Foreign Financial Flows
Funding is often disrupted by highly-restrictive rules on foreign financial flows, including government pre-authorization and limits on the amount of foreign funding allowed. In Egypt, the Law of Association (Law 149/2019), adopted in 2020, requires civil society organizations to notify the government of every contribution they receive. By instituting a system of prior approval for foreign donations, the government has unbounded authority to prohibit grants from outside Egypt or from foreign entities in Egypt. In India, organizations that receive foreign funding must be registered under the Foreign Contribution (Regulation) Act, which subjects them to burdensome reporting, disclosure, and registration obligations. In February 2021, the Philippines introduced a law requiring international aid for non-governmental organizations to be cleared with the foreign ministry, with the aim of stamping out funding for terrorism. Indeed, policies that intend to prevent the financing of terrorism have generated unintended negative consequences for civil society, whilst categorical terrorist designations allow governments to freeze assets and restrict the activities of organizations they deem ‘undesirable’. In addition, the Financial Action Task Force (an intergovernmental global money laundering and terrorist financing watchdog) has called on states to review the laws governing non-profit organizations to ensure they are not abused for terrorist financing. This guidance has worked against civil society organizations by overburdening an already strained system of grassroots initiatives.
The United States is the largest donor country in the world, with 12.2 percent of its $35.5 billion dollar commitment going to civil society organizations. In this context, the government, financial industry, and funders in the US have the most at stake when considering steps to lessen the burden on organizations working at the front-lines of human rights and democracy.
Governments’ Role in the Effects of Sanctions
In his Report on access to resources in the context of freedom of association and assembly, UN Special Rapporteur Voule calls on states to repeal laws and regulatory measures that impose restrictions contrary to international human rights standards, including unnecessary and disproportionate sanctions. Sanctions must be necessary in a democratic society, in line with a strict test of necessity and proportionality, as originally set forth in Articles 8 to 11 of the European Convention on Human Rights (ECHR) and Article 22(2) of the International Covenant on Civil and Political Rights (ICCPR). To meet the condition of necessity, authorities must demonstrate that the measure can truly be effective in pursuing the legitimate aim and be the least intrusive means among alternative legal avenues. The State must also prove that the measure is necessary to avert a real and not hypothetical threat. In addition to these criteria, the law must be sufficiently precise to give actors fair notice so they may regulate their conduct for compliance. Critically, the legal validity of sanctions is determined by the precision of instruction governments provide to the public to supplement the overarching purpose or objective of such sanctions. The impact of these sanctions, including compliance obligations and resulting effects, is therefore a legal question.
Voule’s first recommendation in the Report, which is targeted towards governments and state actors, outlines that in order to ensure that sanctions regimes do not prevent access to essential goods and services, governments must ensure sanctions are targeted, rather than broad or country or region-specific. Second, to facilitate this guarantee of access to resources, Voule highlights that governments must systemize and clarify the process for humanitarian and civil society exemptions to sanctions. For example, as part of its sanctions pertaining to Venezuela, the US Office of Foreign Assets Control (OFAC) has two exempting provisions for humanitarian purposes and at least four general licenses. OFAC’s Russia-Ukraine sanctions are qualified by up to ten active general licenses, including transactions relating to the activities of non-governmental organizations, meeting the basic needs of vulnerable or displaced populations, and supporting democracy building, citizen participation in elections, and the rule of law.
While such exemptions are effective, the legal requirement of foreseeability and fair notice for compliance dictates that exemptions should be embedded more deeply and fundamentally into sanctions. When governments introduce sanctions first and exemptions later a chain reaction is created, where organizations and corporations implement strict policies to comply with the sanctions before considering the impact of these exemptions. This is most clearly demonstrated within the financial services sector, which is often slow to respond to recognize and permit exempted transactions. In addition to making sanctions clear, simple, and more targeted, governmental bodies, like OFAC, should pair newly introduced sanctions with humanitarian and civil society exemptions by default if they hope to meet the recommended standards proposed by UN Special Rapporteur Voule. Uncertainty about valid exemptions to sanctions has negative implications on the behavior of financial institutions who facilitate transactions to civil society and instills fear in donors, funders, and the providers of material goods and services.
Implications of Sanctions on the Behavior of Financial Institutions
A report by UNICEF on the impact of sanctions on children and vulnerable populations echoes the concerns of civil society as raised in submissions to the UN Special Rapporteur from 67 civil society organizations (including, for instance, the submission of Access Now). Sanctions with a valid and proportionate objective are still growing more complex and businesses may voluntarily refuse to engage in activity relating to sanctioned states to avoid fines, to reduce bureaucracy, or to counter reputational risks (a practice known as ‘de-risking’). According to UNICEF, a “recent spate of fines from the US Government, amounting to billions of US dollars, have made banks and other financial institutions reluctant to support payments to countries they deem to be high-risk jurisdictions”. It is therefore clear that an increase in the number, scope, and reach of sanctions has rendered exemptions and exceptions more confusing and complex.
Beyond compliance with sanctions, private sector actors typically initiate their own programs to reduce fraud and corruption that while well-meaning, appear contrary to their own purposes and to the promotion of human rights. The effect of over-compliance with sanctions is amplified by overlapping counter-terrorism and anti-money laundering measures. According to the UN Special Rapporteur, in many cases, this heightened scrutiny had resulted in the denial of services and in banks foregoing charitable customers, thereby avoiding, rather than managing, risks associated with non-profit clients. Additionally, in the UN Human Rights Council (HRC) ‘Guiding Principles on Business and Human Rights’, the HRC highlights the responsibility of financial institutions to avoid the infringement of civil society organizations’ rights and to ensure that they are not financially excluded.
This is clearly not a new challenge for civil society organizations. For instance, in a report by IMPACT - Civil Society Research and Development, the challenges faced by non-profit organizations in Syria include basic tasks like opening a bank account or processing a financial transaction. The report identifies key recommendations to the financial industry to remove these impediments, including by establishing “clear guidance on payment mechanisms, including correspondent banking channels, extent of due diligence required, how to deal with the common problems (such as having Syria in the name etc.)”. Though seemingly simple changes to the practices of banks, these challenges are still present and are identified specifically in the UN Special Rapporteur’s Report.
Fears of Donors and Funders
Funders are faced with the legal risk of violating sanctions through their funding programs. As a result of this risk, some donors’ grant-making processes and administrative requirements are overly complex and onerous. While an organization can have as its core mission the funding of hard-to-reach or vulnerable populations, legal practices and procedures may frustrate this purpose through fear of failure to comply with the maze of regulations imposed upon them.
Arguably, it is incumbent on funders to be advocates for exemptions to sanctions. For example, in May of 2022, the UK Government issued a general license for the “Continuation of Business and Basic Needs for Telecommunications Services and News Media Services” in Russia and Ukraine. The license formalized an exemption to sanctions in the information and communications technology (ICT) sector to ensure civilians have access to global internet and news media services. The UK government’s issuance of this license was a response to calls by a civil society coalition highlighting the unintended consequences of sanctions on internet access in Russia and calling for civilian access to the internet. As identified in the Report, the current practice of ‘regulate first, exempt later’ is in dire need of correction.
Impact on Essential Goods and Services
The reticence of funders and financial institutions in facilitating essential transactions for civil society is often replicated by private sector providers of essential goods and services. For example, a Swedish company which makes special bandages for a severe and life-threatening skin condition called epidermolysis bullosa (EB) has refused to participate in trade with Iran, where patients require access to the product even though such trade would be exempt from sanctions-based prohibitions due to explicit medical and humanitarian exemptions.
While companies are free to decide where to sell their products, manufacturers and providers of critical medical, humanitarian, communication, and financial goods and services should not be disincentivized from providing those essential goods and services. However as indicated, this is the current effect of regulatory sanctions regimes that fail to highlight the importance of humanitarian efforts by prioritizing practical exemptions to wide-reaching and sometimes overbroad sanctions.
Insights and the Future
The UN Special Rapporteur's Report highlights the importance of transparency, clarity, scope, and structure in the introduction of sanctions to ensure access to resources for civil society - sanctions should be introduced with exemptions because the legality of a sanction is determined by the foreseeable instruction it gives to the public. Financial institutions and others should be able to comply with sanctions without tending towards over-compliance. Having exemptions embedded in sanctions is essential to avoid the infringement of the fundamental human right of civil society’s access to resources.
In the financial sector, banks struggle with sanctions, as they grapple with the overlap of anti-money laundering, fraud, and anti-terrorism regulations, which according to the UN Special Rapporteur, results in a denial of services to civil society rather than creating productive risk management. Clearly, the complexity of sanctions regimes and the opaqueness of relevant exemptions instills fear of compliance which alters the behavior of funders and other actors - this then trickles down to impact essential humanitarian goods and services.
In light of the recommendations from the UN Special Rapporteur’s Report, it is possible that governments will reflect on how they institute their sanctions regimes. If nothing else, the report gives civil society hope that the limitations on their access to resources and their right to free association and assembly will be acknowledged, and potentially repaired over time.
