other corruption totaling more than $1.3 billion, Dan Gertler, the Israeli billionaire who earned millions of dollars through underpriced mining contracts in the Democratic Republic of the Congo, and Angel Rondon Rijo, a Dominican lobbyist central to Brazilian construction firm Odebrecht’s $4.5 billion Latin America-wide bribery-for-contracts scheme. Other sanctioned parties include the former Gambian president and first lady for misappropriating $50 million in state funds, a former Mexican judge and a former Mexican governor who took bribes from drug cartels, and a Sudanese businessman who, along with senior South Sudanese government officials, embezzled millions of dollars from a government food program.

The GMA represents a new era of so-called “smart sanctions.” Instead of limiting transactions with an entire country—as in the case of U.S. sanctions programs targeting Cuba, Iran, North Korea, and Syria—these individualized sanctions are designed to maximize harm and minimize collateral economic damage by restricting only bad actors’ access to global commerce, not that of entire populations. This approach is catching on outside the United States, with Canada, the United Kingdom, and the European Union recently announcing their own GMA-esque sanctions, while other countries, like Australia and Japan, are actively considering adopting similar programs.

Yet, a fundamental question remains: is the GMA working?

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Even “Tough on Corruption” Proponents Should Worry about “Zero Tolerance” Rules

“Zero tolerance for corruption,” as Professor Stephenson suggested in a 2014 post, is an expression that can be construed in several different ways: from a general attitude that corruption should be considered “a high priority,” to an uncompromising policy mandating that “all feasible measures to minimize corruption must always be used.” In this post I will discuss another common, narrower understanding of “zero tolerance for corruption,” according to which corruption – at least in certain contexts – must always be addressed with a mandatory predetermined harsh sanction. A clear example of such a “zero tolerance” rule is the Colombian and Peruvian law demanding the instant termination of “any public contract tainted by corruption.” Another illustrative example is the EU’s directive mandating debarment from public contracting of any company convicted of offenses of corruption, fraud, or money laundering.

Granted, the potential deterrent value of mandatory harsh sanctions for corruption is substantial. A company aware that any conviction for corruption will inevitably incur severe penalties is more likely to be dissuaded from violating the law. Nevertheless, the costs of this “take no prisoners” approach to anticorruption may be much higher than the actual benefit. Thus, as Rick Messick recently showed, the law mandating termination of corruption-tainted public contracts has proven to have disastrous ramifications for the infrastructure in Peru and Colombia. As it turns out, not only has the nondiscretionary cancellation of corruption-tainted public contracts halted the advancement of existing infrastructure projects, but it has also deterred investors and developers from taking any part in such projects, for fear that they will be cancelled due to “the tiniest of infractions by anyone associated with the project.” Similarly, debarment is nothing less than “a death-sentence” for companies whose main business involves public contracts, and its mandatory imposition for even a relatively minor offense may be so draconian as to be counterproductive.

This kind of cost-benefit reasoning, though compelling to some, would not convince many proponents of an unequivocally “tough on corruption” stance. Many anticorruption hardliners believe in maximizing deterrence notwithstanding any associated costs. From this point of view, the end of deterring corruption justifies all necessary means. Yet even for those who take this view, it turns out that “zero tolerance” may not be the ideal approach. Supporters of “zero tolerance” rules assume that adoption of mandatory sanctions for corruption would guarantee that actors in the anticorruption system – judges, prosecutors, and legislators – will adhere to the “zero tolerance” ideal, and that such rules would be sustainable. But these decisionmakers in the anticorruption system may evade the application of “zero tolerance” rules where doing so would lead to sanctions perceived (rightly or wrongly) as patently absurd or unjust. In other words, a “zero tolerance” rule on the books does not guarantee that a “zero tolerance” policy would actually be implemented. Consider the various ways that actors in the anticorruption system may avoid triggering the mandatory sanctions for corruption:

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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:

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Getting People Off the Sanctions List: A Process that Doesn’t Support the Policy

Individually-targeted “smart sanctions”—not to be confused with country-wide sanctions, such as trade or arms embargoes—are garnering increased attention as a potentially powerful tool in the anticorruption toolkit, particularly in the United States. Such sanctions typically prohibit persons or entities on the list of those under sanction (known in the U.S. as the Specially Designated and Blocked Person (SDN) list) from accessing the sanctioning country’s financial system. They can also impose travel bans and/or prohibit third parties subject to the sanctioning country’s jurisdiction from doing business with the targeted individuals. These individually-targeted sanctions, particularly the asset freezes, are a powerful instrument, and may be an especially effective deterrent in the context of venal crimes like corruption, given that those motivated principally by greed might also be more sensitive to severe financial penalties. (According to a 2016 study by the US State Department, a sanctioned or associated company loses, on average, over half of its asset value and one-third of its employees and operating revenues.) While the United States had previously used individually-targeted asset freezes to punish individuals responsible for acts of public corruption in places like Venezuela (pursuant to Executive Order (EO) 13692), Syria (pursuant to EO 13460), and Zimbabwe (pursuant to EO 13469), the 2016 Global Magnitsky Act (GMA) has made individually-targeted asset freezes a more prominent piece of the US anticorruption arsenal. Pursuant to this Act, last December President Trump authorized sanctions against 15 individuals and 37 entities for human rights abuses and acts of grand corruption; in June, the Office of Foreign Asset Control (OFAC) added two more entities and five more individuals to the list.

In the months since OFAC released the first tranche of GMA names, there has been extensive discussion about how civil society organizations (CSOs) can add more names to the Global Magnitsky list. Former Deputy Assistant Secretary of State Rob Berschinski, for example, is spearheading efforts through Human Rights First to coordinate CSOs endeavouring to submit names for consideration, while the Helsinki Commission organized a special “how-to” event for CSOs to help them be more effective in lobbying to add names to the list.

Yet for all this attention on how to get names on to the GMA list, little ink has been spilled addressing the question of how sanctioned individuals might get off that list. It’s not surprising that CSOs would not devote their scarce resources to getting individuals who have engaged in acts of grand corruption off of a sanctions list. Yet the de-listing issue is important—even in contexts where it’s unlikely that a name would be added to the list erroneously. The main reason has to do with incentives. As the US Treasury Department acknowledges, the “ultimate goal with sanctions is not to punish, but to bring about a positive change in behavior of illicit actors.” And it is the prospect of getting off the sanctions list that can encourage bad actors to change their behavior and/or to cooperate with the US government investigations into wrongdoing. Continue reading

Getting the Right People on the Global Magnitsky Sanctions List: A How-To Guide for Civil Society

Last December, pursuant to the 2016 Global Magnitsky Act, President Trump issued Executive Order 13818, which declared that “the prevalence and severity of human rights abuse and corruption that have their source, in whole or in substantial part, outside the United States … threaten the stability of international political and economic systems,” and authorized the Treasury Secretary to impose sanctions against (among other possible targets) a current or former government official “who is responsible for or complicit in, or has directly or indirectly engaged in: (1) corruption, including the misappropriation of state assets, the expropriation of private assets for personal gain, corruption related to government contracts or the extraction of natural resources, or bribery; or (2) the transfer or the facilitation of the transfer of the proceeds of corruption.” Pursuant to this Executive Order, the Treasury Department imposed powerful economic sanctions against 37 entities and 15 individuals, including Chechen warlord Ramzan Kadyrov, Israeli billionaire Dan Gertler, and Artem Chaika, the son of Russia’s Prosecutor General.

This was big news, for a couple of reasons. Most obviously, Trump doesn’t exactly have a reputation as a “human rights guy,” let alone a Russia hawk. Given that the 2016 Global Magnitsky Act (unlike its predecessor, the 2009 Magnitsky Act) enables but does not require the imposition of sanctions, it was far from inevitable that the Trump Administration would make use of it. Perhaps just as newsworthy was where the specific names on the list came from: nearly half of those names were provided to the Administration by civil society organizations (CSOs) or by Congress (and in the latter case, it was likely CSO efforts that brought individual names to the attention of Congressional staffers).

The Global Magnitsky Act and EO 13818, then, seem to create promising opportunities for anticorruption CSOs to impose consequences on kleptocrats and their cronies. Because the process is so new, it’s not yet clear how it will develop, yet it is nevertheless useful to draw lessons from the first round of Global Magnitsky sanctions for how CSOs can be maximally effective in using this new tool. The Committee on Security and Cooperation in Europe (also known as the Helsinki Commission) hosted a workshop in early March 2018 to discuss this issue. I was fortunate enough to attend this gathering, and in this post I’ve attempted to distill a handful of key lessons that the participants discussion identified. I’ve framed the lessons as a “how-to” guide addressed to members of a hypothetical anticorruption CSO: that would like to take advantage of this powerful tool.

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Unfriended: Should Facebook be Required to Enforce US Sanctions Against its Users?

Late last year, Facebook abruptly shut down the accounts of Ramzan Kadyrov, the despotic leader of the Chechen Republic. The social media giant claimed that it had a “legal obligation” to disable Kadyrov’s Facebook and Instagram accounts because of new sanctions imposed by the United States government under the Magnitsky Act. Among other things, Kadyrov has been accused of ordering the assassination of a political opponent, personally torturing another, and leading a violent purge of gay men. He’s also an active social media user: four million people followed his Facebook and Instagram profiles, and 400,000 continue to follow him on Twitter. Kadyrov had become famous for posting videos of himself wrestling a crocodile, praising Russian President Vladmir Putin, and—perhaps ironically—mocking what he saw as the ineffectiveness of American sanctions.

As many journalists noticed, Facebook hasn’t disabled the accounts of other sanctioned individuals, including Venezuelan President Nicolas Maduro, Russian Deputy Prime Minister Dmitry Rogozin, and Israeli billionaire Dan Gertler. Facebook explained this seeming inconsistency with an unhelpful truism that it “operate[s] under the constraints of US laws, which vary by circumstance.” Its statements have led observers to speculate that Facebook is using the sanctions as a pretextual reason to cut off a user it already disliked, or that it’s “picking and choosing compliance” in an attempt to please the government. Although those explanations seem plausible at first glance, a careful look at the relevant laws suggests an even simpler (albeit more mundane) one: Facebook may actually be correct that it had a legal obligation to suspend Kadyrov’s accounts but not those of others targeted by American sanctions.

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The Trade-Off Between Inducing Corporate Self-Disclosure and Full Cooperation

In discussions of appropriate sanctions for corporations that engage in bribery, much of the conversation focuses on the appropriate penalty reduction for firms that self-disclose violations, cooperate with authorities, or both. Self-disclosure and cooperation are often lumped together, but they’re not the same: Plenty of targets of bribery investigations, for example, did not voluntarily disclose the potential violation, but cooperated with the authorities once the investigation was underway.

This gives rise to a problem that is both serious and seemingly obvious, but that somewhat surprisingly is hardly ever discussed.

The problem goes like this: Enforcement authorities want to encourage self-disclosure, and they want to encourage full cooperation with the investigation; they would like to do so (1) by reducing the sanction for firms that voluntarily disclose relative to those that don’t, and (2) by reducing the sanction for firms that fully cooperate relative to those that don’t. But if the minimum and maximum penalties are fixed (say, by statute or department policy or other considerations), and the penalty reductions necessary to induce self-disclosure and full cooperation, respectively, are large enough (cumulatively greater than the difference between the maximum and minimum feasible sanction), then adjusting sanctions to encourage self-disclosure may discourage full cooperation, and vice versa.

It’s easiest to see this with a very simple numerical example: Continue reading

Argentina’s Draft Bill on Corporate Criminal Liability for Bribery: Some Striking Innovations on Sanctions

A few weeks ago, I had the good fortune to be able to attend an event at the University of Buenos Aires (co-sponsored by the New York University Law School), that focused, among other things, on a new draft bill, currently under consideration in the Argentinian legislature, that would impose criminal liability on corporations and other legal persons for corruption-related offenses. I’m largely unfamiliar with Argentina’s legal system, so I was very much an outside observer for this discussion, but there were a couple of things about the draft bill that struck me as interesting and worthy of attention from the wider anticorruption community. (Apologies for not providing a link: I’m working off a hardcopy of an unofficial English translation of the draft bill, which I can’t find on the web.)

A lot of the provisions in the bill are fairly standard, though in many respects the bill is quite aggressive. For example, Article 3 makes parent companies jointly and severally liable for sanctions imposed on their subsidiaries (without any requirement to show that the subsidiary was an agent of the parent), while Article 4 imposes successor (criminal) liability in all cases of merger, acquisition, or other corporate transformation. In both these respects, the draft Argentinian bill imposes more sweeping corporate criminal liability than does U.S. law. Also, like U.S. law, the Argentinian bill (in Article 2) would make corporations criminally liable for the actions of its officers, employees, and agents.

But what most caught my attention were the draft bill’s provisions on sanctions: Continue reading

Jared Kushner May Have Violated the Foreign Corrupt Practices Act

Recent media reports – which would be even more sensational if we weren’t getting so desensitized to Trump-related scandals – indicate that prior to Trump’s inauguration, his son-in-law and senior advisor Jared Kushner had private meetings with Russian government officials, including both Ambassador Sergey Kislyak and Sergey Gorkov, the head of a Russian state-owned bank (and a close associate of Vladamir Putin). We still don’t know (and may never know) the precise contents of the meeting, but based on circumstantial evidence, several of the media reports discuss speculations Kushner and his Russian government contacts discussed the possibility of extending financing to business ventures owned by Kushner or his family (including, most notably, a financially struggling office building at 666 Fifth Avenue in Manhattan), if Kushner would help to persuade his father-in-law, the President-Elect of the United States, to lift the sanctions that the U.S. had imposed on Russia for its military intervention in Ukraine.

Again, we don’t yet know whether this is true. But let’s suppose for a moment that some version of that story is approximately correct: that during conversations with Russian government officials, Jared Kushner proposed or endorsed the idea that he would try to persuade his father-in-law to lift the Russia sanctions, and that Kushner did so because he believed (or was told) that if he did, a Russian state-owned development bank would provide valuable financing for his family’s business.

If that’s what occurred, then even nothing further came of these discussions, then there’s a very good argument that Jared Kushner committed a criminal violation of the Foreign Corrupt Practices Act (FCPA). Though there’s been quite a bit of discussion in the reports so far about various federal laws that Kushner may or may not have been broken in connection with these meetings (such as the little-used Logan Act, which prohibits private citizens from interfering with U.S. diplomacy). But I haven’t seem much discussion of the FCPA angle. So even though it might still seem unrealistic to imagine that FCPA charges will be brought, let me elaborate a bit on why I think there’s a plausible case for an FCPA violation here, if the evidence supports the characterization of the meetings sketched above: Continue reading