Sanctions Overcompliance: What, Why, and Does It Matter?

Abstract

Economic and financial sanctions have become one of the most prominent tools of U.S. foreign policy. The relevant sanctions programs are complex and their implementation relies extensively on private parties, such as banks and multinational corporations. These developments have raised concerns about overcompliance, that is, situations in which market participants apply sanctions beyond what is legally mandated. This paper proposes a definition of overcompliance and analyzes its principal forms, drawing on examples from recent sanctions targeting Russia. It then examines the causes of overcompliance from a "bottom-up" perspective, starting from the incentives of market participants called upon to comply with sanctions under threat of civil or criminal enforcement. Turning to the consequences of overcompliance, it asks whether they require a legal or policy response. Market participants, it argues, cannot and should not be expected to “optimize” sanctions compliance in the manner contemplated by critics. Overcompliance is a rational response to uncertainty in sanctions rules, which is itself a rational response by policymakers to the costs of providing additional clarity (which may include facilitating evasion). As a result, it is at best unclear that current levels of overcompliance are undesirable, at least from the standpoint of policymakers. The humanitarian impact of overcompliance on innocent third parties, however, provides reason for alleviating uncertainty and facilitating certain categories of transactions.

Keywords: sanctions, overcompliance, international law

JEL Classification: K33, F51