Congress wants to strengthen financial sanctions against Islamic State

By KAROUN DEMIRJIAN | Washington Post | Published: December 29, 2015

WASHINGTON — With Washington at loggerheads over how to counter the Islamic State on the ground, both parties are proposing expanded financial sanctions as a strategy to assail the terrorist group's operations.

Republicans like Jeb Hensarling, chair of the House Financial Services Committee, and Democrats such as Senate Minority Leader Harry Reid, are calling for Congress to pass new laws to further cut off the group's financial networks. And panels on both sides of the Capitol are examining ways to enhance such sanctions next year.

ISIS is only the latest foreign aggressor that Washington is trying to neuter with sanctions through the Treasury Department's Office of Foreign Assets Control (OFAC), which implements and enforces economic restrictions against a variety of terrorist organizations, rogue nations and regimes with which the United States has complex relations - such as Russia after its invasion of Ukraine, and Iran, with whom the country recently struck a nuclear pact.

"Sanctions have become an increasingly popular alternative between words and war," said acting OFAC director John Smith during a recent interview.

But the nature of the ISIS threat, and Congress' zeal to respond to Paris and San Bernardino with more sanctions, is stirring a debate about whether more sanctions will actually be helpful. Some wonder whether lawmakers would be better focused on the political impasse over the anti-ISIS military strategy, or on confirming Adam Szubin, the acting Treasury undersecretary for terrorism and financial crimes, whose nomination has been stalled since the spring.

"Sanctions not only can block you out of the international financial system, but from crossing a border, or getting on a plane, or getting on a train. And so our lists can do all of that - and that can be incredibly impactful," Smith said. But, he added: "Economic sanctions are not the answer to every one of the world's problems."

Seventy-five years ago, when the Treasury's sanctions office was set up - then as the Office of Foreign Funds Control - its mandate was comparatively simple: Keep foreign assets from getting into the hands of Nazis, and preserve them for the more legitimate governments that would follow.

For decades, the work that the FFC, and later OFAC, would do focused chiefly on sanctioning states, from the Soviet Union to Cuba to Iraq to South Africa, with varying degrees of across-the-board economic restrictions. Over the last 20 years, humanitarian concerns led the United States to adopt "targeted" or "smart" sanctions instead, to alleviate the economic burden on civilian populations. Since Sept. 11, 2001, much of OFAC's efforts are concentrated on effectively sanctioning terrorist entities and governments that sponsor terrorists, such as al-Qaida and its affiliates, and cyber-hacking networks.

As the global conflicts grew more complex and terrorism rose, OFAC's portfolio grew significantly. While the office managed about a dozen active sanctions programs in 2000, it now counts over 40, including efforts to sanction the Islamic State.

OFAC has been sanctioning several leaders of ISIS and its spinoff groups under Executive Order 13224, which has let the government target terrorists and their facilitators since it was issued in 2001. The Treasury Department is working with foreign governments, such as Iraq, to cut off ISIS's access to local financial networks.

But experts point to ISIS as a unique kind of threat, even for an agency as experienced as OFAC, because of its hybrid nature: Terrorist in its tactics and purpose, but state-like because it controls such a broad swath of territory, with access to local resources and populations to tax. That structure requires OFAC to address the ISIS threat with unique combinations of its tools.

"You can apply dimensions of the Treasury playbook from the past decade quite well if you've got the right intel, but you've got an enemy that has adapted and learned to move money in territory it controls," said Juan Carlos Zarate, a counterterrorism expert with the Center for Strategic and International Studies, and a former assistant Treasury secretary for terrorism and financial crimes during the George W. Bush administration. "That creates complications beyond what Treasury has been able to handle in the past."

Congress's determination to give OFAC new sanctioning tools is a testament to "the experience of sanctions over the last decade actually working and having some effect," Zarate continued

Yet it's somewhat misguided to think expanding the toolkit of sanctions is the answer, he argued.

"You need more financial intelligence, more cooperation, and ultimately, the major dimension to this is the physical disruption on the ground," he said.

Treasury officials seem to agree that adding to their range of existing options might have limited effect.

They stress that foreign banks already pay close attention to the United States' Specially Designated Nationals List, which freezes the assets of individuals and companies prohibiting them from doing almost all dollar-denominated business. They stress that the current sanctions can interrupt the Islamic State's connection to the outside world, even if they can't prevent the group from accessing money through other means, such as plundering bank vaults in territory they seize.

In a recent CNN interview, Treasury Secretary Jack Lew didn't press for more sanctioning tools, but more support for coordination between the U.S. and its international partners.

"We've shut the formal banking system off from ISIS," Lew said. "What we need to do now is be effective and only the world community together can do that."

The world community took a step toward such coordination last week, when the U.N. Security Council adopted a resolution to interrupt the flow of funds that ISIS receives from selling oil, antiquities, stolen goods, and other criminal enterprises. While the sanctions are more a repackaging of existing measures, the united front from global powers otherwise at loggerheads over their ISIS strategy is significant.

"By having the U.N. rules in place, now we've got an ability to say, it's not just us, it's the U.N. too," said Richard Nephew, head of Columbia University's Center on Global Energy Policy and a former top State Department official on sanctions policy who served on the U.S. team negotiating a nuclear deal with Iran.

The one area in which Congress might be able to augment OFAC's ability to effectively sanction entities like the Islamic State, Nephew continued, is by passing laws to allow for secondary sanctions. That would effectively allow the U.S. to cut off non-U.S. entities engaging with those whose assets are frozen in the same way as they would a designated entity.

"But the real question is whether or not that is going to have any material benefit on what we have done," Nephew said.

"My guess is no," he added.

Instead, equipping OFAC with people who can maximize the its existing tools is paramount, Nephew concluded.

"The fact that Adam [Szubin] is where he is means that his replacements can't be hired behind him," Nephew said. "There may be some additional value of additional tools, but really, it's having enough people on deck to use the tools you've got."