Greed & grievance economic Agendas in Civil Wars edited by mats Berdal David M. Malone

Africa has managed to resist conditionality, and democratization will not be the best lens through which to observe the continent as shadow networks of power emerge in reaction to the privatization of the state and the economy. Informal and illicit trade, financial fraud, systematic evasion of rules, and international agreements will be some of the means used by certain Africans to survive the tempest of globalization.27

What Patrick Chabal and Jean Pascal Daloz have called the political economy of disorder offers opportunities for those who know how to play the system.28 Informalization affects politics as well as economics. In many respects what we are seeing in the conflict zones of Africa is the playing out of rivalries for the control of scarce resources and the manipulation of business links, licit and illicit, to the benefit of the entrepreneurs of violence. On the back of these resource wars vast profits are to be made on the transportation of other things, from guns to food. If this analysis of the African state is applied to the current wars raging in and around Central Africa, then we must adjust our thinking and assume that we are dealing with a set of pseudo-states in which the interest of the community and the rule of law count for nothing. The problem is that the current international diplomatic and security architecture is unable to cope with this type of crisis. It is partly a matter of scale, of course, the equivalent of a body being overwhelmed by massive infection. But it is also more than that. Current diplomatic and security arrangements are state-centered and predicated upon regarding states as the primary actors in international affairs. In Africa this is simply no longer so. Regional alliances are forming between private actors, and some leaders appropriate the framework of the state to their own ends and in their own private interest. In this environment the international community finds itself ill at ease, having to deal with individuals both as the source of power and wealth and as the origin of ambiguous signals in a rapidly changing environment. Hesitating between nonintervention and semi-intervention in the opaque world before them, institutionalized external actors find themselves uncertain of where to exert leverage and unwilling in any event to muster the political will to use force to back up their political pressure. It is in this environment that the issue of regulation and, above all, self-regulation of the private sector becomes key in determining the length, scope, and impact of conflict situations.

In this context the onus must again shift to self-regulation of the private sector. It may be very easy for companies to respond that it is not possible to alter the way in which they do business, but this response, especially when set against the scale of recurring tragedies across the African continent, is no longer acceptable. In the end any company should determine for itself if it can do business in Angola and remain in accordance with its own policies and ethical code of conduct. This is desperately needed.

Over the past decade support for comprehensive economic sanctions has waned as the weaknesses of these systems, including their undesirable impact on civilian populations and their nonefficacious nature, became ever more evident. The failure of these comprehensive regimes has led to a fruitful rethinking of how best to use economic levers to alter the behavior of rogue regimes or leaderships engaged in unacceptable activity. Targeted financial sanctions that strike directly and decisively at the personal financial and commercial interests of the leadership responsible for the unacceptable behavior at issue are beginning to be recognized as the international community's last best alternative to costly and destructive military interventions.1 This chapter will explore the goals of financial sanctions, how they might best be employed, the challenges and opportunities that could accompany their implementation, and the types of instruments and actors who could be involved in creating viable targeted financial sanctions policy, including a key role for the private sector.

While the implementation of sanctions has multiplied during the 1990s, so have questions surrounding their efficacy and humanity.2 Economic sanctions, such as trade embargoes or the withholding of development assistance, in particular have come under fire for the devastating impact they often produce on the general population of the target country.3 This impact is regrettable since these populations, particularly in nondemocratic countries, often have little opportunity to influence the policy direction of their respective governments.4 Acknowledging these failings, some supporters of sanctions, unwilling to forgo the use of what many consider both an alternative to indifference and, in some cases, the final option prior to military action, have suggested less blunt and more targeted forms of sanctions.5 These "financial sanctions" would be directed at the offending country's leadership and its associates rather than the general population.

To date, most of the preparatory work in the field has been done at the Expert Seminars on Targeting UN Financial Sanctions in Interlaken in 1998 and 1999 (which has come to be called the "Interlaken Process"6), and the supplementary working seminars held in London in September 1998 and New York in December 1998. The Interlaken seminars were hosted by the Swiss government and brought together a variety of actors from different sectors to study the potential use of targeted sanctions. However, more work must be done to examine how these sanctions could be designed, implemented, and monitored.7

What Are Financial Sanctions?

The introductory paper for the Interlaken conference described targeted financial sanctions as "measures such as the freeze of foreign assets of specifically designated individuals, companies or governments that particularly contribute to the threat of peace and security."8 It was intended that only an elite group determined by an official list would fall within the scope of this measure. The example provided at the conference was the 1994 edict issued by the UN Security Council to freeze funds and assets of Haitian elites.

Most financial sanctions pertain to asset freezing or asset blocking. The terms are interchangeable. If a property, be it a boat or a bank account, is blocked or frozen, title to this property remains with the designated country, individual, or entity. However, the exercise of powers and privileges normally associated with ownership is prohibited without authorization by the appropriate authority. "Refusal to deal" can be considered another form of financial sanctions and is a catchall phrase designed to prohibit any financial or commercial dealings of any kind with designated individuals or entities. What is important to consider with targeted sanctions of a refusal-to-deal nature is that they clearly broaden the impact of financial sanctions on individuals or entities from going after existing accumulated assets to disrupting the target's ongoing or future commercial and financial interests.

How Will the Leadership Group to Be Targeted Be Defined?

The targeting of individuals and companies or organizations is relatively rare, but it is not unknown.9 The United States, not surprisingly, is the leader in imposing financial sanctions against individuals and organizations, with numerous executive orders freezing the assets and blocking financial dealings with a range of individuals and organizations. U.S. targets include "specially designated narcotics traffickers" (SDNTs). This list of affected individuals and organizations includes both "principals" in the drug trade and those who are determined to materially assist these individuals in some fashion. The list of designated SDNTs provided by the Office of Foreign Assets Control (OFAC) extends to fourteen pages in double columns of small type. Penalties for breaching the order range from ten years in prison to U.S.$500,000 in fines.10 The United States has also set special provisions in place for targeting certain individuals and entities engaged in or supporting terrorism. As of OFAC's last count, its master list of "specially designated nationals and blocked persons" contained over 5,000 names of individuals, government entities, and companies located around the world.11 If this sort of attention can be directed toward individual drug traffickers, terrorists, and their supporters, it seems appropriate that potentially more destructive and dangerous political leaders and those that materially assist their activities be treated in the same fashion.

It is important to ensure that the group targeted for financial sanctions is broad enough to encompass those who may not be directly part of the relevant leadership but whose support is essential to maintaining their hold on power. Therefore, both obvious decisionmakers and their sometimes less obvious enablers are targeted. Clearly, in some instances a comprehensive list of associates or enablers is not available. In these instances, efforts will be required to obtain the best intelligence available on these issues. Furthermore, a demonstrated ability to rapidly append to the target list individuals and entities determined to materially support the target group could dissuade those who have not yet been discovered to end their support and discourage any entity contemplating engaging in such support.

What Are the Goals of Financial Sanctions?

The primary goal of financial sanctions would be a change in the policy of the targeted leadership, be it ethnic cleansing or the prosecution of an aggressive war—civil or otherwise. This approach recognizes the importance of economic agendas in shaping the nature and direction of civil strife and assumes the targeted leadership will be influenced by financial pressure.12 In some instances, with a true ideologue or ideologues, targeting the direct leadership will not be sufficient—their loyalty to the cause may override any concern with their financial interests. In these situations it becomes doubly important to ensure that the sanctions are broad enough to encompass those whose support is necessary to the leadership but who may not share its fervor for the cause. Once this group calculates the costs of supporting the regime to be greater than the benefits, support can begin to unravel quickly. For example, reports in May 1999 indicated that a member of Slobodan Milosevic's inner circle, Dragomir Karic, "a business tycoon, has been secretly negotiating with Russians and Americans in Vienna to allow foreign ground troops to enter Kosovo."13 Karic, along with his brothers, runs the largest private-sector business empire in Yugoslavia.

Secondary goals would include penalizing the leadership and its associates for their behavior and revealing ill-gotten gains to the general population. This approach may undermine their support in a way that collective punishment for an entire population through trade sanctions never could.14

Finally, financial sanctions can be employed as a deterrent or warning to other leaders who may wish to contravene international norms of civil conduct.

Financial sanctions are not easy to enforce. The international financial structure as it exists today is designed to operate outside state control, and it has to a certain extent achieved this "sublime" nature. It is a system designed to continually outrun state rules and norms. This otherworldly nature of the international financial structure is the reason why cash is targeted in most money laundering investigations. Once the electronic sphere is entered and physical assets are converted to numbers flashing across screens, the international financial structure typically ensures a safe haven from all but the most dogged pursuer.

There are, however, structures and systems that can be put in place to facilitate the implementation and enforcement of financial sanctions. The most sophisticated system administering financial sanctions is employed by OFAC. OFAC sets out a system of penalties for failure to abide by sanctions and allows responsible financial institutions and individuals to determine how best to comply. OFAC does little in terms of enforcement or compliance monitoring but attempts to ensure that all financial institutions and other groups affected by U.S. sanctions are aware of the individuals and companies on U.S. sanction lists. OFAC advocates that affected commercial entities employ what is known as interdict software to assist them in complying with U.S. law.

Interdict software, such as OFAC Tracker, acts as a filter through which all new financial transactions are screened. These systems are capable of checking over 4,100 names per second, or close to 15 million names an hour. Each match that is made results in an interruption of the transaction should a suspected individual or commercial entity be detected.

The Australian government had some success when it adapted a somewhat different computer program that had its origins in U.S. president Ronald Reagan's failed "Star Wars" defense initiative. The software had been designed to determine which of a thousand incoming missiles was the most dangerous. This software was adapted by the Australians to examine instead the thousands of international financial transactions occurring almost simultaneously to determine which were suspicious.15 The system, known as ScreenIt, is now employed by AUSTRAC, Australia's money laundering authority.

These systems, as sophisticated as they may be, are only as good as the information that is fed into them. Although they can be refined to accommodate multiple spellings and minor spelling errors or changes in form, they become less useful when faced with common surnames such as Lee, Smith, or Abdhulla. They are also incapable of detecting deceit.

When target individuals and entities begin to use the same techniques employed by criminal money launderers and tax evaders, the financial sanctions challenge becomes even greater. Few targeted despots are likely to stumble late upon the fact the rest of the world disapproves of their acts and wishes them ill. Most would have started hiding their assets early in their careers. However, it would be incorrect to suggest that this challenge would be comparable to combating money laundering in general. The major hurdle facing those who combat money laundering is the staggering volume of potential offenders and the extraordinary resources required to deal effectively with the phenomenon in its entirety.

This is not true for the implementation of financial sanctions. Whereas there appears to be an unlimited supply of felons engaged in money laundering, only rarely will there be a multilateral condemnation of a country's leadership of a type that would lead to the implementation of financial sanctions. This would enable significant resources to be directed by the international community toward both the monitoring and the enforcement of these sanctions.

For analogies, one could look at the UN operation conducted against Iraq and UN Security Council Resolution 687 (1991) to ensure no weapons of mass destruction were developed. This was a massive effort that enjoyed support from intelligence services around the world. The information these services provided through signals, intelligence capacities, and other methods and sources provided useful and timely information to the relevant UN monitoring agency, UNSCOM. Such resources directed toward a different type of task—discovering hidden assets and financial covers—would be necessary to any new system set up to ensure that financial sanctions worked.

Drawing from the UNSCOM experience, both good and bad, a critical path and structure in enforcement and intelligence for financial sanctions could be developed in order to collect and analyze information provided by intelligence and enforcement sources around the world.16 This would allow for a quick start to the work of establishing link charts and other necessary information when the mandate is set. This group could also act as a liaison with private-sector financial institutions and other commercial entities. In many ways, its work would be analogous to some done by the Financial Crimes Enforcement Network (FINCEN) of the United States. FINCEN provides analytical services to U.S. enforcement authorities by searching databases and other sources for evidence of relationships between targets and other persons or entities who may be involved in the money laundering process. In addition, they provide link analysis to identify relevant connections and interpret the results of their findings.

Monitoring and tracking financial transactions is not something that would be new to intelligence services brought in to support a financial sanctions regime.17 The Promis software case allegedly portrayed a situation where "bugged" software was deliberately sold by Western intelligence services to international financial institutions and private banks in order to utilize a "trapdoor" secretly installed in the communication software. The door allegedly enabled intelligence agencies to surreptitiously monitor the communications between international financial institutions and potentially defaulting Mexican banks.18 In a more recent incident, the British signals intelligence agency allegedly intercepted a 1997 wire transfer of U.S.$800,000 from Tariq Aziz, Iraq's deputy prime minister, to an account that was linked to Yevegny Primakov, the Russian prime minister.19 As a Pravda correspondent in the Middle East, Primakov reportedly became friendly with Saddam Hussein and has since been suspected of working to assist Iraq's weapons program. The Russians have vehemently denied these accusations. Intelligence sources said they "vacuum" up information like this all the time. The implementation of targeted financial sanctions could certainly benefit from such activity.

Although signals intelligence would be important in these areas, old-fashioned human intelligence (or humint) often turns out to be the source of the information that ultimately leads to the assets or disguised financial flows. Most persons in positions of power involved in civil strife are justifiably somewhat wary about the people they have around them. Kroll Associates' experience in asset search indicates that leaders in these positions tend to feel the need to maintain some direct contact with their money and assets, no matter how desperately they wish to hide them. It is this need to maintain some control, often through a relative or close associate, that leads to the identification of the assets. In one Canadian example, assets of the leadership of an African country became revealed only after it was discovered through a source hostile to the regime that one of the wives of a member of the leadership group was in Canada engaging in financial transactions. Canadian financial authorities were informed of her identity and followed up on the disclosure.20

The creation of an elaborate government-run investigative and intelligence capacity to support targeted financial sanctions akin to FINCEN but on a global scale may, however, not be required for the successful administration of targeted financial sanctions. Private-sector forensic accounting companies and intelligence and investigative firms have already been employed in some instances by governments pursuing a leadership's hidden assets. After financial sanctions have been agreed upon, concerned countries could hire a private-sector group to locate the assets and then pass on the information to legal authorities, who would freeze or seize the assets. (See Appendix.)

Depending upon the scope of the investigation, the cost would be, at most, in the millions of dollars. The chances of success, defined as locating hidden assets or at minimum ensuring the leadership and its associates have little opportunity to enjoy them, would be rather good. Kroll Associates, which has been retained to search for the assets, inter alia, of Ferdinand Marcos, Baby Doc Duvalier, and Saddam Hussein, experienced considerable success in these cases. Working for the Kuwait Investment Office in London, Kroll located assets connected to Saddam Hussein worth tens of millions of dollars. They were found attached to a front corporation named Montana Investments, located in Switzerland. This discovery resulted from thorough investigation of public record materials and was assisted by the creation of large text databases capable of sorting names, bank accounts, and other data points according to exact instructions. One of the case-breaking clues was the discovery of a company with a director who was a known associate of Saddam Hussein. The goal of the Kuwaitis was twofold: first, to identify assets that could be seized for reparations; and second, to ensure Saddam Hussein had as few financial resources as possible to pursue his weapons program.

One of the drawbacks to private-sector involvement in searching out assets and links is the challenge of integrating valuable government intelligence resources, such as signals intelligence, into the process. This might best be resolved through a hybrid approach that allocates specific roles to public- and private-sector actors in the realm of financial sanctions.

At minimum, market mechanisms and the pursuit of personal gain that create many of the opportunities to evade these sanctions could also be harnessed to reinforce them through rewards for information and bounties. Offering bounties and rewards for information on front-company pseudonyms, numbered accounts, and hidden assets of the targeted leadership group could pay real dividends and create an atmosphere of suspicion that would bring added pressure to bear on that leadership.