Executive Branch

The Lawfare Podcast: Sanctions Past, Present, and Future with OFAC Director Brad Smith

Scott R. Anderson, Brandon L. Van Grack, Brad Smith
Thursday, February 29, 2024, 8:00 AM
How has the Biden administration used economic sanctions?

Published by The Lawfare Institute
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Over the past several decades, financial sanctions have become one of the most widely used tools in the U.S. foreign policy arsenal. And since Russia’s invasion of Ukraine two years ago, the Biden administration has wielded them in a number of innovative ways. At the same time, some of these uses have also triggered concerns about U.S. overreach, something that could have consequences for both U.S. national security and the health of the U.S. economy. 

To better understand how the U.S. government is approaching its financial sanctions policies today, Lawfare Senior Editor Scott R. Anderson and Lawfare Contributing Editor Brandon Van Grack sat down with the man who manages them: Brad Smith, the Director of the Office of Foreign Assets Control (or “OFAC”) at the U.S. Department of the Treasury. A veteran of U.S. sanctions policy, Smith walked through some of the history of sanctions, lessons the Biden administration has learned from past efforts, and how these lessons are being applied to new challenges, including from Russia. 

This is the latest entry in our special “The Regulators” series, co-sponsored with Morrison Foerster, in which Brandon and Scott sit down with some of the senior officials working at the front lines of U.S. national security policy. 

Click the button below to view a transcript of this podcast. Please note that the transcript was auto-generated and may contain errors.



[Audio Excerpt]

Brad Smith: We're always going to be looking for new points of pressure to bring to bear on Russia. And our objectives are pretty straightforward. First of all, we want to deny Russia revenue that it can use for its war machine. And second, we want to deny Russia the goods that it uses to produce the war material that it's trying to lob into Ukraine. And those very simple objectives have been at the forefront of the policy over the last two years and really have been at the center of every action that we have taken. Now there are nuances there because we're aware of Russia and its presence in the energy world. And we are trying to find ways in which we can take these actions without unduly destabilizing the global economy and perhaps undermining the broader objectives that are at play.

[Main Podcast]

Scott R. Anderson: I'm Scott R. Anderson, and this is the Lawfare Podcast for February 29th, 2024. Over the past several decades, financial sanctions have become one of the most widely used tools in the U.S. foreign policy arsenal. And since Russia's invasion of Ukraine two years ago, the Biden administration has wielded them in a number of innovative ways. At the same time, some of these uses have also triggered concerns about U.S. overreach, something that could have consequences for both national security and the health of the U.S. economy. To better understand how the U.S. government is approaching its financial sanctions policies today, Lawfare Contributing Editor Brandon Van Grack and I sat down with the man who manages them, Brad Smith, the Director of the Office of Foreign Assets Control, or OFAC, at the U.S. Department of the Treasury. A veteran of U.S. sanctions policy, Smith walked us through some of the history of sanctions, lessons the Biden administration has learned from past efforts, and how these lessons are being applied. to new challenges, including from Russia. This is the latest entry in our special The Regulator series, co-sponsored with Morrison & Foerster, in which Brandon and I sit down with some of the senior officials working at the front lines of U.S. national security policy.

It's the Lawfare Podcast for February 29th: Sanctions Past, Present and Future with OFAC Director Brad Smith.

Brandon Van Grack: Brad, to begin, I want to talk a little bit about your background because you've been dealing with OFAC, as far as I can tell, it's at least three administrations, maybe four, from the Bush to Biden, dealing with sanctions in one way, shape or form over a decade over at the Office of Foreign Assets Control and then time before that at the Justice Department. And maybe as a baseline, just if you could talk about, first, can you define sanctions for our audience? And then I think it'd be helpful just if you could walk through, really over the four administrations, like how sanctions have evolved as a national security tool.

Brad Smith: Sure. So I guess I would begin by just saying sanctions have always been part of U.S. foreign policy. If you were to go back to the founding and look at the Napoleonic Wars, you would see that President Adams and then Jefferson were considering sanctions authorities. So sanctions as a concept are not new. Now, I started to get exposed to them about 2006 in the second term of the George W. Bush administration, when I was an attorney advisor in the Office of Legal Counsel. And ironically, one of the first things I worked on was the ramp-up of the Burma program, which was a high priority for the Bush administration and for the First Lady. Over time, I would say what I have observed with respect to sanctions from a variety of different roles as a purely legal perspective at OLC, and more of a policy role in the Deputy Attorney General's office, and then also in a legal and policy role at the National Security Council for a couple years. And then my current role over the last 10 years in different positions at OFAC is that sanctions have always been a point of inflection and discussion in terms of national security crises that we might be facing. What has probably evolved and changed is when I started at OFAC or Treasury, it would be unusual to have more than one or two rollouts of a sanctions action a week.Over the last probably eight years or so, we've picked up the tempo such that she might have regularly two a week throughout a week. And I think that's because we've seen over time that sanctions can be pretty effective with respect to individual targets and individual actors. And also they're a tool that's available to us when we want to take something short of kinetic action. And sanctions, broadly described, can fall into a lot of different buckets. It's a term that, if you were to talk to a foreign government, they might be thinking about tariffs. They might be thinking about something our Commerce Department colleagues would impose. When I talk about sanctions from a Treasury perspective, I'm thinking about, broadly speaking, a toolkit that allows us to do a variety of things, but at the base level, essentially imposes two different prohibitions.

First of all, it prohibits U.S. persons, wherever located around the world, from engaging in any transaction with our target. And our target might be an individual, it might be an entity, or it might be a country. The second thing that sanctions do, and this is, I think, probably more the traditional sense in which they're used or thought about, is they immobilize and freeze, in the United States, any asset that target or that regime holds. And then under various regulations we have, they're then held and they earn interest until we pull down the national emergency that stood up the program. But at its core, sanctions effectively say to U.S. persons and U.S. industries, "You can't deal with this target and you can't move anything that they have within the United States."

Brandon Van Grack: I want to continue with sanctions 101. So we talked about what sanctions are and then want to talk about the agency that you lead, OFAC, which after DOJ is the acronym I probably use the most with respect to the government. So the Office of Foreign Assets Control, could you just place that in terms of what we just talked about in terms of the tool?

Brad Smith: Yeah, sure. So as I mentioned, sanctions have been around, really, for the last 200 years. And they've been in the Treasury Department since their founding. They were deployed perhaps most aggressively in the pre-modern era during the Civil War. And you actually would have debates within the Treasury Department using the same terminology we use today about whether or not we should license certain transactions with the South to send cotton to the North. But in the modern era, OFAC, the Office of Foreign Assets Control, was stood up around 1940, before the United States entered World War II. We were stood up to essentially undertake what we call a protective blocking. And basically what was happening is countries around Europe were being overrun by the Nazis, and President Roosevelt didn't want those assets to fall into Nazi hands. And so OFAC, we were called the Control then, and it's not a name we hope to bring back in some level, but essentially it was stood up to protect and hold the assets of countries as they fell to the Nazis. And then, as the United States entered World War II, OFAC ramped up to full force, and we were responsible for helping to immobilize, and then in certain circumstances, administer assets that were frozen belonging to the Axis powers. OFAC has more or less been in existence since that time. There was a brief period after World War II where we were transferred as a functional matter to the Department of Justice. But then President Truman brought us back to full life with the Korean War in December of 1950, when Treasury sanctions were imposed. And we have actually been in existence in treasury since that time, and have actually been administering the North Korea sanctions program since President Truman put it back in place in 1950.

Now over time as foreign policy and national security threats have evolved, our mission has evolved. You can imagine that during the Cold War, there were certain programs we had in place that have gone away and evolved. And we have gone up and down depending on the threats that the country faced. We probably reached--and I'd have to check data and don't know if this is precisely accurate--but I think we reached our, at least in the modern sense, smallest size actually right before 9/11. And then with the terrorist attacks on 9/11, there was a realization that terrorism, like so many other threats, is ultimately financed by money, and we have to do everything we can to try to immobilize those assets. And so in the wake of 9/11, OFAC was charged, working with a lot of our colleagues around the government, including a number of offices within Treasury, of trying to help track down, identify, and immobilize terrorist-related assets. And since that time, we've had a gradual increase in, I would say, expansion of our authorities to address a variety of different national security threats. If you were to think about our historic programs that have been a continuous operation, North Korea ebbing and flowing in terms of some of the prohibitions; Cuba, which we have administered since President Kennedy imposed the embargo in the 1960s. And then it's evolved and changed quite a bit, but Iran has been a constant program, initially tied to the fall of the embassy, and then in the mid 1990s with President Clinton, an increased focus on terrorism. And those have been some of our constants, augmented, as I mentioned, after 9/11, and then an expansion to deal with terrorist related threats. All told, OFAC right now is starting to approach not quite where we were at World War II in terms of size, but we're about 320 folks if we are fully staffed at any given time. And we are responsible for administering, depending on how you count them, roughly three dozen different sanctions programs.

Now sanctions programs have a variety of different authorities. If you look historically, sometimes they were grounded simply in Article II of the Constitution. In the modern era, sanctions have been administered using what I call some of the Watergate-era laws. Essentially IEPA, the International Emergency Economic Powers Act, which was passed in the mid 1970s along with the National Emergencies Act to try to ensure there was some congressional oversight over the president's assertion of authority in the national security space. And essentially, what that means is the president has to make a finding and declare, we usually do it through an executive order, a national emergency that identifies a threat and then authorizes anyone in the Executive Branch, historically it's been Treasury or the State Department, to administer economic sanctions, and then on an annual basis, the president will renew that national emergency. There are certain statutes that also are in existence that underline some of our authorities. Congress over the years has augmented some of that IEPA authority. In some instances, pushing us to take additional actions. In some instances, trying to freeze in place some of our authorities. And I should caveat all this by saying Cuba is a special program that exists under a sort of a grandfathered authority that actually came around from World War I, the Trading with the Enemy Act. And that authority, through a statute that was passed in 1996, is basically codified through both regulations and then regulations that Congress has essentially made out of the force of law. But that's, roughly speaking, the legal infrastructure under which we operate.

Brandon Van Grack: I love this. I think we should print this out as a pamphlet and hand it to every law student that wants to get into national security law. It's it was those perfect pros. Go ahead, Scott.

Scott R. Anderson: We are going to spend a lot of our time here talking about Russia. The last two years have been a seminal era in the application of sanctions used in different ways, interesting ways, scale, pace, all sorts of variables have really changed. But even before that moment two years ago where we faced this crisis of Russia's invasion of Ukraine, the Biden administration, your office, and work that probably preceded the Biden administration substantially, had already taken a moment to think back about how we use sanctions, particularly financial sanctions of the sort that OFAC administers, and conducted a pretty interesting, a short, but interesting, insightful strategic review that released in 2021 that kind of laid out certain touchstones about how to approach sanctions policies, some of which reflected some learning over the prior particularly 20 years of experience since 9/11 when we've seen the skyrocketing in the use of this tool.

Tell us a little bit about that learning process and some of the key lessons that you've taken away from it, your office has taken away from it.

Brad Smith: Absolutely. I think some folks would be surprised, but we really welcome the sanctions review. Because I will tell you candidly, at the Treasury Department, we often are concerned that the tool can be overused. It's a bipartisan issue and administrations have all, at some level and at some point in time, initiated reviews. They've never really come as far as the one that was undertaken a few years ago by Treasury, but it is a process that I think is healthy. Because we've been using this tool pretty aggressively for the last 20 years. We've been deploying it across a variety of threats and we've been doing it at a time in which there have been increased questions about whether or not the U.S. will continue to have economic dominance and the dollar will continue to be the reserve currency. And sometimes there has been concern that sanctions, though pushed in a number of different directions, isn't fully coordinated around the national security apparatus. That's understandable. People are really focused on a couple different issues. They're focused on the area that is of concern to them, but they may not be aware of how that tool is being operated and deployed in other settings. And the sanctions review, as I thought of it and heard it messaged to us and the way we participated in it within Treasury, was really to assess, okay, we have this tool. It can be very powerful and effective. Are we doing it in the right way and at the right time? And when we think about sanctions, rather than instinctively just reaching for them, what are the questions that we want to ask? And I think some of the principles that we saw come out of that review are really ones that, again, across administrations, different policy makers have highlighted. But what they underline is that sanctions are going to be most effective when we know up front what we're trying to achieve. If you simply throw it at a problem without asking what it will achieve and if it will help advance the policy goal, you might be disappointed or you might have unreasonable expectations. And so trying to frame up front in the policy apparatus the question of what our objective is was a real theme of that review.

Another thing that I think actually we've seen in the CT space or in the North Korea space is that we recognize sanctions are going to be most effective when they're used multilaterally. And if we're going to deploy an authority or take an action, a fundamental question I think we always want to ask, but that was really stressed as part of this review, is do we have allies or partners who are going to support us either publicly or quietly? The third part of it in my mind that, again, is, I think, part of an objective that's always been a focus but has come more and more to the surface as the tool has expanded, is what do we need to do up front or after implementation to mitigate unintended consequences? Because we know that there are times where sanctions can be a very blunt instrument, we also know, because you deploy them often in a way in which you're trying to immobilize assets before they leave the U.S. system, that we may catch some things we don't want to. Or we may chill certain activity that we actually want to encourage. So increasingly, part of that review underlined the need to make sure we're trying to think through consequences up front.

And the other part of it that was really important, I think, internally for the workforce, is also understanding, okay, what do we need to invest to make sure we're responding effectively to the demands that are being placed on the tool? And that can include such basic things as investing and IT infrastructure to make sure we're processing and gathering information that comes in effectively. That we have in place a workforce that is adjusting to the demands that are being placed upon us, but also developing expertise on certain areas and segments that are very important as we move into a new economy and a new world. And so those are some of the themes that I've seen. The nice thing about the sanctions review and the principles is that there's something that can be applied in any policy discussion, but there are also things that can evolve as the tool evolves and as the threats evolve. And I think it's a process that certainly has been embraced within Treasury and we hope more broadly.

Brandon Van Grack: This month marks the two year anniversary of Russia's invasion of Ukraine, and as we've mentioned, the sanctions now, collectively over those two years, I think the term unprecedented gets used all the time, but unprecedented in many ways, the scale, the scope, the speed, the multilateralism, there's many superlatives we could use to talk about them. And so it struck us as a good time to take a step back, in line with what you just talked about, to look at these two years' worth of sanctions. And I think maybe to start, we don't have enough time to explain all of them, right? But I'm wondering, what strikes you most, looking back now over the two years, what of those sanctions strikes you as most remarkable over what's been done these last two years?

Brad Smith: If I were to look back just the last two years, what I would say has struck me the most would be the multilateral impact of the sanctions, the way in which European allies, as well as allies around the world in the G20 and the G7, mobilized quite quickly to respond. I think, in fact, if you were to look at the Russia sanctions program going back, let's say, 10 years, something that's always struck me is the way in which at times, the United States deliberately has allowed other countries to lead and recognizing that sometimes having either the E.U. or if you think in 2014, 2015, Canada, taking the lead and pushing out a new initiative created an environment in which there were a lot of partners who might want to join us. And so I would just say the extraordinary speed with which the United States, the U.K., the E.U., you think of Japan, South Korea, a lot of countries around the world, basically the entire Five Eye universe in a lot of ways, stood up the sanctioner dream, stood up things that are in so many ways very nuanced and unprecedented and build a little bit on what was done ten years ago, but really expanded the scope in a way that I don't think an outside observer three years ago would have guessed would have been possible.

Brandon Van Grack: And I want to press on that because I'll consider myself an outside observer. I was last in the government over three years ago, and I'm wondering the difference between your engagement with your foreign counterparts today than what it looked like three years ago before the invasion.

Brad Smith: Yeah, and I worry, I don't want anything I say to be misinterpreted on this and how I think a foreign country would view it, but I would say 10 years ago when Crimea was invaded, it seemed to catch everybody by surprise. Two years ago, it wasn't a surprise that Russia was going to invade Ukraine. It had been messaged. European countries were coming on board. We had started preparing for it in the fall before the actual invasion unfolded. And so there was probably a longer ramp to build up. I think too, the scale and breadth of Russia's invasion in the last two years shocked the world out of complacency. That this threat that we thought had hopefully gone away after the Second World War, in fact, was still very much in existence. And that a country that was leaning towards liberal democratic impulses and trying to westernize could be threatened by Russia in a way that could be existential to the existence of the continent or the values that we and our European allies have tried to uphold since the end of the Second World War, I think, really brought home in sharp relief sometimes these threats that maybe I, too naively, thought had gone away and were in fact very real and could happen to a society in a world that we thought of as Western. And I think we thought of Russia as Western in a lot of ways at that time.

The other thing that I think struck me, and I still find it actually pretty moving, was the way in which the private sector moved. Because they also took a position, when you look at what we were rolling out in February and March of two years ago, the private sector went further than we did. Because they felt that, look, morally, even though it's against our business interests, we can't associate ourselves or our brand or our businesses or our people with this type of regime. And I think seeing that harmonization of government policy but also simple moral impulse in the business community was what struck me as incredible.

Scott R. Anderson: So I think we want to dig in deeper on some of these things. Before we do though, I think it's worth acknowledging the news, because of course we've seen just in the last few days one of the more notable developments in the sanctions space of the last two years. More than 500 new individuals and entities designated around the two year anniversary, also around the death of Alexei Navalny in the last week or two. Tell us a bit about this latest wave of sanctions, and how it fits into what is the strategy as it's continuing now two years after the initial implementation. Who's on this list, what are the entities being targeted, and what's left? Like what is the strategy moving forward, is it simply about gap filling? Are there new points of pressure that we're trying to bring to bear on Russia?

Brad Smith: I would say, broadly speaking, we're always going to be looking for new points of pressure to bring to bear on Russia. And our objectives are pretty straightforward. First of all, we want to deny Russia revenue that it can use for its war machine. And second, we want to deny Russia the goods that it uses to produce the war material that it's trying to lob into Ukraine. And those very simple objectives have been at the forefront of the policy over the last two years and really have been at the center of every action that we have taken. Now, there are nuances there because we're aware of Russia and its presence in the energy world, and we are trying to find ways in which we can take these actions without unduly destabilizing the global economy and perhaps undermining the broader objectives that are at play. In the most recent round of actions, I think you saw a few different themes that really build on those broader points. First of all, you saw us targeting and identifying a number of companies in Russia that we believe are directly involved in producing war goods. And the reason that's important is because it's very easy, once names and individuals are identified, for sophisticated actors in global markets to say, "Hey, I shouldn't be doing anything with this target." And so it makes compliance, we hope, a lot easier, but it also gives us a lot more leverage if someone continues to deal with those targets to then go after them down the road.

The second thing we did is we looked and found third-country actors who we believe were supplying Russia and the war machine by providing goods, things like grease for equipment, ball bearings, technology that's used to manufacture goods, parts that with commerce we've identified as being at risk even if maybe two years ago you wouldn't have ostensibly thought of them as being a war good. And we hit those third country actors as a way of signaling just because you're outside of Russia doesn't mean you aren't a participant in helping to facilitate or build that war machine. The third thing that we did is we continued to tighten the screws, and they've been really tightened if you think about what's happened over the last two years, but on Russia's financial system. We went after, in this round, basically the infrastructure that undergirds their payment system mirror, and that we believe will continue to signal to some of these third countries that there are problems if you try to deal with Russia and try to support some of its activity.

And then the third big bucket that I would say jumps to mind with me would be going after Sovcomflot, which is essentially Russia's state-owned marine arm that's being used to transport a lot of its oil around the world. And this builds on the activity since December of 2022 and what we call the price cap, where essentially what we've been trying to do is ensure that if Russia goes on to the international oil market, it's selling its oil at a price that is at or below our price cap when they're using essentially Western services. And we identified that fleet and about 14 of the vessels that they own as a way of further signaling that we are tracking and monitoring this activity and that we intend to go after and, where we can, disrupt some of the revenue flow to Russia and the way in which those funds can then be put to use for the war machine.

Brandon Van Grack: In terms of this most recent announcement from last week, how much of that was tied to, in fact, the two year anniversary versus the death of Navalny?

Brad Smith: I would say both of them. There's no surprise when you see the calendar coming that the two year anniversary is coming and you want to send a message just as we did on the one year anniversary. So of course there were things that we had in the hopper and we had been planning for some time. But then you have Navalny's death, and that obviously is just going to ramp up the desire to signal because his tragic passing really, I think, reminds us of what we're fighting against, not just the horrors in Ukraine, but also the brazen way in which you can extinguish effectively one way or another, extinguish a life of a dissident. You can't get much more fundamental in terms of what we're dealing with right now than his death. And of course, on the anniversary, that's something that we have to respond to.

Scott R. Anderson: So you've mentioned a lot of the key strategic elements of this plan, and you mentioned the objectives. How, two years in, do we grade the accomplishment of those objectives? We've seen a lot of stories in the media, frankly, of the last few months about a Russian economic recovery, where they've seemed to have weathered, or at least by media accounts have weathered, some of the initial tumult following the invasion. And we've seen Russia making gains on the battlefield. A lot of that is about shortages on the Ukrainian side, that is an entirely separate issue. But there is a part of it about Russia, both on the personnel side and on the material side, having stabilized some of their production processes, supply chains. How effective do you think these tools and strategies are fairing thus far? And does this mean that we need to adjust these tools or up them in certain ways? Are there steps we can take or different ways to use them we need to account for if we're gonna accomplish these objectives moving forward?

Brad Smith: No, I think we can't lose sight of the fact that we're in a war setting. Anytime you're in a war setting, even though we're obviously not a direct participant, you're going to have to adjust as things ebb and flow. We never had the expectation that sanctions would immediately cut off every single thing flowing to Russia. That's not realistic. There's no period in history where that has happened. But if you look at where Russia is from where they were two years ago, I think you can say that sanctions have been an effective tool in trying to slow and complicate their war-making process. The economists who are the real experts at Treasury would quote it better, but I think Russia's economy is well below where they were supposed to be according to IMF estimates two years ago. When you look at what they've done is they have had to effectively shift to a full wartime economy where they are diverting all their investment, all their resources, to trying to backfill. That's a huge complication for them. Not only that, they're backfilling with lesser products, weaker goods. There is a lot of frustration in their system. Even their Deputy Prime Minister spoke publicly about the impact the price cap is having on their revenue flow. In terms of gumming up their system, frustrating their ability to rearm, complicating their war machine, I don't think you can say anything other than that sanctions have been a success. It doesn't mean we aren't going to be looking for ways in which they're being evaded, doesn't mean we aren't going to be looking for ways in which we can apply additional pressure points. We should be doing that. That's part of our job. It's part of what you have to expect in this space. But it doesn't mean that they're a failure. Sanctions are always going to be, when you're in an armed conflict, a complementary tool.

The heroes in this conflict are, of course, the people in Ukraine, who have held out so brilliantly and so bravely for so long. But they obviously aren't going to have goods to continue that fight. And that's not something that we are necessarily going to be producing at OFAC, but we're going to do everything we can to help with their effort by making their lives easier by complicating Russia's ability to wage war. And on that front, I think we're seeing by both Russia's admissions, but objective data, that there has been progress and there has been a success and we should take pride in what we collectively in the Western world have been able to impose over the last couple of years.

Brandon Van Grack: In this discussion, you talk about some of the limits of sanctions, but I will say that for I think maybe every podcast we've had on The Regulators, I always mentioned that I think sanctions are the tip of the national security spear, depending on the guest they don't always agree with that. But I still think that to be true. And so I say that because one of the things you mentioned is we talked about this historic rollout of sanctions that happened last week. I'm wondering, just to talk about what's in the hopper, so to speak. One of the things that's remarkable about these sanctions are secondary sanctions, which I'm a little intimidated to ask you to explain it to the audience, but I do think it's worth because it strikes me as not just one of the features of sanctions targeting Russia, which makes it remarkable, but a potential tool that could be also redeployed and expanded going forward. And I'm wondering if we could just talk a little bit about the secondary sanctions and how they're being utilized.

Brad Smith: Sure. No, I'd be happy to. And I'll start with giving you my baseline definition, because sometimes secondary sanctions is a term that's tossed around and people have different understandings and different meanings. That term actually was coined just about probably 12 years ago in the Iran context. And I'm going to credit Lisa Palaconi an OFACer, our current deputy director, who I think first used it. But effectively, what it was described and used at the time to mean was essentially, if a foreign financial institution facilitated a significant transaction with somebody that we have designated, that we had sanctioned, or potentially a regime, that we could cut off their correspondent account. Essentially, we would say, "You cannot bank in the United States if you engage with these targets of ours." And that tool was first discussed and used in connection with Iran, and it was deployed with respect to one bank at that time. Now, the concept behind secondary sanctions is actually fairly basic and it's baked into almost every executive order that's behind an OFAC sanctions program. And it's essentially saying if you provide material support to somebody that we've targeted, we have the ability to come after you. And that is sometimes also what people mean when they say secondary sanctions.

Now, perhaps fortunately or wisely or just to avoid confusion or, blend definitions, we did both with the recent--or, I should say, the president, did both in December of last year where he rolled out a new executive order that explicitly gives us the ability to impose sanctions on foreign financial institutions that more or less engage in a significant transaction or help facilitate a significant transaction or service with parties operating in Russia's military industrial base. And the authority that we have under that executive order allows us to impose what we would call full sanctions, full blockings, where everything, asset they have in the United States is frozen. But also explicitly gave us the authority to cut off their correspondent accounts. And that is traditionally what foreign banks and others understand to be secondary sanctions. The reason we think that's important, and the reason we did that, is building off some of the points we had talked about earlier. We know that Russia's trying to go to third countries to get supplies, but we also know they have to pay for those supplies through financing or simple transactions and transfers. And one way in which we can choke off their ability to get those goods is by targeting financial institutions that help facilitate those transactions. We've not been subtle about this. We have been talking to governments and countries around the world, including the banking sector as well, both domestically and internationally, about what our concerns are. And sometimes just having those soft conversations can lead to positive results. And what we want to see are that banks and financial actors around the world are scrutinizing transactions that maybe on their face two years ago wouldn't have looked suspicious to ensure that, in fact, we aren't sending things, or they aren't helping to send things, to Russia that are going to be turned around and used against the fighters in Ukraine.

Brandon Van Grack: I'm appreciative that you invoked Lisa's name as the originator of the term, because she taught me secondary sanctions like nine years ago in the context of Iran.

Brad Smith: She's still teaching me.

Brandon Van Grack: Yeah, so it means I had a good teacher.

Brad Smith: Yeah, that's right. The best, absolutely.

Scott R. Anderson: That opens up a good line of inquiry that's worth digging down a little bit more that you mentioned before, and obviously is important in the context of Russia, that is the multilateralism question. Because secondary sanctions, along with extraterritorial enforcement and regulation, always a sensitive point with European allies, other international allies. Not always, but often. How do you balance the secondary sanctions calculus with the need for a multilateral strategy? How do you avoid the perception or the understanding by some allies that you're intruding in their regulatory space? I guess more generally, how does the need to deploy these tools interface with the drive for multilateralism? How do you calibrate those and when is multilateralism most important, most effective, the higher priority that you pursue in these sorts of measures?

Brad Smith: I would say that is a great question. The first thing I would offer is in some ways Russia made it easy for us. When we talk about secondary sanctions, historically where we would often get complaints and frustration would be from European allies in large European banks that engage in trade-related transactions around the world. With respect to Russia and the invasion of Ukraine, we have common cause. They may not have the exact same authorities that we do. They may have limits on what some might characterize as extraterritorial approaches. But overall, the objective of ensuring third countries aren't helping to rearm Russia is a common one. And so with respect to this newest authority, it's an area that hasn't caused as much friction as you might expect in other contexts, say, Cuba, where it's pretty clear a lot of our allies don't agree with that sanctions regime and there's sometimes conflict between our domestic laws.

The way we try to address those issues, though most directly, is through communication, by engaging with governments in relevant financial sectors in advance, by trying to articulate as clearly as possible what we're trying to achieve, by reaching out to industry and explaining our concerns so that when we take an action, if we have to take an action, no one is caught by surprise, and there can be a candid assessment of risk by all relevant actors. And I think we've been able to do that over the last few months with respect to the new secondary sanctions authorities we have on foreign financial institutions. And we've done that not just with Europe, but with countries and institutions around the world. And I think that's a real credit to some of the objectives that were outlined in the sanctions review, but also to the maturing way in which we approach sanctions questions, recognizing that sometimes being a little more transparent than maybe we were in the past can actually yield better results.

Brandon Van Grack: So you mentioned in discussing the strategic review, the difficulty of avoiding unwanted consequences or unintended consequences. In my mind, that often boils down to what a lot of people describe as de-risking or excess de-risking, this idea that people are going to overreact to sanctions. How has your office come to think about and approach that? Because Russia is an interesting case study for folks who are really tracking this. It's a double-edged coin. One edge gets a lot more attention than the other. You see the designated entity and then you have the more permissive licenses that come after and start authorizing things. And in Russia we saw a really complex evolving array of licenses with especially when you're, we're talking about sanctions on financial instruments. You saw long lead in times, slow escalations, sometimes even licenses that would adjust and be responding to perceptions among investors, financial institutions, concerns. And it struck me as a really interesting and difficult policy balance to strike to say, how do you calibrate your communication? What have we learned about that excess de-risking? How big a priority is that for you all in this context and other contexts? And have you changed, in fact, how OFAC approaches sanctioning when you're dealing, particularly, with another major economic power like the Russia sanctions, to account for the potentially negative effects of de-risking that might be more prominent than if you were designating a terrorist entity or a drug trafficker?

Brad Smith: Absolutely. I think hopefully anybody in government, and certainly all the people that I respect in government, we at OFAC have tried to evolve and learn from some of our past experiences, and if we didn't do that, we wouldn't be good stewards, which I think we all think we are, we wanna be anyway, are good stewards of this public trust. And what we've seen over time is because we do not usually take actions through a notice and comment period, we have to move based on information that we've gathered sometimes through soft conversations with the private sector, sometimes through sophisticated economic analysis, sometimes through intel and law enforcement leads. And we have to make our best judgment about the impact we're going to have up front without always soliciting that feedback. And over time, we have seen sometimes and learned from experiences, you might take an action and if you don't authorize a wind down, something which essentially says, "Hey, you can get out of business with this target," we're going to be flooded with requests, there's going to be panic in industry, and we're going to trap a lot of innocent folks who are trying to just do their best and support our overall policy. So we built out some lead times that try to be a little bit less disruptive, I should say. We want to currently, of course, disrupt and impact and harm Russia and the transactions that are going through the system. But we also want to ensure that we create some space where good faith actors understand that they have an opportunity to come in, to work with us, to bring to the surface some of the nuances that might be seen, and we can talk through ways in which they might be able to respond to the new prohibitions, if appropriate, extract themselves from an area or region or business enterprise that had been targeted. And so when we think about some of the longer wind downs you may see in the Russia program, it's really just trying to match what we would have been doing through a private licensing apparatus in the normal course of business without those public ones up front. And it's a design, it's a way to signal to industry, there's space here, let's sort this since you're being blindsided by this action. At the same time, individuals and entities that are paying attention to our sanctions and our licenses are also going to understand that doesn't mean I can necessarily give away billions of dollars to Russia or essentially, no, they aren't going to do that. And so it's a kind of a good faith comfort level that's evolved over time.

The other thing that I would say if we even broaden out a little bit from the Russia space is I was first struck when I was at NSC about the impact our sanctions can have on the ground at a humanitarian level. And this was coming up in probably the 2011-2012 time frame where you had challenges in Mali and other places around Africa. And there were really nuanced questions about how we could get aid in to those countries. And you had NGOs and sometimes UN relief organizations, sometimes individual actors within our own government, who were terrified that if we didn't send some upfront signals, they wouldn't provide the assistance that's needed to the people on the ground, because they risk being subject to civil or criminal enforcement actions. That's not a great policy and very senior folks in the Obama administration who were at the forefront of our counterterrorism strategy, no one [you would] describe as soft on CT issues, bluntly said, "We have to remember we're trying to balance a lot of competing interests here." And so I think we've gotten better, as a lot of folks have around the sanction space with understanding that when you take actions, you also have to remember there are people on the ground who can be impacted, and harming them is sometimes the last thing we want to do. And so we need to balance a little bit of the prohibitions that we're putting in place with the impact that it may have to ensure we're actually achieving and advancing our objectives and that the United States is being viewed as an ally as opposed to the enemy of the people we're trying to help.

Brandon Van Grack: So we've talked about--I've even made you get into secondary sanctions. So we've gotten to some of the tools themselves, but the tools ultimately need enforcement in order for compliance to occur. So I want to shift to enforcement for a moment. This past year was a better year of sorts for OFAC and for sanctions enforcement: 17 enforcement actions over 1. 5 billion in penalties. And even before that, you've had the Department of Justice officials there talk about sanctions in a way as a priority on the criminal side as well. And so I just want to first give you the opportunity to talk about it. Was there anything about this year in particular that again struck you as particularly remarkable, both in terms of actions, but also in terms of trends?

Brad Smith: I would say anytime first when I'm talking about enforcement, I would look to you, Brandon, because you're so much of an expert in this space, historically, with everything from Justice. And I'll offer my thoughts, but recognize I'm speaking to people who are real authorities in it. I would say probably 15 years ago, 10 to 15 years ago, when we talked about sanctions and enforcement, the big narrative at that time was OFAC and Treasury bringing actions against large European banks that had essentially what we'll say dollarized transactions through the U.S. Essentially they were dealing with sanctioned parties abroad, but they would send the transaction through by and large New York City to convert, or part of the one leg in the stop, to have it move through the dollar. That was a very novel and sort of revolutionary enforcement action. Before 2006, roughly, I'd say mid-aughts, it wasn't even recognized by a lot of European banks that the United States would have jurisdiction over those transactions. And that was viewed as truly revolutionary. Now when I arrived at OFAC, we were at the tail end of that. A lot of great people had done so much work. And when I think about OFAC enforcement right now --and we enforce, but the Department of Justice may have enforcement actions, a lot of regulators are going to have enforcement actions. Depending on the institution, sometimes state regulators may have enforcement jurisdiction. And so I'm speaking very broadly here, but also from an OFAC perspective.

Where I see things going right now are on two fronts. If 15 years ago a lot of the sanctions bar discussion was on financial institutions, I think we're at a posture right now where increasingly there's a recognition of a need to focus on fintech. And Binance was a big action that we took. Candidly, we were one of many that were involved in the space with DOJ and our sister treasury agency, FinCEN, really at the forefront. And what those actions collectively, I think, are signaling, and Binance was a virtual currency exchange, was essentially saying, "Hey, industry, you don't think you're subject to U.S. regulations." There's even some, and I don't know if this is completely accurate, and I don't want to mischaracterize their position, but sometimes you'll hear from them they aren't sure they're subject to any jurisdiction. And our essential position is no, if you're transacting through the United States, if you're involving U.S. persons or U.S. institutions, you do have a touchpoint in the U.S. We do have a jurisdictional hook. And if you're not building out compliance programs to ensure that you're complying with all of our authorities, whether they're sanctions or elsewhere, you can expect enforcement action. And over the last maybe 18 months to two years, I think you've seen more than a half dozen, what I would call, fintech virtual currency-related cases from OFAC. And I think that's just part of a growth in which industry is having to come to terms with the fact that, yeah, there's a jurisdictional hook in the United States.

The other thing that I would say from an enforcement perspective that has always been there, but I think has been brought more and more to the surface in recent years, is that we will level large penalties against non-financial institutions that commit violations. British American Tobacco is one of our largest non-FI, if not, I think our largest non-FI penalty, and that was within the last year to 18 months, involved, really, in some ways, simple stuff. Tobacco. Going to North Korea. North Korea converting that. Using it, for revenue to then, again, fund this machine. And getting that message out has been a big priority. And the other part of it is we have to reach out more and more to industry. And we've been doing that really across administration, but it's a real priority for us going into sectors that may not be as familiar with OFAC as they are with other regulators and explaining to them the ways in which our prohibitions attach. One of the things that is so much fun and I think has been a positive note, if there can be anything positive over the invasion of Ukraine, is the way in which as a broader interagency cross governmental component community, we've coordinated much better. We work with Commerce where we're syncing with them on a weekly basis. We have people over there, they have people over with us, and we're tipping and leading each other into areas in which, hey, this looks like it's primarily probably you, Commerce, but there may be a services hook where we at OFAC have jurisdiction, and maybe you should talk to them or we should talk to them, and I think that type of education is something that we're really prioritizing.

But I'd say the final thing, with respect to enforcement, that we all try to stress and underline is that at the end of the day, for sanctions, we recognize that it's the private sector that's at the forefront. Some would say, OFAC, Treasury is the tip of the spear and in the national security space, and we've heard that. As a practical matter, it's not. It's the compliance departments in industry. It's the law firms that assist them that are at the forefront and that are seeing transactions on a daily basis and having to make calls. And so engaging with those industries and those actors and explaining what the risks are and how you can comply and how you can screen in an effective way is probably our main objective.

Brandon Van Grack: One more piece on that, maybe even that last point, and even beyond FinTech, which is one, I think, theme that we've seen from some recent enforcement actions from OFAC, is the U.S. jurisdictional piece and an emphasis on back end support or technological support in a way that industry sometimes or at the time may not have fully appreciated. I'm wondering if that's intentional in terms of OFAC or addressing that point with respect to companies, global firms, that may not fully appreciate their U.S. touchpoints on that end.

Brad Smith: I think it's a matter of education. I think it's something that has always been there. I think if you were to canvas our cases over the last 20 years, we could probably find a few examples in which that has been at the forefront of the action. But one of the things that we want industry to understand is if you're supporting a transaction that is going to be going to a targeted party or targeted regime, you need to be really careful because if there isn't an exemption, if there isn't an exception in place, you may well be committing a violation. And under our authorities, there isn't a mens rea requirement. It's strict liability. We mitigate that because if you look at each, any given year, we close out more than a thousand enforcement cases. Only a handful of those are public. Our guidelines, though, make very clear that if you recklessly or intentionally undertake an action or a transaction, or if you essentially ignore a lot of warning signs, the penalty could be quite severe. And so we really just want to encourage industry--and we know it's a cost center. We know it's a burden. We know it's not going to be driving up profits in the short term. But in our mind, if you're effectively looking at and ensuring that you're complying with sanctions, you're making an investment that will potentially avoid a penalty that could be in the billions of dollars. But more importantly, you're also probably avoiding some of that moral taint that we were talking about earlier with respect to companies that were concerned about their activity with Russia. And so I think that's the message we're trying to stress to industry. It's just make sure that you know other parties on the other side of your transactions, that you're doing reasonable due diligence. We don't expect you to know everything. No one can know everything, but make sure you're asking a lot of those questions up front and you should be in good stead with us.

Scott R. Anderson: So before we wrap, I want to take a step back a little bit and think about some of the bigger policy context in which we are applying sanctions that bears on this. And you've already hinted at this earlier in your remarks about this question, this problem of de-dollarization that hangs over a lot of our economic tools, but particularly the use of sanction because it's such a prominent one. And it's something that has become particularly prominent in the last few years, driven in substantial part by the pretty unprecedented choice to freeze huge tranches of Russian central bank assets in particular, and now potentially moving to even seize those assets. That is a dramatic step. A lot of people were worried when it happens saying, "Is this going to be the tipping point that tips us towards de-dollarization where foreign governments will stop using the dollar as a reserve currency, stop tying themselves, holding their foreign assets here, tying themselves to U.S. economy in a number of other ways? I don't think we 100 percent know whether we've hit that tipping point or not yet. We won't probably for a decade or two for sure, but we don't see any imminent signs of it escalating in a dramatic way. But nonetheless, the risk is very real. And there's always this concern that the next big sanctions innovation, the next big economic statecraft measure is going to be the straw that breaks the camel's back.

How do you all think about that on the implementer side? How do you craft tools or frame implementation of different sanctions measures in a way to mitigate those risks? And is there learning that's happened around that from this Russia experience in particular, given that it is the most aggressive use of these measures we've seen and that somehow, so far, at least it seems we've emerged as unscathed, it seems, as we can tell at this point, from that sort of risk.

Brad Smith: It's a really challenging question and this is where I always wish I were a macro economist as opposed to a lawyer, right? Because it's so much of this is gonna be in a space where I defer to others, but I'll tell you the way I think we approach it. Russia is unprecedented because of its size. Immobilizing or seizing central bank sovereign assets. Now, of course, we did that in World War II. We've done that if you think about the conflict in Iraq. We did that with Libya when Gaddafi was falling. And Libya was not a small transaction, but it was a little bit different because you had regime changes. And so those contexts, though they exist, aren't great analogies. And obviously, Iran's not a great analogy either, given the way things have evolved over time. When we look at where we are with Russia, where we have immobilized the central bank assets, a fairly small percentage of those are in the United States. The overwhelming majority by multiple factors are in Europe. And I think that is where you will see a lot of risk in terms of if you're weighing who took the bigger step. [It's] incredible what the United States did, but it's also incredible what our European allies did.

Some of those assets are going to be in dollars, some of them are going to be in euros. But the question about what happens with respect to the dollar as a reserve currency is one in which there is a lot of debate and a lot of uncertainty. Sometimes the way I think about it is if you go back in time, sanctions are going to have the greatest impact where you have a reserve currency. When the United States, in the Napoleonic Wars, imposed sanctions, they just had cataclysmic impact on us and didn't do anything to Britain or France and the global powers at the time because our economy was so small and insignificant. As we moved in the 20th century, the dollar emerged as a reserve currency, starting to displace, though the pound is still a reserve currency too. Certainly, there is that risk. But I think the question we sometimes have to ask ourselves is that risk comes from power. And are you going to deploy that power where you see an essential, existential, potentially threat to the West? And whether we're there yet, I don't know in terms of what may happen with the reserve, but I think it's really challenging for policymakers to not use that authority where you have it. Now, it doesn't mean you just gingerly move forward. You have to be asking yourselves, what's the alternative? Where is it going to emerge? And I think right now in my mind, what's so fascinating about the discussion and the debate, is if you're not going to go to the euro, if you're not going to go to the dollar, if you're not going to go to the pound, what reserve currency are you going to go to? If you're not going to go to the yen, you can identify the highlights. You don't want to go to a reserve currency that's held by a regime that doesn't recognize the liberal democratic values, the property interests that we in the West hold so dear because that currency may be subject to a lot of fluctuation or change or instability. And I think that is something that, at least right now, we have in our favor. Particularly when we talk about the Russia context, is you have a lot of Western economies that all have reserve currencies that are all taking, by and large, a very similar approach.

We'll see what happens with time, and certainly some of regimes in countries that are less predisposed to support our policies have signaled a desire to find an alternative to a dollar. But at the end of the day, given the size and strength of our economies at this moment in time, we at least seem to have still a foothold in which even those regimes still want to have touchpoints and a presence in the West. Because at the end of the day, it seems that our values and our laws ultimately preserve the value of those currencies. And so hopefully we'll be able to persevere and prevail on that front. But I know it's a fluid point that we'll all continue to watch.

Brandon Van Grack: One follow up, I think it's possible we've gone through an entire podcast dedicated to national security and foreign policy, have not said China, said the country of China. And just want to spend maybe one final point there, which one theme that I think we see through the national security tools that the U.S. government has been and is deploying is a focus on China. And I use tools plural because whether it's export controls, foreign investment, recent executive orders. But when it comes to sanctions, we actually don't see China as prominent as many other countries. And I'm curious if you could talk about how you perceive the role of sanctions as it pertains to China.

Brad Smith: I think with respect to China, we've talked to the Chinese and across different administrations about our concern would be third-country actors within China who might be engaged in activity, whether it be Iran, North Korea, not so much CT, but certainly Russia that are contrary to our sanctions. And we can have very candid and direct dialogues. The counter-narcotic space has been an area over time, particularly with uptick in fentanyl and the precursors where we've publicly signaled we see bad actors often in their private sector. They're engaged in activity that we're going to target and try to disrupt. I don't think we are in a position right now when we wouldn't want a message that there is some strong overall China sanctions program. There isn't, but that's true for a lot of regimes around the world. There was this question came up, I forget, oh, in connection with some policy discussions or maybe it was like an event and there was a question like, what percentage of your SDN list are Chinese targets? And if you look at it, there aren't a huge percentage. And that's not because we aren't looking, but because they aren't necessarily that different than a lot of other regimes where you have other targets that have come in from third countries, some of whom we think of as allies and in fact are allies, but you're going to have bad actors. And that's where I would think about where we are with China. I think our hope is always with any country, but particularly one where you can have discussions, that we can identify our concerns and avoid a situation in which we deploy sanctions unnecessarily or before they're necessary. Overall, as part of our approach on sanctions, I think we're getting into a posture where increasingly we recognize sometimes we can achieve the same thing through private conversations, whether it be with country X or country Y or actor Z, in the same way through a soft signaling as we can through a big public action. And that to me is just a reflection of being a little bit nuanced and mature in the space and recognizing that other actors understand the power of the tool if it's deployed. And there may be ways in which we can avoid that and achieve everybody's objectives.

Scott R. Anderson: We are out of time for today, but I'm sure we'll have opportunities to look into these issues a little bit further, hopefully with you, perhaps as a guest at some future occasion. But until then, Brad, thank you for joining us here today on the Lawfare Podcast.

Brad Smith: Oh, I'm so humbled to be included. You guys are great. I've followed the podcast and Lawfare for some time. It's just an honor to be part of it. And thanks for bringing attention to our issues.

Scott R. Anderson: The Lawfare Podcast is produced in cooperation with the Brookings Institution. Please be sure to rate and review us wherever you get your podcasts and be sure to check out Lawfare's other podcasts, including Rational Security, a casual, lighthearted chat about national security news that I co-host each week with my colleagues Quinta Jurecic and Alan Rozenshtein.

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This podcast was edited by Jen Patja and produced by Cara Shillenn of Goat Rodeo. Our music is performed by Sophia Yan. As always, thank you for listening.

Scott R. Anderson is a fellow in Governance Studies at the Brookings Institution and a Senior Fellow in the National Security Law Program at Columbia Law School. He previously served as an Attorney-Adviser in the Office of the Legal Adviser at the U.S. Department of State and as the legal advisor for the U.S. Embassy in Baghdad, Iraq.
Brandon L. Van Grack is a partner and co-chair of the National Security and Crisis Management practices at Morrison & Foerster LLP. He is a former senior national security official at the U.S. Department of Justice, where he served as Chief of the Foreign Agents Registration Act (FARA) Unit, Senior Assistant Special Counsel to Special Counsel Robert S. Mueller III, Counsel to the Assistant Attorney General for the National Security Division, Trial Attorney in the Counterintelligence & Export Control Section, and as a prosecutor in the U.S. Attorney’s Office for the Eastern District of Virginia.
Brad Smith is the Director of the Office of Foreign Assets Control at the U.S. Department of Treasury.

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