The Problem with Sanctions

By Neil Roberts, Head of Marine Underwriting, Lloyd’s Market Association and member of the IUMI Policy Forum, IUMI Member Association,

Sanctions were used by Athens against Megara in the 5th Century BC and they helped to trigger the 27-year long Peloponnesian War. Perhaps as a result, it was the more direct tool of embargo that was widely employed subsequently. After the Cold War, individual countries chose sanctions as a cheaper and more acceptable option to the catastrophically disruptive military action of 1914-45, seeking to employ their own measures in addition to those the United Nations (UN) and European Union (EU) produced. The tangled cats’ cradle of all these unharmonised interventions has produced a very real business impediment with significant costs of compliance – in most marine operations, one of the few growth areas is in sanctions staff. 

Sanctions are variously seen as coercive diplomacy or even asymmetric warfare, but they cause collateral damage, which can be as unpredictable as in actual war. They are an expression of disapproval based in mistrust but often with a corresponding reluctance or weakness in resource. They can be used to influence societal and state behaviour, for example by putting controls around specific commodities, particularly oil and “dual use” goods. The democratic West and particularly America have increasingly attempted to control political and economic change by indirect means, intervention without overtly direct involvement.

In theory, the gradual effect of sanctions produces results comparable to a successful conflict but without the warfare that is so damaging to market-state economies and politically unacceptable to increasingly materialistic populations. Sadly for the planners, calculating the resistance threshold and future behaviour of the intended target, trade is international and markets can and do cross borders, carving new concentrations, as water reshapes the landscape.

The problem with sanctions is that they are a double-edged sword, just as likely to harm the friendly side as they are to harm the target because they work by raising the cost of pursuing a particular thing, often for both sides, so they tend to suit richer nations. Results are very difficult to quantify as analysed by Maarten Smeets writing for the World Trade Organisation (WTO). Then there is the need to focus the aim noted by Paul Ivan writing for the European Policy Centre. These commentators suggest the effectiveness of sanctions is highly variable and declines markedly over time, usually because of strategic vagueness in aim and actions by the targeted nation.  

To make sanctions effective, multilateral co-ordinated and balanced action is needed, preferably with incentives and ideally, the target nation should be enduring some sort of crisis. To cope with widespread implementation by multiple regimes, there are now huge databases of suspect individuals, companies and materials, requiring bespoke checking systems. Without the necessary harmonisation, traders are left with legal uncertainties - whether Gadaffi and Qadaffi are the same people for example. Uncertainties breed concern and also cost money to allay.

Those of a semantic bent will have long pondered the irony that the word “sanction” is a contronym, containing opposite meanings, to allow and to prevent. In insurance circles, the prevent aspect is very much king. Insurance of course, is the required ingredient that allows business to trade but no-one really wants to pay for. Since 2010 when President Obama issued an Executive Order on piracy, the US has realised the ubiquity of insurance and has sought to utilise that permeation in ways that are simply incompatible with world trade and the way it depends on and interacts with insurance.

The US has chosen to specifically target the financial sector through OFAC (Office of Foreign Assets Control) as part of its attempts to control Iran, Cuba and DPRK, among others. The net result is a steep rise in the compliance burden for all insurance entities attempting to trade quite legitimately, with specific limitations on any that have US persons or that trade in dollars. All parties are deemed to be strictly liable, so each insurance entity must run its own checks, with obvious duplication of effort. The majority of the insurance world trades in dollars to some degree and is thus under the direct and real threat of having its trade stopped by a watchful US administration because of an inadvertent infringement. This risk alone is enough to fuel the multiplication of compliance checks that has developed into a formidable hydra.

For the most part, trade continues fairly normally with some headline exceptions, if with added cost. However, when there’s a loss involving a sanctioned territory, things get very complex with questions of blame, delays and OFAC calling the tune. There is an unfortunate misapprehension that because insurance is integral to trade and thus underpins the social fabric, it has extensive accompanying constabulary powers when it actually has none. If there is a criminal intent, there are contractual policy defences, and insurers contend that the outcome of such intent will not be affected by the removal of cover even if that could be achieved.

In the frank words of David Brummond (ex-OFAC staffer) speaking in London, (US) “government policy trumps commerce”, so the octopus of bureaucracy is winning and trade is losing. The western business world is now encumbered with a plethora of ever-increasing compliance checks, whilst its competitors take advantage and the trade focus moves inexorably east. That trajectory is clearly signposted but there are signs of recognition that sanctions are not the panacea they were once thought and can indeed become actively counter-productive. The recent US advisory on illicit shipping , released after months of interaction with industry, demonstrated some degree of realism in its expectations but it is clear that difficulties still lie ahead.