The Biden administration’s policy review of U.S. sanctions is a positive step in acknowledging the need to anticipate potential unintended consequences when designing sanctions. A public summary of the findings highlights examples of how sanctions have imposed costs on designated actors and exacted some concessions, but notes that unwanted effects can still occur. It calls for calibrating sanctions to avoid harming a sanctioned regime’s population — a problem that the shift from “comprehensive” embargoes to “targeted” sanctions in the early 2000s did not entirely solve. However, there is another unintended consequence the calibration process should consider: corruption.
Research on this topic argues that sanctions expand the shadow economy in target states and foster endemic state corruption. Early case studies focused on the “criminalizing consequences” of multilateral sanctions against the Former Republic of Yugoslavia and Saddam Hussein’s Iraq. Like Haiti, those states were subject to comprehensive United Nations trade embargos and other measures. Corruption and illicit activity increased in all three countries as political, military, and business elites and criminal networks exploited opportunities to smuggle sanctioned goods. The regimes’ response to sanctions, in turn, contributed to the hardship their populations experienced by forcing civilians to turn to the informal sector to survive.
The advent of targeted sanctions did not mitigate this problem. Concern about adverse humanitarian impacts drove an international initiative to replace broad trade embargoes with weapons and travel bans and financial restrictions aimed at specific individuals, entities, and economic sectors while attempting to spare the population as much as possible. However, an assessment of U.N. targeted sanctions concluded that enhanced corruption and criminality were the primary unintended consequence of these targeted measures. The Center for a New American Security found a significant correlation between post-9/11 U.S. sanctions and increased corruption in targeted regimes.
Corruption: an Overlooked Consequence
Sanctioned states often have longstanding corruption issues, so it is challenging to determine how much to pin on sanctions. And even if corruption clearly increases under sanctions, other drivers may be at work, such as the war profiteering incentives of state and non-state combatants, the impact of peacekeeping missions and development aid in post-conflict settings, and economic and institutional factors such as patronage systems and weak rule of law. The criminalization of Slobodan Milosêvić’s regime partly stemmed from its reliance on paramilitary gangs to wage war against Bosnia. In Iraq, the U.N.’s oil-for-food program — a form of sanctions relief — fueled corruption by creating new rent-seeking opportunities. Iraqi corruption became rampant after the 2003 U.S. invasion and subsequent reconstruction effort.
While many factors drive corruption, the potential for sanctions to contribute to the problem has received little attention in policy circles. In fact, sanctions have become a key tool for targeting corruption under the Global Magnitsky Human Rights Accountability Act of 2016. The Biden and Trump administrations have designated more than 200 individuals and entities for corruption under an executive order (E.O.) based on the law. Other E.O.s include corruption as a sanctionable activity, including the Belarus E.O. President Biden signed in August. The administration’s June 2021 National Security Study Memorandum identifies combating corruption as a foreign policy priority and lists sanctions as a tool for holding corrupt actors accountable. However, given sanctions can fuel corruption, then their design should account for the risk.
Corrupting Effects of Countermeasures
Indices such as Transparency International’s Corruption Perceptions Index (CPI) and the World Bank’s Worldwide Governance Indicators provide a sense of a prospective sanctions target’s relative corruption level, but it is also necessary to understand the domestic drivers of corruption. This requires evaluating the country’s political economy and the role of corruption within it—similar to best practices for planning development assistance and contingency operations. The recently released U.S. Strategy on Countering Corruption calls for assessing corruption risks associated with foreign and security assistance but does not mention the benefit of accounting for corruption when planning for sanctions.
Another consideration is how a regime might resist external pressure and whether this could increase corruption. Wealthy states have the capacity to adjust to economic coercion without becoming more corrupt. Qatar — the world’s third richest country — responded to a Saudi and United Arab Emirates-led blockade from 2017 to 2020 by shifting trade and orchestrating a bovine airlift in an effort to establish a domestic dairy industry. Qatar’s 2020 CPI score was slightly better than its pre-sanctions, 2016 ranking, but its import substitution strategy would be too costly for many states, leaving sanctions evasion and other mitigation measures as better options.
Sanctions evasion in the form of smuggling is a typical response to arms embargoes and trade restrictions on essential commodities like fuel. Indeed, the sanctions-corruption correlation is unsurprising, given the prevalence of weapons bans in UN sanctions regimes — and natural resources embargoes in the 1990s and early 2000s. Even when highly targeted, such measures create black market incentives for states, elites, and criminal networks. Former Liberian president Charles Taylor, for example, worked with an international network of sanctions busters and illicit facilitators to run smuggling rackets in embargoed weapons and diamonds to sustain his corrupt regime and fund West African conflicts.
Financial sanctions also shape incentives — some good, some bad. The power of restrictions on aid, assets, investment, or financing lies in their ability to sever a sanctioned country’s access to the international financial system and deter foreign banks and other firms from doing business with it. But working around financial sanctions can involve the same techniques that kleptocrats and their cronies use to launder and safeguard their ill-gotten gains, including using third parties to hold assets, conduct transactions, or register anonymous shell companies. As the recent “Pandora Papers” exposé illustrated, U.S.-designated Russian oligarchs have leveraged international connections to try to reduce the impact of sanctions.
Domestic mitigation measures are another response to consider. The prospect of sanctions-related hardship incentivizes leaders of sanctioned countries to limit damage to their political fortunes stemming from waning support from key constituents. A regime may provide sanctioned elites with privileged access to state contracts or other perks — as the Kremlin has done for oligarchs and state-owned sectors under Western sanctions. Such countermeasures can deepen corruption as state control of the economy increases.
In short, the calibration process should gauge corruption risks by assessing how the regime will resist external pressure. What are its response options? Which domestic and foreign actors are positioned to facilitate sanctions busting and benefit from state largesse? And how might such countermeasures strengthen patronage networks or alter power dynamics in ways that expand corruption?
Evaluating Corruption Risk to Inform and Refine Sanctions Design
An assessed risk of enhanced corruption does not necessarily negate the utility of sanctions. A baseline assessment can inform the selection of sanctions as well as other policy tools well-suited for disrupting a prospective target’s countermeasures while mitigating undesired consequences. Public notices, such as the recent advisory on corruption in Cambodia that the Treasury, State, and Commerce Departments released in conjunction with the designation of two Cambodian officials on corruption grounds, or the 2019 advisory on Venezuelan public corruption, can help alert the commercial sector to business-related risks and sanctions-evasion red flags. And while determined states can always find willing enablers to facilitate their schemes, follow-on designations of sanctions busters and collaboration with U.S. foreign partners to target their operations can raise the costs and risks of evasion and potentially deter others.
Calibration should be an ongoing process. Regular monitoring and assessment can help identify how sanctions evasion and other countermeasures evolve over time and who benefits. As sanctions pressure mounts, targeted regimes may be compelled to devise new circumvention schemes that contribute to corruption by empowering certain elites and third parties or strengthening the state’s ties to criminal networks. Examples include Iran’s use of the Islamic Revolutionary Guard Corps in sanctions busting, which helped expand the paramilitary force’s domestic business interests, and the Nicolás Maduro regime’s use of Colombian money launderer Alex Saab for facilitating gold sales to Turkey to circumvent U.S. sectoral sanctions on Venezuela. Analysis of such trends and the networks involved can inform adjustments to sanctions design, such as the use of different measures or the selection of new targets, or suggest opportunities for the use of other policy tools. Saab was recently extradited to the United States, where he faces federal money laundering charges.
Ongoing evaluation has the added benefit of helping policy makers identify ways to undercut regime countermeasures that can undermine the effectiveness of the sanctions regime. Equally important, it can help limit unintended consequences for innocent parties. A state’s efforts to divert scarce resources or capital to privileged groups to shelter them from the impact of sanctions can harm the rest of the population. Accounting for corruption risks and ways to limit them when designing and implementing sanctions ultimately supports humanitarian goals.
Note: The opinions and conclusions expressed in this product are solely those of the author and do not necessarily represent the views of the U.S. Department of the Treasury or any other federal agency.