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Dealing with Trump's Unexpected Magnitsky Expansionism
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Institute for Statecraft

Dealing with Trump's Unexpected Magnitsky Expansionism

Dr Alan Riley

The December expansion by Executive Order of the Global Magnitsky Act will have significant consequences in Russia and the European Union.

Currently tout Moscou is alarmed at the prospect of appearing on the Section 241 list, which is expected to be published by the State Department on January 29th. Section 241 of the Countering America’s Adversaries Through Sanctions Act 2017 requires Congress to be furnished with a report by the end of January 2018 which identifies the most significant senior political figures and oligarchs in the Russian Federation, as determined by their closeness to the regime and their net worth. This report does not bring immediate sanctions against those individuals in its wake, but those who fear they may be placed on that list do fear that is what may well happen. They also fear that simply by being on the list will make travel and business transactions much more difficult to undertake. Countries will be more wary of providing visas and fewer business counterparties will want to enter into commercial transactions for fear that the Russian side will be subsequently subject to sanctions.

While oligarchs have been obsessing over the prospects of being included on the Section 241 list, just before Christmas the White House announced another major development of its sanctions regime which is likely to overshadow the consequences of the Section 241 list. This was the publication of Executive Order 13818 . This Executive Order (EO) significantly expands the scope of the Global Magnitsky Human Rights Accountability Act (GMA) enacted in the final weeks of the Obama Administration. In fact, as the EO lowers the requisite legal standards for the GMA to be applied in respect of both human rights abuses and corruption, combined with the open filing processes available to NGOs and Congress, it is not unreasonable to say that the EO effectively weaponizes the GMA.

The difficulty with the GMA as enacted in 2016 was that, in respect of human rights abuses, it only applied to specific classes of individuals who may have been abused, for instance those who had advocated for human rights, and it only applied in respect of significant acts of corruption. The EO sweeps away these restrictions. All forms of human rights abuse are now capable of being subject to a GMA filing. Equally, the legal standard for corruption is reduced from significant acts of corruption to corruption per se. In addition, the scope of liability for facilitation and support of corruption is also expanded.

The GMA also provides for two routes for sanctions to be imposed. First, via a State Department assessment with inter-agency co-operation, ultimately handing over the enforcement process to the Treasury Department’s Office of Foreign Assets Control (OFAC). It has been made clear in the State Department briefings on the GMA and the EO that it welcomes evidence from NGOs and civil society on cases it is examining-that external information will be assessed alongside information from US agencies and law enforcement. There is also however, a second process whereby Congress, in the shape of the chair and ranking members of a number of congressional committees, can make their own GMA filings to the President. The US government has then to make a determination within 120 days. It is likely that when NGOs and civil society groups have significant evidence they will use this route to fast track a determination.

A weaponised GMA is likely to prove a very powerful tool in the hands of the US government, the Russian opposition and Russian civil society against the Russian elites. This is not likely in the Russian case to result in significant number of human rights filings, but it is the case that it may lead to many filings in relation to corruption. This is because corruption is the operating principle of the modern Russian state system, described in detail in Karen Dawisha’s book Putin’s Kleptocracy. In that book, Dawisha compellingly lays out the evidence that the organising principle of the Russian state is indeed corruption. The elite close to the centre of power operate a multi-level spoils system across almost all sectors of the economy. As an indicator of the scale, and the fact that corruption is an organising principle, Dawisha points to the Transparency International analysis that annual bribes in Russia amount to approximately $300 billion – i.e. the equivalent to the entire Russian state budget. Her analysis indicates that most of the theft, bribery and side payments made to the elites are offshored into Western banks and property assets.

The practical problem (from the perspective of the Russian elites) with this multi-level, at scale system of corruption is that it also creates its own immense data trail. It generates huge flows of data, documents and witnesses who can provide testimony for the US authorities. At least some of that evidence will make its way to Washington in the form of GMA corruption filings against Russian individuals and corporate entities. Such filings in particular are likely to be enthusiastically seized upon by the Russian opposition as a means to target individual members of the Russian elite and to tarnish the regime. Given the animus toward the current regime in Washington, and in particularly in Congress, such evidence is likely to be embraced and propelled toward sanctioning many more Russian individuals and entities.

The prospect of active use of the GMA against Russian corruption also creates a significant problem for European business. Geography, and the pattern of business development over the last two decades, mean that many more European than American businesses have commercial relationships with Russian individuals and corporations. However, the prospect of a ramping up of sanctions against specific Russian individuals and entities on a rolling basis is alarming for European business partners. First, because many European businesses may count as ‘US persons’ for the purposes of the GMA and will have to terminate their commercial relationships with their Russian partners. Second, even if they are not formally required to terminate their relationships, commercial caution combined with pressure from their own banks and shareholders will encourage termination. Third, Russian partners reliant on access to US assets and US facilities to sustain their Western commercial relationships will find that their assets and credit lines will become frozen. Fourthly, the supplementary facilitation and support provisions of the EO raise the prospect that they could also be sanctioned in any event alongside their Russian partners.

As a consequence, European businesses with ongoing commercial relationships with Russian partners in which they have heavily invested in terms of resources, cash and reputation, are vulnerable. One way to deal with the prospect of GMA liability and disruption is to take a proactive anti-corruption approach to such relationships. This would involve engaging an independent third party to assess the Russian partner in order to give it a clean bill of health. The effect of carrying out such corruption audits would be to make it much less likely that an attempt to sanction a Russian individual or entity would be made and, if it were made, there would be a basis for launching a successful defence.

It is likely, therefore, that Western firms involved in major projects with Russian partners, which may be politically controversial but where corruption is unlikely to be present, will seek to deploy robust independent corruption assessments. For example, take the history of Nordstream 1, where Dawisha reports that the cost of pipelines in Russian waters was three times higher than that of pipelines in European waters. While there may have been a legitimate justification for those higher costs, that history - combined with the fact that the provider of the Russian pipelines, the Rotenberg brothers, have already been subject to Western sanctions - will have made the promoters of the Nordstream 2 project very cautious. Nordstream 2 and its Western partners will have sought to ensure that there is no possibility that the project could in any way be challenged on corruption grounds. However, given the history and the political controversy, it is now clearly vulnerable to a GMA filing. As a consequence, it is likely that, in response to the coming into force of an enhanced GMA, projects like Nordstream 2 will seek to protect themselves from a GMA filing by seeking a robust independent analysis of their operations.

The weaponisation of the GMA may therefore have two major consequences. First, it hands to the Russian opposition a means to highlight and sanction corruption amongst the Russian elite. This is likely to bring forward the day of reckoning for the current beneficiaries of such corruption, as sanctions will both undermine their business operations and access to the Western commercial facilities, banking and assets, while exposing their business practices to the glare of publicity worldwide and in Russia. Second, Western capital will increasingly focus on Russian business partners who can pass an independent anti-corruption assessment. Capital will be channelled in the direction of legitimate businesses who cannot be subject to GMA challenges and do not raise the prospect of sudden termination of business relationships or of facilitation sanctions being imposed on Western partners.

If the GMA does turn out to be a sanctions machine that targets the bad and channels resources to the good, it will have a much broader and positive impact on corrupt regimes than the bare bones of the 2016 Act would suggest. It also appears from the text of the EO that the Trump Administration are willing to do what is necessary to operationalise the GMA. We will now see whether the Administration will follow through by making a significant number of sanction determinations under the Act.

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