Sanctions: War By Other Means

To continue borrowing from Clausewitz, sanctions are a tool to disarm the enemy so that the enemy is powerless to prevent you from imposing your will. The use and threat of force of sanctions are such that an opponent will sooner or later acquiesce rather than resist.

Sun Tzu's quote from The Art Of War, "The greatest victory is that which requires no battle," is also relevant to using sanctions as a deterrent.

Sanctions can have the opposite effect, leading to a rapid escalation of political tensions, economic stress, and eventually physical violence. The use of sanctions can stoke "primordial violence, hatred, and enmity" that Clausewitz identified as part of war.

Sanctions That Helped Trigger A War

The US and Japan were rivals in the Pacific since before World War I. Japan's militaristic expansion and the invasion of China in 1937 led to even poorer relations between the two countries. In 1940, the US embargoed war supplies to Japan, including steel, iron, and scrap metal. The US also froze Japanese assets in the US in 1941. Japan saw these sanctions as a threat to its war effort in China and the survival of the Japanese Empire. On December 7, 1941, the Japanese attacked the US by bombing Pearl Harbor.

Sanctions That Worked

The UN encouraged a variety of sanctions against South Africa and its apartheid regime beginning in the 1960s. By the 1990s, the first fully democratic election was held, and Nelson Mandela was elected president. When Mandela was asked if economic sanctions helped to bring an end to the apartheid system, he replied, "Oh, there is no doubt."[1]

Sanctions are tools that can be wielded surgically or as a sledgehammer. Every time a nation considers using sanctions, it should consider the ability to enforce them; as we will see, this can be problematic. The nation’s leaders should also ask “and now what will happen?” US President Carter’s 1980 grain embargo against Russia "shocked" the Japanese into making much larger investments in the now flourishing Brazilian soybean industry so as not to be reliant on the US.[2]

Various Forms Of Sanctions

Individuals

• Visa bans to select or all countries.
• Global travel ban, such as the ‘no-fly’ list.
• Freezing of assets.
• Confiscation of assets.
• The sanction can apply to family members.

In my professional experience, sanctions have the greatest impact on the individual. A brother of a sanctioned drug dealer, who was also sanctioned by affiliation, commented to me that he was stuck in Honduras. He could not leave, send his children away to the US or UK for a good education, or even buy or rent a house, as no one would open a financial account for him. He was forced to transfer his agricultural business to a group of employees and make other financial arrangements to make a living. He told me he had become “a faceless refugee, unknown in his hometown, an exile, and invisible to all.” His cell walls are and continue to be the borders of Honduras.

Another example has been the success of the Magnitsky Sanctions championed by Sergey Magnitsky’s friends and business associates, William Browder and Jameson Firestone. These sanctions began targeting Russian oligarchs for their corruption and human rights abuses, and have been successfully applied against many other despots.

Companies

• Prohibitions on the export of certain items.
• Prohibition on purchasing items.
• Revocation of domestic and international permits/memberships.
• Freezing of assets.
• Confiscation of assets.
• Often, these sanctions will be applied to controlling persons and their families.

In 2014, BNP Paribas S.A. (BNPP), a global financial institution headquartered in Paris, agreed to enter a guilty plea to conspiring to violate the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA) by processing billions of dollars of transactions through the US financial system on behalf of Sudanese, Iranian, and Cuban entities subject to US economic sanctions.[3] BNPP did not violate sanctions by accident. Instead, the company went to elaborate lengths to conceal its violation and then, when confronted, was less than forthcoming. The fines alone were $8.9 billion. The legal fees and third party AML/sanction audit are estimated to have cost an additional $3.5 billion.

In 2009, DHL agreed to pay a $9.4 million fine to resolve allegations it aided and abetted illegal shipments of goods to Iran, Sudan, and Syria. Unlike BNPP, DHL did not do this deliberately, but failed to pay attention to where its re-shippers were forwarding the shipments delivered by DHL to their reshipping customers. This is an example of a failure to inquire about what your customer’s customer is doing with transferring or the use of items received.

Non-State Organisations

Typically, sanctions are a blanket application impacting all supply, support, aid, finance, etc. Examples are ISIS, Al-Qaida, Taliban, Houthis, and others. The sanctions of non-state organisations are aimed at those who intentionally or unintentionally support the non-state organisation, and any affiliated companies and designated individuals.

Nations

• Prohibition of the importation of select items.
• Military sanctions aimed at cooperation, training, and weapons supply.
• Diplomatic sanctions include the expelling of diplomats or suspending relationships.
• The freezing of assets.
• The confiscation of assets.

Broad sanctions currently exist against North Korea, Syria, Iran, Belarus, Myanmar, Venezuela, and Cuba. Russia, with over 18,000 specific sanctions levied against them, is the most sanctioned country. The 18,000 sanctions are greater than the combined sanctions collectively levied on Syria, North Korea, and Iran![4]

What does a nation do when it cannot directly buy the items it requires? They source through willing front companies located in non-sanctioned intermediate countries. Russia, for example, has sourced goods through front companies in Armenia, Kazakhstan, and Turkey. Who buys Russian oil? The primary buyers are China, India, and Turkey. The oil is shipped, violating sanctions, in shadow tankers that sail with their transponders off, and will sail directly to a customer nation and or conduct a ship-to-ship cargo transfer to a recognised ship. The incentives to evade the oil sanctions are massive. Oil traders in this gray market can earn $5 to $7 million monthly.

How do computer chips get to the sanction countries? Simple. The manufacturers, typically a subsidiary of the US or EU chip-making company, sell the chips to a third party that has a genuine use for the chips, but buys more than they need and sells the surplus chips to a front company that ships them to another front company in a sanctioned county. One might assume mischief is afoot when the chips are sold for 20 to 50 times the factory's direct price. Sanctions busting can be very profitable.

Another way is to ship the newer chips along with other older chips under the banner of computer waste. The Harmonised System (HS) code is a standardised numerical system for classifying products in international trade. The HS Code for electrical and electronic waste and scrap is 8549. In the last few years, the number of US electrical and electronic waste buyers has gone from 140 to 1,190, and the volume has grown four-fold to 19,412 shipments. The top buyers are Vietnam, India, and Japan. US customers and Border Protection consider this such a significant issue that they have issued warnings and provided educational materials to raise awareness of malicious actors’ ability to obtain advanced computer parts. It is worth remembering that the US computer chip scrap from smartphones and laptops is more than enough to use in various weapon systems.

For international service providers in law, finance, or planning, few things are more dangerous to our jurisdictions and our own financial wellbeing and freedoms than the violation of sanctions. The civil penalties for the violations of US sanctions are severe. Fines are enormous and used to be capped at $200,000 or $1.075 million per violation, depending upon the US government department. That changed in September 2024 when all caps on fines were removed.[5] The criminal penalties include lengthy jail times of up to 30 years imprisonment. The more willful or ignorant you were, the greater the penalties. Self-disclosure of violations and cooperation may help ameliorate the severity of all penalties.

The Crypto Factor

Cryptocurrencies and crypto service providers are at the forefront of moving money to evade sanctions. In 2019, Hamas engaged in a cryptocurrency donation campaign that led to the US seizure of several websites and 150 cryptocurrency accounts. From 2020 to 2023, Hamas received $41 million, and Palestine Islamic Jihad received $93 million in Bitcoin and other currencies. Once prohibited in Russia, the use of digital currencies is now encouraged. Putin signed a bill in August 2024 permitting the use of cryptocurrencies as part of a “multiple choice solution” for payments to work around the sanctions. Several crypto services providers, such as Tornado Cash, Bitpapa, and Crypto Explorer, have been sanctioned, and others have paid huge fines, such as the $967 million paid by Binance. If you live in the West and your crypto services provider is sanctioned, you cannot access your funds. What would be the impact if an entire cryptocurrency was sanctioned? I expect we will find out in the coming year.

So, what can we do? It starts with good old KYC due diligence. As a service provider or manager, do you know your customer and their business? Who do they deal with, and what do they do to avoid the red-faced moment of sanctions? The OFAC, EU, and UN sanctions lists are a good start but not the end. Over 20 per cent of nations have their own specific sanctions lists. Have you heard of Argentina’s ‘Registry of Persons and Entities Linked to Acts of Terrorism’? Anytime you or your client is working between two countries, it is wise to know with whom, how, and where your clients are conducting business, as well as the country-specific sanctions lists.

For example, what if your client is in the import and export business of, let’s say, olive oil? Use public records and data service providers such as databases like Import Genius or TradeImex to check if they or their trade partners are named importers or exporters. If they are buying and selling cargo en route, have them show you warehouse receipts, bills of lading, airway bills, transshipment papers, or something to show the genuine activity. You will find the HS code, origin, destination, and price per unit in most of those documents. Look to see if the county of origin produces the item described and be aware of red flags. For example, one company exported more gold from Uruguay every two weeks than the nation produced in a year; another bought licorice roots at $30 per pound when the going rate was under $2.

Like Goldilocks, the sanctions tools have a sweet spot. Underusing sanctions allows the enemy to exploit your advantages and later deploy systems and weapons against you. Under the Joint Comprehensive Plan of Action (known commonly as the Iran nuclear deal), signed in July 2015, the United States agreed to cancel most of its sanctions against Iran, which has allowed Iran to amass a large treasury and armory to be used by Iran and its proxies against the West. A nation’s overuse of sanctions can lead other nations to become wary of future actions. Japan’s reaction to Carter’s 1980 grain embargo led to significant investments in Brazil to grow soya beans. A current example is the BRICS nations looking to form their own trade block and an alternative currency to the US dollar.

Does it sound like the IFCs of the world are to be policemen on yet another matter? It seems like it, but all businesses in all nations face the same burden. The burden and risks are so well recognised that recently, banks in China ceased processing payments for all Russian companies and persons. The Chinese banks did not want to lose their US and EU correspondent banks and their access to the US Fedwire and SWIFT networks.

It is unwise to come between a nation and its enemies. "Let's just say we'd like to avoid any Imperial entanglements"[6] is wise advice.

[1] Riding, Alan (16 April 1991). "European Nations to Lift Sanctions on South Africa". The New York Times.

[2] https://www.foreignaffairs.com/articles/united-states/1980-09-01/lessons-grain-embargo

[3] https://www.justice.gov/opa/pr/bnp-paribas-agrees-plead-guilty-and-pay-89-billion-illegally-processing-financial

[4] https://theconversation.com/some-nations-have-done-well-out-of-russia-being-sanctioned-heres-why-223696

[5] https://www.bis.gov/press-release/commerce-implements-regulatory-changes-voluntary-self-disclosure-process-and-penalty

[6] Hans Solo, Star Wars: A New Hope

L. Burke Files DDP CACM
Mr. Files is an international financial investigator and due diligence expert who has run cases in over 130 countries and has visited over 100 countries. Mr. Files has tackled investigations running from a few hundred thousand dollars to over 20 billion. Along the way, he became familiar with the knowledge of what people need to do, for due diligence, preventing corruption, and to avoid helping criminals launder money. He brings this experience of hands-on investigating and problem-solving experience to his lectures on Due Diligence, AML, and Anti-Corruption. Prior to founding FE&E, Inc., he served as the Director of Corporate Finance for American National an investment bank focused on development stage venture capital. He was also employed by Oppenheimer/Rouse as a commodities specialist trading customer accounts in Agri-Business, 24-hour gold and silver, and foreign currencies. Mr. Files has authored six books, and many white papers and articles. He has been quoted in major publications including The Guardian, The Financial Times, Forbes, US Newsweek, and more. He is the author of the award-winning book Due Diligence For The Financial Professional 2nd Edition. Mr. Files serves on the board of directors for several private companies, funds, and non-profits. The companies include Unicus Research a specialty advisory service for fund managers and family offices, SGS Glazing a specialty glazing design and estimating firm, and NSI a premium spirits company.