Sanctions as an institutional and social construct — not just as a ‘technical’​ measure

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Note: this article was written early March 2022 and published on Linkedin, when a lot of people were asking me practical questions about Sanctions rules and applications. I noticed that in a better safe than sorry approach, companies were going beyond what was in the Sanctions law, thus possibly violating human rights. But I also noticed people were mixing up levels of analysis, so I tried to order things into an institutional approach of Kiser and Ostrom.

Update: The UN, in a rather short timeframe, published a Guidance note by June 28, 2022 on Overcompliance with Unilateral Sanctions and its Harmful Effects on Human Rights. The accompanying press releases states: A UN human rights expert today urged banks and other financial institutions around the world to stop over-complying with sanctions regimes imposed by various countries, saying the practice was inadvertently leading to human rights violations.

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So do the sanctions really have effect? How does it work when they cut off Swift? Is this package of sanctions enough? Should we go further?

Over the past two weeks I have been in contact with many journalists and media seeking expertise on the sanctions against Russia and Swift. In sharing my knowledge I found that the primary focus of analysis is very technical: do the sanctions work, yes or no. How does Swift work? But can it be evaded? Etc. Etc.

Similarly the public discussion evolved very much towards scoring the sanctions on effectivity in a technical sense. At times the discussions became a national sport with commentators lining up to propose the best selection of the [football team]/[sanctions]. While very understandable, as a means to come to grips with a developing very complex situation, I also think that this technical approach towards the effectiveness of sanctions and systems is far too narrow a perspective.

By focusing on technicalities in the bank/financial markets domain, the analysis of other levels of action is being overlooked. I tried to highlight those other domains in this thread on Twitter. Bottom line is that we should apply an institutional perspective on regulation so that we do not underestimate the second or third order effects of sanctions. In this respect I draw upon the elementary framework of Kiser and Nobel prize winner Ostrom (Three worlds of Action: A Metatheoretical Synthesis of Institutional Approaches) which for me, as a practicioner, has always been quite helpful in positioning the interactions leading to regulation.

Sanctions as an institution and social construct

In the original framework Kiser and Ostrom distinguish between three levels of action, and I will sketch how this could be viewed in respect of the sanctions discussion for Russia (and yes dear theorists: I know this may not be scientifically correct under your understanding of institutions and institutional theory, but bear with me please):

  • the operational level, where stuff really happens, where compliance officers read sanction rules, where systems need to be adapted, where boards need to decide on reputation issues and such; this is the level where a lot of attention is being paid to effectiveness, loops, holes in the system and such,
  • the collective level, where groups of companies and other collective entities, poiticial parties etc discuss whether some form of collective action (protests, expulsion from social circles etc) is relevant/necessary,
  • the constitutionel level, where formal governments formulate constitutional arrangements and rules that set the boundaries for actors in society; this can be the national government, the regional government or at the united nations level.

Individual level

At each of those levels we see different things happening. But let’s start at the individual level. As for financial institutions and crypto companies, the sanction rules apply to all of them. Quite a few people seem to think that there is no regulation or supervision for crypto, but this is incorrect. Thus, crypto-mechanisms can indeed act as channels for sanction evasion but this is done via methods that are also used in the regular money world: using front men, straw men, fake entities. So banks and cryptocompanies are on the same footing here.

Many compliance officers will read the sanction rules and figure out how it affects their companies business. Now imagine what would happen if they have to make a judgment call when indications exists that a certain customer might be indirectly linked to a sanctioned person…. they may well seek the safe side for a variety of reasons. Because they read the news paper and see what the collective social norm is, they will mark all undecided cases as a no-go. In addition they will point out to their superiors that apart from the risk of technically mis-executing sanction instructions, there is a clear reputational risk, regardless of the sanction.

Within non-financial institutions a similar sanction check is required and compliance officers will investigate. The board of directors will of course accept that its business has to be stopped/frozen due to sanction, but this may evoke a next level discussion. The reputation risk factor leads to questions as: do we really want to look away and continue doing business in this region or this country? The sanctions but also the public domain discussions may thus act as a catalyst for strategic decision making to exit the region and for changing course strategically. BP was the first to announce this very clear move.

Collective level

At the collective level a range of players in society play their own role. Here we can see the impact of social norms and follow up behaviour. Having witnessed the exit of BP, Shell en Exxon decided to do likewise. Having witnessed the banning of Russia from sporting events, all sports associations around the world start reflection on their stance. On this level, the process starts to become one of social norms, acceptability and exclusion of actors who violate important social norms.

On the collective/social level there may still be a relation to the actual sanctions (as with the Russian owner that may have relinquished his control of a UK soccer club) but this sets in motion a discussion within other social arena’s as well. The fact that such a unified G7-action was taken with respect to the sanctions may be impactful for in particular its effect as a social norm, aside from its technical effect.

Constitutional level

Next up on the constitutional level we see governments (local, national and supranational) align their position as to the best regulatory response to an awkward humanitaran disaster in progress. The speed and collectivity of this response was remarkable, as was the impact of the calls of Ukrain leadership expand the scope of the sanctions. In the end the sanctions, which are a bit of blunt last-resource tool in the geopolitical toolbox, where taken out to draw a line. After the first line a second, more intrusive line was drawn, including freezing of the central bank of Russia assets and going after the posessions of oligarchs with a specific task force.

The governments used a regulatory framework and we should be mindful of the regulatory constraints that are still present at this constitutional level. Regardless of whose side you are on, it is imperative to understand that a sanctions decision comes down to denying some the right or acces to his own property. This is an intrusion on a human right that can only be decided upon if — on balance — other human rights come into play that carry more weight. So the Human Rights Charter, which found its way into numerous forms of further regulation, still matters here. The human rights framework functions as a safeguard to ensure that the sanctions remain limited to what is specifically necessary so that they do not violate the rightful freedom of enterprise and ownership rights of innocent Russians.

Sanctions: maintaining a balanced view and respecting human rights

It is quite easy to get carried away in the heat of the discussion and call for a wider net of sanctions to be cast. For a full exclusion of all Russions from services of Western companies and such. Similarly one could argue that it doesn’t make sense to not stop gas deliveries and payments as well. Why stop at the current level of sanctions? Or, as could be noticed in Dutch parliament, the idea to use the frozen assets to help Ukraine in rebuilding their country.

While I fully understand the sentiment, I would like to point out that any idea in this domain should be mindful of the constitutional, collective and operational level in the discussion. Stripping someone from his ownership rights and freedom to act is not to be taken lightly. Imagine being on the other side of the discussion and being subject to a wrongful asset freeze just because you were on an outdated list of a foreign government. Or because some local MPs in a small country adopted a motion to take away your money.

We need to maintain our dignity and shield innocent bystanders of this conflict as much as possible as we can. We need to respect our constitutional rules and understand that a narrow approach to sanctions is vital as a matter of respecting the human rights. We should be careful and hesitant not to overdo it in terms of the technical sanctions. There are many developments on the collective level unraveling and we haven’t yet captured the full impact of all of this (if this possible in any way).

Don’t fall in the sanctions effectivity trap discussion

Any statement as to the effectiveness of sanctions or the need to widen them is anyones guess. We are dealing with a complex, international social system in which on a constitutional level a social norm has translated into a sanction rule (or vice versa), which will have a multitude of second and third-order effects that we are unable to really grasp or predict. But we do know that the effects exist as they unfold in practice.

At this point in time, I think it is fair to say that the public debate that has followed the sanction discussion is evolving to a wider discussion and reflection on reputation risks, the moralities of doing business in/for certain jurisdictions/industries/persons. The clear social norm that has been set by formulating the sanctions may well take over the social change momentum and become a force of change itself.

Disclaimer: no answers!

Again I stress: it is hard to appraise developments when so much is going on, on so many levels. But I hope the shared values enshrined in the human rights charter may serve as a guiding light for all of us.

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Simon Lelieveldt

Simon Lelieveldt

Dutch banking, payment and digital money / blockchain expert - Also: tours & talks on financial history