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Bill S-217, The Frozen Assets Repurposing Act

 

Honourable senators, we are giving our consideration to Bill S-217 at a time of great stress in the international system and, more importantly, great human suffering in Ukraine due to Russia’s invasion of that country. It is no surprise that many commentaries on this bill start with the deplorable war in Ukraine and use the fact of Russian aggression as the reasoning — indeed, as a kind of slam dunk — for approving this bill.

There is a case for supporting this bill and you have heard different versions of the slam dunk, including from our honourable colleague and my friend Senator Kutcher just a few minutes ago. But this is not a basketball game, and I have reservations about the rush to the net. I believe this bill is an opportunity for us to think more broadly about the role of sanctions and how we should make laws that stand the test of time.

I will start with a heterodox view. It is that the Ukraine war should not be the reason for adopting this bill. One could in fact argue that with Russia continuing to wage war in Ukraine, this is possibly the wrong time to be thinking about repurposing seized Russian assets.

Let me explain. This bill allows for the seizure and repurposing of assets frozen under our sanctions regime, namely, the Special Economic Measures Act, or SEMA, and the Sergei Magnitsky Law as well as the Freezing Assets of Corrupt Foreign Officials Act, also known as FACFOA, which is not strictly part of the sanctions regime but closely related to it.

There is nothing in Bill S-217 that increases our power to sanction Russia. Every sanction that we have imposed on Russia since the start of the war has been imposed under existing authorities, including a raft of additional sanctions that were imposed while we were on recess the last two weeks. That is why we have hundreds of Russian individuals and entities on the SEMA. Any Canadian assets of these sanctioned persons and entities are now frozen. They cannot be spent, sold, traded, pledged or transferred. They are in effect rendered useless to the Russian owners of the assets. If there are any additional assets in Canada that we want to render useless to the Russian owner, we can do so without this bill.

What Bill S-217 does is to give the Governor-in-Council the power to take the next step by seizing and repurposing the assets for ends to be proposed by the Governor-in-Council and approved by the courts. The goal of Bill S-217, in other words, is not to increase sanctions as such; it is to provide for justice, restitution and a measure of retribution. Some will argue that repurposing assets adds to the deterrent effect of sanctions, but it doesn’t. Any deterrent effect on the sanctioned individual or to a would-be corrupt oligarch has already taken place through the primary action of freezing the asset.

Colleagues, justice and restitution are important objectives, but so is the objective of inducing a change in behaviour. The latter is in effect the classical motivation for imposing a sanction. A sanctioned asset that is frozen has the potential for the asset to be returned to the owner if that person changes his or her behaviour in accordance with the objective of the sanction. On the other hand, a sanctioned asset that is repurposed removes any incentive for the owner to change.

Which brings us to Russia and why we should not be thinking about Bill S-217 as immediately applicable to Moscow’s ongoing aggression.

If it came down to a choice between (a), the current sanctions on Russian oligarchs having a positive effect in changing the course of war and reducing human suffering in Ukraine or, (b), removing the incentive for Russian oligarchs to influence a change of direction in Moscow, I would choose (a) in a nanosecond. We might chafe at the thought that the oligarchs are getting back their assets that they likely obtained through massive corruption and, possibly, human rights violations, but we should be clear that the recent sanctions on these oligarchs were specifically for the purpose of inducing them to put pressure on President Putin to stop the war, not for their previous activities.

I don’t know how oligarchs think, but I have to imagine that Roman Abramovich’s feverish efforts at informal diplomacy with Ukrainian interlocutors have something to do with the sanctions on his fancy homes, boats, clubs, companies and cash. Would he cease such efforts if there were no longer any prospect of retrieving his frozen wealth?

That is why I believe we should be thinking about Bill S-217 not in terms of how it is going to be useful in the Ukraine crisis, but in the broader terms of what we want from a sanctions regime.

As I intimated earlier, sanctions are imposed for a mixture of reasons, including domestic politics, to punish bad acts, as an inducement to change behaviour and as a deterrent to would-be bad actors.

Bill S-217 is consistent with the first two objectives, but it runs counter to the third and fourth.

For this reason, I proposed in committee a set of amendments that would have limited the scope of Bill S-217 to only one of the three acts referenced in the bill. The amendment was defeated, and I am not going to reintroduce it at third reading. However, I will state for the record that in our zeal to connect Bill S-217 with the Ukraine war, we risk muddying some important principles in the use of sanctions and in diplomacy more generally.

For example, Bill S-217 will apply to the Freezing Assets of Corrupt Foreign Officials Act, or FACFOA, even though FACFOA is not actually part of the sanctions regime. It is, rather, a tool for mutual legal assistance and cooperation between Canada and a requesting country to repatriate improperly obtained assets from that requesting country through negotiation. It is inappropriate to impose a unilateral asset repurposing function on FACFOA, which should be about Canada working cooperatively with the requesting country.

In situations where the affected country is run by a regime that Canada simply cannot work with, it is preferable, in my opinion, to sequester the assets until such time as an acceptable regime is returned to power than to repurpose the assets unilaterally.

Bill S-217 will also apply to the Special Economic Measures Act, or SEMA, which covers sanctions that Canada has chosen to impose on foreign states, persons or entities outside of a UN Security Council resolution. SEMA is very much a tool of Canadian foreign policy and is typically used in conjunction with diplomacy and other tools of statecraft. In this sense, a major but not exclusive objective of SEMA sanctions is to try and induce behaviour change, which is why it explicitly leaves open the possibility of reversing the sanction.

Did you know that a SEMA sanction can be amended or revoked by a motion signed by at least 50 members of the House of Commons and at least 20 members of the Senate? A SEMA sanctioned asset that is repurposed under Bill S-217 would render useless the behaviour change objective and, I believe, reduce the number of tools in our diplomatic tool kit.

On the other hand, Bill S-217 is well suited for the Justice for Victims of Corrupt Foreign Officials Act, or Sergei Magnitsky Law, since this act is very much about punishing bad actors. As the formal title of the act suggests, the goal of this legislation is to restore “justice for victims of corrupt officials.” Behaviour change does not appear to be an objective of Magnitsky. Hence, Bill S-217 is not only appropriate for assets frozen under Magnitsky, it is in fact the logical extension of that bill.

To the extent that you agree with my reasoning, we can take some comfort that the inclusion of FACFOA and SEMA in Bill S-217 — assuming it passes — does not compel the Governor-in-Council to repurpose any frozen assets, but only gives them the option of doing so. In other words, Bill S-217 is permissive, not obligatory.

Supporters of this approach would argue that we should trust the government of the day to not be imprudent in seizing and repurposing assets that may be better left frozen in the hope of inducing behaviour change. Perhaps. But already we see the near unanimous sentiment among politicos, opinion leaders and chattering classes that Bill S-217 is needed now because of Russian aggression. That would suggest to me that, at the very least, there will be public pressure to quickly sell off the assets of Russian oligarchs that are currently frozen under our sanctions regime — never mind that those assets are already rendered useless to the owners — and that the stated intention of the sanctions in the first place was to induce the oligarchs to persuade Putin to stop the war.

There is a deeper problem, which gets at the question of how we as senators should think about legislation and how we craft bills that can stand the test of time rather than responding to the emotions of the moment. It is that we should not be giving powers to the government that don’t properly belong in a piece of legislation, even if those powers are permissive as opposed to obligatory. It is possible that the Governor-in-Council will use the permissiveness we grant it through Bill S-217 in a judicious and beneficial way. It is also possible that the Governor-in-Council will use it poorly, swayed by public emotion rather than by broader and longer-term objectives. The proper question is whether a measure such as the power to repurpose assets is consistent with the purposes of the bills to which that power applies. A permissive approach simply means things could go right or they could go very wrong. That is why I believe that while Bill S-217 is consistent with the Justice for Victims of Corrupt Foreign Officials Act, the fit with SEMA and FACFOA is too awkward to even allow for permissiveness.

Some of you will be thinking about the repurposing of sanctioned assets in a different way, which is the question of how to pay for the costs imposed on victims of corruption and human rights abuses and on forcibly displaced persons, which is a special focus of Bill S-217. Regardless of the deterrent or compellence objectives of a sanctions regime, somebody has to pony up the costs of rebuilding cities that have been levelled; food, clothing and medical supplies for a war-ravaged population; resettlement of displaced persons in new communities and compensation for survivors of war. Why should we not seize the assets of perpetrators to pay for these very real and very substantial costs?

Recently in the United States, President Biden issued an executive order to seize Afghanistan’s $7 billion-plus foreign reserves that are held in America. Half the amount will be distributed as compensation for the American victims of 9/11 and the other half will be put towards humanitarian efforts in Afghanistan directed by the United States. None of the money will be returned to the Taliban government with whom the United States negotiated a withdrawal from Afghanistan.

This action provides a form of justice, restitution and retribution and is consistent with the public mood in the United States after 20 years of a failed war in Afghanistan and the lingering effects of the 9/11 terrorist attacks. It is, however, rough justice at best and will surely mean more misery for the people of Afghanistan whose economy has effectively collapsed because of ongoing sanctions.

It is important to state that Bill S-217 would not allow Canada to do something similar with Russian central bank assets held in our country. The reason is not because the Russian central bank is not sanctioned under SEMA — it is — but rather because Bill S-217 only allows for the repurposing of assets owned by individuals and not by entities. The exclusion of entities is curious since it means that Bill S-217 will not apply to the vast majority of sanctioned assets under SEMA. I am actually happy to leave it that way, but I’m also certain that it will not take long before there is pressure to also include entities under Bill S-217 because of the immense desire to punish all of Russia and not just its leaders and oligarchs. Mark my words.

Proponents of the bill will counter that the rule-of-law process under Bill S-217 guards against wanton acts of asset repurposing because the court has a role in approving any orders issued by the Governor-in-Council. I think, however, that a court would be hard pressed to disagree with an order by government to seize assets on grounds that have to do with international peace and security and which will surely be couched in all manner of privileged and classified information. In such situations, I fear the court will be largely a rubber stamp dressed up as the rule of law.

If we truly believe in the importance of international law, the proper forum for compensation claims arising from Russia’s invasion of Ukraine is a war crimes and reparations commission, not unlike the aftermath of the two world wars — of course drawing on the lessons learned from those experiences. Russia must pay for the carnage wreaked on Ukraine, but that should be done in a way which makes a meaningful difference to reconstruction and resettlement while allowing for a durable peace.

Does the above mean we do nothing? No. If you agree that a seized asset is rendered useless to the owner even without repurposing, then we should focus on seizing more assets rather than on how to repurpose the assets. In that way, we continue to add pressure on the belligerent without giving up on the compellence objective of the sanction and without compromising the deterrent effect. That is, in fact, what is happening as the war drags on — without the necessity of Bill S-217.

The bigger question, of course, is whether sanctions even work. Scholarship on this question suggests the success rate is in the range of 20% and that success is more likely for sanctions that are very targeted and modest in scope.

Broad-ranging sanctions and sanctions that have very ambitious goals, such as changing the fundamental policy direction of a country or regime change, rarely succeed. What is very clear, however, is that broad-ranging sanctions have devastating effects on ordinary citizens and lead to long-term immiserising effects on the population. They can also produce boomerang effects where resentment against the sanctions, combined with domestic repression, create popular animosity against the sanctioning states. If sanctions don’t really work, should we bother with them? The reality is that governments are not likely to give up on their use, if for no other reason than a need to play to a domestic audience.

But if sanctions don’t work, and we continue to use them, they will no longer be part of the diplomatic tool kit, but will rather have turned into a form of economic warfare. And if we are in a world where sanctions are used unabashedly as economic warfare, this bill, for all its good intentions, will become a lethal weapon in that arsenal.