By Tiffany Jenkins, ACSS Reporter
March 18, 2023
In August 2021, US troops withdrew from Afghanistan. What followed was the rapid collapse of the Afghan government and the Taliban’s return to power. Several militant group members of an organization that had been listed as terrorist by the UN, EU, and other autonomous sanctions regimes were catapulted into official government positions.
Many international aid organizations faced uncertainty with an entity on several national and multilateral sanctions lists now in charge of a country heavily dependent on humanitarian assistance. It was unclear how they could continue humanitarian activities without exposing their own organizations to sanctions violations.
Financial institutions lacked clarity and reacted by de-risking their Afghanistan operations, delaying or blocking funding intended to support humanitarian assistance.
This risk-averse behavior severely jeopardized humanitarian activities. Michael Clements, Director of the US Government Accountability Office, said that banks chose to not serve or to limit service to certain customers for reasons such as compliance costs, their reputation and regulatory risk. “The high cost of conducting due diligence for nonprofits transferring funds to recipients in high-risk countries often outweighs the revenue they generate.”
Security Council Moves to Help Ensure Aid Continues
In December, Ireland and the US tabled Resolution 2664 before the Security Council, suggesting a standing humanitarian carve-out from the asset freeze provisions applicable to all UN sanctions regimes to ensure the continuation of humanitarian activity. The resolution seeks to provide certainty for humanitarian actors and financial institutions for processing or paying funds, other financial assets or economic resources, and providing goods and services for humanitarian assistance or activities that support basic human needs.
That same day, OFAC issued a set of general licenses for the continuation of activities and transactions by international organizations and entities, and for the provision of agricultural commodities, medicines and medical services. Mirroring the UN resolution, OFAC’s licenses encompassed all its sanctions programs, including those that did not previously have humanitarian exceptions.
Jacob Kurtzer, Senior Associate at the Center for Strategic and International Studies, said the OFAC general licenses are critical to ensuring NGOs and their financial and commercial partners can provide urgent assistance in emergencies. “More work remains to be done to continue to overcome many hurdles associated with sanctions and other restrictive measures.”
Earlier Humanitarian Exemption Efforts Failed
Following the US withdrawal from Afghanistan, OFAC started to issue licenses that gradually increased the scope of humanitarian activities. In December 2022, the UN Security Council adopted Resolution 2515, exempting humanitarian activities in Afghanistan from the assets-freeze measure similar in scope to Resolution 2664.
But aid agencies operating in Afghanistan still found themselves cut off from vital funding streams. “There is an immediate issue for humanitarian agencies to gain access to cash to continue our work,” said Janti Soeripto, the CEO of Save the Children, in an interview with HuffPost in April 2022. “We have a little bit of access through a single international banking partner that still does business with Afghanistan.”
The European Banking Authority shared this concern. One of its spokespersons explained that not-for-profit organizations face difficulties in accessing financial services, particularly those operating in jurisdictions subject to EU, US or UN sanctions or jurisdictions associated with higher money laundering or terrorism financing risks.
“We identified that this is mainly because credit and financial institutions are reluctant to service such customers for fear of breaching sanction regimes. We also noted that institutions’ decisions to de-risk not-for-profit-organizations appeared to be related to the perceived complexities of their setup and associated difficulties in obtaining the requisite customer due diligence information,” said European Banking Authority Expert Amandine Scherrer.
Calls from within the UN also highlighted that the existing humanitarian exemptions were insufficient. Martin Griffiths, the UN Undersecretary-General for Humanitarian Affairs, speaking to the UN Security Council in June, said that the “formal banking system continues to block transfers due to excessive de-risking, impacting payment channels and causing breakdowns in supply chains.” He said two-thirds of organizations reported that their international banks continue to deny transfers –“exactly what the exceptions were designed to avoid.”
New Resolution Streamlines Humanitarian Exemptions
Before the adoption of standing humanitarian exemptions, the UN had little precedence. Only one of its sanctions regimes contained a similar provision. The so-called “humanitarian carve-out” in the Al-Shabaab sanctions regime explicitly allowed for the UN and its partner organization to continue humanitarian activities in areas controlled by the listed militant group Al-Shabaab. The exemption in Resolution 2515 allowed not only the UN but also several other aid agencies to continue their humanitarian operations in Afghanistan.
The Democratic Republic of the Congo is another example of the Security Council acknowledging the need for stronger humanitarian language in sanctions resolutions. The country has been under UN sanctions since 2004. In May 2021, a volcano erupted in the DRC province of Kivu. The incident compounded an already dire situation as the country grappled with high levels of food insecurity, volatile security, and millions of internally displaced persons and refugees.
The following month, the Security Council renewed the DRC’s sanctions regime, expressing its intent to designate anyone involved in attacks on medical and humanitarian personnel. It stated that the sanctions measures taken under the resolution should not have adverse humanitarian consequences. It intended to preserve the humanitarian space despite sanctions and in light of precarious security.
The standing humanitarian exemptions adopted in December will now standardize provisions for aid delivery and do not have an expiry date.
US Ambassador to the UN Linda Thomas-Greenfield said the UN standing humanitarian carve-out and OFAC’s general licenses will help deliver aid with greater speed and confidence, “all while maintaining safeguards that ensure humanitarian aid gets to its intended recipients.”
De-Risking Not Only a Problem for Humanitarian Aid
US Department of Treasury Undersecretary Brian Nelson said Treasury tries to motivate banks and businesses to manage risk rather than completely avoid it. When financial institutions engage in de-risking, the result can be an “indiscriminate loss of financial access for entire categories of customers,” he said. People can be “forced to turn to unregulated and potentially dangerous financial activity.”
Nelson’s comments coincided with the Treasury’s announcement of a national de-risking strategy, with recommendations to tackle the banking and business challenges.
Kaley N. Schafer, Associate at law firm Ballard & Spahr, said: “Despite statements from FinCEN and the federal functional regulators indicating that not all customers pose the same level of risk and that there is no need to de-risk customers categorically, financial institutions still face potential scrutiny from examiners in providing products and services to certain types of customers. The actions and beliefs of individual examiners often can be more important than high-level policies set by their agencies.”
But avoiding de-risking can be managed, said James DeFrantz, Principal at Virtual Compliance Management Services LLC. “Strong internal controls such as risk-rating clients, tying the risk rating to the way the customer is monitored, and documenting the monitoring process are key to stopping de-risking. Documentation is a key component – written follow-ups from conversations, for example. Written documentation of monitoring efforts will go a long way towards preventing a directive to de-risk.”
Sanctions are often imposed swiftly and with little guidance for practitioners. The conditions can change with the political landscape. Some UN sanctions regimes, including the Taliban and Al-Shabaab regimes, expire every year and are put before the Security Council to renegotiate. The standing humanitarian exemptions have the potential to bring clarity to sanctions practitioners and decrease risk-averse behavior of financial institutions.