Politics

Power Play for the Treasury and State: The Short-Term Success and Potential Long-Term Failure of Sanctions

In 1944, representatives from forty-four nations gathered in Bretton Woods, New Hampshire to prepare for the global economic situation following World War II. A little over one-year later, twenty-eight nations reconvened and established the International Monetary Fund (IMF). Due to the gold standard and the amount of gold secured in America, the United States Dollar (USD) was chosen as the core currency for the IMF. The organization started with $10,000,000,000 —a modern equivalent of $143,000,000,000— which was distributed as shares to members. Even though USDs are no longer redeemable in gold, the USD has largely been distributed throughout the world and remains the most globally traded currency. Today, the IMF has 189 members with close to $1.7 trillion USDs in circulation. For this reason, losing the ability to trade with USDs can have negative consequences.

Operating under Executive Order 13224 and 13608, the United States —Secretary of State, Attorney General, and Department of Treasury— can block property and prohibit transactions with persons who commit, threaten to commit, or support terrorism. The Department of Treasury’s Terrorism and Financial Intelligence Office (TFIO) works with all levels of domestic government, foreign governments, and supranational banking systems to accomplish this task (i.e., World Bank, International Monetary Fund, etcetera). Within the TFIO, the Office of Intelligence Analysis (OIA) works with the Unites States Intelligence Community to identify threats, and the Office of Foreign Asset Control (OFAC) freezes the target’s transactions. Although “freezing assets” can degrade a target’s access to the international market, this strategy has four weaknesses: 1) the implementation of a sanction can be internally challenging, 2) currency can never be fully restricted, 3) other currencies may be as effective if openly traded, and 4) restricting access to the USD may champion another market.

First and foremost, implementing a sanction is limited by its scope and utility. Executive Order 13224 restricts the ability of sanctions to the purpose of terrorism: activity that (i) involves a violent act or an act dangerous to human life, property, or infrastructure; and (ii) appears to be intended – (A) to intimidate or coerce a civilian population; (B) to influence the policy of a government by intimidation or coercion; or (C) to affect the conduct of a government by mass destruction, assassination, kidnapping, or hostage-taking.

This term is specific, which can inhibit the power of sanctions on international threats that do not exactly fit the prescription. Opposingly, the desire to sanction an international threat that is not deemed as “terroristic” can attenuate the term. Also, the intentions of the Treasury may be diminished by the interests of the secretary of state and attorney general. In sections five and six of 13224, it reads, “[the Department of Treasury] may take such other actions than the complete blocking of property or interests in property…if the Secretary of the Treasury, in consultation with the Secretary of State and Attorney General, deems such other actions to be consistent with the national interests of the United States, considering such factors as he deems appropriate.” This issue arose when the Department of State allowed China to move $25 million frozen USD to North Korea, undermining the Department of Treasury. Not to say that the choice of one agency outweighs the other, but interagency conflict may emerge depending on the utility of the sanction.

Although internal issues can limit the capability of the Department of Treasury, sanctions are also limited by its true ability to locate and seize all targeted USDs. Take, for instance, U.S. sanctions on Iran. Since 1979, twenty-seven executive orders “relating specifically to the Iran sanctions program” have been issued by the White House. On 23 January 2012, when Iran was already cut from the USD, the Bank of Tejarat was caught “circumventing international sanctions” and “providing financial services to several Iranian banks” through Europe, aiding Iran’s nuclear energy program. Then on 4 March 2012, attempting to further restrict the support of Iran’s nuclear program, President Barack Obama refit the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, allowing the U.S. to sanction anybody that makes a “significant transaction” of Iranian petrochemical products with USDs. The Bank of Kunlun, in China, was then sanctioned for similar reasons. This by no means indicates that a sanction does not have an impact. When U.S. sanctions were most stringent on Iran, Iranian trade diminished to $550 million. However, close to three years later in 2017, Iran turned to China, increasing trade again. Most recently, Chief Financial Officer of Huawei, Meng Wanzhou, was apprehended in Canada for violating U.S.-imposed Iran sanctions through a sub-company called Skycom. In the provided snapshot of the Iranian sanction program, imposed sanctions seemed to be circumvented. Furthermore, the targeting of these funds only exists on known links using USDs. When USDs move across the desert in the pocket of a Bedouin or are paid out to the local mosque without a digital footprint, it is impossible for the U.S. to track or know how the funds are used.

This may indicate that the overuse of sanctions may lead to the creation of a deeper problem. The U.S. has current sanctions on Belarus, Burundi, Democratic Republic of Congo, Iran, Iraq, Lebanon, Libya, Nicaragua, North Korea, Somalia, Sudan, Syria, Ukraine, Venezuela, Yemen, Zimbabwe, and other identified terrorists and terrorist groups, all of whom conduct trade with China. In 2009, Dr. Zhou Xiaochuan, the governor of the People’s Bank of China, claimed that the inherent fear in the IMF along with the Bretton Woods system, is that the used currency is not accessible enough and is an implement of sovereign domestic goals. Since then, on 19 April 2016, China opened the Shanghai Gold Exchange, a system that pushes back on the removal of the USD from the gold standard. There is no evidence that supports that the ambition of China is solely linked to U.S. sanctions, but if international funds continue to steer away from the USD the power that sanctions have will diminish.

As an action causes a reaction, a blocked path develops a detour. In the case of economic development, freezing an asset does not eradicate the need of the targeted party. If a mutually desired avenue is not available, then the blocked person(s) or group will figure out another way to access the resources needed. However, if there is not an alternate route, then no detour can be provided. In this perspective, sanctions can be fully effective on countries that are limited only to trade with USDs. Although combating terrorism is at the highest levels of importance for the United States of America, the Department of Treasury will never be able to completely freeze the use of USDs. On the other hand, sanctions may be a strong utilitarian tool for the Department of State, more especially if a sanction is imposed from the United States in conjunction with other world banks and organizations, eliminating all avenues to fund illicit activities. For these reasons, the Department of Treasury and Department of State have relatively strong international short-term power, but nothing substantial if not resolved or reinforced in the long-term.

The opinions expressed here by contributors are their own and are not the view of OpsLens which seeks to provide a platform for experience-driven commentary on today's trending headlines in the U.S. and around the world. Have a different opinion or something more to add on this topic? Contact us for guidelines on submitting your own experience-driven commentary.
Guy Barnes

Guy Barnes is a U.S. Army Veteran and former tank commander with service in Iraq and Korea. He has helped train foreign militaries and developed diplomatic ties around the world. He completed his formal education through American Military University, George Mason University, and Oxford University. His current interests are international security, conflict management, ethics, intervention, civil wars, revolutions, responsibility to protect, and international relations.

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