Over the last decade, the United States has refined the use of economic sanctions so that the tool is now used to assert considerable leverage to support allies and pressure bad actors to achieve foreign policy goals. In this speech, U.S. Secretary of the Treasury Jacob Lew discussed the evolution of sanctions, outlined lessons learned from previous challenges and successes, and raised the importance of guarding against their misuse. He also highlighted how to further shape the use of sanctions in the future in order to make the world more secure while being ever mindful of their global economic impact. Carnegie President William J. Burns moderated the conversation.

Remarks by Secretary Lew

Thank you for the kind introduction. As many of you know, Ambassador Burns and I were close colleagues at the State Department. Bill is an American treasure, one of the great diplomats of our day, and a good friend. It is a pleasure to be here with him and all of you today.

And thank you to the Carnegie Endowment for International Peace for hosting me. Carnegie has done so much to strengthen our understanding of international affairs, and to help our nation think through difficult national security policy issues. As we continue to confront complex global challenges in the months and years ahead, your work will remain vital to our efforts.

Seventy-five years ago, one day after Nazi Germany invaded Norway and Denmark, President Roosevelt established an office within the Treasury Department to freeze U.S.-held assets of the governments of Norway and Denmark—and eventually the assets of many other U.S. allies. The Executive Order he signed on that spring day in 1940 prevented the Nazis from seizing those assets as terror spread across Europe.

Since that time, the threats have changed and the international economy has evolved, and we have refined our capacity to apply sanctions effectively. Not long ago, conventional wisdom dismissed sanctions as blunt, ineffective instruments. The old model was a country-wide embargo, which provided little flexibility to mitigate disproportionate costs on innocent civilians—both in the targeted countries and here at home. At the same time, early efforts to ensure humanitarian relief sometimes fell short of the intended goal.

The sanctions we employ today are different. They are informed by financial intelligence, strategically designed, and implemented with our public and private partners to focus pressure on bad actors and create clear incentives to end malign behavior, while limiting collateral impact.

Recent sanctions programs have exposed and disrupted the operations of illicit groups including terrorists and narcotics traffickers, as well as sovereigns, shuttering front companies and stopping facilitators from traveling. Sanctions put concentrated and meaningful pressure on governments abusing their own populations in places like Sudan, Burma, and Libya. They formed the centerpiece of the international response to Russia’s aggressive actions in Ukraine. And most dramatically, together with the international community, we put in place sanctions that imposed massive costs on Iran, helping to bring it to the negotiating table, and culminating in a comprehensive understanding that rolled back Iran’s nuclear program and ensures that it is and will remain exclusively peaceful.

Economic sanctions have become a powerful force in service of clear and coordinated foreign policy objectives—smart power for situations where diplomacy alone is insufficient, but military force is not the right response. They must remain a powerful option for decades to come. That is why the lessons we have learned from our experience need to guide our approach to sanctions in the future. And we must be strategic and judicious in how we apply sanctions to challenging situations around the world.

The power of our sanctions is inextricably linked to our leadership role in the world. Sanctions were forged in the context of our position as the world’s largest economy and the predominant role that the U.S. financial system plays in global commerce. We must guard against the impulse to reach for sanctions too lightly or in situations where they will have negligible impact. And we must be conscious of the risk that overuse of sanctions could undermine our leadership position within the global economy, and the effectiveness of our sanctions themselves.

Lessons Learned  

While every situation will require a tailored approach, the underlying goal of all sanctions is an effort to change behavior. Sanctions are not meant to dole out punishment for past actions. They are forward-looking, intended to keep illicit or dangerous conduct out of our system and create pressure to change future behavior. This foundational principle is very different from civil penalties and forfeiture, which are punitive and meant to address past behavior.

Building on this principle, three broad lessons apply across a wide spectrum of programs.

Lesson One: Broad Support is Best

First, we have learned that sanctions are most effective at changing behavior when we work closely with our partners to build support for a common objective. The more international support there is for sanctions, and for their underlying objective, the more effective they will be.

We learned this lesson over the five decades of our unilateral trade embargo on Cuba. Not only did we fail to win international support, we saw some of our closest partners like Canada and the European Union enact legislation forbidding domestic companies from following these sanctions. As a result, some foreign subsidiaries of U.S. companies were subjected to an untenable conflict of laws and we were at odds with many neighbors in Latin America. The outcome has been an ineffective program.

We have the best chance of success when governments and international bodies align their sanctions. In some cases, UN Security Council resolutions are the best way to reach consensus, as we achieved in December against ISIL and again this month against North Korea. In others, the best approach may involve action by the G-7 or an informal group of allied countries. While we must always reserve the right to act alone to protect our national security, unilateral actions should be the exception, not the rule.

Our sanctions against Iran’s nuclear program are the most powerful example of how a broad-based effort, coupled with serious diplomacy, can succeed. As Iran’s nuclear ambitions came into focus and it repeatedly defied calls to abide by international accords, successive administrations saw as an imperative trying to change Iran’s calculations through various tools of foreign policy, including sanctions.

The United States began by imposing its own sanctions on complicit Iranian banks and businesses. But it quickly became clear that we needed to work with partners around the world to shut down safe havens and increase pressure on Iran’s economy. We traveled the world to explain the threat posed by Iran’s nuclear ambitions and win support for common action in the UN Security Council. Allies such as the European Union, Canada, and Australia came on board, as did countries with traditionally close ties to Iran, including China, Russia, and India. By 2010, four UN Security Council sanctions resolutions had raised pressure on Iran economically, and the world’s banks were increasingly wary of participating in Iranian transactions.

The U.S. Congress and the administration worked together to amplify the pressure, implementing powerful measures, including secondary sanctions, to threaten foreign companies with serious penalties for offshore transactions—even if no U.S. persons were involved. These new measures targeted Iran’s crude oil sales, its financial system, and other key sectors providing support to the Iranian economy and its nuclear program.

Working with governments and banks around the world, secondary sanctions on Iran had a powerful effect. They damaged Iran’s few remaining ties to the legitimate financial system.

The next step was to slow down Iran’s oil revenue. An immediate halt to all Iranian oil exports on the surface would have looked much tougher than an incremental approach, but this would have imposed an intolerable burden on the energy supply of important allies like China, Japan, and South Korea—and would likely have failed from the start. So the sanctions instead pressed our international partners to ratchet down their imports every six months over two years. These efforts resulted in a 60 percent drop in Iran’s most important export, putting massive pressure on Iranian government revenues, while preserving the option to further ramp up pressure. By building pressure over time, we maintained broad international support, maximized our impact, and effectively restricted or blocked nearly all of the Central Bank of Iran’s foreign reserves.

Ultimately, Iran saw a choice: pursue an illicit nuclear program or rejoin the global economy. In 2012, we opened a narrow window to see if a diplomatic solution was possible. Back when Bill Burns was Deputy Secretary of State and I served as White House Chief of Staff, we worked quietly with a small group to see if engagement could work. This process—which was sped up by the Iranian people’s election of Iranian President Rouhani—led to a preliminary arrangement in 2013, the Joint Plan of Action or JPOA, which froze nuclear activity and laid a foundation for a broader negotiation. After two years of tremendous diplomatic efforts led by Secretaries Kerry and Moniz, as well as former Under Secretary Wendy Sherman, with the support of teams from the Departments of State, Treasury, and Energy and our international partners, we secured a comprehensive arrangement to cut off all of Iran’s pathways to a nuclear weapon, removing a serious threat from a region that cannot afford further destabilization.

Lesson Two: We Must Be Prepared to Offer Sanctions Relief if We Want Countries to Change their Behavior

Another lesson we have learned is that since the goal of sanctions is to pressure bad actors to change their policy, we must be prepared to provide relief from sanctions when we succeed. If we fail to follow through, we undermine our own credibility and damage our ability to use sanctions to drive policy change.

The experience with Iran demonstrates how difficult this can be, essential as it is. To achieve its goal of lifting sanctions, Iran had to accept a comprehensive nuclear deal. Lifting nuclear sanctions was an incentive we established to help achieve this profound change in Iran’s calculations and that incentive, coupled with tough, principled diplomacy, worked. Since Iran has kept its end of the deal, it is our responsibility to uphold ours, in both letter and spirit. For this reason, it was vitally important that, on Implementation Day, we lifted the sanctions we promised to lift and provided guidance to make clear where commerce can resume. Since Implementation Day, we have engaged in widespread global outreach to help governments and businesses understand the sanctions relief provided—and, critically, the non-nuclear sanctions that remain in place. And while we have lifted the nuclear sanctions, we continue to enforce sanctions directed at support for terrorism and regional destabilization, and missile and human rights violations.

Iran’s nuclear program posed a special threat to many countries individually and globally—and for countries like Israel, a potentially existential threat. There is no question that removing this nuclear threat has made the region and the world safer. As Lieutenant General Gadi Eizenkot, who commands the Israeli Defense Forces, put it, and I quote: “Without a doubt the nuclear deal between Iran and the West is a historic turning point. It is a big change in terms of the direction that Iran was headed, and in the way that we saw things.”

By following through on our commitment to provide sanctions relief, we sustain the powerful incentive for other malign actors to respond to sanctions by changing their behavior.

Two years ago, when Russia launched aggressive and destabilizing actions in eastern Ukraine and occupied and attempted to annex Crimea, it was clear that the world needed to respond. It was also quickly apparent that economic and financial sanctions would be the most appropriate action. While its veto at the UN Security Council made a response from the UN Security Council impossible, working with the G-7 and other like-minded partners, we developed an international plan to respond to Russia with the goal of changing Russia’s policy choices. Russia’s economic prominence and global financial links meant that powerful sanctions would need to be carefully designed to avoid serious unintended consequences and spillovers for a still fragile global economy.

While some called for the United States to respond with everything in our sanctions arsenal, President Obama directed us to develop a coordinated response in concert with our allies, that would deliver strong but measured pressure, and which could preserve our options and be ratcheted up or down over time depending on Russia’s behavior. We moved quickly to impose sanctions on key officials and entities linked to the crisis in Ukraine, with a particular focus on the inner circle of Russia’s leadership and associated companies. And in readying broader measures, we sought out asymmetries—particular areas where the Russian government relied upon European and U.S. technology and financing, but where sanctions would have the smallest possible spillover effects on us, our allies, and the Russian people.

The impact has been significant: sanctions have contributed to tighter financial conditions, weaker confidence, and lower investment in Russia. While Russia’s very deep economic decline was amplified greatly by the dramatic drop in oil prices, our targeted sanctions have worked as intended: imposing great costs to Russia with only a limited macroeconomic effect on the U.S. and European economies. The path forward will depend on Russia’s conduct. Russia has made commitments under the Minsk process, and if it keeps those commitments sanctions will be lifted. If not, sanctions will continue, along with the pressure they impose over time.

Lesson Three: Implementation is Vital

A third lesson we have learned is that our experience has shown that to be effective, sanctions programs require an investment in infrastructure to implement and support our efforts.

Powerful sanctions require investigators and analysts to track how key actors move and store their money and to build detailed cases drawing on intelligence analysis. And they rely on enforcement officers to investigate violations and levy penalties for significant wrongdoing.

Implementation of targeted sanctions means a commitment to due process. Freezing assets and severing financial access is a powerful step and requires decisions that can be appropriately reviewed and reversed when appropriate. This requires a careful review of evidence and a rigorous legal process.

Finally, using licenses we can protect against unintended effects on the innocent, for example to authorize exports of food, medicine, and medical devices as we did in the aftermath of the Bam earthquake in Iran and Cyclone Nargis in Burma.

Here at home, we have spent decades building a system to implement sanctions and to help private companies and foreign governments understand how sanctions apply to a complex range of industries and transactions. We work closely to maintain two-way communications with companies that are well-positioned to observe the effects of our sanctions and often to assess where they can be improved.

This behind the scenes work is what makes an effective program.

We need more partners internationally to help with this effort, which is why we are working to build capacity in countries around the world. At the outset, this work ensures that sanctions are narrowly and accurately targeted; it continues through designations, especially when targets inevitably seek to evade sanctions.

Internationally, we must work closely with the UN Security Council and expert monitoring teams that support its efforts, with the Financial Action Task Force, which upholds standards and best practices, and with the International Monetary Fund to help countries build capacity to deal with illicit financial flows.

The United States has the most developed capabilities in this area, combining intelligence, policy, regulatory, and enforcement capabilities under one roof. But we need to enhance them further. And we will work with our counterparts in other governments to build their own capabilities.

Threats We Face Today

We must take these lessons learned and apply them to the critical threats of today and tomorrow, like North Korea. And no lesson is more important when it comes to North Korea than the need for international support.   The United States worked closely with China and other members of the UN Security Council this month to unanimously adopt a resolution that significantly ratchets up the sanctions on Pyongyang and underlines for the North Korean regime the resolve of the international community to stop its nuclear and missile programs.

The President then issued an Executive Order to implement this resolution and the strong legislation passed by Congress this February. Taken together, these new domestic and multilateral sanctions measures will increase the pressure on North Korea in several key economic sectors, including banking, transportation, mining and metals, and labor. We are mindful, though, that North Korea’s leadership has prioritized the pursuit of nuclear weapons over just about anything else, including economic growth or the day-to-day lives of its own people. But it is precisely because of this that we must work closely with China and others in the region to ensure strong implementation of the new sanctions. Only with robust international cooperation can we convince Pyongyang to change its calculus and stop its activities.

We have also put these sanctions lessons learned to use over the past two years in our campaign against the so-called Islamic State, conscious of the fact that sanctions will never be a silver bullet to use against every threat. As a group that derives most of its revenues from within, ISIL is not as susceptible to the donor and facilitator-focused approach we used with other terrorist organizations, such as al Qaida or Hizballah. But ISIL has vulnerabilities, which we have attacked step by step, using sanctions as just one part of a much broader effort to cut it off from the international financial system and curtail its renewable sources of funding.

ISIL started out seizing territory and money from banks. We worked closely with the Central Bank of Iraq to cut off the 90 bank branches within ISIL-controlled territory in Iraq from the international financial system and exchange houses. But much of ISIL’s financial strength comes from its ability to generate funding internally through extortion of the local population and oil revenue. Over the past year, the government of Iraq has taken important steps to curtail ISIL’s access to public sector salary payments, helping to ensure that ISIL cannot extort those funds. And in recent months, the coalition led by the U.S. has targeted ISIL’s entire oil supply line, going after oil fields, refineries, and the tanker trucks that transport that oil across the country and to the border.

These actions have made an impact. Late last year ISIL leaders in the Raqqa province of Syria cut in half the salaries of all its fighters there, citing in a letter “exceptional circumstances.”  To ensure broad international support and cooperation, in December, I chaired the first-ever UN Security Council meeting of finance ministers, where we adopted a resolution to expand the longstanding sanctions regime against al Qaida to increase focus toward ISIL. This resolution will keep ISIL cut off from the international financial system and impose sanctions on anyone caught doing business with it, even middlemen. And just last week, military actions took one of ISIL’s top financial leaders off the battlefield.

We are clear-eyed about the challenge we face in going after ISIL’s finances. Successful implementation will take sustained determination by local partners and other countries facing an ISIL threat, and broad international cooperation to make sure ISIL is denied the resources it needs to grow, and to create ongoing pressure to shrink its operations. Through a targeted and multilateral effort—built upon years of international coordination—we have accomplished a great deal, but we still have much more to do.

The Risks of Overuse

Just as with the other ways that the United States projects power, imposing sanctions also involves costs and risks. Sanctions should not be used lightly. They can strain diplomatic relationships, introduce instability into the global economy, and impose real costs on companies here and abroad. And of course they carry a risk of retaliation.

Actions that trigger U.S. sanctions must constitute a significant threat to our national security, foreign policy, or economy. And even then, we should impose sanctions only when we have reasonable confidence that they will achieve their intended policy goal, and only when the balance of costs and benefits is in our favor.

It is important to make sure these tools remain available and effective. And there is a risk that overuse could ultimately reduce our capability to use sanctions effectively. While sanctions are a valuable alternative to more severe measures, including the lawful use of force, it is a mistake to think that they are low-cost. And if they make the business environment too complicated—or unpredictable, or if they excessively interfere with the flow of funds worldwide, financial transactions may begin to move outside of the United States entirely—which could threaten the central role of the U.S. financial system globally, not to mention the effectiveness of our sanctions in the future.

We need to be cautious of rising expectations in this arena. We must be on guard that the ultimate and extreme steps in our Iran nuclear sanctions, taken after eight years of building international support for tougher action, do not become a starting point when we confront each new crisis. We know that foreign policy and security threats will always exist and it is critical that we have scalable options at our disposal.

Secondary sanctions prompt particular concerns. Unlike primary sanctions, which focus on activities of U.S. individuals and companies, secondary sanctions generally are directed towards foreign persons. These measures threaten to cut off foreign individuals or companies from the U.S. financial system if they engage in certain conduct with a sanctioned entity, even if none of that activity touches the United States directly. As a result, they are viewed, even by some of our closest allies as extra-territorial attempts to apply U.S. foreign policy to the rest of the world.

The risk that sanctions overreach will ultimately drive business activity from the U.S. financial system could become more acute if alternatives to the United States as a center of financial activity, and to the U.S. dollar as the world's preeminent reserve currency, assume a larger role in the global financial system. Global norms are hard to reshape, existing alternatives are not well positioned to fully fill the role of U.S. markets and the U.S. dollar, and there are many factors that will continue to make the United States the most attractive financial system in the world. But our central role must not be taken for granted. If foreign jurisdictions and companies feel that we will deploy sanctions without sufficient justification or for inappropriate reasons—secondary sanctions in particular—we should not be surprised if they look for ways to avoid doing business in the United States or in U.S. dollars. And the more we condition use of the dollar and our financial system on adherence to U.S. foreign policy, the more the risk of migration to other currencies and other financial systems in the medium-term grows. Such outcomes would not be in the best interests of the United States for a host of reasons, and we should be careful to avoid them.

Since World War II, the centrality of our financial system has been a source of tremendous strength for our economy, a benefit for U.S. companies and a driver of U.S. global leadership. And, given the volume of trade in the U.S. dollar, even our ordinary, or “primary,” sanctions carry enormous weight and influence beyond our borders.

Sanctions have become a powerful way to protect U.S. national security interests. We must remain vigilant to maintain a high bar for imposing sanctions, so that they are used only to address significant threats to our national security, foreign policy, or economy, and only when the costs and benefits have been carefully evaluated. And secondary sanctions should be used only in the most exceptional circumstances, where—as with Iran—the threat is severe, where we have international consensus, and when ordinary sanctions have fallen short of their mark.

Looking Forward: A Sanctions Strategy that Endures

Today’s economic tools are sophisticated and potent—but they are not the answer to every threat we face. When used thoughtfully and in concert with other tools of national power, they can protect our financial system and apply substantial pressure against our most troubling national security threats. They are a powerful alternative to military engagement, which should remain the option of last resort, not the first.

To preserve the effectiveness of sanctions over the long term, we must use them wisely. We must clearly articulate our goals, and we must provide relief when those goals are met.

Future presidents will need these sophisticated tools to deal with urgent national security objectives. We must continue to build the diplomatic relationships and the operations needed for implementation and private sector coordination.

If we adhere to our principles and continue to learn from what has worked, and what has not worked, I believe that we will be able to use these tools to protect our citizens and our values for many years to come.

Thank you again for hosting me here this morning.

Jacob J. Lew

Jacob J. Lew has served as the 76th secretary of the U.S. Treasury since February 27, 2013

William J. Burns

William J. Burns is president of the Carnegie Endowment for International Peace. He previously served as U.S. deputy secretary of state