This is Democracy – Episode 212: International Sanctions and Banking

Intro: [00:00:00] This is Democracy, a podcast about the people of the United States, a podcast about citizenship, about engaging with politics and the world around you. A podcast about educating yourself on today’s important issues and how to have a voice in what happens next.

Jeremi: Welcome to our new episode of This is Democracy. Today we’re going to talk about international sanctions and banking. This is a topic that comes up quite often in our daily news, especially around, uh, international sanctions that have been placed by the US government and other governments on Russia. On Iran, on North Korea and on other countries in our world.

Jeremi: Today, sanctions are discussed in the news, but often rarely explained. And we’re fortunate today that we have a world class expert with us to help us understand what international [00:01:00] sanctions are and how they work. Uh, this is Sarah Kaiser Cross. A director and regional head of correspondent banking and affiliates for the Americas at Hssbc Bank.

Jeremi: Sarah, thank you for joining us today.

Sarah: Thanks for having me, Jeremy. I’m happy to be here.

Jeremi: We’re fortunate you could take the time to talk to us. Sarah was a student of mine at the University of Texas, uh, where she received two master’s degrees. One was not enough for her two master’s degrees in Middle Eastern studies and in global policy studies.

Jeremi: Uh, from there, Sarah has gone on to an illustrious career as a financial crime risk professional. And geopolitical specialist with experience in counter-terrorist finance, transaction monitoring strategy, and cross-border correspondent banking risk. She’s responsible for articulating key financial crime risks to senior banking executives, and she brings an understanding of the nexus between security threats and financial [00:02:00] markets to her work.

Jeremi: Uh, Sarah has lived in five. Countries in the Middle East over seven years, and she has language proficiency, uh, in many of the key languages of the region. Uh, we’re very fortunate that Sarah can share her expertise with us today. Before we turn to our discussion with Sarah Kaiser Cross, we have of course, uh, Mr.

Jeremi: Zachary sir poem. What is the title of your poem today, Zachary? The World Invisible. The World Invisible. Let’s hear it.

Zachary: The world invisible turns churn. Men meet in dark rooms and the quarters you drop in the street become more digits, adding up to digits. You will never see after the bombs drop. It is the digits.

Zachary: The fingernails you find in the rubble that stay planted like crosses in your memory of home. After the bonds drop and you are left with a styrofoam cup in the streets of a foreign city asking for loose change. [00:03:00] Their world is still invisible. They are plotting your destruction. You are planning your reconstruction all in the wires in digits under the asphalt infinitesimally small.

Zachary: The world invisible. Turns and turns, and we can only see it in glimpses when sweet serendipity. We find it empty, a yacht at the end of the dock. The world invisible turns churns and ka so rapidly that sometimes it seems as if, if you would only tap it in the right places, it might be convinced to stop.

Zachary: And then we kick it in the throat. ,

Jeremi: Why that final line on kicking it in the throat? Zachary, what is that?

Zachary: Well, this poem was really about, uh, the ways in which, um, uh, it is so difficult to monitor and, and regulate a financial world that exists largely underground, but. Has real consequences, uh, for real people.

Zachary: Um, but, uh, I think it’s also a point [00:04:00] about, uh, how even though this system is so complicated, what we’re actually trying to do, which is to stop the flow of money or to stop, uh, uh, economic, uh, activity is really very simple. And it is, it is in some ways, uh, in act of war or at least, uh, in, in, in, in act designed to, um, to, to, to limit, uh, the flexibility of, of, of other countries, right?

Jeremi: what other others are trying to do. Right? And, and as, uh, as Clausewitz has told us, right, the simplest things are often the hardest. So, so, Sarah, help us understand what are international financial sanctions when we use this term? What are we talking.

Sarah: Yes. So sanctions is definitely a word that’s been thrown around in the press quite a bit.

Sarah: And today I’ll really focus on economic sanctions. Um, and just stepping back a little bit to define what we’re talking about today. Sanctions are a group of economic measures that are put in place to restrict the economic activity of either a person, a company, [00:05:00] an industry, a region, or even a country.

Sarah: And throwing back to Jeremy’s love of history, I, I had to mention that a lot of folks date, actually the first use of sanctions to ancient times 4 32 bc. Specifically when the Athenian government banned traders from the neighboring magar, uh, from trading in their city, really wrecking havoc on Mara’s economy.

Sarah: But in more modern times, you might remember from your high school history classes that the League of Nations was, um, really the first to consider the use of economic sanctions to enforce global peace in, in the more modern context. Um, and the league permitted the use of sanctions with very specific criteria outlined, um, mostly to stop war, right?

Sarah: Although the articles are a little bit more specific, um, if you are ever interested, go [00:06:00] check that out. Um, but while historically sanctions were oftentimes used to coerce or persuade or even punish another country’s foreign policy decisions or perhaps domestic policy, war doesn’t have to be happening for sanctions to be put in place.

Sarah: So, unlike other tools of war, they’re often used in times of. Which I think makes them very interesting. Um, and for today’s discussion, I think it’s also important to point out that there are two different kinds of sanctions. Oftentimes, again, in the news, you just hear this, this general term sanctions. Um, but there are two main categories that the US government uses, um, to accomplish their foreign policy and or national security.

Sarah: So the first is what they call comprehensive sanctions. Sometimes I call it umbrella sanctions or blanket sanctions. And those comprehensive sanctions are freezing all of the [00:07:00] assets of a particular government. So you’ll likely be familiar with the Iranian sanctions program, and these are comprehensive sanctions that halts economic activity within a particular country.

Sarah: But the second kind of sanctions is a little bit more targeted and perhaps people may be less familiar with. Those are called list based or selective sanctions, and instead of targeting a whole country using a blanket approach, the list based sanctions are targeting specific people or industries or companies.

Sarah: So for example, they might be targeting a particular leader of a terrorist cell, or they may be targeting a drug. Or companies creating weapons of mass descr destruction. Um, so our government maintains what are referred to as blacklists or if you wanna be more specific, especially designated nationals and blocked persons list for short.

Sarah: They call it the [00:08:00] SDN list. And this list includes thousands of names of people whose property and interests in property are, are really block.

Jeremi: And, and who makes a decision as to who is on those lists?

Sarah: So, in the United States, um, and it is different for all countries, but in the US the Office of Foreign Assets Control, colloquially known as ofac, is the one who administer and enforces economic sanctions programs primarily against countries and groups, uh, of individuals.

Sarah: But obviously that’s done in consultation with some of the other government bodies in the us. Um, but the Department of Justice also plays a really important role because they handle the criminal violations of sanctions, including the prosecution side of things. Gotcha.

Zachary: And in what role do, do banks and and private financial institutions have to play in the enforcement of these sanction?[00:09:00]

Sarah: Yeah. So governments are leading in the creation of the sanctions, right? So in the US we have ofac, um, but other countries like the European Union or China or um, Columbia, right? Any, any country, um, can create a sanctioned person or entity. Um, the United Nation Security Council also has the ability to do.

Sarah: Um, but focusing just on the US because it’s simpler to choose one example, OFAC and the Department of Justice put these requirements into place through policy and for from there all financial institutions must comply with those laws and regulations. It sounds simple, but basically because all financial institutions have that obligation, um, they are also beholden to.

Sarah: Enforce all of the sanctions from their own internal perspective. So most financial institutions, um, [00:10:00] have their own sanctions departments and those departments are focusing on enforcing sanctions from an internal perspective and embedding the right kinds of controls and processes to make sure that they are not, um, facilitating any sanctions of Asia.

Jeremi: And Sarah, this is the area that you work in, correct? .

Sarah: So I don’t currently work in sanctions. Um, I work more broadly in financial crime risk. Um, but throughout my career, sanctions has definitely been a really important topic. Um, but financial crime more generally includes lots of different things. So money laundering, terrorist finance.

Sarah: Bribery and corruption and sanctions to name a few. Wow.

Jeremi: A lot of, a lot of, uh, fascinating but also horrifying stuff. I’m, I’m sure. Um, is there a lot of day to day cooperation? I know you can’t give us too many of the details, but is there a lot of day to day cooperation between the banks and governments?

Sarah: Yeah, so banks have an [00:11:00] obligation to report to their regulators, to the governments when there is a. Um, uh, transaction or a situation that they think may be problematic. Um, so basically any bank, um, is reviewing and monitoring the transactions that go through them. Um, and they do have reporting obligations.

Sarah: Again, it’s very, um, dependent on the country that you’re in. So it’s kind of that dialogue escalating up to the government, uh, when there is. In, in the case of sanctions, for example, um, you know, a sanctions related. Payment.

Jeremi: Right, right. No, I think this is really important because, uh, oftentimes when we read about sanctions, we read about the government actors, We don’t read about what’s clearly happening, uh, on the back end, which is a lot of interaction and cooperation between the government offices and those at the bank [00:12:00] who are handling, overseeing day to day transactions.

Jeremi: And I, I think that’s an important part of the story that’s lost in the news. Would you agree?

Zachary: Absolutely. Um, and at a systemic level, how do banks and financial institutions that are operating a across different countries and across jurisdictions handle those jurisdictional issues? So it to, to put it bluntly, how do banks decide which countries to listen to and which countries not to when they might conflict?

Sarah: It’s a great question, Zach. So, um, every country has, you know, its own specific regulations and policies, um, but for the kind of scope of US sanctions applicability, right? Um, any, and I’m gonna caveat this because I’m sure there are a lot more nuances than I’m gonna be able to clarify in the next 30 seconds, but US sanctions are applicable to a huge.

Sarah: Variety of actors. So it’s not just, you know, [00:13:00] US citizens or US companies, right? This is a, a very broad brush tool that can include everything from, you know, a US citizen or permanent resident, or a foreigner within the us. Um, those are all subject to us sanction. Companies incorporated under US law. There are subsidiaries and branches of foreign companies that are just located in the us.

Sarah: So basically, uh, any entity, individual transaction relating to US dollars of the United States is, is in scope. So oftentimes, um, for sanctions, they’re very broad brush. Um, uh, tools that are used by governments to be able to enact this. And, and that’s part of why, um, you know, they’re a consistent tool used by governments.

Sarah: So that is the US example for other countries. For example, if, if [00:14:00] you are a bank that has different, uh, locations, let’s say you have a location in the US and you have a location in Columbia, All banks have a requirement, right? To adhere or subscribe to the laws and regulations of the country that they are in, as well as the currencies that they’re transacting in, right?

Sarah: So it is, it does become very complex. Um, but. laws and regulations are also pretty clearly communicated. Um, and there’s a lot of engagement between banks and governments in the jurisdictions that, that they’re in to ensure that there is very clear, uh, communication and transparency about those expectations and, and implementation of regulation.

Jeremi: Uh, but in the end, of course, you have to, if you’re chartered in a particular country, you have to actually follow that country’s rules whether you agree with them or.

Sarah: Just like any company or US citizen would. Yes.

Jeremi: So I [00:15:00] know from a prior conversation you and I had, Sarah, that you observe that it’s become harder sometimes to, uh, monitor financial transactions, harder sometimes to enforce sanctions because of new technology and new modes of moving finance around the world today.

Jeremi: So what are the challenges Sarah facing the enforcement of sanctions in today’s?

Sarah: So there are a couple of different threads that you can tease out here, and we could have a four hour podcast on this sometime later, Jeremy. But in terms of challenges, I think there are probably four main categories. So I’ll list them all first and then maybe go back and explain a little bit, um, in a little bit more detail for each one.

Sarah: The first is that the payment environment is changing extremely rapidly and thus the complexity of enforcement also must keep pace with those change. The second is that implementation requires significant coordination, which kind of goes back to your earlier question. [00:16:00] Third, some countries choose not to enforce sanctions, and fourth criminals evolve quickly.

Sarah: So, The payment environment, going back to the first one, the payment environment is changing so quickly. So if you think about how, as an individual you sent money 10 years ago, things like Venmo or sending somebody, uh, you know, splitting a ride in an Uber, uh, app, right? Those things didn’t exist. So 10 years ago, the way that you would transact even individual into individual domestic.

Sarah: um, is very different than it is today. And then you think about how people are now transacting across borders. Um, the world of payments, the technology surrounding payments is evolving so quickly that all of the regulations from a country perspective, all of the implementation standards from company perspectives all have to keep pace with the change of technology, uh, [00:17:00] as quickly as it is going.

Sarah: And in addition to kind of the evolution of the technology itself, you also kind of have the changing nature of how we ascribe value to things in the financial world, right? So we have new trends like crypto and NFTs and mobile banking. Again, all of these didn’t exist a few years ago, so. because those are also financial instruments, right?

Sarah: Those things are also part of US laws and regulations. Um, so making sure that keep banks, companies, governments are keeping pace with the speed, the evolution really of the payments world, um, is definitely a challenge.

Jeremi: And, and Sarah, I, is there, um, A new approach to the world of sanctions that banks are taking with the help of governments to address these changes?

Sarah: Yeah, so ofac, you know, publishes, [00:18:00] actually, you can even read it on their website if you’d like. They have, um, they do have some guidance for, for banks and institutions. So I think the US. Government, uh, you know, works as quickly as they can to kind of keep pace and really lead the way on what regulations look like in that space.

Sarah: Um, but it is definitely an evolution,

Jeremi: Jeremy, right? And so it’s kind of a cat and mouse game, right? As the, um, bad actors find new ways to get around sanctions, we then try to close up those holes and counteract what they.

Sarah: Yeah, so actually let’s, let’s just skip down to number four, The fourth challenge, which was that criminals evolve quickly, right?

Sarah: And criminals are always changing approaches. This is not any different from sanctions than it is from money laundering or drug trafficking or human trafficking. When an economy is squeezed, the reaction of some players and particularly illicit actors who benefit from existing power structure, Are likely to continue to try [00:19:00] to identify streams of revenue to continue their operations.

Sarah: Right? So keeping on top of the new trends in typologies that criminal organizations are using is a constant and never ending battle. But that really is what the world of financial crime risk is, is, you know, trying to address. But this is a case of having non-state. Who are intentionally attempting to circumvent or evade these sanctions.

Sarah: If we then pop up to challenge number three, it’s that some countries don’t enforce these sanctions. So in this instance, you actually have state actors, for example, Iran and North Korea, who are still attempting to trade and, and fundamentally challenge the sanctions placed upon their countries. So non-compliance from those countries are, you know, actively trying to identify roots to be able to keep their economy alive.

Sarah: Um, so those are two kind of interesting counterpoints from a challenge perspective.

Jeremi: And, and what do we do, [00:20:00] uh, when, uh, or what do banks at least do and what does the government do when we find, um, that individuals have ev evaded and cheated on sanctions? What, what are the measures that are often taken in.

Sarah: So maybe I’ll answer that in two parts, uh, because I do wanna maybe hammer one final point on the challenge part cause it’ll nicely dovetail into, into your question, which is that the implementation of sanctions, um, requires a huge amount of coordination. So though sometimes it sounds simple, the coordination and consistent embedment is really challenging.

Sarah: Um, both from a public and private sector perspective, but also looking at collaboration between governments. So earlier we talked about how you can sanction an individual or a company or a country, but remember that each country can only kind of control their own sanctions, so other countries can decide to [00:21:00] sanction the same individual or the same company, or the same countries to really increase the economic.

Sarah: Burden on that country or individual, et cetera, right? So that coordination, even from a policy perspective is a factor. Um, but there’s actually a really great example, uh, from North Korea. Um, if I can kind of go into that in a little bit of detail. Sure. And actually you can also read about this on the state department’s website if you’re interested, but, um, the UN Security Council brief history sanctioned North Korea’s imports of refined petroleum in 2017.

Sarah: And since then, they’ve been trying to evade these sanctions, including through smuggling oil, through ship to ship transfers in the ocean. So that is literally, you know, in the dark of night, two ships trading oil, um, to try to evade, try to evade the sanctions. So in order to make these sanctions kind of stronger, [00:22:00] you had 50 UN member states who were co-sponsoring a message to the UN Security Council Committee, uh, sanctions committee on North Korea, calling for the fact that they had exceeded their petroleum cap.

Sarah: So what did they do? They created something called the Pacific Security Maritime Exchange, and that was. And information sharing initiative with lots of different countries, including the re, South Korea, the Republic of Korea, New Zealand, Japan, the us, France, Germany, Australia, uk, Canada, et cetera. And they had been wor have been working for the last several years to monitor North Korea sanctions of Asian activity.

Sarah: So part of how they do that from a collaboration perspective is to monitor those illicit activities at sea and in the air and through information sharing. So they are identifying smuggling ships, right? They identify, track those ships, report and share on the vessels that are involved in the illicit [00:23:00] smuggling of oil.

Sarah: Um, they raise the cost of sanctions of Asian, right? So the higher the cost. You’re Disin, deincentivize, or disincentivizing, um, any kind of private sector actors from potentially facilitating that when you increase the cost of sanctions and they’re also disrupting black market networks. So by identifying some of this illicit maritime activity, they’re able to disband some of those networks that are helping to violate un sanction.

Sarah: So I think that’s a really interesting example of how multiple countries can come together to try to strengthen a sanction that, um, a variety of countries believe, um, is, is necessary.

Zachary: This might be more obvious from a, a government or, or policy perspective, but from the perspective of financial institutions, uh, in particular, but also governments, how do you measure the effectiveness of sanctions or the effectiveness of financial crime prevention?

Zachary: Mm, [00:24:00]

Sarah: that’s a great question, Zach. So I can’t really speak from the US government perspective. Um, but what I can say is often. Um, it is pretty binary, right? So there isn’t a whole lot of gray space in the world of sanctions. Um, you either ev Eva a sanction, right? You either are, are breaking a sanction or you are not.

Sarah: Um, I, there is a little bit more complexity in that, but I’ll leave that to the lawyers of the Department of Justice. Um, but for all intents and purposes, the sanctions, regulations and requirements are pretty clear. Um, and so people who are intentionally attempting to evade those are prosecuted as such.

Sarah: Um, which I guess Jeremy goes back to your question is what actually happens? Like what are efforts that, that they take to, um, Sanctions VI or, uh, prosecute sanctions violations. So again, I’m, you [00:25:00] know, uh, probably a little bit more geared towards government officials, uh, this question, or, or the lawyers.

Sarah: But at the 20,000 foot level, the Department of Justice does prosecute those who don’t comply with sanctions. And what is, what does that actually mean? Um, the Department of Justice can levy. Those fines can be for individuals or companies and can range in amount quite a bit. Um, in many cases, the civil and criminal penalties can exceed several million dollars.

Sarah: And in the world of banking, if a bank is found to be in non-compliance, In addition to, I’m sure receiving a hefty fine, there is also a serious risk of using losing your US dollar license, which effectively cuts a bank off from transacting in US dollars. That’s sort of the nuclear option. I assume that is the nuclear option.

Sarah: Indeed. Yeah.

Jeremi: So it’s often, uh, written, Sarah, that sanctions are unsustainable. This is the critique of sanctions, that it’s very hard [00:26:00] to keep them in place, uh, at least from a fact based point of view are the institutions set up so that once someone is on a sanctions list, they can stay on and they can be enforced for a long period of.

Jeremi: Mm.

Sarah: From a historical perspective, there are examples of sanction states that those sanctions in varying forms or levels of intensity have been in place for years. Right. Only becoming more severe as an not incomp compliance continues. So I think North Korea is a pretty, um, clear example of that. Yes. Yeah.

Sarah: But I think what I would want to focus on in this question is, How sanctions remain an important tool in the government toolbox, if you will. And I think most folks discuss the imposition of sanctions as if they occur in a vacuum, but they’re very rarely the only policy or tool deployed to tackle a particular issue in a country.

Sarah: You know, [00:27:00] sanctions can be an important tool to disincentivize illegal or dangerous actions. For example, um, genocide. or, you know, the start of a war. So for economic sanctions, I think with the rise of technology and open source information and, and kind of the ability to target and, and restrict people’s ability to move money, right?

Sarah: This evolution of the payment space. Sanctions will continue to remain, uh, an important tool in the broader toolbox of foreign policy.

Jeremi: That makes a lot of sense. That like other, uh, policy tools, uh, which could include the use of force, uh, or for example, uh, efforts at, uh, providing aid sanctions are another tool that can be used to try to create incentives or disincentives for certain kinds of, of behavior.

Jeremi: We, we always like to close Sarah on a, an optimistic note using the knowledge of policy and history that we’re [00:28:00] fortunate to share with our listeners and, and gain from our distinguished guest each week. Guest each week. We like to, we like to actually close on an optimistic note that. That examines how this information, how this knowledge can be used to improve the world.

Jeremi: Uh, what would your advice be to our listeners, particularly younger listeners who are concerned about using sanctions more effectively to limit bad behavior by countries like Russia or North Korea or, or various others, Venezuela perhaps, or individuals in those countries. Uh, what can ordinary citizens do?

Jeremi: What role can they play in these discuss?

Sarah: Uh, I would, I would ask the youth, actually, this is gonna be my, my positive plea to the youth of the United States. Um, and those still in their early careers and learning is go and work in these spaces. Right? I, I think the world of financial crime risk is a really [00:29:00] interesting one. It’s relatively newer in the grand scheme of, of professions, but, We need smart, thoughtful, creative people who are thinking to quote a former professor of mine who is on the call with me today, we need people to dream of things that never were, and I think that is very true as well in this space.

Sarah: So if this is something that interests you, go work for the, the US government. Go work for ofac, the Department of Treasury, the Department of Justice, or, or for a bank, and see the financial side of, of those things. Because I think the more creative, intelligent, thoughtful, empathetic people we have, um, working on these issues, the better world we can.

Jeremi: It’s so interesting you say that, Sarah, and, and so compelling too. Uh, because I think our image of banking, and I bet it was your image before you went into it, [00:30:00] is that it’s just about, you know, people who are interested making money. Not that there’s anything wrong with that. You’re, you’re describing, uh, policy idealism, you’re describing, uh, vision of a better world embedded in the work of banking aren’t.

Sarah: You know, Jeremy, I never, um, you know, in my two master’s degrees and, and even my undergraduate work banking was never in my immediate ideals of an obvious profession for me. Um, but it’s been a really incredible, fulfilling career. Um, and it’s definitely one that I wish I had known about in a little bit more detail when I was younger because it is such an important part of, of what makes our world go around.

Sarah: and there are a lot of people who yeah, are very passionate, um, passionate in that field as.

Jeremi: Zachary, what do you think? I, I think

Zachary: it, it’s once again reminding us that, uh, the, the, the reason that, uh, the lights stay on, if you will, metaphorically, is, is, is, is oftentimes not because of the political [00:31:00] discussions we hear on, on, on television or, or on the radio or even in podcasts.

Zachary: Uh, but, but because of the hard work and dedication of, of people working at a government, but also, uh, a, a, a business, uh, level to, uh, ensure that, that, uh, things. Keep going as they should and, and, and that professionalism, uh, wins the day.

Jeremi: I think you’re right. And I think it’s a theme, uh, on our podcast, week after week, 200 plus episodes, that there are so many good people like Sarah Kaiser cross, uh, working in the public and the private sector, sometimes at the intersection between them.

Jeremi: Doing the work of protecting democracy in one way or another. And these are perhaps the unseen heroes, but they’re also the positions and the roles that are crucial for the future of democracy. And we all need to understand the importance of professionalism in these spaces, the importance of this work, and we all need to support it.

Jeremi: As Sarah has, has given us a such an eloquent plea for, for here at the end. Uh, [00:32:00] Sarah, for our last words, uh, do you, do you see, um, progress in this field going forward? Are you optimistic about how we can use sanctions in the future to, to build a better world?

Sarah: I am optimistic that the policy makers and the people who really care about, about these topics, We’ll continue to evolve in, um, in the ways our world is evolving, in the way we think about these things, and to be as creative and thoughtful and as possible, um, to create that better world.

Sarah: So yes, I would say I’m quite idealistic in that way. ,

Jeremi: you’ve never lost your idealism from when you were a student. And, and Sarah, you’ve made me more idealistic as well. Uh, it’s such a pleasure to be able to have you on the podcast, for you to share your insights and your knowledge and, and to explain just the, the basic facts of some of these issues that are not well known, even to those of us who talk and write [00:33:00] about this stuff all the time.

Jeremi: So thank you so much.

Sarah: It was an honor being here with you guys today and, uh, great to catch up on such a fun topic. Yes.

Jeremi: Yeah. Well, you made it fun. and, and Zachary, thank you for your, uh, thoughtful poem. Uh, again, I’m still thinking about the digits and the wiring under the ground, and thank you, most of all, to our loyal listeners for joining us for this week of this is Democracy.

Outro: This podcast is produced by the Liberal Arts Its Development Studio and the College of Liberal Arts at the University of Texas at Austin. The music in this episode was written and recorded by Harris Codini. Stay tuned for
a new episode every week. You can find this is Democracy on Apple Podcasts, Spotify, and Stitcher. See you next time.[00:34:00]