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In late June, U.S. Treasury Secretary Steve Mnuchin announced at a press conference that the United States would be taking action against the Bank of Dandong, a small lender based in a northeastern Chinese province near the North Korean border. He accused the institution of serving as Pyongyang’s conduit to U.S. financial institutions, thus helping channel “millions” toward Pyongyang’s nuclear weapons program. In fact, according to the U.S. Treasury Department, between 2012 and 2015, 17 percent of the customer transactions that the Bank of Dandong directed through the U.S. financial system were sent on behalf of companies tied to North Korean entities sanctioned by the United States and the United Nations.
In clarifying his remarks, Mnuchin stressed that Washington was not targeting China, per se, only “individuals and entities in China.” The coincidental timing of the announcement suggested otherwise. Just a week before, U.S. officials met with their Chinese counterparts in Washington in an attempt to pressure Beijing to do more about North Korea. It appeared that they were unsuccessful. It was no surprise, then, that Washington’s move against the Bank of Dandong was widely interpreted by the media and pundits alike as a “sanction,” intended to coerce change in China’s North Korea policy. It didn’t help matters that Mnuchin himself threw around the term, saying, “Whether they’re in China or they’re anyone else, we will continue with sanctions.”
Although it’s clear that President Donald Trump did mean to send a signal to China, his administration didn’t apply sanctions. Instead, it chose to invoke Section 311 of the USA Patriot Act, which is a regulatory tool intended to thwart illicit money from flowing into the United States. The Trump administration, however, is effectively deploying Section 311 as if it were a sanction—to pressure foreign governments, in this case China, to change their behavior. This misuse is problematic. The two tools have separate purposes, targets, requirements, and processes for repeal. While sanctions are an offensive mechanism, used to influence other nations’ behavior in line with U.S. foreign policy, Section 311 is a defensive instrument, employed domestically to protect U.S. financial institutions from inadvertently facilitating funds from bad actors, such as terrorists and drug traffickers. By misusing Section 311, the Trump administration is undermining a valuable and nonpolitical instrument of U.S. security.
AN UNINTENDED DISCOVERY
Although Section 311 is no longer a sanction, it was initially intended to be one. It was adopted into law under former President George W. Bush after 9/11, but was conceived during the administration of Bill Clinton at a time when the comprehensive sanctions available were felt to be too blunt an instrument for pressuring other countries to change their foreign policies. It was thought that Section 311 could remedy that gap by serving as a gentler type of sanction.
The law enables the U.S. Treasury to require U.S. banks to take certain “special measures” against foreign institutions, governments, or individuals that it designates a “money laundering concern.” These special measures can include stronger background investigations into the targets in question and special recordkeeping and reporting requirements, among others. The one most commonly used is the closing of “correspondent” accounts for any foreign banks that the U.S. Treasury identifies as lacking the systems and controls needed to keep the proceeds of organized crime, human trafficking, official corruption, and other unlawful activities out of the United States. Since correspondent accounts enable foreign banks to conduct business outside their home countries, disabling them means that a foreign bank cannot conduct critical cross-border payments for its customers in the United States, which effectively closes off the target’s access to the U.S. dollar. Without the ability to do business in the world’s de facto global currency, cross-border trade is severely limited. This effectively quarantines targets from the U.S. financial system, and by extension, the global dollarized economy. By cutting off their access to the U.S. system, Section 311 slows the spread of funds that sustain criminals and terrorists, and aids efforts to weed out these bad actors. Further, because actions under Section 311 go through a standard regulatory process that delays implementation, the mere proposal of a Section 311 action can prompt the target to begin corrective action even before the special measures can go into effect.
When Section 311 first rolled out after 9/11, however, the effect was not gentle at all. The global scope of the response surprised U.S. officials who were expecting it to serve more as a scalpel, delicately extracting bad actors, rather than as the axe that it turned out to be. Non-U.S. bankers voluntarily cut off all business transactions with targets that the U.S. Treasury labeled as at high risk of financial crime because they feared becoming the next target of U.S. and local regulators, as well as being shunned by other U.S. financial institutions, by continuing to do business with the marked party. The strong reaction stemmed from the fact that by the time Section 311 was finally enacted, norms related to anti-money laundering had become fairly embedded in other countries and across the global financial system. The tool has since earned a reputation in the international banking community as an exceptionally powerful way to isolate institutions that have failed to fulfill their responsibility to combat financial crimes. Because Section 311 proved so effective at incentivizing banks to protect their financial integrity, the U.S. Treasury learned to use it as a regulatory tool to safeguard against illicit financing, rather than as a sanction, despite its original intent.
Sanctions, on the other hand, are used as a political tool and are intended to change a country’s behavior. One kind—secondary sanctions—is often confused with Section 311. Both can have similar effects, but their purposes remain entirely different. Secondary sanctions are distinct from regular sanctions in that they do not target rogue countries but rather, foreign persons and entities that do business with those countries. In 1996, for example, when Washington launched secondary sanctions against Iran under the Iran and Libya Sanctions Act, it threatened to penalize non-Iranian companies doing business with Iran’s energy sector, even when those businesses fell outside of U.S. jurisdiction. This was possible because the range of penalties under the sanctions act included, for example, a prohibition on loans from U.S. financial institutions to parties abroad that had been designated by the U.S. Treasury’s Office of Foreign Assets Control. These sanctions also called for the closure of U.S. correspondent accounts for foreign designated banks. Thus, it is true that both secondary sanctions and actions under Section 311 can be said to cut foreign banks off from the U.S. financial system.
The purpose of most sanctions against Iran, however, was to get it to negotiate with Washington over its nuclear weapons program. Others targeted human rights abuses, ballistic missile development, support for terrorism, and activities in the Middle East considered destabilizing by the United States. Section 311, in contrast, is designed to protect the integrity of the U.S. financial system. In this regard, banks have an understanding that the U.S. Treasury will only rescind a 311 finding or rule when the targeted banks can demonstrate that they have the proper controls in place—not when a country alters its foreign policy, for example. The U.S. Treasury’s track record on unwinding sanctions, meanwhile, is tied to changes in the political behavior that brought sanctions on in the first place. In short, Section 311 is the wrong instrument for coercing foreign governments to serve ends that are unrelated to protecting the financial system.
NOT A BARGAINING CHIP
If Section 311 is applied or revoked too often in service of politics, the tool will lose its main source of strength: international support for the measure and trust that the U.S. Treasury’s professed concerns over illicit finance are made in good faith and independent of political calculation. In other words, if bankers around the world see Section 311 as just another sanctions measure, as opposed to a mechanism to help protect the integrity of their institutions, they will lose the incentive to isolate designated banks even when not legally required to do so. What’s more, foreign financial institutions with poor controls for monitoring illicit financing may be less motivated to improve their systems. After observing the repeated political use of the tool, they will stop seeing Section 311 designation as a threat.
From time to time, the use of Section 311 may coincide with foreign policy initiatives, just as it has in the past. In 2005, for example, as China, Japan, Russia, South Korea, and the United States engaged in multilateral talks with North Korea, the U.S. Treasury acted against the Macao-based Banco Delta Asia, accusing the bank of laundering money for the regime of former leader Kim Jong-il. Even so, the United States must guard its financial tools carefully. For starters, the Trump administration should refrain from including the 311 measures against the Bank of Dandong on its agenda for negotiations with Beijing. The U.S. Treasury should rescind the restrictions only when the Bank of Dandong addresses all the deficiencies that were identified in the June findings, and not when or if Beijing cracks down more harshly on Pyongyang.
Going forward, the U.S. Treasury should deploy Section 311 in more non-crisis situations to demonstrate the tool’s apolitical nature. Most importantly, the United States should employ sanctions, not Section 311, when it intends to coerce another country to change its foreign policy. If the U.S. Treasury identifies banks that do not have sufficient controls for identifying illicit funds, it should consider applying both options simultaneously so that each can be reversed when appropriate. And the next time Section 311 is used during a crisis or diplomatic impasse, the U.S. Treasury should send a strong message to remind banks around the world that Section 311 is a tool meant to protect financial integrity—and not intended for use as a bargaining chip.
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