[Senate Hearing 115-55]
[From the U.S. Government Publishing Office]
S. Hrg. 115-55
COUNTERING RUSSIA: FURTHER ASSESSING OPTIONS FOR SANCTIONS
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HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
CONTINUING EXAMINATION OF EXISTING RUSSIAN SANCTIONS
__________
APRIL 27, 2017
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
John V. O'Hara, Chief Counsel for National Security Policy
Sierra Robinson, Professional Staff Member
Graham Steele, Democratic Chief Counsel
Colin McGinnis, Democratic Policy Director
Dawn Ratliff, Chief Clerk
Cameron Ricker, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, APRIL 27, 2017
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 32
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
WITNESSES
R. Nicholas Burns, Roy and Barbara Goodman Family Professor of
Diplomacy and International Relations, Harvard University, John
F. Kennedy School of Government................................ 4
Prepared statement........................................... 33
Senator Tester........................................... 43
Chip Poncy, President and Co-Founder, Financial Integrity
Network, and Senior Advisor, Foundation for Defense of
Democracies' Center on Sanctions and Illicit Finance........... 6
Prepared statement........................................... 36
(iii)
COUNTERING RUSSIA: FURTHER ASSESSING OPTIONS FOR SANCTIONS
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THURSDAY, APRIL 27, 2017
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met, at 10:04 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. The hearing will come to order.
This morning, the Committee will receive testimony on the
smart use of sanctions to counter Kremlin military incursions
in Ukraine, Syria, and its increased reliance on cyber warfare
against many nations.
The Committee met 6 weeks ago to begin an inquiry into the
effectiveness of the United States sanctions regime imposed 3
years ago against the Russian Federation for its invasion of
Crimea, continuing violence and interference in the Ukraine,
and cyber intrusions against the United States.
At that hearing, we learned that, alone, United States-
imposed targeted sanctions have had a somewhat limited impact
on the economy of the Russian Federation. That impact was
magnified by the combined effect of sanctions imposed by other
Western nations coupled with the severe drop in world oil
prices.
It was less clear, however, if the existing sanctions were
affecting any change in the aggressive geopolitical
calculations that President Putin continues to make.
Some analysts say that the economic sanctions have had a
deterrent effect on Putin pushing even farther into Ukraine
territory, and that is a good start.
Others look to Putin's continued actions in the Ukraine and
Syria in the weeks since this Committee last met and conclude
that we should target additional sanctions on the Russian
Federation. Despite existing U.S. and Western sanctions, Putin
has not shown any intention to cease his aggressive behavior.
For the Committee, today's inquiry is not about punishing
the people of the Russian Federation but, rather, those
responsible for Russia's misbehavior.
The goal now is to transform the initial, limited
application of financial leverage into the next step of what
must become a general campaign to impose real costs that impact
Putin's ability to conduct hostile activities in an already
troubled world.
A good starting point might include a codification of
existing Executive orders and a deepening and broadening of
sanctions in
certain economic sectors, addressing cyber activity and
financial corruption, and making mandatory certain existing
discretionary sanctions.
Vital in all of this is harmonizing the conditions to lift
sanctions so that if Putin were to try to reverse course,
overlapping or misdirected sanctions would not defeat the
potential for meaningful change in Kremlin policy.
Since sanctions were first imposed 3 years ago, the Obama
administration, the U.S. Congress, and now the Trump
administration have been prepared to impose additional
sanctions as
circumstances warrant or until Putin follows through with his
commitments to the Minsk cease-fire agreement. In fact, several
rounds of new designations have been implemented under existing
sanctions laws over the last 3 years.
Make no mistake, these sanctions currently in place, and
those that may yet come, are Putin's fault and a result of
Putin's confused notions of Russian power and pride. Putin is
not defending the interests of his people but exploiting
opportunities to seize neighboring lands by fomenting disorder
and seeking to perpetuate Mideast conflict to advance Russia's
military influence.
America must lead on the issue since the most successful
sanctions result from a united front of the United States and
EU
cooperation.
Since the unlawful annexation of the Crimea, the years of
destabilizing Eastern Ukraine through relentless war, the
global spread of cyber intrusions, and Putin's indefensible
support of Assad's leadership of Syria, particularly in light
of the recent chemical attack, fewer are left in Europe to
defend Putin's policies.
The European Union must ask itself if it is prepared to
join the United States to take the necessary financial actions
in the foreseeable future to deny Putin the resources he needs
to take whatever his next steps may be.
The last thing the European Union, the United States, or
this Congress can be is divided in the face of Putin's
uncertain path. The times call for clarity of purpose and a
correct amount of pressure.
I thank our witnesses for coming here today to help the
Committee understand what a next course of action might look
like, what the repercussions of taking such actions might look
like, and how even those may be mitigated.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, for calling this
second important Committee hearing on Russian sanctions. I
appreciate your willingness to explore how the current U.S. and
multilateral sanctions regime is working and next steps to
strengthen it while preserving unity among our allies.
Mr. Poncy, welcome to our Committee. Ambassador Burns, good
to see you again. Thank you for your public service.
As witnesses underscored in the last hearing, U.S.-EU unity
is critical if multilateral sanctions on Russia are to continue
to be
effective. In our last hearing, witnesses discussed how
Congress has worked together on a bipartisan basis to craft the
current U.S. sanctions regime and to hold Russia accountable
for its aggressive activity. This encompasses Russia's
violations of international law and of the territorial
integrity of Ukraine, including its illegal annexation of
Crimea, its role in the brutal repression in the war in Syria,
and the Assad regime's recent gassing of its own people and its
cyber attacks on the United States, including on the U.S.
financial system and on our elections.
In the last hearing, witnesses also outlined their ideas on
ways to strengthen the current sanctions in response to Russian
aggression. We should focus today on the broader strategic
questions,
including on what the Committee might do to strengthen our
response to Russia, and for its continuing efforts to
destabilize states in Europe and beyond. We should talk about
what the Administration should be doing now on this front.
Russia's interference in our election, confirmed
unanimously by the U.S. intelligence community in a
declassified report issued in early January, as we all know and
recognize, poses a problem that goes far beyond foreign policy
and strikes at the core of our democracy. It should not be a
partisan issue. As their joint report made clear, there was no
disagreement within the U.S. intelligence community about the
Russian role, and it noted that similar efforts would likely be
undertaken by Russia against U.S. allies and others. It is
clear that it is happening in European elections now as Russia
intervenes to bolster extreme anti-democratic forces there.
Just this week, we see reports of cyber attacks against one
of the French Presidential candidates, attacks that look very
similar to the Russian attacks and disinformation efforts in
our election last year. The same reportedly happened in the
German elections. Earlier this week, we read of Russia's
attacks on Danish military computer systems over the last
couple of years.
It is not subtle. It is a blatant, unprecedented attack on
Western governments and on democracies. While we have started
to impose sanctions for Russia's cyber attacks, we have not yet
fully responded to these challenges. Congress must look
backward, as various committees are doing, to determine and
describe precisely what happened. But we must also look
forward, strengthening our election processes and cyber systems
to prevent future interference and imposing strengthened
sanctions to deter the Russians from future activity like this.
We should be clear-eyed. The Ukrainian community in my
State and around the world knows firsthand, like our Baltic
NATO allies Latvia, Lithuania, and Estonia, they know firsthand
the dangers of unchecked Russian aggression. The recent
escalation of violence by Russian-backed separatists in Eastern
Ukraine, the lack of a consistent policy to deter further
Russian aggression, those acts are dangerous.
It seems clear from the surge of violence in recent months
that Russia and its allies are testing our resolve. We must
leave no doubt that Russia must comply with the Minsk
agreement. Until it does, Russia deserves no sanctions relief
for the conflict it
created.
We should strengthen not weaken sanctions, and the
President must work with Congress on a principled, bipartisan
Russia policy that firmly counters this aggressive behavior.
We are joined by two people today, Mr. Chairman: an
accomplished former senior career diplomat who has held
important positions in Republican and Democratic
Administrations, and a former Treasury official and sanctions
expert who will help us assess where we are and what effects
the current sanctions regime is having on Russia's economy and
behavior. We will discuss how stricter sanctions enforcement,
how closing loopholes, how strengthening statutory requirements
where appropriate, and how taking other measures can send a
clear and unambiguous signal of U.S. resolve to deter future
Russian aggressions.
I welcome our witnesses. Thank you.
Chairman Crapo. Thank you very much, Senator Brown.
Before I introduce the witnesses, I again want to remind
the Members of the Senate Committee that we want to be very
careful about the 5-minute rule. I will try to remind you if
you forget. And that is also a reminder to the witnesses. We
ask you each to keep your testimony to 5 minutes. Your full
statements will be included in the record, and you will have
ample opportunity to respond to questions as well.
First among our witnesses we will receive testimony from
Ambassador Nicholas Burns, who is the Roy and Barbara Goodman
Family Professor of the Practice of Diplomacy and International
Relations--that is a long title, and I am not done yet--at the
Harvard Kennedy School of Government. And he is a 27-year
veteran diplomat at the United States Department of State.
Next we will hear from Mr. Chip Poncy, who is the President
and Co-Founder of the Financial Integrity Network and Senior
Advisor at the Center on Sanctions and Illicit Finance at the
Foundation for Defense of Democracies. Another long one. Mr.
Poncy was also a Senior Advisor at the U.S. Treasury
Department's Office of Terrorism and Financial Intelligence.
To both of you, we welcome you here, and you may begin, Mr.
Burns.
STATEMENT OF R. NICHOLAS BURNS, ROY AND BARBARA GOODMAN FAMILY
PROFESSOR OF DIPLOMACY AND INTERNATIONAL RELATIONS, HARVARD
UNIVERSITY, JOHN F. KENNEDY SCHOOL OF GOVERNMENT
Mr. Burns. Mr. Chairman, thank you. Ranking Member Brown,
Members of the Committee, thank you very much for this
invitation to be with you. I will try to be very brief. You
have my full testimony.
Mr. Chairman, I would start by saying that Russia is the
most dangerous adversary that the United States has in the
world today, and I think that is pretty much agreed by most
national security experts. And President Putin has used the
power of the Kremlin to undermine America's global interests in
the Middle East and Europe and around the world. He launched a
deliberate assault on the heart of our democracy, designed to
discredit the American Presidential elections in 2016. Russia
is actively contesting the democratic peace that we established
25 years ago with our allies and the people of Eastern Europe
to create this peaceful, democratic, united Europe. That was
the great victory at the end of the cold war.
During the last 8 years, Putin has invaded Georgia and
Eastern Ukraine and divided both countries. He invaded,
occupied, and then annexed Crimea, and no European leader had
annexed another country's territory since the Second World War.
He has kept Moldova divided, and he has sought to undermine the
internal stability--and you mentioned this, Senator Brown
mentioned it--of Estonia, Latvia, and Lithuania.
So, essentially, Putin has redivided Europe on a dotted
line from the south and west of the Russian Federation, and
that is a serious strategic challenge to the United States and
to our European allies.
I just returned from France last evening, and I would just
repeat some of what Senator Brown said. Many leaders in the
Netherlands and France and Germany are convinced that the
Russian government is intervening right now in their elections,
in this three-tiered election in Europe in 2017. He is
attempting to do to them what he did to us: discredit, disrupt,
and possibly alter the results of democratic elections in
Europe as well as in our country.
This is a blatant, unprecedented, and deadly serious attack
on democracy, and that is why we need a vigorous bipartisan
investigation by the Senate and House Intelligence Committees
and, of course, an investigation by the FBI. And if bipartisan
investigations in Congress are not possible, then the President
and Congress should agree to form a bipartisan commission to
study this issue, investigate, and report to the American
people.
Sanctions are one of the most important instruments we have
to contain Russian power and eventually--and this may take
quite a long time--roll back Putin's territorial aggression.
That is why I support continuing without exception our current
sanctions on Russia and Ukraine.
I also recommend that Congress should consider a strong and
unmistakable response, additional sanctions against Russia,
following its interference in our elections. This is the only
leverage, toughness, that President Putin understands.
President Trump's response to Russian interference in the
elections, however, has been extremely disappointing. I would
say it has been weak. President Trump has repeatedly questioned
the judgments of both the FBI and the intelligence community
about Russia's attempt to undermine our elections. He has taken
no initiative of his own to have the executive branch
investigate these allegations. He has failed even to criticize
President Putin in clear and harsh terms on this or any other
issue, including Ukraine.
I have worked, as you noted, for three American Presidents
on the Russia issue: President George H.W. Bush, President
George W. Bush, and President Bill Clinton. I cannot imagine
any of President Trump's predecessors since the Second World
War failing to act swiftly to let Russia know how unacceptable
these actions are to the American people and to our Government.
But that is the unfortunate reality with President Trump's
administration, and it is why Congress must now take the lead
on the sanctions issue on a bipartisan basis, because our
national security depends on it.
The American, Canadian, and European sanctions are having a
negative impact on the Russian economy--not decisive, Mr.
Chairman, as you noted, but they are an effective way to
isolate and to shame and pressure the Russian government.
Sanctions alone cannot contain Russian power, but we know that
they can act in concert with other measures. We can provide
lethal military support to Ukraine. We can make permanent the
stationing of NATO forces in Poland and the Baltic States. We
can rebuild the strength of the United States military in
Europe. As the Congress funded in 2016, that package of
initiatives to strengthen the U.S. military in Europe with the
sanctions can help over the longer term to contain President
Putin.
So much depends on what Congress will do, and thank you for
the honor of testifying today.
Chairman Crapo. Thank you, Ambassador Burns.
Mr. Poncy.
STATEMENT OF CHIP PONCY, PRESIDENT AND CO-FOUNDER, FINANCIAL
INTEGRITY NETWORK, AND SENIOR ADVISOR, FOUNDATION FOR DEFENSE
OF DEMOCRACIES' CENTER ON SANCTIONS AND ILLICIT FINANCE
Mr. Poncy. Thank you, Mr. Chairman.
Chairman Crapo, Ranking Member Brown, distinguished Members
of the Committee, thank you for inviting me to testify here
today. It is truly an honor. And it is an honor to testify
alongside a career diplomat and distinguished public servant,
Mr. Ambassador Nicholas Burns.
I was extraordinarily privileged to serve at the United
States Department of the Treasury for 11 years following the
terrorist attacks on 9/11. I worked with an extraordinary group
of individuals across the Government, the private sector, and
allied governments to develop sanctions policies and financial
and economic authorities to protect our national collective
security.
With bipartisan leadership across the Congress and four
Administrations, we further developed and institutionalized
financial and economic power as an increasingly important
component of our foreign policy and our national security.
I have continued to focus on this work in the past 4 years
with an extraordinary group of colleagues at the Financial
Integrity Network and the Center on Sanctions and Illicit
Finance. These experiences inform the recommendations in my
written testimony, which focuses on specific sanctions-related
steps that the Congress can take to protect our national
collective security moving forward.
However, it is critical at the outset to recognize that
sanctions cannot be effective in isolation. To be effective,
sanctions policy should be crafted within a broader strategy--a
strategy that incorporates regulatory, diplomatic, law
enforcement, intelligence, military, and positive economic
power in pursuit of clear national security and foreign policy
objectives.
Moving forward, there are steps that we can now take to do
this, and with a unified approach to a broader strategy in
pursuit of clear objectives, these steps can include sanctions
against
dangerous, illicit, and aggressive actions taken by the Russian
Government.
Many of these steps are consistent with those set forth in
the Senate bill proposing the Counteracting Russian Hostilities
Act of 2017. I will take a minute to review these.
First, Congress should prioritize targeted sanctions
against illicit conduct by the Russian leadership. This
includes calling for the establishment of a Russian Counter-
Illicit Financing Task Force dedicated to tracing, mapping,
tracking, sanctioning, and prosecuting
illicit flows from Russian leadership that touch our financial
system. Such a task force should also work with allied
governments to similarly track and trace illicit flows abroad.
Congress should also codify, consolidate, and expand
existing sanctions authority to specifically target Russian
leadership engaged in illicit conduct, including conduct that,
with respect to any state, undermines democratic processes or
institutions; threatens the peace, security, territorial
integrity, or political sovereignty of our allies; or
misappropriates state assets.
Congress should also create specific funding for
publication of studies and research on the corruption of
Russian leadership. And Congress should call upon Treasury to
consider applying Section 311 of the USA PATRIOT Act to any
foreign financial institution, including Russian financial
institutions, that engage in substantial transactions
associated with illicit conduct by Russian leadership.
Beyond these steps targeting illicit conduct by the Russian
leadership, there are steps that Congress can take to heighten
controlled pressure on the Russian economy. This should include
steps that build upon the sectoral sanctions issued by the
United States, the European Union, Australia, Japan, and Canada
in 2014.
To strengthen the effectiveness of U.S. sanctions in
general, Congress should take additional steps. This includes:
Providing funding for Treasury to expand its sanctions
targeting, compliance, and enforcement resources and
capabilities. Sanctions are here to stay, and we need to
resource them appropriately.
Authorize Treasury to issue regulations specifying
sanctions program and training requirements for global
financial institutions operating in the United States and for
other sectors vulnerable to sanctions evasion. We have had over
$20 billion of enforcement actions levied against banks for
breakdowns in controls that have led to sanctioned parties
getting access to our financial system.
Congress should call upon FinCEN to finalize pending anti-
money laundering (AML) rules that enhance the transparency of
the financial system. That transparency is critical to allow us
to understand where illicit flows are, including sanctioned
assets.
And Congress should issue a report--Congress should call
upon Treasury to issue a report offering recommendations for
expanding information sharing in ways that reduce costs and
enhance the effectiveness of our illicit finance analysis
efforts.
These recommendations are based in large part upon key
developments, conditions, and challenges evident in the recent
evolution of sanctions policy and implementation as discussed
in greater detail in my written testimony.
I am grateful for the opportunity to testify before you
today. I look forward to your questions. Thank you.
Chairman Crapo. Thank you, Mr. Poncy.
The first question I have is for both of you, and either of
you please respond as you choose. There are elements in the
Russian Federation that are unparalleled in black and gray
market operations, bulk cash smuggling, and general corruption
practices. And it is equally clear that Russia will put up a
significant resistance to sanctions pressure.
Could you comment on to what extent and through what
mechanisms the Kremlin is able to evade or circumvent
sanctions, particularly those relating to its oil, financial
sectors, and individual oligarchs?
Mr. Poncy. I will take the first shot. Thank you, Mr.
Chairman. It is a great question. Sanctions evasion is an area
about which we do not know a lot. What we do know is that there
are holes in our financial system, globally and at home, that
prevent us from really understanding whose assets we are
holding and transacting, and we have seen this with cases that
law enforcement has brought. We have seen this with regulation
that is targeting vulnerable sectors, including geographic
targeting orders against high-end real estate where we know we
have had Russian organized crime buying high-end real estate in
Manhattan and Miami. We have also seen this in regulatory
rulemaking around customer due diligence, the final rule that
is going to impose beneficial ownership requirements on due
diligence for financial institutions next year.
These actions turn the lights on in our financial system.
That is going to allow us to get smarter on where money,
whether it is Russian organized crime or Russian leadership or
other illicit assets, may be in our financial system.
What is clear--and I do not know if you have seen the
expose from ``60 Minutes'' last year on Anonymous, Inc., or
obviously everyone has heard of the Panama Papers or the 1MDB
scandal on corruption--is that we are exposed at the highest
levels of the financial system, high end, capital markets,
gatekeeper accounts, top-tier firms--not willingly, but
exploited because of a lack of understanding or diligence or
requirements to understand who to do business with. Closing
those loopholes will give us a better understanding.
That said, I do not think that the sanctions that we have
imposed have been ineffective. I think how we define a success
here is making it harder, costlier, and riskier to do business
in the United States if you are conducting illicit activity
abroad. And I think we have done a decent job of that.
Chairman Crapo. Ambassador?
Mr. Burns. Mr. Chairman, I would just add very quickly--
because Chip is the sanctions expert and I agree with what he
said--one thing that Congress could do, as we reflect on the
interference in our elections and the Ukraine sanctions issue,
is to ask the Administration to step back--it is a good thing
for the Trump administration to do, too--assess the
effectiveness of the sanctions so far, and how effectively they
are being implemented and how tightly and comprehensively they
are being implemented by the United States. That is the first.
Second, to make sure that the European governments are
making sure that their companies are actually implementing the
sanctions, so that the sacrifices made by European companies
are equal to the sacrifices made by American companies, because
we all know there is sometimes a double standard.
And, third, this is an opportunity, I think as both of us
have said, and you have also said, to tighten and strengthen
the sanctions in 2017. So it is an opportunity for Congress to
ask the Administration, and hopefully the Administration would
welcome that, to do a fundamental review.
Chairman Crapo. Thank you very much.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Ambassador Burns, I would like to start with you. In
January, the U.S. intelligence community unanimously said, and
I will quote, please:
Russian efforts to influence the 2016 U.S. Presidential
election represent the most recent expression of Moscow's
longstanding desire to undermine the U.S.-led liberal
democratic order, but these activities demonstrated a
significant escalation in directness, level of activity, and
scope of effort compared to previous operations.
They then noted they expected similar efforts by Russia against
U.S. allies.
Talk about their grand strategy. Talk about, if you would,
how best we increase the cost of that strategy to Putin, how we
change his calculus, how we deter that behavior, and wrapping
that into fundamentally what you would suggest the State
Department does and what you would recommend that President
Trump personally do.
Mr. Burns. Thank you, Senator. As I said in my full
testimony, there is no question--and we saw this in the Bush
administration; I think the Obama administration had the same
assessment--no question that President Putin has set out to
undermine the basis of America's power position around the
world. He knows that we are by far, by a great extent, much
more powerful militarily, politically, economically than Russia
will ever be. But he is trying, in essence, to cut us down to
size. He thinks he has an opportunity to do that.
One way he has done it is through the last 8 years these
territorial attacks on Georgia, Moldova, Ukraine, Crimea,
pressure in the Baltics.
A second way is to discredit the ability of the United
States to be a good allied leader, so he is really preying upon
the weaker members of both NATO and the EU--Bulgaria, Greece--
trying to convince them not to uphold the unanimous sanctions
that the European Union has voted.
And he is also trying to undercut America's democratic
leadership. We saw that by the interference in our elections.
We have seen it--he alleges that the United States does not
protect its allies. We saw that in his response to the Arab
revolutions. He has tried to move into Egypt to replace the
United States, now into Libya to replace American influence
there.
This is a concerted campaign. He is skillful. He is very
opportunistic. He is cynical. And he is attempting to weaken
the United States, and I think he believes that there is a
rising tide of authoritarianism--China, Turkey, Russia itself,
and nationalism in other countries--and he can take advantage
of that.
So that is part of the strategy of President Putin, is to
cut the United States down to size, to limit our effectiveness,
especially in Europe. But he has also displaced us in the
Middle East.
What can we do to respond to it? Well, I think that
President Obama and the Congress, Republicans and Democrats,
had a good start: strengthen the American military in Europe.
We hollowed it out to fight the two wars after 9/11. We need to
rebuild our armor and our army capacity and our air capacity in
Europe, and there is a congressional appropriations to help the
U.S. military do that. Make permanent the stationing of our
forces in Eastern Europe. These are very small contingents, our
battalions in Poland and in the Baltic States. But they are a
signal to him that we are going to defend the NATO allies. And
we set a red line, must defend the red line--and the red line
is the territory of the Baltic States themselves.
I would also say, Senator, I testified before House Foreign
Affairs last month. The idea that you reduce the budget of the
State Department and aid by 31 percent at a time like this,
when we need our diplomats to be on the front lines, we need
Radio Free Europe, Radio Liberty to be fully funded, to fight
the intelligence war and the information war against fake news
that the Russians are propagating, this is a comprehensive
strategic response that the United States needs to make, and I
think President Trump has done well to put in place a strategy
against the Islamic State, and he has a theory of the case on
North Korea, which you heard about yesterday.
What we have not seen from the Trump administration is how
do we strengthen America's strategic position militarily and
diplomatically in Europe, how do we respond to Putin, and that
is what needs to happen from Secretary Mattis, Secretary
Tillerson. I think both of them have been very tough-minded,
but we have not seen that from the White House and the
President.
Senator Brown. And if you were advising the President and
he were listening, what would you say he should say?
Mr. Burns. As I said in my testimony--and I am not
accustomed as a career Foreign Service Officer to be publicly
critical of a President in the way I was in my opening remarks,
but I feel quite profoundly that his reluctance to be critical
of President Putin is a mistake strategically and tactically,
that Putin does not respect nice, flowery words. He respects
strength. And what we need now from the American President is
strength, especially on this issue of Russian interference in
our election. There has been no response from President Trump
except to question the intelligence community and the FBI.
So that would be my recommendation, a toughening of
American policy toward Russia.
Senator Brown. Thank you, Ambassador.
Chairman Crapo. Thank you.
Senator Shelby.
Senator Shelby. Thank you.
I believe both of you are spot on, on what you are talking
about about Russia, but the fact remains that there has been no
real response, real concrete response to Putin's moves in
Georgia, in the Ukraine, the threats of the Baltics, the other
stuff. But how do we really do this without sweeping, biting
sanctions? And that would take our European allies to go all
the way with us.
Of course, they are dependent, as you guys know well, on
Russia for energy, and that is Russia's lifeblood for money.
Their economy is based on that, and their military comes from
that, too, everything funded.
So how do we do it? I could see sanctions if they were
sweeping and if they meant something, they were not porous, not
tepid sanctions. You would get somebody's attention, including
Putin's. But short of that, Putin is an opportunist. He is
tough, he is smart, he is tactical. He looks for opportunities,
and he has found some. But how do we get our allies behind us
when they are doing business in different ways with Russia? And
how do we get them, including Germany, of all people, the
biggest economy there and the biggest population, to come forth
with more defense money? You know, a lot of them are not even
meeting the 2 percent, as you well know. Secretary Burns?
Mr. Burns. Thank you, Senator. I think three things in
answer to your question.
Number one, the most direct thing we can do to change the
game with Putin is to help arm the Ukrainians, lethal,
defensive weaponry--not offensive. They can defend themselves
from these attacks, and the attacks have actually accelerated
over the last 3 months, instigated by Russia inside Eastern
Ukraine.
Number two, I think you are exactly right. We need to act
in tandem with Europe and hopefully some of the Asian allies--
Japan, Australia, South Korea. Germany is the key, so the
President needs to have a close strategic relationship with
Chancellor Merkel as long as she is in power. We will see what
happens in the September elections. Whoever is in power in
Berlin is going to be the key European leader. There are some
weak states. Germany is the key to act in tandem with the
United States on sanctions to make them that much more
effective. And so I think those are the most important
principles we have got to follow right now.
Senator Shelby. What about financial crimes and financial
sanctions? I do not believe we have done enough in the banking
area as far as Russia is concerned, because you can choke off
an economy fast if we had sweeping sanctions, could we not?
Mr. Poncy. There are certainly steps that we can take to
elevate and escalate our pressure on Russia. What I tried to
outline in my testimony is sensitive to what you have raised
about the possibility of blowback, particularly on our allies
that are highly exposed to Russian potential retaliatory
sanctions. So how do we escalate this pressure in a way that is
going to be strategically meaningful in addition to tactically
significant?
I really think that the starting point here is to go after
the conduct that we see in Russian leadership associated with
corruption. We have not studied this with the resources that we
should be applying toward this. I do think the creation of a
task force that is dedicated, that has protected funding, and
that does this for the longer term--this is a 17-year picture
that we have seen evolving, as you pointed out. And rather than
wait for a regime change and trying to find assets after the
fact or hope that the policies that we have had over the past
17 years, which have not necessarily been dissuasive, let us
figure out where Russian leadership money actually is. Let us
figure out where the corruption is that we can highlight. Let
us go after that illicit conduct, and let us make it very
public. We need to make investments into investigations,
analysis, tracking, tracing here, and we need to get our allies
to do the same abroad. If we focus on that, that is one
element.
A second element would be to look at the pressure that we
have put through our sectoral sanctions in 2014 and ways that
we could ramp that up, but calibrate it in a way that is
sensitive to blowback that we may get.
I do not know that we know enough about this either. It is
clear that the Russian economy has been reeling. It is also
clear there are a lot of contributing factors to that.
Sanctions are one of those factors, but, clearly, depressed oil
prices were a big part of the picture.
Ways that we could ramp this up depend on, one, additional
designations in sectors we have already identified as critical.
To your point, finance is one of them; energy is another, and
so is defense. There are other industries that may also be
relevant, whether it is mining or it is aerospace or other
industries that we should understand are highly exposed to
vulnerability in sanctions that we could impose.
At the same time, there are ways to broaden the sectoral
sanctions by taking sectoral-wide investment bans against
anyone who is going to be investing in the Russian energy
market as an example.
Again, the bill on counteracting Russian hostilities
proposes this sort of a ban on any person. And to the
Ambassador's point, you do not want U.S. businesses sitting on
the sidelines while the Europeans that we are trying to assist
are investing in energy markets that are lining the pockets of
the Russian government. At the same time, I do not know that
the Europeans can join us politically in that because of the
blowback.
So you know more than anyone, sir, how effective secondary
sanctions can be in sanctioning regimes that we have problems
with. We have to be very careful how we do it, but this might
be an instance where we provide the cover by saying that we
will sanction anyone who is going to be investing in the
Russian energy sector. And we do that in a way that we can
manage and be flexible with, but that also starts to heighten
the economic pressure on Russia.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Cortez Masto.
Senator Cortez Masto. Thank you.
To follow up on that conversation, do you anticipate FinCEN
would be an integral partner of any task force that would be
created? And along with that question, also, are there
additional
resources or tools that FinCEN needs now to be able to go after
any type of illicit Russian money or activity?
Mr. Poncy. Thank you, Senator. I do think FinCEN is a
critical component of the task force, but I also think that the
task force needs to rely on all the assets that we have in the
investigative and analytic community.
I would propose putting that task force in Treasury itself
where the office that I came from, Terrorism and Financial
Intelligence, of which FinCEN is a part, relies on joint
analysis across FinCEN, the Office of Foreign Asset Control
that administers and implements our sanctions, the Office of
Intelligence and Analysis that has a dual reporting function to
the Director of National Intelligence in addition to the Under
Secretary for TFI. That will allow us to do the joint analysis
where we are at our best at Treasury and to merge that or
combine it with the investigative assets and expertise from the
Department of Justice. At Justice, you have a National Security
Division and a Criminal Division that are highly skilled in
these issues as well.
So the funding should be at a level where we are demanding
the interagency support and participation and prioritization
that this task force will need across intelligence, law
enforcement, and analysis. FinCEN is a part of it, but it is
only a part.
So I do think it is important to dedicate that funding in a
way that everyone can participate. I think it is important to
provide the leadership at a senior level to include the Under
Secretary for TFI and potentially the Deputy Attorney General
of the United States to co-chair something like this, and to
give it a 2- or 3-year mandate with regular reporting so that
this is a long-term and sustained commitment against a regime
that has had 17 years to consolidate its power around this.
Senator Cortez Masto. Thank you. And further discussion on
this topic. At the earlier hearing of this Committee, there was
discussion of possible options for Congress in countering
Russian aggression, and at that time witnesses urged that we
move cautiously on imposing further, more draconian sanctions.
In particular, one witness noted the possible profound
consequences for all large U.S. global banks if we targeted
President Putin and his associates' direct and indirect assets.
How concerned should we be in Congress about potential
systemic risk to large banking institutions if we impose
significantly tougher sanctions?
Mr. Poncy. Thank you, Senator. I do not think that there is
risk to our financial institutions for going after illicit
conduct. The Russians themselves, the entire international
community has agreed upon the criminality associated with
corruption, associated with fraud, associated with organized
crime and the interests that we should be pursuing in the task
force. I do think those issues are front and center when we
start talking about pressure on the Russian economy. But that
is where I believe the experience we have gained in sectoral
sanctions has been critical.
Those sanctions, having worked in the industry for the past
4 years across the global banking community, have been
implemented effectively and responsibly, in ways that have
produced economic pressure, and that can be ratcheted up in
ways that global banks understand.
There are going to have to be sensitive and ongoing
consultations with industry as that happens. There is going to
have to be a broader strategy that also looks at engaging our
foreign partners so that we can calibrate this as we go. We
have to be careful how we do it, but we can certainly do it.
And I do think the notion that we have to go this alone is
inaccurate when you look at the fact that we have the European
Union, Japan, Australia, and Canada that have moved in lockstep
with us on these sectoral sanctions. So we will have support
experience from the global banking community and not just U.S.
banks.
Senator Cortez Masto. Thank you.
Ambassador, anything else to add?
Mr. Burns. Senator, I would say there has to be a response.
Putin acts in a zero-sum fashion. He is expecting a response.
And I agree with Chip that it has to be multilateral, it has to
be with Europe and our Asian allies. And we can start with some
of the sanctions that President Obama put in place at the very
end of his term, deepen them and broaden them, go to different
areas like mining, expand the energy sanctions, expand the
number of individuals in the Russian government that we
identify for personal sanctions, travel bans, that kind of
thing.
I did not think the Obama sanctions went far enough, and
certainly what we have seen in the three European countries and
the United States merits a tougher American response.
Senator Cortez Masto. Thank you.
Chairman Crapo. Thank you.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
Gentlemen, before Russia invaded the Ukraine, clearly Mr.
Putin would have thought about what the responses would have
been. Part of that planning perhaps would have been how they
could defend their assets against the possible retaliation for
their invasion. They knew there had to be something. I am just
curious. Prior to the implementation of the sanctions following
Russia's invasion, how exposed was Russia's targeted assets to
both U.S. and EU sanctions? Basically what I am trying to ask,
I guess, is: To what extent did Mr. Putin have the opportunity,
along with his supporters, to protect or isolate their assets
from the reaches of our proposed sanctions?
Mr. Poncy. Thank you, Mr. Senator. That is a great
question, and it is one of the reasons why I feel there has to
be urgency around this task force.
Hindsight is always 20/20, but it is very clear that
President Putin had allegations associated with corruption when
he was in St. Petersburg pre-2000, investigations the Russians
themselves were running. They were shut down when he was
elected President. It is very clear that he has marginalized,
that he has intimidated, that he has expelled oligarchs that do
not share his political pathway or support for his political
leadership. And this is a picture, when you look in hindsight,
you see has emerged where he strengthened and consolidated his
power and protected his assets over 17-plus years. So I do
believe that when the invasion happened in 2014, he was already
in a great position of relative
security.
That said, without any effort to combat that, that pathway
continues. And as a G-8 economy, there are only so many steps
he can take to protect the Russian economy from exposure to
heightened sanctions pressure.
The challenge for us is, I think, how effective can we be
in going after illicit assets--right?--of the Russian
leadership, and that is what the task force is designed to do,
is to figure that out, and at the same time, ramp up what is
not targeted at illicit conduct, what is very deliberately
targeted at economic pressure on key sectors, and to do that in
a way that minimizes the possibility for blowback, which may
require, even with broad-based political support, the United
States taking a unilateral position on the most aggressive
measures where we would apply secondary sanctions against
European companies or others that would be investing in sectors
that are important for the Russian economy, because the
Europeans, if they were to do something like this, would
probably engender blowback in a retaliatory sanctions manner.
We do not have as much exposure. For us to do that well and
to do it carefully, I think we need to have a study of our
economic exposure, that of our allies, and the exposure of the
Russian economy beyond the steps we have taken. But those are
recommendations I have advocated in my testimony to take
immediate actions to escalate responsibly, but to take
immediate actions to also get a better picture of illicit
assets and of our exposure, our allies' exposure, and the
exposure of the Russian economy to where we can be most
effective in ramping up economic pressure while minimizing
blowback.
Senator Rounds. Mr. Ambassador?
Mr. Burns. Senator, I think it is reasonable to assume that
President Putin did not anticipate that the European Union,
Canada, the United States, and some of the Asian countries
would actually come together in a coherent sanctions package.
He thought he could divide the Europeans, because
traditionally, as you know, the Germans, the Italians, the
business communities have resisted these types of sanctions. I
think he was surprised by Merkel's view and her toughness.
And so we have got to keep that coalition together. I am
here to support stronger U.S. sanctions across the board
against Russia. But if we maximize it with the others, we will
be in much better shape.
Senator Rounds. Can we identify who his most important and
influential associates are, the people that really are the
decisionmakers? Can we identify them appropriately now?
Mr. Burns. I think so, after so many years in power. There
is a group around him from his youth in St. Petersburg. He has
enriched them. They run some of the big state enterprise firms.
We know who they are. Treasury knows who they are. They can go
after them. He also has loyalists from the KGB----
Senator Rounds. The reason why I ask is--and I am going to
run out of time, but we have heard talk about sectorizing it
and going after particular segments of the industries that
really do impact Russia as a whole. But some of the reports we
are getting and some of the recommendations we are receiving is
that we need to go after the decisionmakers and after their
assets. There is a difference between the two--and I would
really like to hear just very, very briefly--what your thoughts
are on that.
Mr. Burns. I think we should investigate that possibility.
That is one way to toughen sanctions, is to make it direct,
somebody in his inner circle is hurt financially because of
what they have done.
Chairman Crapo. Thank you.
Senator Rounds. Thank you.
Chairman Crapo. Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
I want to get to the issue here that goes beyond kind of
sanctions but our own, I think, vulnerability. I think Putin
understands that the greatest vulnerability we have internally
in this country is hyper-partisanship, is that you can say one
thing and people will believe it because we have no longer let
foreign policy happen at the water's edge. We just keep sending
a message that we cannot get along and we cannot get things
done, and so it gets easier to drive a wedge through.
I want to applaud the Chairman for these hearings. I think
they have just been very--not bipartisan. They have been
nonpartisan. And when you read the questions, you would not
know if it was a Democrat or a Republican asking the questions.
This is our challenge to send that message.
And so my question is: Do you believe that today Vladimir
Putin believes that there is a unified U.S. internal policy to
combat his aggression? Ambassador.
Mr. Burns. I do not believe that President Putin sees a
unified response by the Congress and the Administration to what
he has done on the hacking issue and in a way even the Ukraine
issue. And I believe he now thinks that maybe the Congress is
the party that might take action and the Administration is the
party that might not. He might seek to divide the two, just as
he has divided us, tried to, from the Europeans. That is a
danger, that we have to act on a bipartisan basis and between
the Congress and the Administration on both grounds, on Ukraine
as well as on the interference in our election.
Senator Heitkamp. Mr. Poncy?
Mr. Poncy. Thank you, Senator. I could not agree more that
unity is essential. It is essential for sanctions policy to be
effective for the industry to understand that these are
intended, expected, and will be enforced as operational
measures, for our allies to understand that these are not
sanctions where they can sit on the sidelines with their
investments ready to go in, but where they have to start to
impact their long-term business strategies, and sanctions where
our adversaries understand that until there is a serious change
in behavior, there is no serious discussion of sanctions
relief. I fully agree with all of that.
I have confidence that if we were to do that, our sanctions
would be much stronger. I have confidence that President Putin
has misjudged us. I think our best unifying moments are often
in the face of adversity, and the question is--it is like
family. The minute that somebody outside the family starts
yelling at your brother or sister or your mom or dad, you
forget about whatever quarrels you had over the dinner table.
And I am hoping that is what happens here.
Senator Heitkamp. In the 2 minutes that I have left, what
more can we do to send the signal, other than hearings like
this, where we come together and you do not know who is on
either side here, what more can we do in Congress, absent
passing additional sanctions or doing something legislatively,
that will send a clear message that we stand united in this
country against this aggression?
Mr. Burns. Well, there has to be new legislation.
Senator Heitkamp. Right. I agree with that.
Mr. Burns. There has to be a response. Right now, there has
not really been a significant response by the Congress or the
White House, either President Obama or President Trump, to what
happened in the interference in our election. So that has to
happen, a unanimous denunciation of what the Russians did by
both the Administration and both parties in Congress on a
nonpartisan basis.
Senator Heitkamp. OK. Mr. Poncy?
Mr. Poncy. Thank you, and I fully agree with that. I think
just for simplifying it as clearly as possible, the response
should include immediate legislation to codify what we have
already done. There is no going back. Two, to escalate as
aggressively as possible on illicit conduct.
In response to Senator Rounds' question earlier, that
conduct should focus on the nepotism associated with the Putin
regime. The fact that the sanctions we have issued have
translated into the passage of assets from those who are
closest to him to nominal accounts held by their kids or their
nephews or their close associates is something that we can
track and trace, but we need the resources to do it. That is
what the task force is about.
Senator Heitkamp. Can I just ask, there is a young
gentleman in the audience. I do not know whose son or nephew he
is, but we welcome you. And I want you to know when you are
watching this that all these people really want to create a
very safe America for you in the future. So thank you for
coming.
Is he related to either one of you?
Mr. Poncy. I believe the proud mom is right behind you.
Senator Heitkamp. Oh, great.
[Laughter.]
Senator Heitkamp. Anyway, I want to acknowledge--you know,
sometimes when we get into this, we forget that this is about
our children and about our future and our country and making
our country and the world safe for them to thrive.
Chairman Crapo. Thank you, Senator Heitkamp.
Senator Scott.
Senator Scott. As Senator Heitkamp has pointed out, today
is ``Bring Your Kid to Work Day.'' I would imagine that the
Banking sanctioning hearing is an interesting and perplexing
conversation----
[Laughter.]
Senator Scott.----for many of us on this side of the aisle,
much less this attentive young man. I will say that Senator
Heitkamp also mentioned the fact that the need for legislation,
enhanced sanctions, is important, and I know that Senator
Lindsey Graham and others have been talking about that for the
last couple of months from my perspective.
I do thank you both for being here, and, Mr. Chairman, I
thank you for having another hearing on such a critical topic.
Whether it be unwarranted aggression in Eastern Europe or
propping up the Assad regime in Syria or meddling in our
elections here at home, Russia's actions have shocked the
entire free world.
I would like to counter one of the main arguments used
against the sanctioning of Russia. In 2014, the United States
and the European Union deployed targeted sanctions against
Russia in response to its actions in Ukraine. Targets were
determined by Treasury and State after a careful investigation
and vetting process. Russia's economic growth slowed
dramatically, and critics of our targeting claimed that we
unfairly hurt neighboring countries and innocent parties. These
critics conveniently ignore the dramatic drop in oil prices
that occurred during the same time. And my understanding is
that the drop of the oil prices had about a 4-percent impact on
Russia's economy; whereas, our sanctions had about a 1.4-
percent impact, thereabouts, on the Russian economy, at least
under 2 percent. So the drop in the oil prices had a
significant impact, and our targeted sanctions had a targeted
impact.
The State Department released a report in December 2016
detailing the strong evidence it found that our targeted
sanctions, and I quote, ``affected the financial health of the
targeted firms or firms associated with sanctioned individuals,
while causing minimal collateral damage,'' which I think is
consistent with the impact of 1.4 or 1.5 percent of the GDP.
Mr. Poncy and Mr. Burns, you have already spoken to part of
this. I want to ask you a similar question. I would like to get
your thoughts. Can targeted sanctions be used to effectively
pressure those who threaten our national interests while
limiting collateral damage on innocent parties or other
countries?
Mr. Poncy. Thank you, Mr. Senator. I could not agree more
that the evolution of sanctions--and I spent a lot of time on
this in my written testimony--but the evolution of sanctions in
recent years has clearly reflected a migration toward conduct-
based sanctions that are targeted on behavior and are intended
to minimize collateral damage on innocent parties or
populations.
I do think that the advent of sectoral sanctions we have
seen in Russia, they are a new breed of targeted sanctions
because they are not targeting illicit conduct. They are
targeting pressure points in an economy, but they are
attempting to do it in a way that is still tailored. And I
think we have had some success with that. If they are
sophisticated, our sanctions implementation, our compliance,
our oversight in the market and in authorities here at home
have made those sanctions effective.
I think combining the two is the best approach, and the way
we do that is to identify the key firms that are owned or
controlled by the close associates of Vladimir Putin. To do
that well, we need resources that are targeting what we call
derivative designations. This is how this works. We identify at
a primary level close associates that are associated with the
illicit activity of the Russian government, that are the
decisionmakers in the regime that are engaged in illicit
conduct, and they put all their assets in the hands of others,
right, that are not named as sanctions, that evade our filters
and our controls, the way that we operationalize this stuff.
And then it is a game of cops and robbers, and as fast as we
can identify those who are acting for, on behalf of, or
supporting the regime, the faster they continue to change
color, change shape, change form.
We can keep up with them, but we need the resources to do
it. And when you have got Iran on the radar screen and North
Korea and ISIS and all the other challenges that we face, this
is why we need the task force. And in getting to the task
force, we should also make sure that we are resourcing
targeting over at OFAC and at TFI to specifically go after
sanctions--to levy sanctions against those who are close to the
regime and are holding assets in the names of others that are
materially significant to the Russian economy. I think that is
the strategy.
Senator Scott. Thank you. I will skip to my last question
because I think you really have hit on the whole nepotism
nature of the sanctions and what we have to do to pull a larger
net to get more folks. But, Mr. Burns, you talked a little bit
earlier about the necessity of not only our sanctions being
enhanced, but perhaps the European Union and others joining
that team. Can you talk a little bit more about----
Chairman Crapo. Briefly, please.
Senator Scott. Briefly. No more than 7 or 8 minutes, sir.
[Laughter.]
Mr. Burns. I will be very brief, Mr. Chairman and Senator
Scott. The key is going to be built on this consensus that is
growing in Europe that they have been hacked, in the
Netherlands, France, and Germany. And the key country is always
going to be Germany. Germany has enforced the sanctions
implementation against Putin. A lot of countries have wanted to
cut and run, and Chancellor Merkel has not let them. So I think
consolidating that relationship is going to be key for us.
Senator Scott. Thank you.
Chairman Crapo. Thank you.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. And thank you
both for your testimony.
You know, I am amazed that the Congress and the
Administration has not responded to a cyber attack on the
United States seeking to affect its national elections. Whether
or not one believes they succeeded at it is not the question.
The mere fact of launching a cyber attack with that purpose
should create an outrage from the President of the United
States on down. If we had any other form of attack, believe me,
we would have imminently responded. And yet in this context,
there seems to be a reticence to ultimately pursue what is one
of a handful of peaceful diplomacy tools, which is the use of
sanctions. And as the architect of the Iran sanctions, I can
tell you that that brought Iran to the table. And we have just
touched the surface on Russia as it relates to a sanctions
policy.
That is why I was a co-author of the Countering Russian
Hostilities Act, which I think would go a long way toward
moving us in the right direction here. And when former
Secretary Burns says this statement--this is an extraordinary
statement: ``Russia is the most dangerous U.S. adversary in the
world today.''
``Russia is the most dangerous U.S. adversary in the world
today.'' Wow. And we seem to be frozen in time.
So I strongly believe that where we are missing the boat,
at least as it relates to a sanctions policy, is where
sanctions work the best, which are financial sanctions--and
sectoral sanctions, of course. I mean, Russia's economy is
basically an extraction economy, so it depends overwhelmingly
on its oil and related enterprises.
And so while we have had some sanctions in that regard,
there are far more pervasive sanctions that could be pursued
there. And above all, Putin and his cronies care about where
their money flows. And so, therefore, sanctions against
financial institutions, of which we have at best scratched the
surface, is sorely, sorely missing.
Mr. Poncy, would you agree that sanctions against financial
institutions that are appropriately designated would go a long
way toward moving our policy along?
Mr. Poncy. Thank you, Senator, and thank you for all of
your work on the Iran sanctions campaign. It was tremendous,
and I was proud to be a part of that when I was at Treasury.
And I fully agree. I think that there is plenty of powder in
the keg to apply in sanctions if the intent is to disrupt and
overwhelm the Russian economy. We can do that. The question is:
How do we do it in a way that preserves a multilateral approach
that will ultimately be necessary within a broader strategy
that allows us to escalate in a manner that drives settlements
toward whatever the aggression is, whether it is Georgia or it
is Ukraine or it is Syria or it is cyber. And there is a lot,
obviously, with the Russian government.
What you have in the Counteracting Russian Hostilities Act
I think is a tremendous start. My written testimony supports
virtually everything in there. I want to focus on two issues
that you have just identified in particular. One is the
investment ban in the energy sector. I think that is a very
interesting idea because it is a ban in which we would sanction
any person who invests in energy. And as I tried to say
earlier, I think that is an area where we are going to have to
lead unilaterally, just as we did in the Iran campaign, because
of the blowback on the Europeans.
Senator Menendez. And if you can briefly talk to the second
one, because there is one more question I want to ask before my
time runs out. You said the investment----
Mr. Poncy. The second one is sovereign debt, and you have
got that one in there as well.
Senator Menendez. Now, the United States imposed sanctions
on state-owned oil company, Rosneft, and its effective owner,
Putin crony Igor Sachin. Russian owns 69 percent of Rosneft and
sanctions that both the United States and European countries
have imposed intend to prevent financing of Rosneft. However,
Rosneft, as well as other Russian state-owned enterprises, they
are still operating.
For example, Rosneft recently purchased nearly 50 percent
ownership of Venezuela state-owned oil company PDVSA, which,
incidentally, wholly owns and operates Citgo in the United
States, which has a large amount of critical infrastructure in
the United States, with the possibility that Venezuela may
collapse in its economic standings and default. And I have no
doubt that Rosneft purchased on the open market other shares to
put them over 50 percent ownership. Is that not something that
we should be taking as an action to make sure that Russian
state-owned companies cannot further expand into international
markets?
Mr. Poncy. I could not agree more. That is part of the
study that needs to be done, not just the task force to track
and trace illicit finance, but to better understand the points
of vulnerability that we have to Russian economic and financial
influence, that our allies have, our exposure, and the leverage
that we have on a Russian economy that is, as you say, highly
extractive.
I do not think we have studied this enough. I do not think
our defenses are up where they need to be. I think those sorts
of actions are actions that we need to be highly attentive
toward, and where we see those, escalate with a sanction where
we are not allowing a vulnerability like our own dependence on
imported oil, with Venezuela in particular, to be controlled by
a regime that we are trying to sanction.
Senator Menendez. Thank you.
Senator Tillis. [Presiding.] Senator Cotton.
Senator Cotton. Thank you. Gentlemen, thank you for your
testimony today.
In November 2015, I wrote an article in Foreign Affairs
talking about how to counteract Russia's aggression across the
world. It was caused most immediately by their surge into Syria
and their attacks on the proxy forces that we were supporting
there. But it ranged more widely--security, intelligence,
economic, legal, diplomatic measures.
I would like to go through some of the measures I suggested
there. Ambassador Burns, I know you state in your testimony
that you are not an economist or a sanctions expert, so maybe,
Mr. Poncy, if I could just run through those discrete items
with you, and then, Ambassador Burns, you could back him up on
the kind of geopolitical implications of that basket of
measures.
So, first, I called for expanding individualized sanctions
against regime cronies much further than they had been, but
also to include immediate family members, spouses and children,
so wives can no longer have apartments in Paris and villas on
the French Riviera and kids can no longer go to private schools
in the United Kingdom. Is that still a feasible option?
Mr. Poncy. It is not only feasible; it is part of the
targeting criteria now under, I believe, Executive Order 13661.
The challenge there, Senator--and I fully agree with that as a
point that we ought to be pressing--is putting these dedicated
resources in place where they are not getting pulled into Iran
and North Korea and ISIS, which are equal national security
threats, as you are aware, but that require resources to map
that transfer from principal to family to close associate to
front company to shell company to offshore. That takes a lot of
homework, as you know, and under the legal principles that we
operate under, we have to have evidentiaries in place before we
can take those actions, and that takes time.
So given the urgency of the threat, given the importance of
the issue, we should be investing the resources to make that
work.
Senator Cotton. Direct and secondary sanctions against the
energy sector, in particular the refining industry?
Mr. Poncy. Absolutely, and very much in support of some of
those provisions in the Counteracting Russian Hostilities Act.
Senator Cotton. Reciprocal provisions of arms, so, for
instance, if Russia sells weapons to Iran and Syria, then
Ukraine gets defensive anti-armor, anti-tank weapons?
Mr. Poncy. That certainly makes sense to me. I will defer
to the Ambassador on that.
Senator Cotton. Extending the long arm of U.S. law to
Russia? As you know, since I wrote that article, Russia was
punished severely by the World Anti-Doping Agency not only in
the Olympics but in the Paralympics. They cheated in the
Paralympics. They are hosting the World Cup next year. I
suspect that bid was greased with all kinds of kickbacks and
other bribes. Should our investigators, as they did with FIFA
and in the Olympics, extend the long arm of U.S. law into all
Russian activities?
Mr. Poncy. Targeting all illicit conduct by the Russian
leadership should be a priority.
Senator Cotton. Finally, one other example, and there are
many more in the article: Extending laws in the direction of
the Helms-Burton Act or the Alien Tort Claims Act to open U.S.
courts to victims of Russian aggression, theft, war crimes, and
so forth, exposing the regime to reputational and litigation
harms and costs?
Mr. Poncy. Expanding the intent of the Magnitsky Act in
that direction makes sense to me.
Senator Cotton. OK. As I said, there are many more measures
in the article, but just after giving you a flavor of those,
Ambassador Burns, would you like to now give your geopolitical
take on what that kind of approach to Russia might yield from
Russia?
Mr. Burns. Thank you, Senator. First, I sense strength in
the Congress in both parties on this issue; not so much from
the White House. I hope we could close that gap, number one.
Number two, we are going to have to ask the allies to do
more. In 2007, I took Stuart Levy with me to meet the European
allies on the Iran sanctions. The Europeans were very
resistant. They came around when they saw the effectiveness of
what congressional and Administration sanctions did with Iran.
We have to replicate that on the Russia side, and Germany will
be key.
Third, yes to deeper sanctions by the United States on
energy, in mining, and sanction more of these individuals who
are Putin cronies throughout the Government. And you have
written about that.
And, finally, yes to arms to Ukraine. We have got to do
more on the military side, and you know a lot about this,
strengthen the U.S. military in Europe to be a deterrent to
Putin, defensive arms to Ukraine. That puts pressure on Putin,
and he will respond to that. He will understand that. In a way
we will have greater deterrent power over him.
Senator Cotton. Thank you. I have just a few seconds here,
so I will ask one final question along these lines coming out
of recent news. What are the implications of Gazprom receiving
the approvals and financing that it needs to proceed with Nord
Stream 2 in Europe?
Mr. Burns. This does get back to the question of having
Europe make the same kind of sacrifices that we are making and
having an identical policy with Europe, which we do not have at
the present time.
Senator Cotton. And European action matching European
rhetoric.
Mr. Burns. Right.
Senator Cotton. Thank you.
Senator Tillis. Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
We all know that there are a lot of unresolved questions
about the disturbing ties between this Administration and the
Russian government, and the President has suggested that he
might unilaterally start waiving sanctions against the
Russians. Thanks in part to the pressure from Congress, the
Trump administration is currently enforcing those sanctions.
The Treasury Department recently rejected Exxon-Mobil's request
for a waiver from our Russian sanctions so it could get its
hands on more Russian oil.
But just 2 months ago, their CEO bragged that, and I am
going to quote him here, ``In Russia, we are there for the long
term. We have got a successful business there, and we will
continue to invest in that business.'' This sounds like Exxon
does not plan to give up on this deal.
So the Trump administration could face more requests for
waiving Russian sanctions in the future. So let me ask the
question. We have talked a little bit about pending legislation
here, but let me ask, Ambassador Burns, given the questionable
ties between the Trump administration and Russia and the fact
that the Trump administration has wide latitude to waive our
Russia sanctions, would a law to require congressional review
before the President can waive or suspend our sanctions on
Russia be a good insurance policy here?
Mr. Burns. Thank you, Senator. Before I answer, I want to
let you know that I informed Committee staff a couple of days
ago that I consult with the Cohen Group in Washington. The
Cohen Group has a client relationship with Exxon-Mobil, and I
wanted to disclose that to the Committee.
Senator Warren. All right.
Mr. Burns. Having said that, I very much supported what the
Administration did in denying the license to Exxon-Mobil. I do
not think that we should have any kind of waivers or weakening
of the sanctions regime. I generally am a disciple of executive
branch power, having been a creature of the executive branch.
But in this case, given the weakness of the President's
statements on Russia, I do favor a law that would require
congressional consent, congressional review, whatever, before
the Administration could waive sanctions, either on the hacking
of our elections or on Ukraine.
Senator Warren. That is powerfully important. Thank you.
I think it is also clear that our sanctions work better
when we coordinate with our allies and our partners, a point
you have made. Right now, the United States and the European
Union coordinate their sanctions on Russia's energy, financial,
and defense industries, and those sanctions were designed to
try to push back on Russia's actions in the Ukraine.
Ambassador Burns, if we ease our sanctions on Russia
without meaningful changes in Russia's behavior, does that
increase or
decrease Putin's ability to destabilize the countries along its
border and in the rest of Europe and, frankly, around the rest
of the world?
Mr. Burns. Senator, it would increase Putin's ability to be
aggressive against the countries around his borders, mainly
because he would not have paid a price; and, second, because
some of the countries in the European Union that do not really
want to implement tough sanctions would have an excuse, if the
United States eased up, they would argue in the EU councils--
and they have to agree by unanimity on these sanctions. They
would argue that Europe should weaken correspondingly. So it
would not be in our interest.
Senator Warren. Right. And let me just ask a related
question on this. Obviously, one of our strongest tools against
Russia is the U.S.-EU economic pressure. If we unilaterally
ease our pressure on Russia without meaningful changes in
Russia's behavior, can Europe on its own effectively hold
Russia accountable?
Mr. Burns. I do not think so. Europe has a greater trade
relationship, as you know.
Senator Warren. Yes.
Mr. Burns. But Europe does not have the political and
military weight to be an effective deterrent. It needs the
United States. That is why we have had NATO since 1949. So we
have got to have an integrated strategy.
Senator Warren. Good. Thank you very much. You know, I am
very glad that the Administration denied Exxon this recent
waiver from our current Russian sanctions for now. But we have
to be clear about the broader context for this. Our
intelligence community has determined that Russia engaged in
cyber attacks on the United States to interfere with our
election. The FBI has active and ongoing investigations into
connections between Russia and the Trump campaign. Members of
the Trump administration and campaign have questionable ties to
Russia and were forced to resign in disgrace. And there is good
reason to believe that President Trump himself has substantial
financial relationships with Russia, but we will not actually
know the details of that so long as he will not release his
taxes.
If ever there was a time for Congress to serve as a check
on any attempts to roll back sanctions against Russia, now is
that time. I have cosponsored the legislation to do that, and I
hope we can pass it. Thank you.
Thank you, Mr. Chair.
Senator Tillis. Thank you.
Mr. Ambassador, I think this should be directed to you. I
just want to clarify for the record on what Exxon sought. I
thought they sought a license from Treasury, not a waiver from
State. Is that correct? And they were denied that license back
in March under the Trump administration?
Mr. Burns. I am not the best person to answer that. I am
not aware of what the specific obligation----
Senator Tillis. I believe that is right. So I do think you
are right that at least particularly last year some of the
words about Russia out of the then candidate concerned many of
us here. But it seems like that action is an action that you
agree was an appropriate action. Thank you.
Mr. Burns. I certainly do.
Senator Tillis. Yeah. I have a question about when we
identify targets--are the people in Russia that we identify as
targets of potential sanctions aware--are they aware--they know
that they are actually a part of people that we may go after?
And if they are, how do they behave? What do they do
financially to try and inoculate themselves from the effect of
some of those sanctions?
Mr. Poncy. Thank you, Senator. I think they are keenly
aware, and in the discourse with Senator Rounds, I was
explaining that the Putin regime has had 17 years to
consolidate its power around behavior that has been remarkably
consistent, marginalizing anyone that does not support the
regime and rewarding those that do. And as our sanctions were
levied, they followed years of investigations into corruption
by the regime, initially by the Russians themselves, then
through opposition parties, all of which have been suffocated.
And so this is not a new game for them. They understand how to
do this.
By the time that we started issuing sanctions, they were
well insulated into the financial system, into the global
economy, with holdings that are derivative in nature. And I do
think we can get to those holdings, but that requires a lot of
research, analysis, and intelligence. And this is the point
about funding the task force again on illicit finance, but also
funding the task force on the economic ties and relationships
between their economy and their leadership and between their
economy, ours, and that of our allies, so that we can start to
connect the dots, understand where the pressure points are, and
then start to go after it.
It is not going to be an immediate picture. We have got to
get smart before we shoot. But I think we can get there with a
dedicated investment from the Congress, a dedicated commitment
from the Administration. And given that this has been a 17-year
behavior pattern and it does not look like it is going to
change, this is what we should be doing.
Senator Tillis. Another question I thought about as Senator
Menendez was talking about some of his concern with the lack of
action. One area that I have a significant concern with is the
lack of action of using our energy assets as a tool that begins
to put us in a different posture with European nations. You
know, it is easy for us to say that they need to join us. It is
a little bit more difficult if, I do not know, a quarter of our
energy supply was coming from the very nation that you want me
to put pressure on.
So, you know, for the last 8 or so years, we have more or
less made it very difficult to extract natural gas, to export
natural gas, to wean European nations off of Russian energy. Do
you believe that that is a very important part of how we change
the dynamic and make it more likely that people in Europe will
work with us when it will not have the kind of consequences it
could have if they came down too heavy? Ambassador?
Mr. Burns. I agree with you. The Europeans are trying to
diversify through Norway, natural gas through Algeria, but they
do want to have natural gas exports from the United States.
They want to over the long term reorient their energy
dependencies and escape it. So I agree this is an option for
us.
Senator Tillis. And to the extent that we reduce some of
the regulatory barriers, responsible, environmentally sound
regulations, but reduce the regulatory barriers and reduce the
underlying cost of natural gas, doesn't that also directly
affect the resources that Russia has available for any malign
activities? In other words, if gas is cheaper, they are making
less money?
Mr. Burns. Well, that certainly is the case, and the
Russians have a stranglehold on the European market and have
had for 35 years.
Senator Tillis. The last question that I have in my time
remaining is--we have focused a lot on how we can create new
sanctions, enforce the sanctions regime--but what other things
would you encourage us to think about that go beyond the
traditional sanctions regimes that we have used in the past
that maybe we have not thought about? And to the extent that it
would require congressional approval, what advice could you
give this Committee?
Mr. Burns. We have to have greater capacity to resist
Russia's propaganda efforts, Sputnik and RT, and we need to
rebuild our ability to have an effective information program of
our own. This gets to the Broadcast Board of Governors, with
Radio Free Europe, Radio Liberty. It gets to reconstituting in
the State Department a much more effective organization to try
to distribute factual facts around the world and combat the
fake news of the Russian Federation. State is being defunded
right now, a 31-percent proposed budget cut by this
Administration. And I hope the Congress will resist that
because we need a strong State Department in order to counter
Russia in that sphere. That is very important.
Mr. Poncy. Thank you, Senator, and I fully agree with that.
Again, I think the Counteracting Russian Hostilities Act and
the dedication of what I believe was $100 million in 2017-18 to
go toward these sorts of programs, and not only information
programs but programs to highlight the corruption that we know
is associated with Russian leadership, we have to be much more
aggressive in the public messaging campaign here. Sanctions, as
I was saying earlier, cannot work in isolation. It requires a
very strong diplomatic push, a very strong push on law
enforcement, which the task force will also use the long arm of
U.S. jurisdiction to go after anyone associated with corruption
in Russia. It has to be part of a broader strategy.
Senator Tillis. Thank you.
Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman, and I want to
thank the witnesses for being here. It is clear to me that
Russia actively engaged and actively interfered in United
States elections this past election, that they worked nonstop
in that effort, and in my book, among many other reasons, that
certainly gives us the right to impose sanctions. And my
question would be, Ambassador, what do you think is the most
effective sanction that could be imposed right now?
Mr. Burns. Senator, first, we need to be better aligned
with the Europeans, the Japanese, the Australians, and others
to have maximal impact, and I think there is work to be done
diplomatically to do that.
Second, deepen the sectoral sanctions and even broaden some
of them into mining, for instance, deepen the energy sanctions,
make it more difficult. Senator Tillis talked about this. This
is Russia's comparative advantage. Make it more difficult for
them in their supposed area of strength.
And, third, we do have--Congress voted sanctions, and the
President did as well, initiated sanctions in 2014 to go after
certain individuals around Putin. Other Members have raised
this today. I think that is an area where we begin to pressure
Putin personally. He is not--he does not govern alone. He
actually in a way has----
Senator Donnelly. And there is a real perception that it is
just him.
Mr. Burns. It is not. I mean, he has got full autocratic
power over the machinery of the state, but for his continuation
as President, he depends on the oligarchs, he depends on the
people who run these state enterprises. He needs to keep them
happy by throwing them contracts. If you go after those people,
you are more liable to really influence the thinking and the
behavior of Putin.
Senator Donnelly. Mr. Poncy?
Mr. Poncy. Thank you, Senator, and I fully agree with that.
I believe the most immediate step is to codify sanctions in a
way that sends a strong message. And this is not about
politics. It is just about unity and saying, look, this is a
position where the United States is not going to be
entertaining any sort of a walk-back. That is not a message
that I would weigh in on internally. It is a message I want to
weigh in vis-a-vis an external audience that says the United
States is united on this. We have open discourse disagreements,
sometimes very hostile, as a democracy does. But on this issue
we are united. So that is step one, no rollback, we are united
on that.
Two, we are going after illicit assets by the Russian
leadership.
Three, we are going to prioritize task forces to look into
where that money is, and our economic vulnerability and
opportunities associated with interconnections with the Russian
economy and that of our allies. And we are going to heighten
economic pressure responsibly, using the sectoral sanctions we
have, expanding them where it makes sense, and doing that in
concert with our allies; all that makes sense.
That entire package has to sit within that broader strategy
that we were just talking about with military reinforcements in
Europe, with an intelligence capability, law enforcement ramped
up, diplomatic outreach to our allies, and positive economic
power, something that we have not talked a lot about, but how
do we reinforce opposition? How do we counter this not just
playing defense but some offense? How do we use our export
credits to--how do we do a substitution for the European----
Senator Donnelly. It is about a five- or six-front effort.
Mr. Poncy. Yes, exactly. And that is really what has been
missing, is a prioritization of that, the integration of that,
and the consistency behind it from a unified Government.
Senator Donnelly. Ambassador, let me ask you this: How
powerful is denying access to things like the SWIFT transfer
payment system for his oligarchs and for the country? And is
that something that, if we do, sets off a whole cataclysm of
events at that point?
Mr. Burns. I do think this gets into the range from a
national security perspective. We are going to have to be
careful and think through this. I am all for tougher, deeper,
broader sanctions. He needs to feel the pain.
If you go to SWIFT--that is just one example--he may take
that as an existential threat against the Russian state, not
just against himself but the Russian state. And I am not sure
the United States wants to go there. This is a very dangerous
adversary. They have nuclear weapons. He is not unpredictable.
He is rational. But he would, I think, in a rational sense take
that as a blow to undermine the very existence of this
particular Russian government. So I think the Congress needs to
be careful here but tough.
Senator Donnelly. So how do you best ensure that--
obviously, we hope he rolls back in Ukraine and in Crimea, but
how do you ensure that he does not go further, do you think?
Mr. Burns. I think the place he would have gone further
would have been the Baltic countries had we not deployed forces
there and had President Obama not gone to Tallinn in September
2014 to say we will defend these countries. And you have to
make that meaningful. That gets to building up the American
military in Europe right now and adding to the strength of our
armor and our air capacity now because he is testing us there.
So strategic deterrence of the type we practiced in the cold
war is definitely back in this equation.
Senator Donnelly. Mr. Poncy?
Mr. Poncy. Just to reinforce the Ambassador on this,
particularly with respect to the SWIFT action, not only would
that be a potential existential threat, but it is also one that
starts to lose the message campaign that we want, which is this
is not about Russia, this is about a leadership that we can and
should be targeting more aggressively than we have been and
where we can be dissuasive by focusing on their illicit
conduct, their cronyism, and then the key ties between that
leadership and the Russian economy rather than a broad-based
hit against a G-8 economy that has a lot of people who may be
on our side on this.
Senator Donnelly. Thank you.
Thank you, Mr. Chairman.
Senator Tillis. Senator Cortez Masto, I want to apologize.
I am surprised Senator----
Senator Brown. She went already.
Senator Tillis. You have already gone? OK. Then I withdraw
the apology.
[Laughter.]
Senator Tillis. I thought I skipped over--I will save it
for another time, but I thought I skipped over you for Senator
Donnelly.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman, and thank you
both for your testimony today. Thank you for your service both
in and out of Government, and I appreciate your comments.
I think there is a growing consensus, at least in the
Congress, that we need to not only codify the existing
sanctions that are currently operating through Executive order,
but also that we need to go further as a result of the
interference in our democratic process, something that concerns
Democrats and Republicans alike, both for what happened and the
potential for it to happen again. So I am hoping that the
Congress is moving quickly in that direction.
As you have indicated, we have also seen this kind of
interference among our Western European allies. We know that
the pro-EU centrist French Presidential candidate Emmanuel
Macron's campaign was hacked by the Russians. We know that
Russians targeted Angela Merkel and the Christian Democratic
Party and also hacked into the German parliament. We know that
the Russians provided more than a million euros to the National
Front Party in 2014, and, Ambassador Burns, as you indicated,
President Trump made some very positive remarks just recently
about Le Pen's campaign, even though the Russians would love to
see a victory by that particular party because, as you have
indicated, their overall strategy is to undermine the
democratic processes within Europe and try to increase the rise
in authoritarianism more to Putin's liking. So I am glad that
we are focusing on how we can make sanctions more effective.
I want to focus for a minute on developing a broader
strategy to combat cyber attacks and hacking. Punishing via
sanctions for past behavior is one thing. How can we develop a
strategy going forward? I had hoped we were moving forward very
early on. President-elect Trump said he was going to establish
an anti-hacking plan. He asked for a plan to be put forward
within 90 days. That deadline passed last week, and apparently
there is no team in place, no plan, and nobody at the White
House has been able to indicate who, in fact, would be in
charge of that plan.
I am in the process right now of finalizing some
legislation with Senator Cory Gardner to try to establish a
working group and strategy with the United States and our
allies to really coordinate our efforts with respect to
responding to cyber attacks. And as you indicated in your
testimony, Ambassador Burns, we have a right to sanction
Russian individuals and firms. The tougher question is, of
course, how to address the Russian state.
But we also need to try to find a way to not only respond
but deter going forward, and I would ask both of you, beyond
economic sanctions and financial penalties, what diplomatic
measures, what counter cybersecurity actions can be taken to
sort of set up rules of the road so the Russians know that when
they try to interfere in American elections or European
elections, there will be a response? What suggestions or ideas
do you have in establishing a kind of structure that could do
that?
Mr. Burns. Senator, thank you, and let me just say I agree
with all of your comments about the need for bipartisanship,
the fact that the Europeans are being harassed and interfered
with right now in these elections. And I agree with your
comments on Marine Le Pen. I cannot remember a time when an
American President said anything positive about an anti-
democratic leader in Europe, but it happened last week.
Your question is the key question. I think we know what to
do on Ukraine sanctions, less clear what to do on cyber
sanctions. A couple of thoughts.
One is we know that the United Kingdom, Germany, France,
and Israel have capacity here. We should be working in tandem
with them and have a common response with them. That will
impress the Russians more, first.
Second, we have got to strengthen defense, obviously. We
are in a defensive mode. We have to think about our offensive
capabilities as well, as the Trump and Obama administrations
have been trying to do.
Third, you are right that some of the new sanctions
proposed by Congress have to be directed at the Russian state,
not just Russian companies that might be working in a cyber
capacity, a wink and a nod with Russian security services, but
with the state itself and the people and organizations around
Putin.
And, finally--and this is going to be difficult--President
Obama did succeed in having a conversation with President Xi
Jinping on the cyber issue, what we will not do against each
other, kind of unwritten rules of the road. President Trump is
going to have to have that conversation with President Putin.
President Trump should want to be in a position of strength and
not weakness, and right now he is in a position of weakness.
And I am sorry to say that, because if we are going to be
effective, we have to have a tougher-minded and much more
serious approach by our Government.
Senator Van Hollen. Thank you for raising the example of
President Xi, and I know my time is up, but I would like to
continue the conversation about whether you think that model,
backed up with the kind of sanctions we are talking about, can
actually be effective in dealing with Putin.
Thank you.
Senator Tillis. Any other questions on the part of the
Members? Senator Cortez Masto.
Senator Cortez Masto. This is for the Ambassador. Yesterday
we had a briefing on North Korean, and last week the Russian
Federation vetoed a resolution at the United Nations seeking to
condemn North Korea for their nuclear tests. At the same time,
this week, unconfirmed reports indicate that Russia may be
moving troops to the North Korea border for fear of military,
potential military conflict and/or refugees flowing across the
border into Russia.
Do you think that with respect to North Korea the United
States' and Russia's interests may be aligned in terms of
constraining North Korea? And if so, do you think that that
should be a consideration when we are looking to impose severe
economic sanctions against Russia?
Mr. Burns. Thank you, Senator. For a long time, when I was
involved in the Bush administration in our policy to try to
work with Russia on North Korea, the Russians did not deviate
much from what we wanted to have happen. This was back in 2007
and 2008. The same was true with the Agreed Framework in the
Clinton administration. But, you know, now, I think because
President Putin does have this objective of trying to undercut
and undermine American power, we have seen it in Egypt, we have
seen it in Libya, we have seen it in Syria, we may now be
seeing it in North Korea.
And your question also gives me the opportunity to say I
think that Russia is important in North Korea, China is much
more important. I think President Trump has been right to
publicly
challenge China to do more. I worry, however, that China is
going to disappoint him the way it disappointed President Obama
and President George W. Bush. In the end, the Chinese prefer
the status quo in the Korean peninsula to the potential
collapse of the North Korean regime and the emergence of a
unified Korean peninsula under the control of a democratic
government, our ally in Seoul.
And so I think that the Administration should temper public
expectations that China is going to resolve this for us. I do
not think that is going to happen. But I do agree with
President Trump that we have to face this squarely. I believe
that putting THAAD into operation makes sense. That is going to
happen, as I understand from news reports, this week, and to up
the pressure on both the Chinese and North Koreans over this
unacceptable threat to the west coast, to Nevada, to the
Mountain States, to the west coast of the United States, maybe
in the next 5 to 6 years from North Korea.
Senator Tillis. Mr. Ambassador, Mr. Poncy, thank you both
for being here.
This will conclude the hearing. The record will remain open
for a period of 1 week for follow-up questions. Thank you
again, and thank you for your service.
The hearing is adjourned.
[Whereupon, at 11:39 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Mike Crapo delivered the following opening remarks during
the full Committee hearing:
``This morning, the Committee will receive testimony on the smart
use of sanctions to counter Kremlin military incursions in Ukraine,
Syria, and its increased reliance on cyber warfare against many
nations.
``The Committee met 6 weeks ago to begin an inquiry into the
effectiveness of the United States sanctions regime imposed 3 years ago
against the Russian Federation for its invasion of Crimea, continuing
violence and interference in Ukraine, and cyber intrusions against the
United States.
``At that hearing, we learned that alone, U.S.-imposed targeted
sanctions have had a somewhat limited impact on the economy of the
Russian Federation.
``That impact was magnified by the combined effect of sanctions
imposed by other Western nations coupled with the severe drop in world
oil prices.
``It was less clear, however, if the existing sanctions were
affecting any change in the aggressive geopolitical calculations that
President Putin continues to make.
``Some analysts say that the economic sanctions have had a
deterrent effect on Putin pushing even farther into Ukraine territory.
That is a good start.
``Others look to Putin's continued actions in Ukraine and Syria in
the weeks since this Committee last met and conclude we should target
additional sanctions on the Russian Federation.
``Despite existing U.S. and Western sanctions, Putin has not shown
any intention to cease his aggressive behavior.
``For the Committee, today's inquiry is not about punishing the
people of the Russian Federation, but rather those responsible for
Russia's misbehavior.
``The goal now is to transform the initial, limited application of
financial leverage into the next step of what must become a general
campaign to impose real costs that impact Putin's ability to conduct
hostile activities in an already-troubled world.
``A good starting point might include a codification of existing
Executive orders, and a deepening and broadening of sanctions in
certain economic sectors, addressing cyber activity and financial
corruption, and making mandatory certain existing discretionary
sanctions.
``Vital in all of this is harmonizing the conditions to lift
sanctions so that if Putin were to try to reverse course, overlapping
or misdirected sanctions would not defeat the potential for meaningful
change in Kremlin policy.
``Since sanctions were first imposed 3 years ago, the Obama
administration, the U.S. Congress, and now the Trump administration
have been prepared to impose additional sanctions as circumstances
warrant, or until Putin follows through with his commitments to the
Minsk cease-fire agreement.
``In fact, several rounds of new designations have been implemented
under existing sanctions laws over the last 3 years.
``Make no mistake, these sanctions currently in place, and those
that may yet come, are Putin's fault and a result of Putin's confused
notions of Russian power and pride.
``Putin is not defending the interests of his people, but is
exploiting opportunities to seize neighboring lands by fomenting
disorder and seeking to perpetuate Mideast conflict to advance Russia's
military influence.
``America must lead on the issue, since the most successful
sanctions result from a united front of U.S. and EU cooperation.
``Since the unlawful annexation of Crimea, the years of
destabilizing Eastern Ukraine through relentless war, the global spread
of cyber-intrusions and Putin's indefensible support of Assad's
leadership of Syria, particularly in light of the recent chemical
attack, fewer are left in Europe to defend Putin's policies.
``The European Union must ask itself if it is prepared to join the
United States to take the necessary financial actions in the
foreseeable future to deny Putin the resources he needs to take
whatever his next steps may be.
``The last thing the European Union, the United States or this
Congress can be is divided in the face of Putin's uncertain path.
``The times call for clarity of purpose, and a correct amount of
pressure.
``I thank our witnesses for coming here today to help the Committee
understand what a next course of action might look like, what the
repercussions of taking such action might look like, and how even those
may be mitigated.''
______
PREPARED STATEMENT OF R. NICHOLAS BURNS
Roy and Barbara Goodman Family Professor of Diplomacy and International
Relations, Harvard University, John F. Kennedy School of Government
April 27, 2017
Mr. Chairman and Ranking Member Brown, it is an honor to testify
before the Senate Committee on Banking, Housing and Urban Affairs on
United States sanctions against the Russian Federation.
The United States should maintain sanctions on Russia due to its
continued aggression in Ukraine. The Congress and the Trump
administration should now also consider additional sanctions over the
Russian government's interference in the 2016 U.S. Presidential
elections.
Russia is the most dangerous U.S. adversary in the world today. For
more than a decade, Russian President Vladimir Putin has used the power
of the Russian state to undermine American interests in Europe, the
Middle East and now in the heart of our democratic system here in the
United States.
Russia is attempting to undermine the democratic peace in Europe
that the United States helped to bring about after the dissolution of
the former Soviet Union and communism in Eastern Europe a quarter
century ago. In August 2008, Russia invaded Georgia and has kept that
country divided since. Russia has imposed a false territorial conflict
in Moldova. In 2014, Russia invaded and then annexed Crimea, violating
the territorial integrity of Ukraine. This was the first outright theft
in Europe of one country's sovereign territory by another since the
Second World War.
Russia has helped to instigate, fund and arm an insurrection
against the Ukrainian government in Eastern Ukraine through the
continued presence of Moscow's military forces in that region. Russia
has also attempted to undermine the internal stability of our NATO
allies, Estonia, Latvia, and Lithuania.
To the south and west of the Russian Federation, Putin has acted to
undermine neighboring states and to gain effective control over their
futures so that they may not seek closer ties to either the European
Union or NATO. He wants to attain what the Tsars and Stalin sought in
the past--strategic depth along his borders to separate Russia from the
West. In this regard, he views the United States as his most serious
competitor for power and influence in Europe. He understands that the
United States, as the leader of NATO, is the pivotal country in
organizing an effective defense against his plan to expand Russia's
sway in Eastern Europe.
In response to Russia's invasion of Ukraine, President Obama was
right to join European countries and Canada in imposing economic
sanctions on Russia in 2014. The Trump administration should not lift
those sanctions until all the provisions of the Minsk agreements have
been implemented fully.
These sanctions are a critical component of the ability of the
United States to counter Russia in Europe and to assist those European
countries that are victims of Russian aggression. Helping to create a
free, united and democratic Europe has been one of America's most
important and historic global objectives for a century. The United
States fought in the First World War, World War Two and during the long
decades of the cold war to secure freedom in Europe.
Putin has now put that all at risk. Europe has been divided again
by his illegal actions. It is thus a vital national interest of the
United States to contain Russian power in Eastern Europe. Sanctions are
one of the principal tools the United States and Europe have to ensure
the success of this common strategy.
Russia's clear interference in the American Presidential election
in 2016 should also strengthen our determination to undercut Putin's
ambitions and to raise the costs to his government of this
unprecedented assault on American sovereignty. The U.S. Intelligence
Community report to the country in January was unequivocal. Russia
attempted to undermine the credibility of our 2016 election by
intervening through a variety of nefarious means.
This is a blatant, unprecedented and deadly serious attack on our
democracy. Vigorous investigations by the FBI and the Senate and House
Intelligence Committees are necessary to unearth the full truth of this
attack on our electoral system. It also warrants a response from the
Congress by the imposition of further and stronger sanctions in
addition to those already in place.
The United States must respond swiftly and with conviction or
Putin's government will only be encouraged to continue its campaign to
undermine our democracy and those of our allies. Indeed, there is ample
evidence that Moscow has already been interfering in the Dutch, French,
and German elections this year on behalf of extreme anti-democratic
populist parties. Russian Television, Sputnik and other organs of the
Russian state have been dispersing fake news, misleading articles and
outright lies about those democratic leaders in Europe that oppose
Russian policies. The Russians will very likely continue these
activities unless we work together with the European Union to impose
substantial costs on them for doing so.
The response by President Trump to Russia's actions has been
extremely disappointing.
President Trump has repeatedly contested the judgments of the
intelligence community and of the FBI on this issue.
He has downplayed the need for investigations by the Congress. He
has ordered no serious investigation of his own and has not
demonstrated any sense of urgency to discover the extent of Russia's
interference in our election. He has failed to criticize President
Putin for this brazen attack on our democracy. Based on my experience
working for Republican and Democrat Presidents on Russia, I cannot
imagine any of President Trump's predecessors adopting such a weak
approach on such a grave national security challenge.
One of President Trump's fundamental responsibilities as President
is to defend our country from foreign aggression. He has failed to do
so in not responding to a serious attempt to undermine American
democracy.
That is why Congress must now act by undertaking a comprehensive,
bipartisan investigation of Russia's actions and by adopting a far
stronger and more forceful response than the Trump administration has
to date. Indeed, a recent NBC/Wall St. Journal poll showed that 73
percent of the American respondents supported an independent
investigation into this attack.
With this in mind, I support many of the goals of the proposed
bipartisan Russia Sanctions Review Act of 2017. Congress should
consider imposing more comprehensive sanctions on Russia to build on
the cyber sanctions initiated by President Obama in late December 2016.
At the very least, the President and Congressional leaders must
make clear directly to the Russian government that interference in our
elections or attacks on our critical infrastructure will not be
tolerated by the United States. We must warn that the United States
will retaliate further if these attacks continue. And we should
coordinate our response with our key allies to maximize its impact.
The United States has every right to sanction those Russian
individuals and firms who have carried out hacking attacks during our
election campaign on behalf of the Russian government. But, the far
greater challenge is to decide how to respond to hacking attacks, the
use of false information, fake news sites and other interference by the
Russian state itself. Depending on the results of the FBI and
Congressional investigations, our response must be forceful and
unmistakable in our determination to deter future attacks.
As a career Foreign Service Officer, I worked for three American
Presidents as they sought to respond to challenges from Russia. From
1990 until 1995, I served in the Administration of President George
H.W. Bush as Director for Soviet Affairs at the National Security
Council and then in the Administration of President Bill Clinton as
Special Assistant to the President and Senior Director for Russia,
Ukraine, and Eurasian Affairs.
During the Administration of President George W. Bush when I was
Ambassador to NATO (2001-2005) and Under Secretary of State for
Political Affairs (2005-2008), I worked extensively on our often
difficult relationship with the Russian Federation. While we cooperated
reasonably well with the Russian government for a time after the 9/11
attacks, President Putin eventually adopted a much more aggressive,
competitive and distrustful attitude toward the United States and
Europe. Our relationship with Moscow has suffered as a consequence.
All three Presidents worked within a carefully constructed and
bipartisan strategic framework that emphasized the freedom and security
of our allies and friends in Europe as a primary priority. President
Trump has not made these principles a point of emphasis in his first
months in office. He is the first American president in seven decades
who has not made clear his unequivocal commitment to NATO and the
European Union and to the preservation of democratic governments in
Europe. He has been reluctant to embrace U.S. leadership of the NATO
Alliance. He has been even more lukewarm on our historic support for
European integration. Just last week, he made laudatory comments about
the French anti-democratic populist, Marine Le Pen. This is an abrupt
and misguided departure from seven decades of resolute American policy
in support of democratic governments in Europe.
Congress must thus remain vigilant on the issue of U.S. sanctions
against Russia over its outright violation of Ukraine's sovereignty.
Congress should make it difficult for the Trump administration to lift
sanctions without Congressional concurrence. And if the Russian-
supported separatist forces continue to expand their territorial
control in Eastern Ukraine, Congress should consider adding sanctions
in response. A December 2016 report by the Atlantic Council (where I am
a board member)
details a variety of options from strengthening sanctions on key
individuals in the Russian government to expanding financial sanctions,
including in energy. It would also be beneficial for Congress to
request from the Trump administration a full accounting of Russia's
ongoing violations of the Minsk accords during recent months.
I am neither an economist nor a sanctions expert and am thus not in
a position to judge the precise impact of the sanctions on the Russian
economy to date. Many experts believe lower world oil prices have been
the main factor contributing to Russia's negative economic growth
during this period. But, many also believe sanctions have had an impact
in helping to slow Russia's GDP growth rate and robbing its economy of
badly needed investment capital in energy and other areas.
Sanctions have not been sufficiently robust to cause the Russian
government to withdraw its military forces from Crimea and Eastern
Ukraine. But, the sanctions have isolated Russia internationally and
have been a unifying factor in galvanizing Western opposition to Putin
and in ensuring nonrecognition of Russia's land grab in Ukraine.
The fact that Putin and his government have worked so hard to have
the sanctions lifted is an indication that they are a cause of great
concern for Moscow. The Russian government continues to attempt to
divide the European Union on this issue. German Chancellor Angela
Merkel has been the key leader in insisting that Russia meet all of its
Minsk agreement commitments before sanctions can be lifted. She
deserves our full support in maintaining unanimity within the European
Union in the months ahead.
As Congress debates the right mix of sanctions in response to
Russia's actions in Ukraine as well as its interference in our
elections, it will be important to integrate U.S. sanctions with those
of Canada and the European Union. Congress should request a full report
on sanctions implementation by the United States and all the other
countries to ensure they are being carried out in a rigorous manner.
The United States would be right to insist that the sanctions also be
equitable on both sides of the Atlantic so that the sacrifices made by
European companies are equal to those being made by American companies.
Sanctions are the main tool the United States and Europe can employ
to send a message of tough opposition to Russia's territorial
aggression in Eastern Europe. When Russian military forces entered
Crimea and then Eastern Ukraine in early 2014, President Obama,
Chancellor Merkel, and other allied leaders made the right decision not
to use military force in response. As Ukraine is not a member of NATO,
we had no legal or ethical obligation to do so. And military force
would have created a dangerous confrontation between two nuclear
weapons powers. Sanctions were the only effective way the United
States, Canada, and Europe could respond forcefully to Putin and
inflict economic damage that might, over time, cause him to rethink his
strategy.
For now, however, Russia is far from compliance with the Minsk
accords. During the last 3 months alone, Moscow has instigated more
intensive fighting by the separatist movements it supports directly.
Indeed, the Russian government took an unprecedented step earlier this
year of treating passports of the separatist government in the Donbass
region as legitimate. It has even acquiesced in the use of the Russian
ruble in territory that clearly belongs to Ukraine under international
law. The trends are both obvious and ominous in Ukraine, Moldova and
Georgia-Russia is attempting to subvert the independence of all three
countries.
The United States must now mount a renewed strategy to combat this
dangerous Russian campaign. The first step is for the Administration to
maintain and possibly increase sanctions on Russia. A second step is
for Congress and the Administration to agree to provide lethal
defensive arms to Ukraine so that it can defend its people and its
borders. A third step is to make permanent the recent stationing of
NATO military forces on the territory of Poland, Estonia, Latvia, and
Lithuania. Finally, the Trump administration should also continue the
policy of President Obama to rebuild the strength and armored capacity
of U.S. military forces in Europe as a deterrent to Putin's truculent
behavior.
While there will be some issues where cooperation with Russia may
be possible--implementation of the Iran Nuclear Deal, North Korea, and
counter-narcotics are examples--we will likely remain in a competitive
and hostile relationship with Russia until Putin's Soviet-trained and
inspired generation passes from power some years from now.
Our long-term goal must thus be to contain Russian power in Eastern
Europe to preserve, in the words of President George H.W. Bush, the
``Europe whole, free, and at peace'' that was the historic result of
the end of the Cold War in 1991.
Russia, however, is clearly attempting to rebuild its power base in
Europe and the Middle East at the expense of the United States and its
allies. Its brutal air campaign in Syria has resulted in the deaths of
thousands of civilians. By
weakening both NATO and the European Union, Moscow also hopes to
undermine the credibility of our democratic systems.
Finally, Mr. Chairman, these aggressive Russian actions are a
warning to the American people and our Government. We must be vigilant
in defending the Western values upon which our country was founded and
on the Transatlantic Alliance that is critical to our long-term
security.
Just as during the Cold War, Russia's assault is focused on our
concrete interests in Europe but also on the values that are at the
heart of our democratic system of government. Russia is contesting the
victory of the democratic countries at the end of the Cold War. Putin's
actions are a carefully coordinated power move to divide the West and
reduce American power in the world.
With this in mind, I hope President Trump will speak and act more
resolutely in defense of those values--freedom of speech and of the
press and the separation of powers, including an independent judiciary.
The United States is the natural leader of the West and is an
exceptional global power. We must give confidence to the American
people, as well as hundreds of millions of Europeans who are our treaty
allies, that we will act to protect the freedom and independence of the
Western democracies against a cynical and opportunistic Russian
autocrat.
We urgently need a principled, bipartisan American response, led by
the Congress, to the threat of Russian attacks on our friends in Europe
and on our democracy at home.
______
PREPARED STATEMENT OF CHIP PONCY
President and Co-Founder of the Financial Integrity Network, and Senior
Advisor to the Center on Sanctions and Illicit Finance
April 27, 2017
Chairman Crapo, Ranking Member Brown, and other distinguished
Members of the Senate Committee on Banking, Housing & Urban Affairs, I
am honored by your invitation to testify before you today.
This is the Committee's second hearing in the past several weeks on
assessing next steps and further options for U.S. sanctions on Russia.
I commend your attention to this issue of growing urgency to our
national security and to the collective security of the international
order that the United States has led since the founding of the United
Nations over 70 years ago.
I am also grateful for the substantial contribution of the expert
witnesses who testified before you on this topic last month. Their
prior testimony and ongoing work, together with the contributions of
other dedicated experts studying this topic, continue to inform our
thinking at the Financial Integrity Network and the testimony that I
will deliver to you today.
The primary basis of my testimony, however, is the experience that
I have gained in helping to shape and implement sanctions policy over
the past 15 years, in the U.S. Government, the international community,
and in the private sector. Based on this experience and as explained in
greater detail below, I believe there are important steps that Congress
should take to protect our national and collective security by
clarifying and strengthening sanctions on Russia, summarized as
follows:
1) Prioritize targeted sanctions against Russian leadership
engaged in illicit conduct. Congress should target sanctions
against Russian leadership engaged in illicit conduct by:
(i) Calling for the establishment of a Russian Counter-Illicit
Financing Task Force dedicated to tracing, mapping,
sanctioning, and prosecuting illicit Russian financial flows
that intersect with the U.S. financial system, and for working
with allied governments to similarly track, trace, and combat
illicit Russian financial flows, largely as proposed in the
Countering Russian Hostilities Act Bill;
(ii) Providing specific funding for the Russian Counter-Illicit
Financing Task Force, to be managed by Treasury and the
Department of Justice to ensure interagency participation and
support as needed across law enforcement, intelligence,
regulatory, and financial authorities;
(iii) Codifying and consolidating existing sanctions authority to
specifically target Russian leadership engaged in illicit
conduct, largely as proposed in the Countering Russian
Hostilities Act Bill;
(iv) Expanding existing sanctions authority to specifically target
Russian leadership engaged in illicit conduct that, with
respect to any foreign state: (a)
undermines democratic processes or institutions; (b) threatens
the peace, security, territorial integrity or sovereignty; or
(c) misappropriates state assets;
(v) Prioritizing and expanding derivative sanctions against persons
and entities owned or controlled by; acting for or on behalf
of; or materially, financially, or technologically assisting
Russian leadership engaged in illicit conduct, including by
calling upon Treasury to lower the ownership threshold for
derivative designations from 50 percent to 25 percent,
consistent with Treasury's final rule on customer due diligence
for U.S. financial institutions;
(vi) Creating a Europe and Eurasia Democracy and Anti-Corruption
Fund as proposed in the Countering Russian Hostilities Act, and
further creating specific funding for publication of studies
and research on corruption of Russian leadership.
Prioritizing targeted sanctions against illicit conduct by Russian
leadership will expose, contain, disrupt, and potentially deter such
conduct. Efforts that can expose corruption of Russian leadership may
be particularly powerful in raising opposition to such conduct in
Russia. Prioritizing derivative designations in particular will give
much greater economic impact to primary designations against Russian
leadership by going after the networks that support and benefit from
illicit conduct engaged in by such leadership.
2) Call upon Treasury to consider designating under Section 311 of
the USA PATRIOT Act any Russian financial institutions engaging
in substantial transactions associated with any illicit conduct
by Russian leadership;
3) Heighten controlled pressure on the Russian economy. Congress
should consider building upon Treasury's sectoral sanctions
program to heighten controlled economic pressure on Russia,
including by:
(i) Calling upon Treasury to expand designations of Russian
financial institutions, defense firms, and energy companies
under the sectoral sanctions program;
(ii) Applying new sanctions against any persons with respect to
purchase, subscription to, or facilitation of the issuance of
sovereign debt of Russia, as proposed in the Countering Russian
Hostilities Act bill;
(iii) Applying new sanctions against any persons with respect to
investments in the Russian energy sector, as proposed in the
Countering Russian Hostilities Act bill;
(iv) Considering new sanctions against any persons with respect to
investments in the Russian financial or defense sectors;
(v) Calling upon Treasury and the intelligence community to produce
a study of key Russian sectors exposed to economic sanctions
and U.S. and allied countries' exposure to potential counter-
sanctions by Russia; and
(vi) Based on such a study, considering new sectors for possible
designations under the sectoral sanctions program.
4) Strengthen the effectiveness of U.S. sanctions in general.
Congress should strengthen the operational effectiveness of
U.S. sanctions by:
(i) Providing funding for Treasury to expand its sanctions
targeting, compliance, and enforcement resources and
capabilities, particularly with respect to derivative
designations of key node primary sanctions targets;
(ii) Considering requiring Treasury to issue regulations specifying
sanctions program and training requirements for global
financial institutions operating in the United States and for
other sectors vulnerable to sanctions busting and sanctions
evasion;
(iii) Calling upon FinCEN to issue final anti-money laundering (AML)
rules on the reporting of cross-border wire transfers and on
AML program, SAR reporting, and customer due diligence (CDD)
requirements for investment advisors to heighten the
transparency of the U.S. financial system in accordance with
international standards;
(iv) Calling upon FinCEN to consider rulemaking extending AML
requirements to title insurance companies and/or others
involved in the sale of high-end real estate as necessary to
close proven sanctions evasion and money laundering
vulnerabilities in the U.S. real estate market;
(v) Calling upon Treasury to issue a report offering
recommendations for expanding information sharing under Section
314 of the USA PATRIOT Act to enhance the effectiveness and
reduce the costs associated with counter-illicit financing
analysis by U.S. authorities and across the U.S. financial
system.
5) Facilitate operational sanctions capability in allied countries.
Congress should enhance foreign partner capacity in key allied
countries by providing funding to Treasury to launch a Foreign
Partner Training Program across sanctions administration,
implementation, and enforcement.
These recommendations are based in large part upon key
developments, conditions, and challenges evident in the recent
evolution of sanctions policy and implementation, as discussed in
greater detail below.
Background
I was extraordinarily privileged to serve our country at the United
States Department of the Treasury for 11 years following the terrorist
attacks of 9/11. I worked for and with an immensely talented and
dedicated group of individuals from across the U.S. Government, the
financial services industries, and various governments with shared
interests in our collective security. This was a pivotal period in the
development and institutionalization of financial and economic power as
an increasingly important component of our national and global
security.
With bipartisan leadership across the Congress and four
Administrations, we collectively constructed, secured, and deployed an
unmatched capability to exploit
financial information and apply financial and economic pressure to
identify and attack threats to our national security. We also secured,
strengthened, and expanded enduring multilateral support for these
efforts, including through global frameworks, relationships, and
mechanisms that continue to protect the international financial system
from a wide range of illicit activity and actors. Developing and
applying a broad array of financial and economic sanctions against
various threats to our collective security constituted a core component
of these efforts.
For the past 4 years at the Financial Integrity Network, our
mission has focused on assisting allied governments, the global banking
sector, and critical industries in developing and implementing
financial policies that advance our collective security and protect the
international financial system from abuse. A key area of our work has
been collaborating with clients and partners to design, implement,
assess, and strengthen effective and workable sanctions policies within
broader financial security risk management regimes.
Throughout my experiences in Government and the private sector over
the past 15 years, U.S. sanctions policy has continued to evolve,
benefiting from lessons learned over time. My recommendations above for
strengthening sanctions against Russia are based on this recent history
of sanctions evolution, and how this history has revealed key
conditions and challenges to strengthening the effectiveness of
sanctions policy in general, including with respect to sanctions
against Russia.
Important Developments in the Recent Evolution of Sanctions Policy
Designing, implementing, assessing, and strengthening current
sanctions programs requires an understanding of the recent evolution of
sanctions policy within the broader rise of financial power and
economic statecraft. This evolution is marked by four inter-related and
fundamental developments:
(i) The emergence of sanctions and targeted financial measures as a
core component of foreign policy, national security, and
collective security strategies;
(ii) Shifting expectations of sanctions policy as an increasingly
operational, targeted, and nuanced tool designed to achieve
real financial and economic impact;
(iii) Expanded application of sanctions against a broader range of
illicit conduct, and
(iv) The increased blending and interdependence of sanctions and AML
regimes.
These developments, briefly explained below, help shape the
conditions and challenges that sanctions policymakers should consider
in developing, assessing, and strengthening sanctions programs,
including with respect to sanctions against Russia.
The emergence of sanctions as a core component of foreign policy,
national security, and collective security strategies
The emergence of sanctions and targeted financial and economic
measures as an essential component of foreign policy and national and
collective security strategies is evident in the relatively recent and
rapid expansion of sanctions programs at global, multilateral, and
national levels. Since the terrorist attacks of 9/11, virtually every
United Nations Security Council resolution addressing various threats
to
global peace and security has included heightened sanctions and other
targeted financial and economic measures. This includes global
responses to illicit activities ranging from terrorism to the
proliferation of weapons of mass destruction, as well as global
responses to rogue regimes and destabilizing elites in various
countries such as Afghanistan, the Central African Republic, the
Democratic Republic of the Congo, Iran, Libya, North Korea, Somalia,
Sudan, South Sudan, and Yemen.
In addition to this global expansion of sanctions programs, the
United States has prominently coordinated multilateral sanctions
campaigns targeting collective security threats associated with the
Bashar al-Assad regime in Syria and Russian aggression in the Ukraine.
The United States also continues to work with the European Union and
other partners in maintaining other multilateral sanctions programs
against oppressive and corrupt governing regimes in countries such as
Belarus and Zimbabwe, and in implementing conduct-based sanctions
against designated terrorist groups and their support networks.
At a national level, the United States continues to impose broad
economic sanctions against Cuba, notwithstanding the substantial
relaxations introduced in the last years of the second Obama
administration. The United States has also introduced and heightened
unilateral sanctions against oppressive and corrupt elements of the
governing regime in Venezuela. And the United States has expanded
conduct-based sanctions against threats ranging from drug trafficking
and terrorism to proliferation and malicious cyber-enabled activities,
as well as against transnational criminal organizations more broadly.
Similarly, other jurisdictions, most notably the European Union,
have developed unilateral sanctions programs to advance foreign policy
interests such as combating kleptocracy, including with respect to
ongoing asset recovery efforts against the former Mubarak regime in
Egypt.
This broad expansion of various types of sanctions programs
underscores the increasing importance of sanctions as a core component
of global, multilateral, and jurisdictional strategies to advance
fundamental foreign policy interests and address various threats to
national and collective security.
Shifting expectations of sanctions policy
The emergence of sanctions as a fundamental component of foreign
policy and national and collective security strategies is due in part
to the shifting expectations of sanctions policy. This is
notwithstanding the historically consistent overarching purpose of
sanctions as a means of advancing core foreign policy interests and
addressing threats to national and collective security.
In general and with a few notable exceptions, expectations
associated with sanctions policy have shifted in two fundamental ways.
First, sanctions have evolved from primarily political ``name and
shame'' symbolic measures to operationally meaningful tools to deter,
change, disrupt, and/or contain activity that threatens core foreign
policy or national or collective security interests. As operational
rather than purely political or symbolic measures, sanctions are
increasingly expected to create real financial and economic pressure on
their intended targets.
Second, as sanctions have become more operational, they have also
become more tailored and nuanced, targeting specific actors or conduct
of concern while minimizing collateral damage to third parties or
related interests. Policymakers increasingly craft, tailor, and adapt
specific types of sanctions to address specific types of threats,
maximizing the effectiveness of sanctions while minimizing collateral
harm. This is evident in the rise of conduct-based sanctions and the
general move away from comprehensive jurisdictional embargoes and
toward regime-based sanctions, targeting specific elites responsible
for the threatening behavior of concern.
Expanded application of sanctions against a broader range of illicit
conduct
As sanctions have shifted toward a more operational and targeted
approach, they have been applied against a wider range of illicit
conduct previously addressed exclusively by criminal law enforcement,
or occasionally by the use of force. Such illicit conduct includes drug
trafficking, terrorism, the proliferation of weapons of mass
destruction, cybercrime, and transnational organized crime more
broadly.
This emergence and expansion of such conduct-based sanctions have
been driven by both necessity and opportunity. Such sanctions are
increasingly necessary to protect and advance core foreign policy and
national and collective security interests against an expanding array
of threats that have become more sophisticated and globalized in an
increasingly globalized economy. And such conduct-based sanctions
provide us with an opportunity to apply our considerable financial and
economic power in a manner that directly attacks these threats, in
support of law enforcement, foreign policy, and other national security
interests.
The emergence of conduct-based sanctions has also been critical in
targeting jurisdictional sanctions programs against government elites
that are responsible for a targeted country's threatening behavior.
Such sanctions have increasingly targeted a sanctioned country's
government officials and related individuals responsible for activities
such as: (i) threatening the peace, security, territorial integrity or
sovereignty of other states; (ii) misappropriating state assets; (iii)
undermining democratic processes or institutions; or (iv) engaging in
gross human rights abuses.
Increased blending and interdependence of sanctions and AML regimes
As sanctions have become more expansive, operational, and targeted,
they have also increasingly depended upon and overlapped with AML
regimes. This is particularly true with financial sanctions or economic
sanctions that are primarily implemented and enforced through the
financial system. At a fundamental level, the effectiveness of such
sanctions depends critically on the financial transparency achieved
through sound implementation of robust AML preventive measures by the
banking and financial services industries. The customer and
transactional due diligence conducted by financial institutions
pursuant to AML regulation enables such institutions to identify and
manage risks associated with sanctioned parties, activities, and
jurisdictions. Without the financial transparency achieved through
implementation of such AML requirements, compliance with many sanctions
policies would be substantially limited or even unachievable.
In addition to this fundamental reliance of operational sanctions
effectiveness on financial transparency gained through implementation
of AML preventive measures, most conduct targeted by sanctions is also
criminalized as predicate offenses to money laundering. This includes
drug trafficking, terrorist financing, WMD proliferation (smuggling/
violation of export controls), organized crime more broadly, and
corruption. This overlap enables sanctions policy to benefit from the
support of AML regimes across governments and the global financial
system, where such conduct is targeted for as a basis for suspicious
activity reporting, investigation, prosecution, and asset forfeiture.
Finally, sanctions policy may focus on targeted financial measures
that may also be required or authorized by AML authorities. Depending
on the particular sanctions program and scenario, sanctions may not
require an asset freeze, but may prohibit certain financial
relationships, investments, or transactions, akin to certain AML
measures such as in applying Section 311 authorities of the USA PATRIOT
Act. And as a practical matter, sanctions implementation increasingly
requires AML risk management measures, such as certifications,
representations, and enhanced due diligence.
This is particularly true with respect to the sectoral sanctions
levied by the United States, the European Union, Canada, and other
countries against Russia. While such sectoral sanctions do not require
asset freezing or outright prohibition of relationships or dealings
with sectoral sanctioned parties, they do impose certain debt or equity
financing prohibitions with respect to such designated parties, as well
as other restrictions. These complex sanctions were deliberately
designed to enable ongoing relationships with sanctioned parties while
putting financial and economic pressure on key parts of the Russian
economy. Financial institutions that must comply with these sanctions
while remaining engaged in business with sectoral sanctioned entities
rely upon a combination of sanctions screening and AML-like enhanced
due diligence measures and controls.
These developments in the recent evolution of sanctions policy as
described above can assist policymakers understand conditions and
challenges that impact sanctions effectiveness.
General Conditions and Challenges for Assessing Sanctions Effectiveness
The recent evolution of sanctions policy reveals general conditions
and challenges for assessing sanctions effectiveness as follows:
First, effective sanctions policy and implementation
requires clear sanctions objectives and criteria. With respect
to sanctions against countries, the evolution of sanctions
policies and programs, and in particular the complex
combination of sanctions relevant to some countries such as
Russia, has raised challenges of clarity and common
understanding regarding sanctions objectives and criteria.
Policymakers should ensure that objectives and criteria for
specific sanctions programs are clear, and that these remain
clear as underlying circumstances change. Policymakers should
also ensure that sanctions objectives and criteria are well
understood, including among allied countries, across affected
business communities and the compliance industry, in the
popular media, and within sanctioned countries--particularly
when sanctions target corruption by ruling regimes. Such
clarity and understanding may facilitate greater
compliance with and more active support for various sanctions
programs among allied countries, within affected industries,
and among the general public.
Second, as sanctions programs have become more operational
and nuanced, they must be flexible to adapt to changing
circumstances. Such flexibility is crucial to maintain the
effectiveness of sanctions against intended targets while
preserving their workability for compliance and implementation
purposes. Policymakers should ensure that authority is
delegated to the Treasury with sufficient discretion to manage,
administer, and implement sanctions programs in a dynamic and
complex environment.
Third, the general shift away from classic jurisdictional
embargoes and toward regime-based sanctions targeting illicit
conduct by governing elites not only minimizes collateral
damage to innocent parties, but also highlights and holds
accountable specific individuals engaged in such illicit
conduct. When such illicit conduct includes corruption, it may
make it more difficult for sanctioned regimes to blame the
United States or sanctions programs for economic problems that
are likely due to the corruption and failed policies of the
sanctioned regime.
Policymakers should generally favor developing such regime-based
programs targeting illicit conduct over comprehensive
jurisdictional sanctions. Derivative designations associated
with such targeted programs can still introduce largely
prohibitive jurisdictional risk in such countries for outside
markets; however, the cause of intended or collateral economic
pain in the sanctioned regime's country may be more visibly
attributed to the illicit conduct of the regime and its control
over the country's economy. This may help create internal
pressure for the ruling regime to change its behavior.\1\
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\1\ For similar reasons, policymakers should also consider
converting existing comprehensive
jurisdictional sanctions against Cuba and Sudan to regime-based
programs targeting illicit
conduct.
Fourth, the growth and complexity of operationally focused
sanctions have put substantial pressure on sanctions
implementation, administration, and enforcement resources, both
within the Government and across the private sector. As
policymakers consider strengthening or expanding sanctions
programs, they should ensure that appropriate Government
resources are available to implement these programs
effectively, including for purposes of providing clear and
workable guidance for the financial community and other
industries whose compliance systems are critical in making
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sanctions operationally meaningful.
Fifth, effective implementation of and compliance with
increasingly complex sanctions programs and requirements demand
specialized expertise, particularly in global finance and other
industries exposed to sanctioned parties, activities, and
jurisdictions. Policymakers should support sanctions
implementation and compliance by considering requiring training
programs that specifically focus on developing such expertise
in highly exposed industries.
Sixth, the disparity between the United States and the rest
of the world in sanctions administration, implementation, and
enforcement--including with respect to global and multilateral
sanctions programs--weakens sanctions effectiveness and
heightens the burden of sanctions compliance for U.S. persons
and authorities. Policymakers should prioritize not only global
or multi-lateral political support for sanctions, but global
and multi-lateral operational capability in sanctions
administration, implementation, and enforcement. It is
astonishing that 16 years after 9/11 and the adoption of United
Nations Security Council Resolution 1373 requiring all
countries to develop targeted sanctions against global
terrorism, that only a handful of countries have invested in
any meaningful sanctions administration, implementation,
oversight, guidance, or enforcement. By and large, the
Treasury's Office of Foreign Assets Control (OFAC) remains a
singular source of expertise, authority, and capability on
sanctions administration, oversight, and enforcement, and the
Treasury's broader Office of Terrorism and Financial
Intelligence remains a unique institutional authority in
targeting and implementing sanctions programs within a broader
financial security approach and framework.
Policymakers should consider training budgets and personnel to
assist foreign partners who commit to developing operational
sanctions capabilities, particularly within a broader financial
security framework. Facilitating such foreign capability may
also make it easier to engender political support for using
such capabilities against common threats to collective
security.
Seventh, notwithstanding the need for greater multilateral
capability in sanctions administration, implementation, and
enforcement, the increasing use of sanctions by authorities
around the world may expose the United States and its allies to
retaliatory sanctions by countries subject to U.S. and allied
sanctions. This concern should limit our consideration of
technical assistance to allied countries and should drive a
proactive study of our exposure to retaliatory sanctions by
countries currently or potentially subject to U.S. sanctions.
Policymakers should consider financing such a study.
Eighth, the increased blending and interdependence of
sanctions and AML regimes underscore the importance of
investing in AML regimes not only to combat money laundering
and financial crime, but also to facilitate compliance and
implementation of sanctions policy. Where holes in AML
regulation, implementation, supervision, or enforcement prevent
financial institutions from truly understanding their customers
or transactions, sanctions evasion becomes an elevated and real
risk. In recent years, several enforcement actions resulting in
billions of dollars of fines levied against global financial
institutions for breakdowns in sanctions and AML compliance
underscore this reality.
To facilitate effective sanctions implementation, policymakers
should ensure that sound and robust AML regimes extend across
the financial system and deliver the financial transparency
required to identify and manage sanctions risk.
Sanctions policymakers should also leverage AML authorities and
resources to provide investigative, analytic, and prosecutorial
expertise and support to combat illicit conduct targeted by
both sanctions and AML regimes.
Conclusion
Over the past generation, the United States has led the global
development and institutionalization of global and national frameworks
to combat financial crime, exploit financial information, and leverage
financial and economic power, including through the development and
implementation of sanctions policy. We must continue to invest in this
capability, at home and abroad, and fully utilize this capability to
combat threats to our national security, including with respect to
dangerous behavior by the Russian government. I am hopeful that my
testimony will assist the Congress and the Administration in continuing
to lead these efforts.
I am grateful for the opportunity to testify before you today, and
I look forward to your questions.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER FROM NICHOLAS
BURNS
Cyber-Deterrence
Q.1. During a recent meeting with sanctions experts, a few
Senators discussed the concept of ``cyber-deterrence.'' We are
fighting and fending off--at all levels of Government and
industry--a persistent and growing threat from foreign
government hackers and armies of online trolls. This endangers
our financial systems, our interconnected infrastructure, and
our electoral process.
Do you believe there are any number of sanctions we
could place on Russian entities or officials that could
deter further cyberattacks?
What other actions do you believe the United States
could take, such as increasing our ``cyber-offense,''
that could deter future meddling and cyber-attacks from
Russia?
A.1. Did not respond by publication deadline.
European Support for Sanctions
Q.2. Our allies in Europe depend on us to spearhead efforts
against Russian aggression. For decades, they have relied on
American leadership and the promise that we are going to be
there to back them up. Now, in order for the current sanctions
regime against Russia to work, we need our allies to back us
up. But right now, there does not seem to be a unified voice
for foreign policy coming out of the White House and the State
Department.
What message does this lack of a leading, unified voice
send to our allies in Europe? How is Russian domestic and
foreign policy leadership reacting to current U.S. foreign
policy in Europe?
A.2. Did not respond by publication deadline.
Russian Energy Production
Q.3. Many of our allies in Europe, despite having sanctions on
Russia for its incursions into Ukraine, are still highly
dependent on natural gas from Russia. Clearly, this reduces the
European Union's leverage to levy sanctions where it really
hurts Russia the most.
What policy recommendations would you make to us in
Congress that would help our allies in Europe to wean
themselves from Russian natural gas?
A.3. Did not respond by publication deadline.