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Sanctions and Trade: Influencing Behavior or Inconveniencing Business?

On Friday, the United States imposed sanctions on a number of commanders and units in Myanmar as a result of those individuals’ ethnic cleansing and human rights abuses against Rohingya Muslims in Southeast Asia, actions which have been occurring for nearly a year. However, the sanctions were not against the highest level of the military and did not crackdown against Myanmar for genocide. The sanctions in this case result in freezes of any U.S. assets the individuals hold, a ban on Americans doing business with them, and a ban on travel to the United States.

Unilateral economic sanctions are one of the tools the U.S. government can use to implement foreign policy or to “punish bad behavior.” They can be imposed against full foreign countries, regimes, terrorists, traffickers, and other individuals who are threats to national security. The sanctions are enforced by the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury. Not all transactions with sanctioned individuals or states may be banned—authorization by OFAC or express statutory exemption may limit prohibitions, depending on the location, individual, or program. All U.S. citizens, companies, entities, as well as foreign subsidiaries and permanent residents must comply with U.S. sanctions or pay both civil and criminal penalties. Ignorance is not an excuse, as the list of sanctioned programs, countries, and individuals (the Specially Designated Nationals and Blocked Persons List) is free to access on the OFAC website.

The real questions are whether sanctions work in mitigating or punishing such behavior and whether they are likely to work in this case. In the case of U.S.-Iran sanctions, their utility “has been widely debated.”[1] However, the sanctions on Iran were inconsistent and, at times, unilateral, weakening their impact significantly and creating difficulties in measuring their effectiveness. Despite this, the economic impact on Iran was undisputedly negative. The effect on U.S. businesses was also negative—U.S. firms spent millions on reporting mechanisms and implementing compliance systems and billions in fines were accumulated from both intentional and unintentional violators.[2]

With the rise of Corporate Social Responsibility as an important factor in business reputation, the question remains whether market forces may in fact impose unofficial sanctions, releasing the need for official ones. For example, if companies will lose money by selling clothes made with human trafficked labor, companies are less likely to do business in a country that cannot guarantee the absence of human trafficking. However, if a company cannot afford the more expensive items, it may take a hit to its reputation in order to obtain a better price.

Ultimately, sanctions can work better than individual corporate actions, but will be most effective when they are comprehensive rather than individual, taken shortly after a clear violation of a norm, multilateral rather than unilateral, and without excessive exceptions. Moreover, they need to be enforced in order to be taken seriously.[3] These sanctions will still affect businesses negatively, but if they are more effective rather than extensively drawn out and inconsistent, the overall impact should be minimized. For businesses who engage in extensive international business that might be interacting with sanctioned countries or individuals, it is best practice and most effective cost-wise to implement compliance practices early rather than after receiving harsh fines.

[1] Christopher Beall, Note: The Emerging Investment Landscape of Post Sanctions Iran: Opportunities, Risks, and Implications on U.S. Foreign Policy, 39 Fordham Int’l L.J. 839, n. 29 (April 2016), citing numerous articles on the debate.

[2] See generally, Beall.

[3] Lt. Col. Susan S. Gibson, International Economic Sanctions: The Importance of Government Structures, 13 Emory Int’l L. Rev. 161 (Spring 1999).

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