Policy Briefs

Using Sanctions to Fight Terrorism

by Gary Clyde Hufbauer, Peterson Institute for International Economics
and Jeffrey J. Schott, Peterson Institute for International Economics
and Barbara Oegg, Peterson Institute for International Economics

November 2001

 


Gary Clyde Hufbauer, Reginald Jones Senior Fellow, is coauthor of World Capital Markets: Challenge to the G-10 (2001) and Economic Sanctions Reconsidered, 3rd edition (forthcoming), and coeditor of The Ex-Im Bank in the 21st Century: A New Approach? (2001). Jeffrey J. Schott, senior fellow, is the author of Prospects for Free Trade in the Americas (2001) and coauthor of Economic Sanctions Reconsidered, 3rd edition (forthcoming). Barbara Oegg is a research assistant at the Institute for International Economics.

© Institute for International Economics. All rights reserved.

 

Introduction

Following the September 11 attacks on the World Trade Center and Pentagon, President Bush prepared the country for a “war on terrorism”. As outlined in his speech before the joint session of Congress on September 20, the war on terrorism will be fought on many fronts: diplomatic, intelligence, covert action, economic sanctions, law enforcement as well as military. Diplomacy, intelligence, covert action, and economic sanctions have historically served as auxiliary measures in wartime. Economic sanctions, in particular, have routinely foreshadowed or accompanied broader war efforts.

What sets the campaign against international terrorism apart from other wars is the emphasis on economic tools. Several senior US officials, including Secretary of Defense Donald Rumsfeld, have suggested that economic and financial efforts will be as important in winning the war on terrorism as the military campaign. Determined to bring US economic as well as military power to bear in the fight against terrorism, the Bush administration has deployed a variety of economic tools such as preferential trade measures, the removal of existing sanctions coupled with loans to reward allies, and new sanctions to intimidate adversaries. In this war, sanctions policy is being used both as a stick and a carrot, which is a new and welcome twist.

That said, the history of economic sanctions in the past century reveals very few instances where economic weapons achieved major foreign policy goals.1 Striking terror is the raison d’être of terrorist groups. To eliminate these groups, or persuade them to abandon their objective, would rank as a major policy triumph. The history of economic sanctions amply demonstrates that only military force and covert action can play a decisive role in a battle of this magnitude. At best, economic sanctions can play only a supporting role with respect to terrorist groups.


In this war [on terrorism], sanctions
policy is being used both as a stick
and a carrot, which is a new
and welcome twist.

While economic sanctions alone may not dissuade terrorist groups, they may cause states that harbor and support terrorist groups to reconsider the extent of their support. The Libyan extradition of the two Pan Am suspects illustrates an important shift in state policy induced in part by economic sanctions.

One of the first measures implemented by President Bush in the war on terrorism was aimed at disrupting terrorist finances. On September 23, he issued an executive order freezing the assets of named terrorists, terrorist groups, and terrorist fundraising organizations in an effort to weaken the financial lifeline of the al Qaeda network.2 To coordinate the activities of the various US agencies on the financial front, the administration created the Foreign Terrorist Asset Tracking Center in the Treasury Department.

These measures carry on the tradition of past US counterterrorism efforts. Indeed, US counterterrorism policy, dating back to the early 1970s, has been heavily sanctions oriented. US counterterrorism sanctions policy rests on two primary legislative tools—the designation of state sponsors of terrorism and Foreign Terrorist Organizations (FTOs), and the presidential determination of Specially Designated Terrorists (SDTs).

 

State Sponsors

In the 1970s and 1980s, US counterterrorism policy primarily focused on state sponsorship of international terrorism. State sponsors of terrorism are countries designated by the Secretary of State under Section 6 (j) of the Export Administration Act of 1979 as countries that have “repeatedly provided state support for acts of international terrorism.” Currently the list of state sponsors includes seven countries: Cuba, Iran, Iraq, Libya, North Korea, Sudan, and Syria.
Naming a country on the terrorism list triggers a series of economic sanctions under different US laws. These sanctions include:

 

Although naming a country as a state sponsor does not automatically trigger a total economic embargo, with the exception of Syria, all countries currently designated as state sponsors—Cuba, Iran, Iraq, Libya, Sudan, and North Korea—are also subject to comprehensive trade and financial sanctions imposed by the executive branch under the International Emergency Economic Powers Act (IEEPA). In some of these cases—particularly Cuba and North Korea—US sanctions policy is less determined by concerns over terrorism than broad foreign policy conflicts.


The [Bush] administration has
offered the “carrot” of lifting select
or all existing economic sanctions
as an incentive for countries to join
the war on terrorism. In a few
instances, the administration
has quelled the looming imposition
of new sanctions, or has
provided economic assistance to
allies-of-convenience.


Case Studies

Iran. Iran was added to the list of state sponsors of terrorism in 1984 in response to the alleged Iranian involvement in the bombing of the US Marine base in Lebanon. Export controls imposed following Iran’s initial designation as state sponsor were tightened twice. In 1987, under pressure from Congress, President Reagan invoked Section 505 of the International Security and Development Act and banned all imports from Iran and prohibited exports of several potentially militarily useful goods. In 1992, Congress passed the Iran-Iraq Arms Non-Proliferation Act prohibiting the export of defense items, nuclear material, and certain dual-use goods under the Export Administration Act.

Concerned about nuclear proliferation and Iran’s continued support for terrorist groups, President Clinton issued a series of executive orders beginning in 1995. These eventually banned all US trade, investment, and financial dealings with Iran. In addition, US residents and companies are barred from financing, supervising, and managing oil development projects in Iran under the Iran-Libya Sanctions Act of 1996 (which was extended for 5 years in August 2001).

In 1999 and 2000, the Clinton administration lifted selected sanctions on Iran to signal support for reforms by moderate President Mohammad Khatami. In April 1999, the administration modified the trade ban to allow for the sale of food and medicine on a case-by-case basis, and a year later the administration lifted the ban on certain nonoil imports such as carpets, caviar, pistachios, and dried fruit.
However, according to the State Department’s annual report on “Patterns of Global Terrorism 2000” (hereafter cited as Patterns 2000), Iran remained the “most active” state sponsor of international terrorism in 2000. In other words, two decades of US economic sanctions failed to reduce Iran’s willingness to sponsor terrorism.

Iraq. Iraq was first placed on the terrorism list in December 1979 and removed in 1982. After Iraq’s invasion of Kuwait in 1990, the State Department again placed Iraq on the terrorism list. Meanwhile, Iraq has been subject to the most comprehensive US and UN trade and financial sanctions regime mounted since the Second World War. US and UN sanctions probably curbed Iraq’s ability to instigate very high-tech terror, such as suitcase nuclear weapons and
sophisticated biological weapons, by reducing resources available to Saddam Hussein. But Patterns 2000 reports that Iraq continues to plan and sponsor international terrorism focused on Iraqi dissident groups abroad and continues to offer safe haven to various expatriate terrorist groups such as the Palestine Liberation Front and the Abu Nidal organization. Furthermore, post-September 11 investigations revealed Iraqi contacts with one of the lead hijackers (Mohammed Atta) and possible links between Iraq and anthrax. These offenses, together with US-Iraq differences over Iraq’s regional ambitions and its record of noncompliance with UN weapons inspectors, will probably keep Iraq on the terrorism list for the foreseeable future.

Libya. Libya has a long history of sponsoring international terrorism and was placed on the first terrorism list in December 1979. Export controls were followed by a ban on crude oil imports from Libya, restrictions on exports of sophisticated oil and gas equipment and technology, and later a ban on imports of refined oil products. In response to Libyan involvement in the terrorist attacks on airports in Rome and Vienna, President Reagan invoked IEEPA to implement comprehensive trade and financial controls in 1986. The Reagan administration barred most exports and imports of goods, services, and technology, prohibited all loans or credits to the Libyan government, and froze Libyan government assets in US banks.


The history of economic sanctions
amply demonstrates that only
military force and covert action
can play a decisive role
in a battle of this magnitude.
At best, economic
sanctions can play only
a supporting role.

Following the bombings of Pan Am flight 103 in December 1988 and France UTA flight 772 in September 1989, US policy toward Libya was dominated by efforts to extradite two Libyan intelligence agents accused of the Pan Am bombing. Libyan intransigence in the face of extradition demands led to greater multilateral cooperation. In 1992, the UN Security Council imposed an arms embargo on Libya and prohibited all travel to and from Libya. A year later, the United Nations banned the sale of petroleum equipment to Libya and froze all nonpetroleum-related Libyan government assets abroad.

According to Patterns 2000, Libyan terrorism was sharply reduced after the imposition of UN sanctions. Pressure from the international community was credited as a deterrent to Libyan sponsorship. Mandatory UN sanctions, the first to be imposed in response to government involvement in an act of terrorism, ultimately secured the extradition of the two Libyan Pan Am suspects in April 1999. This led to the suspension of UN sanctions. The suspects were subsequently tried and one was convicted and imprisoned for life, but conviction and punishment were not conditions for lifting UN sanctions.

In continued efforts to improve its international standing, Libya not only expelled the radical Palestinian terrorist group Abu Nidal but also compensated the victims of the France UTA flight. Libya also accepted “general responsibility” for the 1984 shooting of a policewoman outside the Libyan embassy in London and agreed to compensate her family. While Libya has made progress toward meeting US demands, the Bush administration insists that US unilateral sanctions will remain in place until Libya accepts responsibility for the Pan Am bombing, compensates the victims, and renounces all support for terrorism.

The success of UN sanctions in the case of Libya suggests that economic sanctions, if imposed multilaterally, can achieve clearly defined and relatively modest policy goals, illustrated by the extradition of the two mid-level Pan Am suspects.

Syria. Like Libya, Syria has been on the terrorism list since its inception in December 1979. Although subject to strict export controls and other economic restrictions due to its position on the terrorism list, most US trade and investment with Syria is allowed. Despite its designation as a state sponsor, Syria enjoys comparatively normal relations with the United States. According to State Department sources, there is no evidence of direct Syrian involvement in or support for terrorist actions since 1986. However, Syria continues to support and provide safe haven to Hezbollah and Hamas, among other Palestinian terrorist groups.


Despite several decades of economic
sanctions, the majority of designated
state sponsors [of terrorism] have
continued to shelter and harbor
international terrorists and terrorist
groups in their territories.

Sudan. According to Patterns 2000, Sudan signaled its willingness to cooperate with international counterterrorism efforts shortly after the State Department added Sudan to the list of state sponsors in August 1993. In 1994, Sudan extradited “Carlos the Jackal” to France. Under US pressure, Sudan also expelled Osama bin Laden in 1996. Nevertheless, the United States imposed comprehensive sanctions on Sudan because of the persecution of Christians in southern Sudan. Preempting congressional action, President Clinton issued Executive Order 13067 in November 1997, blocking all property of the Sudanese government in the United States, imposing a trade embargo, and prohibiting any transactions with Sudan.3

By the end of 2000, Sudan had signed all 12 international conventions for combating terrorism and taken several other positive steps. However, Sudan has yet to comply with three UN Security Council Resolutions passed in 1996. These resolutions demand the extradition of three suspects in the assassination attempt on Egyptian President Hosni Mubarak in 1995 and ask that Sudan end all support to terrorists. The resolutions impose limited travel and diplomatic sanctions, and (in theory only) restrict international flights in and out of Sudan.

Cuba. Cuba, which has been under comprehensive US sanctions since 1960, was added to the list of state sponsors in 1982, primarily because of its support for the M-19 guerrilla organization in Colombia. Although the Castro regime was very active in providing arms and training to leftist terrorist organizations during the Cold War, Cuba is no longer active in supporting armed struggles around the world. Cuba, however, remains on the terrorist list because it continues to provide safe haven to individual terrorists and maintains ties to Latin American insurgents.

North Korea. Similar to Cuba, North Korea has been subject to comprehensive US sanctions for several decades (indeed since the Korean War). North Korea was added to the list of countries sponsoring terrorism because of its implication in the bombing of a South Korean airline in November 1987. Although North Korea has on several occasions publicly condemned all forms of terrorism, it remains on the state sponsor list because it continues to provide refuge to international terrorists.

Afghanistan. The State Department characterized Afghanistan in 1999 as “the primary safe haven for terrorists”. But the country was never designated as a state sponsor of terrorism because of the State Department’s concern that this determination would constitute a de facto recognition of the Taliban as the legitimate government of Afghanistan. However, the Antiterrorism and Effective Death Penalty Act of 1996 created a new designation category—noncooperation. Section 330 prohibits sale of arms to any country the president determines and certifies is not cooperating fully with US antiterrorism efforts. In May 1997, the Clinton administration certified Afghanistan for the first time as not cooperating with US antiterrorism efforts. Apart from the seven state sponsors, Afghanistan is the only country currently certified as not fully cooperating with US antiterrorism efforts.4

Because Islamic fundamentalist terrorists continued to train and operate out of Afghanistan, and more specifically because the Taliban continued to harbor Osama bin Laden and his terrorist networks that were believed to be responsible for bombing two US embassies in Africa, the Clinton administration imposed comprehensive sanctions on the Taliban in 1999. The executive order banned all trade with the areas in Afghanistan under Taliban control, froze Taliban assets in the United States, and prohibited financial contributions to the Taliban by US persons.


To say that economic sanctions
will play an auxiliary role to
intelligence, covert action, and
military strikes is not to denigrate
their importance. In the war
against terrorism, asset freezes
and other sanctions will
pinch. But we cannot count
on economic sanctions to bring
bin Laden and al Qaeda to heel.


The United Nations supported US efforts, imposed a flight ban, and froze overseas Taliban assets. A year later, the United Nations also imposed an arms embargo and ordered the freeze of the assets of bin Laden and his associates.

Somalia. Although Somalia is not listed as a state sponsor of terrorism, the Bush administration is concerned about terrorist centers in Somalia and regards the country as a likely alternative safe haven for Osama bin Laden and his associates—if they leave Afghanistan. Somalia has been without a central government since its last president Mohamed Siad Barre fled the country in 1991 and interfactional fighting then led to national disintegration. The United Nations intervened in 1992 and imposed a weakly enforced arms embargo. The United States closed its embassy and ended its participation in the UN mission in Somalia in 1994. According to US intelligence reports Somalia has served as a regional base for operations of al Qaeda since 1993, when Osama bin Laden first provided assistance to warlord Mohamed Aideed. (Aideed’s forces killed 18 US soldiers serving in a UN peacekeeping mission.) Al Qaeda also maintains close ties with the radical Somali Islamic group al-Itahaad.

 

Summary of State Sponsors

This brief review of US policy toward state sponsors of terrorism suggests that unilateral US sanctions, by themselves, have not deterred countries from engaging in terrorist activities. Despite several decades of economic sanctions, the majority of designated state sponsors have continued to shelter and harbor international terrorists and terrorist groups in their territories. According to the annual reports, sanctions contributed to the negotiated compromise that led to the extradition and subsequent trial of the suspects in the bombing of the Pan Am flight. Multilateral economic sanctions also succeeded in convincing Sudan to cooperate with US terrorism efforts. These are the only two terrorism-related cases where the United States succeeded in garnering multilateral support for economic sanctions.

Modest success in these two cases corresponds with general trends we have observed. In a survey of about 180 cases of economic sanctions imposed after the Second World War, we found that the success rate of US unilateral sanctions has sharply declined over the last several decades. Between 1960 and 1970 the success rate of unilateral US sanctions dropped from 62 percent to a mere 17 percent. Low success rates for unilateral sanctions continued in the 1980s and 1990s. Meanwhile, the success rate of all US sanctions cases where the United States was part of a sanctions coalition remained in the 25 percent range over the period from the 1970s to 1990s.

The US approach in dealing with state sponsors has differed from the approach favored by its allies. While the European Union believes in “constructive engagement” with countries such as Iran, the United States is inclined to isolate and punish these countries. Frustrated by the lack of international cooperation, the US Congress sought to extend the reach of unilateral US measures by imposing secondary sanctions on firms located in third countries. In 1996, Congress passed the Helms-Burton Act targeting foreign companies that invest in Cuba, and a few months later, Congress passed the Iran-Libya Sanctions Act (ILSA) seeking to prevent European companies from investing in the oil sector in Iran and Libya. The extraterritorial scope of these measures irritated key US allies, but Presidents Clinton and Bush have waived key provisions of each bill to avoid imposing sanctions against allied industrial nations. As a result, these US laws only block activities by US firms.

Other secondary measures imposed in the 1990s include an amendment to the Foreign Assistance Act of 1961 that prohibits selected US government foreign assistance to any country that provides economic assistance or lethal military assistance to the designated terrorist countries, and the Iran Non-Proliferation Act of 2000, which allows for the imposition of economic sanctions to entities in third countries that contribute to Iranian weapons proliferation. The threat of secondary sanctions in these instances did not lead to greater international cooperation with US counterterrorism policies.

Historically, most major acts of terrorism against American citizens and other targets abroad were supported and, in some cases, instigated by state sponsors. Accordingly, US policy in the 1970s and 1980s focused on state sponsors and the groups they support. However, in the last decade, as the State Department has indicated in its annual reports, signs point to declining state sponsorship of terrorist activities and a rising threat posed by independent terrorist networks such as Osama bin Laden’s al Qaeda network. In response to these new threats, US counterterrorism initiatives were expanded to incorporate restrictions on foreign terrorist groups and individuals.

 

Foreign Terrorist Organizations and Specially Designated Terrorists

In 1995, President Clinton issued an executive order that prohibits transfers of funds, goods, and services to any individual or organization that threatens to disrupt the Middle East peace process.5 The order also blocked all property and interests in property of persons designated by the Secretary of Treasury, in coordination with the Secretary of State and the Attorney General, as opposing the Middle East peace process (“Specially Designated Terrorist”). The “Specially Designated Terrorist” (SDT) label, and the associated freeze of US-held assets, also included persons and entities designated to “be owned or controlled by, or to act for or on behalf of” any Specially Designated Terrorist.

The central legislative initiative with respect to US counterterrorism policy in the 1990s is the Antiterrorism and Effective Death Penalty Act of 1996. This Act provides for the designation of “Foreign Terrorist Organizations” (FTOs) by the Secretary of State, a designation equivalent to the state sponsor designation. The Act also included provisions aimed at disrupting financial flows to FTOs: Section 303 makes it a crime for US residents to knowingly provide material support or resources to a designated FTO. In addition, financial institutions are required to block funds in “which a foreign terrorist organization, or its agent, has an interest”6 and report the existence of these funds to the Treasury. The Treasury may require US financial institutions to freeze assets of a designated FTO.

The provision of the Act that received great publicity was the so-called “Farrakhan Amendment”. In its broadest interpretation, the Amendment prohibits financial transactions by US persons with the governments of designated terrorist countries. The administration, in issuing the regulations, chose to interpret the provision more narrowly—restricting donations or transactions when a US person has reason to believe it will be used to support terrorist acts in the United States. The 1990s saw the emergence of Osama bin Laden and the al Qaeda network on the international scene. After the United States successfully pressured Sudan into expelling Osama bin Laden in 1996, bin Laden found refuge in Afghanistan. From there, he is believed to have masterminded the bombing of US embassies in Nairobi and Dar es Salaam in 1998, and the suicide attack on the USS Cole in October 2000. In response to the embassy attacks, President Clinton issued Executive Order 13099 on 21 August 1998 determining that Osama bin Laden and his al Qaeda network constitute a threat to the Middle East peace process, thereby adding them to the list of SDTs and FTOs. The order banned US financial transactions with bin Laden’s organization and allowed US law enforcement to freeze any bin Laden assets in the United States that can be identified. However, prior to September 11, the US Treasury was unable to link any assets in the United States firmly to bin Laden or his terrorist network.

Despite the substantial experience of the US Treasury Department Office of Foreign Assets Control (OFAC) in administering financial sanctions, its pre-September 11 efforts to stop the money flow to terrorist organizations were not particularly successful. The 2000 Treasury Department annual report on terrorist assets reveals that only $301,146 in assets of designated Foreign Terrorist Organizations or Specially Designated Terrorists in the United States were frozen. A major challenge for an asset freeze program is to identify funds belonging to the individuals, governments, and organizations targeted. Although the means of tracking financial assets have greatly improved, so have the means of deception. Even when individual funds can be identified, secrecy and speed are critical in preventing targets from moving assets to numbered accounts in offshore banking centers. Unfortunately, secrecy and speed are not easily reconciled with the need to coordinate efforts with allies or within the UN Security Council.7 The importance of improved cooperation is illustrated by recent press reports that UN, US, and EU lists of targeted individuals and organizations associated with the Taliban and Osama bin Laden do not match up.


The US approach in dealing
with state sponsors has differed
from the approach favored
by its allies. While the
European Union believes in
“constructive engagement”
with countries such as Iran,
the United States is inclined to
isolate and punish these countries.


Post-September 11 Initiatives

Following the attack on September 11, law enforcement focused sharply on the financial trails of terrorist networks. Declaring a national emergency with respect to acts of terrorism, President Bush used his power under the IEEPA on 23 September 2001 to broaden existing authorities in several ways. First, the new executive order expanded the coverage of past executive orders from terrorism in the Middle East to global terrorism. Second, it expanded the class of targeted groups to include all those who are “associated with” designated terrorist groups. Third, it established the ability to block US assets, and deny access to US markets, of foreign banks that refuse to freeze terrorist assets.

Broadening the scope of current laws and regulations with respect to terrorist assets is crucial. Prior laws and regulations gave the government less authority to seize assets of terrorists than the assets of drug lords. The “Specially Designated Narcotics Traffickers” (SDNT) program administered by OFAC has been modestly successful precisely because its targets included those that provide material, technological, or financial assistance to designated narcotics traffickers. The White House reported on October 11 that about $40 million of assets linked to Taliban and al Qaeda have been frozen worldwide since September 11. Some press reports suggested that frozen terrorist assets are closer to $100 million. However, it is not clear if these estimates include assets belonging only to the al Qaeda network or to other terrorist groups as well. By 1999, the United States had already frozen a reported $254 million of Taliban assets. These numbers suggest that inclusion of entities “associated with” terrorist groups may prove to be important for disrupting access to funding.

While no data is available on the amount of money frozen under OFAC’s “Specially Designated Narcotics Traffickers” program, OFAC reports emphasize that since the inception of the program in 1995 more than 10 drug kingpins and about 568 other SDNTs have been identified. OFAC also reports that about 60 companies linked to drug traffickers have been liquidated or are in the process of liquidation. These companies had a combined net worth of about $45 million and combined annual income of about $230 million8—tiny amounts considering that estimates place the retail value of illicit drug trade between $300 billion and $500 billion annually.9 Interpreting the seizure figures very generously, in the case of narcotics, asset freezes have disrupted less than 1 percent of the annual money flow. If the antiterrorist program is 10 times as successful, and disrupts 10 percent of terrorist funding, that unfortunately would leave 90 percent of terrorist money free to spread destruction and disease.

Another difficulty in freezing terrorist assets is that these groups may transfer money outside the banking system either in cash or through street-corner money exchange systems. Further, unlike drug traffickers who control legitimate businesses to launder illegal profits, in the case of terrorism money, legitimate businesses and charities may divert a part of their funds to support terrorist groups. Solid evidence that money is being diverted for terrorist activities is hard to come by. Also, the amounts involved in terrorist activities are much smaller than in drug trafficking and are therefore less likely to attract attention.

Following September 11, the administration worked closely with Congress on broad new antiterrorism legislation. The “USA Patriot Act” passed by Congress at the end of October 2001 strengthens the criminal laws against terrorism and expands the ability of US law enforcement and intelligence agencies to track and detain suspected terrorists. The act also includes several measures to disrupt money laundering and other methods of terrorist financing. The bill requires that foreign banks with corresponding accounts in US banks designate a point person to receive subpoenas related to these accounts. Furthermore, US banks are barred from doing business with banks that have no physical facility or operate outside the regulated banking system. The Treasury also has the authority to require banks to scrutinize deposits from residents of nations that do not cooperate with US officials. The bill also includes a provision that allows the Treasury to impose sanctions on banks that refuse to provide information to law enforcement agencies.

The threat of US sanctions sends an important message about the level of US commitment to foreign banks. Nevertheless, previous efforts to extend the force of US sanctions to third countries have always been contentious. Coordination of efforts within the G-7 and the United Nations Security Council may ultimately prove to be more successful in securing international cooperation than the threat of secondary economic sanctions.

Indeed, dramatically improved international cooperation with US efforts in the wake of September 11 may have made the biggest difference in terms of tracking down terrorist assets so far. According to an October 11 press release by the Treasury Department, 102 countries have committed themselves to joining the effort to disrupt terrorist assets, and 62 countries have already put blocking orders into effect. Terrorist assets frozen abroad include10 :

• Germany: $3.7 million
• Bahamas: $20 million
• The Netherlands: $550,000
• United Kingdom: $88 million (including Taliban assets frozen prior to
September 11)

Despite these early successes, formidable challenges remain. For one, terrorist activities are in most cases low-budget operations. Identifying and tracking accounts (especially small amounts) require a tremendous amount of intelligence and coordination. The new Foreign Terrorist Asset Tracking Center, which for the first time coordinates all intelligence sources and efforts with cooperating governments, together with the provisions of the US Patriot Act and increased international cooperation, may greatly improve the US ability to track terrorist finances and locate targeted accounts. To further increase the effectiveness of financial sanctions, other measures that might be considered include: (1) placing covert agents in banks in countries that do not cooperate with US law enforcement and reporting requirements; (2) more aggressive tracking of even modest money transfers ($20,000 or less) to immigrants living in the United States; and (3) the provision of large bounties to reward disclosure of terrorist funds.
In a Heritage Foundation Backgrounder, Brett Schaefer has argued that America’s allies, as well as the International Monetary Fund and the World Bank, should stop providing grants and loans to all seven countries identified by the US State Department as sponsors of terror (Cuba, Iran, Iraq, Libya, North Korea, Sudan, and Syria). If the US government could accomplish this objective in a cooperative rather than confrontational manner with its allies, and in a way that allowed some of the state sponsors to “switch sides” in the war against terror, that would be a notable achievement. However, it would set the coalition back if the US government attempted to browbeat its allies and the international financial institutions into cutting off all their grants and loans in short order.

 

Carrots

The administration has offered the “carrot” of lifting select or all existing economic sanctions as an incentive for countries to join the war on terrorism. In a few instances, the administration has quelled the looming imposition of new sanctions, or has provided economic assistance to allies-of-convenience. The package of economic benefits for cooperating with the United States is considerable for some countries.

Pakistan:


India:


Sudan:


China:


Iran:


Turkey:


Azerbaijan:


Jordan:

Uzbekistan, as well as several other countries in Central Asia, will probably see economic and military assistance from the United States increase in the coming months. With US support, these countries may also receive increased assistance from the IMF and World Bank.


Multilateral Sanctions

In September 2001, the UN Security Council passed a US-proposed resolution that threatens economic sanctions against countries that continue to harbor and support terrorists.12 The UN Security Council Resolution 1373 requires UN members to crack down on financing, training, and movement of terrorists across international borders, deny safe haven to them, freeze financial assets, and prohibit their nationals from making any funds or economic resources available to terrorists. While UN economic sanctions are no silver bullet, it is worth keeping in mind that international pressure helped convince Muammar Gadhafi to extradite the two suspects in the Pan Am bombing, and contributed to Sudan’s cooperation with counterterrorism efforts.

 

Appraisal

In the aftermath of September 11, the Bush administration took all the right initiatives in deploying economic sanctions. It used existing statutory powers to the fullest extent. It enlisted multilateral cooperation in freezing the assets of terrorist groups and their supporters. Notably, on November 18, all G-20 finance ministers (including Saudi Arabian and Indonesian) at US urging agreed to forceful financial measures against terrorist groups. Imaginatively, the Bush administration used the large reservoir of existing US sanctions to supply carrots for newly discovered allies-of-convenience. It worked diligently to speed other financial assistance for these same allies through the halls of the IMF, the World Bank, and similar institutions.

Even though the administration did everything right and with considerable flair, it would be illusory to expect that the arsenal of economic sanctions can play more than a modest role in the war against terrorism. There are several reasons to suggest that even the best-conceived measures will have limited effect.

 

To say that economic sanctions will play an auxiliary role to intelligence, covert action, and military strikes is not to denigrate their importance. In all of America’s wars during the past century—the First and Second World Wars, the Korean War, the Vietnam War, and the Gulf War—sanctions made worthy, if auxiliary, contributions. In the war against terrorism, asset freezes, and other sanctions will pinch. But we cannot count on economic sanctions to bring bin Laden and al Qaeda to heel. Nevertheless, the judicious combinations of sanctions and positive measures (including the selective waiver of existing sanctions) can help build support among the frontline states in the global war against terrorism.

 

References

Hufbauer, Gary Clyde, Jeffrey J. Schott, Kimberly Ann Elliott, assisted by Barbara Oegg. Forthcoming. Economic Sanctions Reconsidered, 3rd edition. Washington: Institute for International Economics.

Katzman, Kenneth. 2001. Terrorism: Near Eastern Groups and State Sponsors, 2001. Congressional Research Service. Washington: Congressional Research Service, Library of Congress, September 10.

Perl, Raphael F. 2001. Terrorism, the Future, and U.S. Foreign Policy. Congressional Research Service. Washington: Congressional Research Service, Library of Congress, March 23.

Schaefer, Brett D. 2001. Stop Subsidizing Terrorism. Heritage Foundation Backgrounder No. 1485. Washington: Heritage Foundation, October 4.

US Department of State, Office of the Coordinator for Counterterrorism. 2000. Patterns of Global Terrorism 2000. Washington: Department of State.

US Department of State, Office of the Coordinator for Counterterrorism. 1999. Patterns of Global Terrorism 1999. Washington: Department of State.

 

Notes

1. See Gary Clyde Hufbauer, Jeffrey J. Schott, Kimberly Ann Elliott, assisted by Barbara Oegg. Forthcoming. Economic Sanctions Reconsidered. 3rd edition. Washington: Institute for International Economics.

2. For a detailed list of targeted entities, see New York Times, 25 September 2001, B4; Washington Post, 25 September 2001, A9.

3. Although Congress passed the International Religious Persecution Act in 1998, no additional sanctions were imposed on Sudan. The State Department argued that existing measures meet the requirements of the Act.

4. Afghanistan was certified for the first time under Section 40A of the Arms Export Control Act on 22 May 1997. In 1996, the State Department’s Office of Defense Trade Controls amended the International Traffic in Arms Regulations to indicate that the United States will not issue licenses authorizing transactions involving Afghanistan.

5. Executive Order 12947, 23 January 1995.

6. Antiterrorism and Effective Death Penalty Act of 1996, Title III, Section 303, PL 104-132.

7. See “First Interlaken Expert Seminar on Targeting UN Financial Sanctions” (March 17-19, 1998), at http://www.smartsanctions.ch/interlaken1.htm; and “Second Interlaken Seminar on Targeting UN Financial Sanctions” (March 29-31, 1999), at http://www.smartsanctions.ch/interlaken2.htm.

8. R. Richard Newcomb, Testimony before the Senate Appropriations Committee, Subcommittee on Treasury and General Government, 10 May 2001.

9. United Nations International Drug Control Program, Fact Sheet: Economic and Social Consequences of Drug Abuse and Illicit Trafficking, http://www.undcp.un.or.th/econ_soc. Note that the retail value of drugs intercepted at the US border ranged between $1 billion and $2 billion annually in the 1990s. See Statistical Abstract of the United States 2000, table 349. This figure is probably less than 1 percent of the retail value of annual flows across the US border.

10. USIS, 11 October 2001; Financial Times, 3 October 2001, 4; Financial Times, 16 October 2001, 5; Washington Post, 2 October 2001, A12.

11. The waiver does not apply to Indian and Pakistani entitites included on the Commerce Department’s “Entity List” of foreign end users that require individual export licenses for certain US commodities and technologies of proliferation con-
cern.

12. UN Security Council Resolution 1373, 28 September 2001.



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