[Senate Hearing 109-1062]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 109-1062
 
            REAUTHORIZATION OF THE IRAN-LIBYA SANCTIONS ACT 

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

  REAUTHORIZATION OF THE IRAN-LIBYA SANCTIONS ACT IN RELATION TO THE 
                   SECURITY OF THE MIDDLE EAST REGION

                               __________

                             JUNE 22, 2006

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire        DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

             Skip Fischer, Senior Professional Staff Member

                Steve Kroll, Democratic Special Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)












                            C O N T E N T S

                              ----------                              

                        THURSDAY, JUNE 22, 2006

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     2
    Senator Allard...............................................     3
    Senator Reed.................................................     4
    Senator Hagel................................................     4
    Senator Menendez.............................................     4
    Senator Schumer..............................................     5
        Prepared statement.......................................    20
    Senator Carper...............................................    16
    Senator Santorum
        Prepared statement.......................................    21

                               WITNESSES

Nicholas Burns, Under Secretary for Political Affairs, Department 
  of State.......................................................     7
    Prepared statement...........................................    22
Patrick O'Brien, Assistant Secretary for Terrorist Finance and 
  Financial Crimes, Department of the Treasury...................     9
    Prepared statement...........................................    26

                                 (iii)


            REAUTHORIZATION OF THE IRAN-LIBYA SANCTIONS ACT

                              ----------                              


                        THURSDAY, JUNE 22, 2006

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 3:41 p.m., in room SD-538, Dirksen 
Senate Office Building, Senator Richard C. Shelby (Chairman of 
the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The Committee will come to order.
    One of this country's most pressing and potentially 
dangerous foreign policy challenges involves Iran's development 
of nuclear weapons and their means of delivery. A nuclear-
capable Iran would fundamentally alter the situation in the 
Middle East. Furthermore, Iran's support for some of the most 
dangerous terrorist organizations in the world and its 
exploitation of those organizations to undermine efforts at 
peace and stability in the Middle East make it imperative that 
we continue to examine the role of economic sanctions in 
limiting the scope of its conduct.
    Confronting the scourge of terrorism remains the central 
tenet of U.S. national security policy. Terrorist organizations 
from the Middle East to Southeast Asia, to say nothing of 
terrorist tactics employed by insurgents in our own hemisphere, 
continue to present serious challenges to us. It is in this 
context that the Committee today will hear from the 
administration on its views on reauthorization of the Iran-
Libya Sanctions Act, or ILSA. That statute, passed in 1996 and 
renewed in 2001, targets foreign entities that seek to invest 
in the development of Iran's oil and natural gas industries, 
industries vital to Iran's well-being and by extension 
presumably vital to its ability to develop a nuclear weapons 
complex.
    Since the Revolution of 1979, the Iranian regime has 
remained an implacable foe of U.S. interests in the Middle 
East. This blossoming of democracy we thought and hoped we saw 
with the 1997 election proved short-lived, as the ruling 
theocracy subverted genuine democratic reform at every turn. In 
fact, those early gains now appear to have been lost following 
last year's elections. There is open hostility toward the 
United States and toward the existence of the State of Israel, 
combined with their government's commitment to carrying out 
activities consistent with the development of nuclear weapons.
    That has placed a premium on the effectiveness of sanctions 
programs targeting Iran, especially those sanctions intended to 
minimize the financial assets available to develop weapons of 
mass destruction and the ballistic missile technology to effect 
their delivery.
    There seems little question that ILSA has been effective in 
impeding Iran's ability to modernize its energy sector. Even 
though the test case for its application, the French company 
Total S.A.'s $2 billion agreement with Iran for development of 
the South Pars gas field resulted in a Presidential waiver 
rather than imposition of sanctions. The $11 billion in new 
contracts signed since then remain in limbo by virtue of 
foreign concerns regarding ILSA's potential application, 
concerns more recently supplemented by fear of additional 
sanctions or military action.
    That Iran has nonetheless moved forward with activities 
consistent with the development of nuclear weapons is not a 
testament to ILSA's lack of effectiveness but rather to the 
vast increase in revenue resulting from the increase in oil 
prices over the past 2 years. In addition to the questions of 
whether and how to reauthorize the ILSA, the Committee is 
interested in hearing from today's witnesses on the importance 
of other economic sanctions regimes that target Iran.
    In this regard, the Committee looks forward to hearing from 
the Treasury Department on implementation of Executive Order 
13382 and the President's WMD Proliferation Initiative that 
imposes financial sanctions on foreign entities determined to 
be assisting in the development of nuclear, chemical, or 
biological arms and their means of delivery.
    Development of an indigenous nuclear weapons capability is 
beyond the means of all but a few countries. Iran has received 
assistance in developing its nuclear complex. This raises the 
question about how the issuance of Executive Order 13382 
affected this situation. The Committee is pleased to have with 
us today the Honorable Nicholas Burns, Under Secretary of State 
for Political Affairs and the Honorable Patrick O'Brien, 
Assistant Secretary of the Treasury for Terrorist Financing and 
Financial Crimes. The Department of State is the lead agency 
for implementation of ILSA; the Department of the Treasury, 
particularly its Office of Foreign Assets Control, is vested 
with the authority for administration and enforcement of U.S. 
economic sanctions.
    Their appearance here today will help the Committee to 
better understand the role ILSA and other economic sanctions 
regimes have and continue to play in containing or impeding 
Iran's ability to conduct activities threatening to U.S. 
interests.
    Senator Sarbanes.

               STATEMENT OF SENATOR PAUL SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman. I will 
be brief, because I think there may be a vote coming.
    Chairman Shelby. That is right.
    Senator Sarbanes. And I know you are anxious to move the 
hearing along.
    I do want to join you in welcoming Under Secretary Burns 
and Assistant Secretary O'Brien to the Committee to discuss the 
reauthorization of the Iran-Libya Sanctions Act, known as ILSA. 
We reported out a version of the original legislation in 1996 
from this Committee and reauthorized the act in 2001, and now, 
we deal with the question of a further reauthorization, since 
that one expires later in the year. Of course, sanctions 
against Libya have been lifted in the view of the dramatic 
change in Libyan policy.
    Trade with and investment in Iran have been banned by 
Executive Order since 1995. Iran is one of the small group of 
countries listed by the Department of State as state sponsors 
of terrorism, and as such, it is also ineligible for trade 
preferences, U.S. foreign assistance, and U.S. support through 
the World Bank or the IMF or multilateral financial 
institutions.
    ILSA added to these measures. It required the President to 
impose at least two out of a menu of six sanctions on foreign 
companies that invest more than $20 million a year in Iran's 
energy sector. I will not go through those sanctions. They are 
known to all of us, and they are contained in the current 
statute. The application of ILSA may be waived by the 
President, and the statute would cease to apply if Iran ends 
its efforts to acquire weapons of mass destruction and if it is 
removed from the U.S. list of state sponsors of terrorism under 
the legislation.
    So there is a clear path for the nonapplication of this 
legislation. It seems to me a clear, reasonable path for any 
country wishing to play a responsible role in the international 
scene to follow. Regrettably, Iran's pursuit of a nuclear 
weapons program and its material support for terrorists present 
very serious threats to an international, peaceful order. ILSA 
is an important tool for bringing pressure to bear on the 
Iranian regime, and it is my sense of it that there is broad 
agreement in the Congress that the act should not be permitted 
to expire, and we look forward to testimony this afternoon from 
these witnesses, and Mr. Chairman, I have abbreviated the 
statement for the sake of efficiency here, but I do want to 
welcome the witnesses again.
    Chairman Shelby. Thank you, Senator Sarbanes. We will make 
your full statement part of the record.
    Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Thank you, Mr. Chairman, and thank you for 
holding this hearing. I would like to associate my remarks with 
both you, Mr. Chairman, and the Ranking Member, and, you know, 
I supported the extension of the Iran-Libya Sanctions Act, 
ILSA, and I am pleased to have this opportunity to get an 
update on how the act is working. Iran's actions have a direct 
effect on U.S. security, and the ILSA is one piece of our 
policy on Iran.
    Our national security vis-a-vis Iran is more important now 
than ever. Congress enacted ILSA in response to their support 
for terrorism and pursuit of weapons of mass destruction. Yet, 
Iran's support for terror is still incredibly active. Likewise, 
Iran continues to aggressively pursue weapons of mass 
destruction, including nuclear weapons.
    This hearing will be an important opportunity to examine 
not only the act but also its implementation. Even strong, 
potentially effective measures can be rendered ineffective if 
they are weakly implemented and monitored or enforced. I would 
like to hear about the effectiveness of ILSA as well as the 
manner in which it is being carried out. I would like to thank 
the witnesses for being here today, and I look forward to their 
testimony.
    Chairman Shelby. Thank you.
    Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Well, thank you very much, Mr. Chairman. I 
would request that my statement be part of the record.
    Chairman Shelby. Without objection, it will be made part of 
the record.
    Senator Reed. And welcome both Secretary O'Brien, Secretary 
Burns. Good to see you, Secretary Burns, again

                STATEMENT OF SENATOR CHUCK HAGEL

    Senator Hagel. No statement. I look forward to our 
witnesses' testimony.
    Thank you.
    Chairman Shelby. Senator Menendez.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman, and I will take 
a minute or two here. This is a very important issue, and I 
appreciate the Chair's indulgence.
    You know, before I address the issue of Iran, I want to 
briefly discuss Libya. I know the application of the ILSA 
against Libya was terminated in September 2004, when Libya 
agreed or announced that it would dismantle its weapons 
program, but this action in no way in my mind absolves Libya's 
responsibility for the attack on Pan Am Flight 103, an attack 
that shocked the world, claimed the lives of 189 Americans, 38 
who were from my home State of New Jersey.
    The Libyan Government still owes $2 million to these 
families, which it promised to pay as soon as it was removed 
from the state sponsor of terror list, an action the State 
Department announced on May 15. And even though this money 
can't start to replace the lives of those Americans who were 
murdered, I firmly believe that a promise made must be a 
promise kept, and we simply cannot let Libya off the hook until 
it lives up to its promises, and I hope the administration will 
understand that there are many of us on both the Senate and the 
House who hold this firm belief and expect the administration 
to act accordingly.
    Let me briefly turn to Iran. We should be here to examine 
the flaws in the current sanctions framework and to make sure 
that as this Committee moves forward to craft new legislation 
that we close the gaps and tighten the current sanctions. It is 
not enough to simply renew our current sanctions against Iran 
in my mind. In my mind, it is not enough to simply renew our 
current sanctions, which let foreign subsidiaries of U.S. 
companies violate the spirit of U.S. law by investing in Iran's 
energy sector.
    In my mind, it is not enough to simply renew our current 
sanctions against Iran and continue to allow U.S. pension funds 
to invest in foreign energy companies that invest in Iran 
without informing their investors. It is not enough to simply 
renew our current sanctions against Iran and continue to allow 
a Presidential waiver that is so broad and does not include any 
real Congressional oversight, and it is not enough to simply 
renew our current sanctions that would allow the administration 
to continue to ignore certain investments in the Iranian energy 
industry so as to avoid either applying sanctions or waiving 
them. And finally, it is not enough to let the sanctions status 
quo continue at a time when Iran continues to taunt the 
international community and flaunt international standards.
    There are some who say that the U.S. Congress should not 
act while we are in the midst of difficult negotiations with 
Iran in an attempt to stop the development of their nuclear 
weapons. I disagree. I say this is exactly the time for the 
United States to act and particularly for the Senate to act. 
With every day that passes, Iran continues its march toward 
nuclear weapons.
    So, Mr. Chairman, in the interests of time, I would ask 
that the rest of my statement be entered into the record, but I 
look forward----
    Chairman Shelby. Without objection, so ordered.
    Senator Menendez. ----to working with the Chair and the 
Ranking Democrat to have a vigorous reauthorization.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman. I would ask 
unanimous consent my entire statement be put in the record.
    Chairman Shelby. Without objection, so ordered.
    Senator Schumer. I know there is a time problem, and I want 
to thank you and Senator Sarbanes for holding this hearing on 
ILSA. It is a law in which I believe very strongly. In the 
107th Congress, I introduced the initial legislation to 
reauthorize ILSA, because I believed it was an important tool 
in keeping up the pressure on Iran and Libya, countries who 
harbored and supported terrorists. It was an important law for 
us to extend then; it is an important law now.
    Now, I am going to just skip over my testimony on Libya. 
They have improved their behavior, but I still have some 
concerns about compensation for family members of Pan Am Flight 
103, and those are in my statement. I am going to skip over 
that. But let me put it like this: the Libyan Government has 
not lived up to all its commitments, and we have to do some 
things about that.
    Now, as for Iran, I am very concerned about China's growing 
involvement in Iran's energy sector. The administration accused 
NORINCO of proliferating weapons technology and missile 
technology to Tehran, and according to the CIA, the Chinese are 
working on a zirconium production facility that will help Iran 
produce cladding for reactor fuel.
    This is an end run around what we intended to do when we 
enacted ILSA. While we have targeted sanctions at NORINCO and 
other Chinese companies, we have got to be clear with China 
itself that we are not looking favorably upon its dealings with 
Iran. We have much to gain from our relationship with China, 
but as with their actions to manipulate the currency, we have 
to be watchful and apply constant pressure.
    Similarly, there are reports that Russia has been providing 
Iran with nuclear and military assistance. The administration 
is supposedly considering negotiating a nuclear cooperation 
agreement with Russia, something we have steadfastly refused to 
do unless Russia ends its nuclear cooperation with Iran. I hope 
the administration continues to demand that Russia end its 
cooperation with Iran before we enter such an agreement.
    And as we reauthorize ILSA, we have to consider whether a 
few additional measures are necessary, and I am glad that we 
are having this hearing. Under current law, the administration 
has the ability to sign national interest waivers whenever it 
finds, quote, it is important to the national interest of the 
United States. You could drive a Mack truck through that 
loophole.
    I believe that a stricter approach, examining whether a 
country is preventing the acquisition and development of 
weapons of mass destruction by Iran and other national security 
issues should be part of the waiver process. We should no 
longer limit our view to economic considerations in the post-9/
11 world. National security must be at the forefront of our 
decisionmaking.
    And finally, another issue we should consider is whether an 
investment violates ILSA. I am concerned that for some 
investments, no determination is ever made. The Department 
simply avoids the issue altogether. The implications of these 
investments are too important to let them quietly languish in 
the review process.
    And finally, Mr. Chairman, I would note that given Iran's 
most recent behavior, we need a strong law that will clearly 
establish our view that investment in Iran's energy sector 
directly or indirectly aids Iran's larger objects and is 
contrary to what our country is trying to achieve in the Middle 
East: a peaceful region that no longer supports terrorism. ILSA 
is an important tool in our fight against terrorism, and I look 
forward to working with you, Mr. Chairman, and my colleagues on 
the Committee on the appropriate way to extend this law.
    Chairman Shelby. Thank you, Senator Schumer.
    We have reached a point in the Senate when we have a few 
votes. Secretary Burns, Secretary O'Brien, I believe that I 
would like to hear your testimony. We have reviewed your 
testimony, and others here in the room probably would, so we 
will take about a 30-minute break--we hope we will be back in 
30 minutes. We will recess the Committee until then.
    Is that OK with you?
    Mr. Burns. Fine.
    Mr. O'Brien. Certainly.
    Chairman Shelby. The Committee will be in recess until we 
get back from three votes, approximately 30 minutes maybe.
    Senator Sarbanes. Don't hold your breath.
    [Recess.]
    Chairman Shelby. The Committee will come back to order. 
That was a typical 30-minute recess in the U.S. Senate. It runs 
more than 30. That is the way we keep up with it: 30 minutes 
equals an hour, maybe an hour and a half, maybe 2 hours; who 
knows? We do apologize to both of you, but that is the order of 
business.
    Your written testimony will be made part of the record in 
its entirety, and you can proceed. We will start with you, 
Secretary Burns. Proceed as you wish. We think this is a very 
important issue.

                  STATEMENT OF NICHOLAS BURNS,

             UNDER SECRETARY FOR POLITICAL AFFAIRS,

                      DEPARTMENT OF STATE

    Mr. Burns. Mr. Chairman, thank you. Mr. Chairman, I hope 
you can hear me; you can? Thank you very, very much. Don't 
worry about the delay. We understand the legislative process. I 
am glad to be here with Assistant Secretary O'Brien, and we are 
happy to answer your questions. My testimony is submitted for 
the record. I will not read it to you, but let me just make a 
few preliminary points, if I could, to establish the 
administration position.
    First of all, I would like to say in response to what you 
said, Mr. Chairman, and some of the other Members, there is no 
question that the challenge posed by Iran to American national 
interests is profound. It is a very important one, and I can 
tell you that both President Bush and Secretary of State Rice 
treat it as one of our top national security concerns. Iran is 
seeking a nuclear weapons capability, which is unacceptable to 
the United States, and our policy, as Secretary Rice said on 
May 31, is to deny them that ability to create a nuclear 
weapons capability. Iran is the leading state sponsor of 
terrorism in the Middle East and the central banker of 
terrorism, and Iran is pursuing policies in its own country 
that deny people basic rights.
    Chairman Shelby. Plus, they have got more money now with 
the price of oil.
    Mr. Burns. And they have a little bit of money to pursue 
these policies.
    So Iran presents in three different areas direct challenges 
to our most vital interests in the Middle East region, and 
therefore, we are happy to be here to talk about this issue.
    On the question of ILSA, the Iran-Libya Sanctions Act, we 
think the Congress acted wisely in 1996 to write this law and 
wisely in 2001 to reauthorize it for 5 years, and it is the 
position of our administration, that we would very much support 
the further reauthorization of ILSA now in 2006. Mr. Chairman, 
you called it, ILSA, a useful tool. That is exactly what 
Secretary Rice has said as well, because what it has done is it 
has shown a very bright spotlight on Iran, and it has made Iran 
the object of negative attention by the international 
community, and that is positive in our efforts to deny them 
what they want to have.
    Chairman Shelby. It is showing the truth of what they have 
been doing, isn't it?
    Mr. Burns. It has done that as well. It has very much done 
that as well.
    I would just say this: in 1996, when Congress first 
developed this law, I think Congress was concerned, and I think 
the prior administration was concerned, about our allies' 
commitment to put pressure on Iran through the implementation 
of sanctions, bilateral sanctions and multilateral sanctions. 
This year, in 2006, we are dealing with a very different 
international environment, because those allies in Europe are 
now our partners in this international negotiating effort, 
which is designed to deny the Iranians what we had talked 
about, deny them nuclear weapons.
    And as you know, since February of 2005, the President had 
determined that we should support those European negotiations. 
Now, unfortunately, the Iranians walked out on the Europeans 
last August and September, and since then, the President has 
tried very hard to create a large international coalition of 
countries, including Russia and China, India, Brazil, Egypt, to 
rebuke Iran for what it is trying to do; to vote against them 
in the IAEA; to take the issue to the U.N. Security Council, 
and more recently, you saw Secretary Rice go to Vienna on June 
1, and we established an agreement among the Permanent Five 
countries of the Security Council that we are going to offer 
Iran two paths. The first path is the prospect of negotiations, 
and Secretary Rice said that the United States might even be at 
the table at those negotiations for the first time in a quarter 
century should Iran agree to suspend its enrichment activities 
at its plant at Natanz.
    The second path, if Iran refuses negotiations, would be a 
path of sanctions through the U.N. Security Council. And I 
think this is the most dramatic way that the international 
landscape has changed since ILSA was created in 1996. We want 
to keep the European allies with us in this effort to isolate 
and pressure the Iranian Government, and so, while we very 
strongly support the reauthorization of ILSA, and we certainly 
see the value of ILSA, we have not chosen to support some of 
the pieces of legislation in the House and in the Senate that 
would so significantly change ILSA and change its requirements 
together that it would, in the first place, limit the 
President's ability to conduct foreign policy under our 
Constitution, but I think more pertinently, it would focus the 
attention, some of those bills, it would focus the legislation 
on sanctions against our allies at a time when we are trying 
very hard to focus the spotlight on the Iranians and when we 
provided for a sanctions path through the U.N. Security Council 
that I think will have great promise should Iran turn away from 
negotiations.
    So I wanted to make that point to you, because I think it 
responds to some of the preliminary points that the Members 
made. I also wanted to say, Mr. Chairman, that Libya, of 
course, is a special concern of our Government, and back in 
1996, Libya was pursuing unacceptable policies in the realm of 
WMD proliferation but also in the realm of terrorism. And so, 
it was quite appropriate for the Congress to include Libya in 
that act. Libya, of course, has been implicated most 
pertinently--I know that Senator Schumer and Senator Menendez 
spoke to this--to the Lockerbie Pan Am 103 bombing in December 
1988. Three State Department employees were among the 178 
Americans killed in that, so we have enormous sympathy for the 
families of the deceased, and we have tried to support them, 
and in fact, I will be meeting with some of these families 
tomorrow morning. I had a conversation with them this morning 
to get a sense of some of their concerns.
    As you know, we have come a long way with Libya, and on May 
15, just last month, Secretary Rice announced our intention to 
resume diplomatic relations and to remove Libya from the state 
sponsors of terrorism list, and this is the latest decision in 
a very careful process that I know you were very much a part of 
that began in 1999 when Libya began to address our terrorism 
concerns, and then, in 2003, when Libya confirmed its 
renunciation of terrorism. And then, of course, in December 
2003, Libya announced its decision to dismantle its WMD 
program.
    So given that, we think that ILSA served a constructive 
purpose, but as the President had already determined in 2004 
that Libya had met the requirements that we had laid down, we 
would hope that the Congress would now remove Libya from the 
ILSA legislation and just proceed with a reauthorization 
focused on Iran, which, of course, is our major concern on WMD, 
on nuclear weapons, and our major concern on terrorism.
    So I do not want to read the rest of my testimony, but I 
just wanted to get those points out to give you a sense of our 
strong support for reauthorization, our concern about some of 
the House and Senate bills that we think would restrict our 
ability to be effective in limiting Iranian nuclear ambitions.
    Chairman Shelby. We saw that on the floor last week.
    Mr. Burns. Yes; and I think you know from our written 
testimony, I will be very happy to go into any aspect of the 
negotiations that are underway or the policies that we are 
pursuing.
    Chairman Shelby. You might remember Senator Sarbanes and I 
a couple of months ago were in Libya, and we had good meetings 
and worked with the State Department. We want to continue to 
work with you.
    Mr. Burns. We do as well, Mr. Chairman.
    Chairman Shelby. Secretary O'Brien.

                 STATEMENT OF PATRICK O'BRIEN,

ASSISTANT SECRETARY FOR TERRORIST FINANCE AND FINANCIAL CRIMES,

                   DEPARTMENT OF THE TREASURY

    Mr. O'Brien. Thank you, Mr. Chairman. Also in the interests 
of time here, given the hour, I will also try to be brief.
    As an opening remark, I would just say that the Treasury 
Department is lending its full support to the diplomatic 
efforts that are underway, and we are very committed to that 
process and lending whatever support that we can. You mentioned 
in your opening statements in particular the WMD authorities 
that are relatively new to the Treasury Department, so I 
thought maybe what I would focus my comments on would be on the 
new WMD authority.
    In June 2005, the President issued Executive Order 13382, 
aimed at undercutting the firms involved in proliferation of 
WMD and their financial and logistical support networks. Since 
that time, six Iranian entities have been designated for their 
support of the proliferation of WMD and their missile delivery 
systems, including Iran's pursuit of nuclear weapons under the 
guise of a peaceful nuclear energy program.
    A couple of the key designations that I would note: the 
Atomic Energy Organization of Iran, which reports directly to 
the Iranian President and is the main Iranian institute for the 
research and development activities in the field of nuclear 
technology and the Aerospace Industries Organization, which is 
a subsidiary of the Iranian Ministry of Defense, and Armed 
Forces Logistics, which is the overall manager and coordinator 
of Iran's missile program. AIO oversees all of Iran's missile 
industries.
    In addition, just last week, OFAC designated four Chinese 
companies and one representative office in the United States 
that supplied Iran's military and Iranian proliferators with 
missile-related and dual-use components. No reputable company 
or institution should be doing business with these entities.
    I also wanted to mention the broad country sanctions that 
are in place and that are administered by OFAC. They have been 
enforcing this far-reaching set of sanctions against Iran since 
1995. Pursuant to the Iranian Transactions Regulations, OFAC 
administers commercial and financial sanctions against Iran 
that prohibit U.S. persons from engaging in a wide variety of 
trade and financial transactions with Iran or the Government of 
Iran.
    These regulations prohibit most trade in goods and 
services, including financial services, between the U.S. and 
Iran. The ITR even prohibit foreign persons in third persons 
from reexporting high-tech, U.S.-origin goods to Iran. The 
regulations prohibit any post-May 7, 1995, investments by U.S. 
persons in Iran, and U.S. persons are prohibited from 
facilitating transactions involving Iran by third-country 
persons. The effect of these sanctions has been the severe 
restriction on the ability of U.S. persons to engage in trade 
or financial services with Iran.
    Perhaps as important as this governmental action is, the 
response that we are seeing from the international private 
sector, which you also mentioned in your statement, has been 
very important. As it witnesses first-hand the disturbing 
direction in which the Iranian regime seems to be headed, the 
financial sector has begun to reassess whether it is 
appropriate or prudent to do business with Iran. The words and 
signals coming out of Iran have led observers to worry about 
Iran as an investment arena and have prompted reputable members 
of the international financial community to curtail or cut ties 
with Iran altogether. For example, in the international banking 
community, UBS, Credit Suisse, and others, have announced that 
they are ceasing or curtailing their business with Iran. Press 
reports have indicated that in the energy sector, firms like 
Baker Hughes and Conoco-Phillips and others have suspended 
dealings with Iran.
    In May, the Organization for Economic Cooperation and 
Development, the OECD, downgraded Iran's credit rating. For 
official credits, it now assesses Iran at the same level of 
risk as countries with active insurgencies, such as Colombia 
and Sri Lanka.
    These are just the decisions that are being publicly 
reported. Reputable institutions around the world are also 
making quiet decisions to cut back or sever dealings with Iran, 
having decided that they do not want to do business with a 
state sponsor of terror and proliferator. We in the Government 
can help inform this process by identifying specific threats 
that private firms might otherwise be unable to detect and 
protect against.
    We are in a critical moment with Iran now. The Treasury 
Department and all members of the U.S. Government are lending 
its full support to the State Department's work to bring about 
a successful outcome to the recent round of multilateral 
efforts. In the meantime, in cooperation with our interagency 
partners, we will continue to use our tools to dismantle 
networks that support terrorism and weapons proliferation 
wherever they may be. We will continue to do everything in our 
power to deny these networks access to the financial system.
    Thank you. I would be happy to answer any questions that 
you may have.
    Chairman Shelby. Thank you, Mr. Secretary.
    I will start with you, Secretary Burns. The one instance in 
which ILSA sanctions were to be imposed, as I understand it, 
the case of the French energy company Total S.A.'s agreement to 
develop a major Iranian gas field, the provisions were waived. 
I understand that the waiver was issued by the previous 
administration, but I would like to hear from you, if we could, 
on the Bush administration's position on actually imposing 
sanctions under ILSA.
    Is ILSA, Mr. Secretary, a largely symbolic threat that will 
not actually be used? It was not used then. And there are 
reports out there that China and Iran are negotiating or were 
negotiating a $100 billion deal that would involve Chinese 
development of an Iranian oil field. And of course, that makes 
this question, I think, very relevant.
    Mr. Burns. Thank you, Mr. Chairman. We support the 
reauthorization of ILSA, because we think it is an effective 
part of the diplomatic arsenal.
    Chairman Shelby. But it has got to have teeth, hasn't it?
    Mr. Burns. What?
    Chairman Shelby. It has got to have teeth, teeth.
    Mr. Burns. Well, certainly, any legislation worth its salt 
has to have teeth. I agree with you on that.
    Chairman Shelby. Right.
    Mr. Burns. And we support reauthorization, because ILSA has 
been part of the diplomatic arsenal, economic arsenal, that we 
have got to focus the attention of the world on Iran. I think 
the primary benefit of ILSA over the past decade has been just 
that. It has created an environment where Iran has been put 
under a spotlight and made to answer questions, and it has had 
a deterrent effect in some respects.
    Let me give you one specific example: if you look at a map 
of the Middle East, you see over the last decade this 
extraordinary construction of gas and oil pipelines, from the 
Caspian and Black Seas to the major markets in Western Europe, 
and you will notice that the great majority of those pipelines 
are not traveling through Iran. Baku-Ceyhan, which is the most 
prominent, which received very strong support from President 
Clinton and President Bush, does not travel through Iran, and 
ILSA has played a part in creating that kind of climate where 
countries and companies have to fear the potential consequences 
should they get the attention of our Government.
    Chairman Shelby. In preparing a conference on doing 
business with Iran, the Law Society in London included in its 
announcement the following: Do you have trade relations with 
Iran? Have you maximized them to their potential?
    The list of corporations attending the event included 
dozens of prominent financial and energy companies that we are 
familiar with, including HSBC Bank, BP Oil, Royal Bank of 
Canada, Standard Bank PLC, the Deutsche Bank, and United 
Insurance Brokers. Also listed among the attendees, the Embassy 
of Iran. I do not think we should be under any illusion 
regarding the respect for U.S. sanctions policy with regard to 
Iran outside the immediate context of that country's nuclear 
weapons program.
    I am also aware of recent press reports indicating 
increased reservations on the part of some banks and energy 
companies that do business with Iran, which you alluded to. Mr. 
Secretary, is there a point out there, though, where the old 
adage that the business of business is business may take a back 
seat to larger considerations involving a regime like Iran that 
poses a clear danger to U.S. interests and allies in the Middle 
East? Do you understand what I----
    Mr. Burns. Yes, I do, Mr. Chairman.
    I would just answer very briefly and say that our 
administration believes that it continues to be in our 
interests to maintain U.S. sanctions on Iran that have largely 
been in place since the late 1970s. This is the right policy 
for the United States. Now, the newest element of our policy is 
to construct this choice that Iran now has to make. If they 
want to have peaceful relations, a negotiated settlement, and 
some day far into the future a normal economic relationship 
with most of the rest of the world, they are going to have to 
go down the path of negotiations.
    Should they refuse that, then, we have agreed, and this is 
with Secretary Rice's agreement with Russia, China, Germany, 
France, and Britain, all those countries have agreed that if 
Iran refuses to negotiate, we will go to New York, to the 
Security Council, and we will entertain the possibility of 
sanctions against Iran.
    So we believe that sanctions can be an effective instrument 
in international politics but most effective when you have a 
wide variety of countries practicing them.
    Chairman Shelby. Sure.
    Mr. Burns. Not just the United States in isolation but the 
great trading nations of the world.
    Chairman Shelby. But the bottom line is, they have got to 
mean something, haven't they?
    Mr. Burns. They do. Well, they have to mean something, and 
they have to be universally applied.
    Chairman Shelby. First of all, in an abstract sense, they 
have to mean something. Otherwise, it is mainly symbolic.
    I am not saying this is. I am asking you the question: they 
do have to mean something, sanctions do, as a rule, do they 
not? Otherwise, they will be ignored.
    Mr. Burns. Yes, I think that the credibility of the current 
diplomatic effort that we have underway hinges on our ability 
to go down that second path should we must. And we are ready to 
do that if Iran rejects the negotiating path.
    Chairman Shelby. Secretary Burns, the issue of pipeline 
construction has been interpreted by some as a gray area when 
considering whether ILSA provisions should be applied, whether 
they should be applied. The Iran-Turkey natural gas pipeline 
has already proven problematic, and India and Pakistan are both 
involved in pipeline discussions with Iran. Could you describe 
just for the Banking Committee here today the Department's 
approach, the State Department's approach to pipeline 
construction projects within the context of ILSA enforcement?
    Mr. Burns. I would be happy to do that, Mr. Chairman.
    We have had numerous conversations with the Governments of 
India and Pakistan just in recent months, and our advice to 
both governments has been you should resist and refuse to enter 
into any such long-term agreement with the Government of Iran, 
because we say Iran is not a reliable supplier of energy. Iran 
could possibly fall under international sanctions in the very 
near future if it refuses to stop its nuclear projects and 
nuclear activities, and it is interesting that these well 
advertised plans for a pipeline have not materialized.
    And it is our impression that India and Pakistan are 
hesitating on whether or not they should go forward. What we 
have advised is that they look toward Kazakhstan and 
Turkmenistan for long-term oil and gas contracts, not to Iran 
itself. So it is an active part of our diplomacy to dissuade 
these countries from doing this.
    Chairman Shelby. Secretary O'Brien, I will direct this 
first part of this question to you. The Department of the 
Treasury sanctioned four Chinese companies for aiding Iran's 
ballistic missile programs. One of the Chinese companies in 
particular, China Great Wall Industry Corporation, has been a 
repeat offender and, in fact, appears with disturbing 
regularity when the issue of militarily sensitive technology 
transfers are discussed.
    Would you provide the Committee your view on whether U.S. 
sanctions regimes need to be strengthened in order to provide a 
better deterrent? Is the Chinese drive to secure energy 
supplies too powerful to be stopped through sanctions that 
already exist in the U.S. law, and is there a potential for 
U.S. dual-use technology to be diverted to Iran, which we are 
all concerned about, in violation of Iranian Transactions 
Regulations in the course of Chinese transactions such as those 
involving the recent sanctions announcement?
    I recognize that Commerce has jurisdiction of dual-use 
technologies, but does State have any insight here? Does the 
Chinese export of fiber-optic technology to Iran involve any 
U.S. technology? Secretary O'Brien, I will ask you first and 
then call on Secretary Burns.
    Mr. O'Brien. Thank you, and I will focus on the aspect of--
--
    Chairman Shelby. Right.
    Mr. O'Brien. ----the financial and logistical support 
networks for this kind of proliferation.
    And I think, actually, your exchange just previously about 
the need for multilateral action is reinforced by your 
question. Under the U.N. Security Council Resolution 1540, all 
nations agreed that it is important to address the financial 
aspects of proliferation. The G-8 has also discussed this and 
committed to track, identify, and freeze the assets of weapons 
proliferators.
    The United States has played a leading role in actually 
developing a tool to do that, and that is the E.O. that I 
mentioned in my statement, E.O. 13382, which really applies the 
same kind of financial sanctions to weapons proliferators as we 
have in the terrorism context, which are internationally known.
    So can the United States by itself end the activities of 
proliferators that are determined, you know? No; we can do our 
part. I think part of what we are doing in conjunction with the 
State Department is encouraging other nations to look at the 
commitments that they have made in various international arenas 
on the proliferation front and begin to appreciate and address 
the financial component of proliferation. So I think 
multilateralizing this kind of tool will be a very important 
step to increasing our effectiveness.
    Chairman Shelby. Secretary Burns, do you agree with that?
    Mr. Burns. I certainly do agree with what the Assistant 
Secretary has said, Mr. Chairman. With respect to the last part 
of your question, the United States conducts a very limited 
amount of legitimate commerce--of various types--with Iran. 
Since the beginning of 2004, 85 licenses have been approved for 
U.S. trade with Iran, 2 rejected, and 50 returned without 
action for various reasons. These figures do not include 
agricultural and medical projects, which are handled under a 
separate authority. Of those approvals, a small percentage 
pertained to fiber-optic technology, so some legitimate 
transfers are being done, although obviously those are 
carefully reviewed. As to other sourcings of American fiber-
optic technology to Iran, some smuggling has happened in the 
past and likely will be tried again, but we have no hard 
numbers on the exact volume. Additionally, we have no record of 
fiber-optic technology licensed to China being diverted from 
China to Iran.
    Optical fiber communication cables are normally controlled 
for export to China under ECCN 5A001.c.1 and c.2 for national 
security reasons. A license exception to civil end users (CIV) 
under section 740.5 of the EAR is permitted for exports to 
China. The technology to produce these cables, in turn, is also 
controlled for national security reasons under ECCN 5E001, and 
no license exceptions are applicable for its export. We would 
have to refer you to the Department of Commerce, Bureau of 
Industry and Security for the data on how many export licenses 
were approved for these items as well as for its production 
technology to China.
    For sensitive missile-related exports, according to the 
FY99 National Defense Authorization Act, prior to the transfer 
to China of dual-use items that are controlled for missile 
technology reasons, such as fiber-optic gyros, the President 
must certify to Congress that the export will not be 
detrimental to the U.S. space launch industry and will not 
measurably improve China's missile or space launch 
capabilities. Accordingly, requests to export dual-use missile 
technology are subject to special scrutiny. These measures help 
mitigate the risk that missile-related items licensed from the 
United States will be diverted to programs of concern.
    With respect to the earlier part of your question, I would 
note that E.O. 13382 was signed in order to augment existing 
nonproliferation sanctions by allowing the United States to 
freeze the U.S. assets of designated proliferators and their 
supporters, and to prohibit U.S. persons from engaging in 
transactions with them. Treasury's June 13 action was the first 
such designation of Chinese entities under E.O. 13382. This 
designation effectively levies additional restrictions on China 
Great Wall Industry Corporation that were not imposed under 
previous sanctions.
    Chairman Shelby. For the record; that will be good.
    Mr. Burns. For the record.
    Chairman Shelby. I think it is very important. Pipelines 
are central to all of this energy.
    Secretary Burns, the House bill's provisions on sanctions--
if I may, in your opening statement, Mr. Secretary, you 
addressed problems the Department of State finds in the 
legislation passed by the House. In addition to those issues 
specified in your statement, were there other provisions to 
which the Department objects? Does the provision targeting the 
foreign subsidiaries of U.S. corporations present any problems? 
Would such a provision continue to be problematic if 
implemented prospectively and not retroactively? And do the 
parameters for imposition of sanctions reflected in that 
legislation fit within your comfort zone? Can you discuss that 
openly here?
    Mr. Burns. I would be happy to.
    First of all, Mr. Chairman, I want to say we share with the 
sponsors of the House and Senate bills, with which we disagree, 
we share with them a concern strategically of what we ought to 
do, which is isolate and pressure Iran and stop it from 
developing nuclear weapons. So there is no argument there.
    We have a tactical difference in two respects. In general, 
we are at a point in our diplomacy now where we want to turn 
the attention of the United States and the instruments at our 
disposal toward the Iranians and not toward our allies, because 
we do not want to weaken that international coalition that we 
have created.
    Chairman Shelby. How do you do that? That is kind of a 
tightrope, is it not?
    Mr. Burns. Well, it is difficult, and you certainly want 
the Europeans to be focusing their attention on Iran, not their 
attention on the United States and a piece of legislation here 
in Congress. So in general, that is the major objection that 
the administration has had for many months to the two bills 
that are under question, H.R. 282 and S. 333. Specifically, 
there are a couple of provisions that I put into my testimony 
that we believe would restrict the President's ability to 
pursue a policy that would be effective and that would give him 
the flexibility that he might require in this very fluid 
environment where we are on the verge possibly, possibly, of a 
negotiation with Iran on the future of its nuclear weapons 
program, and I think I have detailed those in my testimony.
    Chairman Shelby. You have.
    Secretary O'Brien, Iranian support for terrorism; you know 
a lot about this. As you have said, and we know, Iran is the 
world's leading state sponsor of terrorism. Secretary Burns 
touched on this in his opening statement. But could you provide 
the Committee, for the record here, the Department's current 
assessment, the Treasury Department's current assessment of 
Iranian financial support for terrorist organizations?
    Recent press reports indicate, and your statement confirms, 
that foreign banks, including some that were assessed large 
fines for their failure to comply with U.S. anti-money 
laundering laws, are lowering their profiles in Iran. Are 
European countries whose banks do business, and a lot of them 
do, with Iran reassessing those relationships beyond the crisis 
atmosphere that surrounds the nuclear weapons issue?
    In other words, is there any sense of reputational risk for 
banks doing business with Iran that extends beyond the current 
crisis? You know, we worked with you a lot on the financing of 
terrorism on this Committee. Senator Sarbanes and I believe 
that is one of the important ways to fight terrorism, and you 
know that. Do you have some comments.
    Mr. O'Brien. Absolutely, and we appreciate your support in 
that regard very much.
    As a general matter, and I touched on this in my written 
statement as well, we do have grave concerns and would say that 
Iran is a leading----
    Chairman Shelby. They are the banker for a lot of the 
terrorism in the world, are they not?
    Mr. O'Brien. Yes, and I think they pose a particularly 
difficult target to combat in that as a state sponsor, as a 
sovereign, they have vehicles and apparatus available to them 
that others do not. There are state-owned banks; there are 
parastatal companies that can help mask their activities in the 
financial sector in addition to the informal methods like 
hawala or cash couriers to move money.
    So they are a particularly difficult target. I think we 
have focused very heavily on some of the organizations that 
they support: Hezbollah and Hamas and the Palestinian Islamic 
Jihad. We have taken substantial actions against the front 
companies and organizations, charities, or individuals that are 
working on behalf of those operational groups.
    So I think they clearly are at the foremost of our mind and 
our concern with respect to terrorist financing, and your 
comment about European banks, as I touched on in my remarks, we 
are seeing an increased sensitivity to reputational risk. And I 
would not limit that only to the proliferation context. I think 
it is broader than that, and in effect, you know, Iran is 
isolating itself by its conduct, by its support for terror, by 
its support for proliferation, by the statements that its 
leadership is making.
    So I think we do see an increased sensitivity to 
reputational risk, and we think that is a very positive 
development.
    Chairman Shelby. Thank you.
    Senator Carper.

               STATEMENT OF SENATOR THOMAS CARPER

    Senator Carper. Thanks, Mr. Chairman.
    Chairman Shelby. Excuse me. Senator Menendez was here 
first.
    Senator Carper. Please go ahead; no, go ahead.
    Chairman Shelby. No, he was here earlier, first.
    Senator Menendez. I am happy to yield--well, thank you, Mr. 
Chairman, very much. I appreciate in the beginning of your 
testimony, I understand you made some reference to my concerns 
about Libya, and I appreciate that.
    We are going to be vigorously engaged in hoping to see that 
a promise made is a promise kept and that our administration 
and our Government helps these families achieve that, even 
though it will never fill the void in their lives and in their 
heart, but I believe it is critical. So we will be working with 
others, hopefully collaboratively with you, to get the results 
that we would like to see.
    I do have a few questions about our reauthorization. 
Secretary Burns, is it not true that under current U.S. law, if 
a U.S. company invests, let us say, $20 million over the course 
of 1 year in Iran's energy sector that the President must 
impose sanctions?
    Mr. Burns. Senator, thank you for the question. That is my 
reading of the ILSA legislation that was reauthorized in 2001. 
Now, the President retains the ability to ascertain whether or 
not to impose the sanctions, and of course, the President has 
waiver authority.
    Senator Menendez. Right.
    Mr. Burns. And one of the reasons that we support 
reauthorization is we think--I will not give you my whole 
testimony, but you were out of the room; we think this has been 
a very useful tool in the ability of our administration to 
focus a spotlight on the Iranians and to put some pressure on 
them. But the President does, and President Clinton and 
President Bush have had this authority.
    Senator Menendez. Let me ask you this: is it not true that 
under the current law, if a foreign subsidiary of that U.S. 
company, that very same U.S. company, invests the same $20 
million over the course of 1 year in Iran's energy sector that 
there be no consequences for that company?
    Mr. Burns. Senator, I am not a legal expert on the bill. I 
do not want to pass myself off as one. So I would be happy to 
take your question for the record and give you a written 
response.
    Senator Menendez. Well, we would love to get an answer, but 
I think the answer----
    Chairman Shelby. Would you do that for the complete record 
for the Committee plus the Senator?
    Mr. Burns. Yes, yes, sir. Nothing in the ILSA statute 
exempts subsidiaries of U.S. firms from the reach of the Act. 
ILSA applies to any person, including any subsidiary of a U.S. 
firm, who engages in the activities covered by the statute. The 
U.S. embargo on Iran prevents U.S. companies from making such 
investments.
    Senator Menendez. Thank you, Mr. Chairman. I would love to 
get an answer through the Chair, and let me just offer that the 
answer is yes, and that is the problem.
    It seems to me that the very essence of our sanctions 
regime in this regard does not have the teeth that it needs, 
because it allows U.S. companies to do business in Iran through 
their foreign subsidiaries. And particularly if one thinks 
that--one's focus is that the essence of our sanctions program 
is to make sure that we achieve a goal that Iran cannot use 
money from its petroleum sector to fund its development of 
nuclear weapons program, then, we are undermining it by having 
this very large loophole available. And so, it seems to me that 
we need to close that loophole in a reauthorization.
    The other concern that I have is that under existing law, 
American companies by and large are not allowed to do business 
in Iran, and non-U.S. companies face possible sanctions if they 
invest over $20 million in Iran's energy sector. And the 
rationale is again rather simple: petroleum production gives 
Iran the cash to pursue production of weapons of mass 
destruction, and they need massive foreign investment to keep 
oil producing.
    Those non-U.S. companies that have invested in Iran's 
energy sector are liable to American sanctions under ILSA. Yet 
many American pension plans and mutual funds continue to invest 
large amounts in these very same companies. Several State and 
municipal pension plans have actually begun to take steps to 
end their investments in such companies, so that in essence, 
they are not fueling Iran's ability.
    Do you believe that a cessation of this type of investment 
would have a major impact on Iran's political leadership and in 
doing so pursuit of nuclear weapons, given the fragility of 
their economy?
    Mr. Burns. Senator, we share with you a very deep desire to 
stop Iran's nuclear weapons program. Now, we have to calculate 
the best way to do that, and our sense is that you have on one 
hand American sanctions in place for the last 26-and-a-half 
years on the Iranian Government that have not had a decisive 
impact on Iran's ability to proceed to develop its economy and 
its nuclear industry.
    We think it is far preferable to try to get a great number 
of countries involved in sanctions. And so, we have offered the 
Iranians a choice: negotiations to deconstruct their nuclear 
program, and if they do not accept that, then, of course, an 
alternative path that would lead to the U.N. Security Council 
and what we hope would be a sanctions regime. We think that 
would be far more effective.
    And one of the reasons why we support the reauthorization 
of ILSA is because we think ILSA is an instrument in that 
policy. We do not support some of the other bills that have 
been put forward in the House and Senate, because we think that 
they would tie the President's hands so much that we could not 
carry out this policy of trying to offer these two choices to 
Iran and would perhaps make it even impossible for him to lead 
a coalition down that second path, toward sanctions.
    Senator Menendez. Well, Mr. Secretary, if I may, just as a 
final comment, Mr. Chairman, you know, I do agree with you: the 
problem is that in the beginning of your answer here, the 
problem is that we have not used ILSA as forcefully. I have 
seen the testimony of both Secretary Rice; I read yours, and 
the reality is that we have not used ILSA under its existing 
wherewithal, and as a matter of fact, in a way that I think has 
been helpful. We have not had the will; that is why I think you 
have an accurate statement, that it has not been as powerful as 
it could be.
    If you look at a CRS report, they say, and I quote, that 
while some believe ILSA did slow Iran's energy development 
initially, its deterrent effect weakened as foreign companies 
began to perceive that ILSA sanctions would not likely be 
imposed, and that same report includes a list of 11 foreign 
companies which have apparently invested over $20 million in 
Iran's energy sector.
    So, yes, I mean, if you have a tool, and you leave it in 
the shed, it is never going to produce any fruit. If you have 
the wherewithal to use the law, and you do not enforce it, it 
is never going to be of value, and that is the very essence of 
what I think is happening here, and that is why I, for one, 
believe that we need to make sure that there is a strengthened 
ILSA renewal so that we can actually guarantee.
    You know, we have not stopped Iran's march yet. I find it 
interesting that we have a set of circumstances where what the 
administration pursues today, the administration originally 
criticized the 1994 framework agreement that the Clinton 
administration conducted with North Korea; very critical of it, 
but the very essence of that same framework is what they are 
pursuing in Iran.
    I have real concerns here. We still have a chance to make a 
difference as it relates to Iran's achievement of any nuclear 
weaponry. We are already past that with North Korea, but we do 
have an opportunity here. And I believe that this is a tool, 
Mr. Chairman, that can be vigorously used, and I appreciate the 
Chair's beginning to hold hearings and hopefully a markup in 
the not too distant future.
    Chairman Shelby. Thank you, Senator Menendez.
    Senator Carper had to go, but he asked that we keep the 
record open. He has a number of questions to both Secretaries, 
and we would get those to you.
    We appreciate your patience today; appreciate your 
contribution, and more than that, we appreciate your waiting on 
us.
    Mr. Burns. Mr. Chairman.
    Chairman Shelby. Secretary Burns.
    Mr. Burns. Would you indulge me just for a moment?
    Chairman Shelby. Absolutely.
    Mr. Burns. And very briefly.
    I just wanted to respond to the Senator. I think he has 
given us a very thoughtful presentation of his views, and I 
just wanted to say I think we all agree on the strategy. 
Everybody agrees we have got to stop the Iranians from 
developing a nuclear weapons program. The major problem we have 
with a so-called strengthening of ILSA as opposed to a straight 
reauthorization of S. 333 or H.R. 282 is that it would allow 
Iran to divide us from our European allies.
    Right now, you have got a situation where Iran is trying to 
escape the pressure of the Security Council. It fears the unity 
of the Security Council. And what President Bush and Secretary 
Rice have achieved is the unity of the Security Council. Some 
of the provisions in both of those bills would actually point 
ILSA directly at the allies. It would make them the issue 
rather than Iran. I told the Chairman before that we feel that 
one of the great benefits of ILSA over the last decade, it has 
made Iran the issue.
    But some of the provisions here to which we object--it is 
in my testimony--would actually make France the issue or 
Britain the issue or Germany the issue, and we think we will be 
far more effective in stopping Iran if we maintain that unity 
and if the President and future Presidents have the flexibility 
that they ought to have to pursue a rational policy. So I just 
want to give you the benefit of that thought. I think you gave 
us a very thoughtful presentation.
    Senator Menendez. Mr. Chairman, very briefly.
    Chairman Shelby. Senator Menendez.
    Senator Menendez. I appreciate the Chair's indulgence.
    I appreciate what you have to say, Mr. Secretary, but even 
when we focus on U.S. companies, on U.S. foreign subsidiaries 
and on U.S. pension plans, it does not hurt any foreign 
country.
    Chairman Shelby. We appreciate your appearance here today. 
The Committee is adjourned.
    [Whereupon, at 5:55 p.m., the hearing adjourned.]
    [Prepared statements for the record follow:]
            PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER
    Thank you Mr. Chairman, and Senator Sarbanes, for holding this 
hearing on ILSA, a law in which I believe very strongly. In the 107th 
Congress, I introduced the initial legislation to reauthorize ILSA 
because I believed it was a very important tool in keeping up the 
pressure on both Iran and Libya--countries who harbored and supported 
terrorists. It was an important law for us to extend then and it is 
now.
    In the past 5 years, Libya has improved its behavior--although I 
have some concerns about compensation for family members of Pan Am 103 
which I will address in a moment. But as we consider reauthorizing 
ILSA, I believe we must look at ways to strengthen it, possibly by 
expanding it to other types of investment or trade activity, so 
hopefully we can help bring about the same result in Iran.
    Iran is a state sponsor of terrorism and President Ahmadinejad has 
steered Iran further and further down an extremist path since assuming 
office saying Israel should be ``wiped off the map . . . '' And they 
have not yet shown that they're willing to deal with the international 
community in good faith with respect to nuclear weapons.
    Until we see dramatic change in Iran's behavior, we must keep up 
the pressure through the threat of sanctions authorized by ILSA. It's 
clear that Iran is not going to seriously heed the world's call to be 
more responsible unless they are truly diplomatically and economically 
isolated.
    I'd like to address Libya for just a moment. As we know, Libya 
agreed to pay compensation in the amount of $10 million to each family. 
Libya admitted responsibility for this vicious attack which killed 189 
Americans . . . some of whom were my constituents and neighbors. 
Unfortunately, Libya has only fulfilled 80 percent of its obligation to 
these American families. I don't believe 80 percent is good enough and 
I know many of my colleagues agree.
    I was disturbed to learn of reports that a State Department 
spokesperson suggested that the Department is not a party to this 
settlement and will not get involved in further compensation issues. 
But clearly there are steps this Administration can take to pressure 
Libya to do the right thing here. For example, the State Department and 
this Administration can refuse to accept the credentials of Libyan 
diplomats even before Libya has fully compensated the Pan Am 103 
families. I have joined a resolution, led by Senator Lautenberg, urging 
the Administration to do just that.
    It's simply unacceptable that State Department is not supporting 
these American victims of terrorism in their quest for justice and 
instead siding with Libya. So although a reauthorization of ILSA would 
not apply to Libya, we must be vigilant and do all we can to ensure the 
families of Pan Am 103 are fully compensated.
    Turning to ILSA--our original purpose was to curb growth and 
modernization of Iran's energy sector and I note that it appears that 
it has worked, at least to some extent. In the 1970s, Iran was pumping 
an average of 6 million barrels a day; today it pumps approximately 4 
million barrels a day. Measures like ILSA have clearly played a role in 
deterring foreign investment in Iran's energy sector. We must keep ILSA 
in place to further discourage any foreign investment in Iran's energy 
industry.
    I am concerned, however, about China's growing involvement in 
Iran's energy sector. For example, the Administration has accused the 
Chinese company Norinco of proliferating weapons technology and missile 
components to Tehran. And according to the CIA, the Chinese are working 
on a zirconium production facility that will help Iran produce cladding 
for reactor fuel. This is a complete end-run around what we intended to 
do with ILSA.
    While we have targeted sanctions at Norinco and other Chinese 
companies, we also must be clear with China itself that we will not 
look favorably upon its dealings with Iran. We have much to gain from 
our relationship with China, but as with their actions to manipulate 
their currency, we must be watchful and apply constant pressure. And I 
believe our discussions with China must specifically address their 
involvement in Iran.
    Similarly, there are reports that Russia has been providing Iran 
with nuclear and military assistance. The Administration is supposedly 
considering negotiating a nuclear cooperation agreement with Russia, 
something we have steadfastly refused to do unless Russia ends its 
nuclear cooperation with Iran. I hope the Administration is prepared to 
demand that Russia end its nuclear cooperation with Iran before we 
enter such an agreement.
    As we reauthorize ILSA I believe we must consider whether a few 
additional measures are necessary and that's why I'm glad we're having 
this hearing. Under current law, the Administration has the ability to 
sign national interest waivers whenever it finds it is ``important to 
the national interest of the United States.''
    I believe a stricter approach, examining whether a country is 
preventing the acquisition and development of weapons of mass 
destruction by Iran and perhaps other national security issues should 
be part of the waiver process. We must no longer limit our view to 
economic considerations in this post 9/11 world--national security must 
always be at the forefront of our decisionmaking.
    Another issue we should consider is whether we should set a 
timeline for determining whether an investment violates ILSA. I am 
concerned that, for some investments, no determination is ever made--
that the Department simply avoids the issue altogether. The 
implications of these investments are far too important to let them 
quietly languish in the review process.
    Finally, I'd note that given Iran's most recent behavior, I believe 
we need a strong law that will clearly establish our view that 
investment in Iran's energy sector, either directly or indirectly, aids 
Iran's larger objectives and is contrary to what our country is trying 
to achieve in the Middle East--a peaceful region that no longer 
supports terrorism.
    ILSA is an important tool in our fight against terrorism and I look 
forward to working with you Mr. Chairman and all of my colleagues on 
the committee on the appropriate way to extend this law.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR RICK SANTORUM
    Mr. Chairman, thank you for scheduling this timely and important 
hearing on the Iran and Libya Sanctions Act (ILSA). As you are aware, 
this law will expire in early August 2006, so it is important for the 
Committee on Banking to gather insight on enforcement of the current 
law, find out how the law is meeting our foreign policy goals, and 
determine if modifications to the law are necessary.
    As you know, I have taken a keen interest in making sure that the 
tools authorized by ILSA are effectively employed to deter investment 
in Iran's energy sector. In addition, because of the nascent democratic 
movement taking hold within Iran, I have sought to provide greater 
financial and political assistance to the people of Iran to enable a 
peaceful democratic government inside Iran. Both goals are reflected in 
S. 333, the Iran Freedom and Support Act, a bill that has garnered 61 
cosponsors.
    In my opinion, the Senate missed a golden opportunity to not only 
improve upon current law but also to support the pro-democracy movement 
inside Iran when it failed to adopt Senate Amendment 4234 during 
consideration of the Fiscal Year 2007 National Defense Authorization 
Act last week. However, the issue of an atomic Iran is pressing enough 
and important enough for this body to reconsider its vote last week. I 
am confident that the Senate will realize that now is the time to 
authorize not only improvements in ILSA, but also help shape a viable 
U.S. foreign policy approach toward Iran.
    Mr. Chairman, as you know, the Congress enacted ILSA because it 
concluded an Iran that with fewer oil revenues would allocate its 
limited resources toward intrinsic domestic needs rather than funding 
terror groups. Not wanting to tie the President's hands, Congress 
permitted the use of a waiver if use of the waiver is important to the 
national interests of the United States. While most observers would 
contend that the law has been helpful in dissuading large scale 
investment in Iran, additional improvements are necessary so that the 
law can be strengthened. Put bluntly, some would say that the law lacks 
teeth. If that assessment is true, I believe that this committee can be 
helpful in adding teeth to ILSA.
    Let me remind this committee that in 2001, when the Iran and Libya 
Sanctions Act of 1996 was nearing its expiration date, the Bush 
Administration requested a 2-year reauthorization of the law. Congress 
chose to disagree with the Administration and reauthorized the law for 
another 5 years. I ask members of this committee to remember that 
request for ``flexibility'' when recalling last week's objections 
raised by the Department of State to my amendment.
    I find it even more telling that foreign investments in Iran's 
energy sector, investments made during the Clinton Administration, have 
not yet been acted upon. That is, the current administration has not 
made a determination on whether investments by foreign entities in Iran 
have triggered sanctions defined by the law. To date, the only action 
taken was the issuing of a waiver back in 1998 on the investment made 
by a consortium lead by TotalFinaElf, Gazprom, and Petronas to develop 
phases two and three of Iran's South Pars gas field.
    Unfortunately, major investments in Iran's energy sector have 
continued despite the enactment of the ILSA legislation. Recent 
examples include GVA Consultants of Sweden's Caspian Sea transit 
contract worth an estimated $225 million (March 2001); ENI of Italy's 
Darkhovin field contract worth an estimated $1 billion (June 2001); LG 
of South Korea's Phases 9 and 10 of the South Pars field worth an 
estimated $1.6 billion (September 2002); and Inpex of Japan's Azadegan 
field contract worth approximately $2 billion (February 2004). As best 
I can tell, these deals are still under review by the Administration.
    While ILSA has probably discouraged whole-scale investment in 
Iran's energy sector, these recent investments are a result of 
calculated assessments by foreign companies and entities that they will 
not be sanctioned by the U.S. Government. One of the aspects of the 
amendment I offered to the Fiscal Year 2007 National Defense 
Authorization Act was a provision requiring the President to take 
action on transactions that were under review. I believe that this 
provision makes sense as the executive branch has been silent on ILSA 
for far too long.
    Another area that deserves attention is the role played by private 
or government lenders, insurers, underwriters, and guarantors--entities 
that can help facilitate investments in Iran's energy sector. Finally, 
it is worth considering eliminating the sunset provision altogether 
given the behavior of the leaders of Iran's government.
    In closing Mr. Chairman, I want to reaffirm my commitment to 
reauthorize ILSA and to provide adjustments and/or modifications that 
will strengthen the law and, perhaps, provide the teeth necessary to 
dissuade foreign investment in Iran's energy sector. I have said time 
and again that Iran is the most dire threat facing America today. It is 
high time that the Senate act on this threat.
    I look forward to working with you on this matter in the near 
future.
                                 ______
                                 
                  PREPARED STATEMENT OF NICHOLAS BURNS
       Under Secretary for Political Affairs, Department of State
                             June 22, 2006
     Thank you Chairman Shelby, Ranking Member Sarbanes, and 
distinguished Members of the Committee for this opportunity to discuss 
United States policy toward Iran, and in particular the reauthorization 
of the Iran and Libya Sanctions Act.
Iran
     Acknowledging the grave challenge Iran and Libya posed to American 
interests, Congress enacted the Iran and Libya Sanctions Act (ILSA) in 
1996. The effort was a good one and provided us, as Secretary Rice has 
said, ``a useful tool'' to combat both countries' dangerous behavior. 
In particular, the existence of this law has underlined the depth of 
our global concerns about the spread of weapons of mass destruction and 
support for terrorism, and has given the United States a platform to 
raise those concerns with our allies.
    Over the past decade since the creation of ILSA, there has been a 
major shift in the international community's strategy for confronting 
Iran and Libya. In 1996, we were concerned about our allies' commitment 
to put pressure on Iran through the implementation of multilateral and 
bilateral sanctions.
    In 2006, we are operating in a vastly different international 
environment. Our allies in Europe, the Middle East, and Asia are very 
much with us in seeking to isolate and pressure Iran to give up its 
nuclear weapons ambitions. Over the past 15 months, the U.S. has 
assembled a broad international coalition to deny Iran a nuclear 
weapons capability; to stop its sponsorship of terrorism in the region 
and around the world; to blunt Tehran's aggressive regional ambitions; 
and to extend support to the Iranian people who suffer under the 
regime's repression and economic misrule. President Bush and Secretary 
Rice have worked to create a united response of the world's major 
powers to blunt Iran's designs. I have traveled to Europe over a dozen 
times as the primary liaison with the EU-3 and Russia and China on this 
issue.
    As a result of our efforts, we have achieved an unprecedented unity 
among the major powers of the world on how to address the Iranian 
regime's nuclear ambitions. President Bush and leaders of the European 
Union noted in a statement yesterday--after the U.S.-EU summit in 
Vienna--that over the past year U.S.-EU cooperation on Iran has reached 
a new and qualitatively positive level. We have worked closely with 
European allies, Japan, Australia, India, Russia, China, and other 
countries at every stage of the ongoing attempts to address the 
question of Iran's nuclear program. We have agreed on a set of far-
reaching proposals as a basis to find a negotiating solution with Iran.
    Back in 1996, Libya was pursuing policies that endangered the 
national security and foreign policy interests of the United States. It 
was sponsoring terrorism and pursuing weapons of mass destruction. 
Libya was implicated in terrorist incidents, including the destruction 
of the Pan Am Flight 103 over Lockerbie, Scotland, in December 1988 in 
an incident in which 270 people, among them many Americans, perished. 
As with Iran, ILSA helped galvanize international pressure against 
Libya.
    Ten years later, on May 15, Secretary Rice announced our intention 
to restore full diplomatic relations with Tripoli and remove Libya from 
the list of state sponsors of terrorism. This is the latest decision in 
a careful, step-by-step process begun in 1999 when Libya began to 
seriously address our terrorism concerns and surrendered the suspects 
in the Pan Am 103 bombing for trial. The United States and United 
Kingdom began direct talks with Libyan representatives in 2001 and in 
August 2003 Libya confirmed its renunciation of terrorism in a formal 
letter to the U.N. Security Council. Then, on December 19, 2003, Libya 
announced its historic decision to dismantle WMD programs and long-
range ballistic missiles. Throughout this process, we have acknowledged 
progress by Libya while continuing our review at every stage.
ILSA
    From 1996 onwards, ILSA served its constructive purpose in our 
policies toward Iran and Libya. In 2006, 10 years later, we must look 
at the very different political context when assessing legislation and 
policy. As we move forward in confronting the challenges of Iran and 
Libya, the Administration supports legislation now before this 
committee, S. 2657, that would reauthorize the current ILSA statute for 
an additional 5 years.
    At the same time, we support removing references to Libya from the 
law. The President in 2004 took action, under the provisions of the 
existing law, to terminate the application of ILSA to Libya, so the 
significance of removing references would be symbolic, rather than 
practical. For instance, it would demonstrate to Iran the potential 
benefits that could accrue over time if it chooses the path of 
cooperation and greater prosperity envisioned in the P-5+1 package 
offered to Iran on June 1.
    As far as the Iran provisions in the legislation, I want to 
reemphasize our strong support for the bill now before the Committee. 
However, there is other legislation pending in both houses of Congress 
that directly affects ILSA. H.R. 282, which was recently passed by the 
House of Representatives, and S. 333, pending before the Senate Foreign 
Relations Committee, incorporate features that we regard as highly 
problematic.
    We believe that some elements of those bills--in particular the 
provisions that freeze current restrictions, set specific deadlines for 
decisionmaking, that restrict certain waiver authorities, and (in H.R. 
282) that call for divestment of assets and prohibitions on 
assistance--would narrow in many important ways the President's 
flexibility in the implementation of Iran sanctions and strain 
relations with close allies whose cooperation is crucial to our efforts 
to change Iran's behavior.
    Despite the international consensus to prevent Iran from acquiring 
nuclear weapons, Iran is still working very hard to create divisions 
among the international community--including the P-5+1. We are 
concerned that the proposed amendments would take the focus of 
international attention away from Iran's misdeeds, where it now 
appropriately lies, and shift it to potential differences between the 
U.S. and its allies over ILSA provisions. Such an eventuality would 
play into Iran's hands and retard the progress that we hope to make 
diplomatically in stopping Iran's nuclear weapons programs. We have to 
consider how the ``message'' of the ILSA amendment proposals would be 
received by the audiences it would reach. In key European and Asian 
capitals, adoption of these proposals could lead to an extensive public 
debate over the ``extraterritorial'' reach of U.S. sanctions. It would 
be far better to keep the debate in those capitals centered firmly and 
squarely on Iranian misbehavior and conduct.
    We should be doing everything possible to strengthen the 
unprecedented and expanding consensus we currently have in place. We 
would be deeply concerned about any move, such as enacting the 
problematic legislative provisions I have described, that would 
undercut and complicate this diplomacy.
    In a practical sense too, the situation that ILSA addresses has 
changed markedly in recent years. Despite Iran's immense hydrocarbon 
resources and the thirst for energy that today's high oil prices 
reflect, foreign interest in investing in Iran's oil and gas sector 
appears to be slowing, not accelerating. Major business and financial 
publications have recently called attention to the perception of 
heightened political risk that is now associated with doing business 
with Iran. Some private banks have already decided to limit or cutoff 
their dealings with Iran altogether, including UBS and Credit Suisse. 
The OECD has recently downgraded Iran's credit rating for official 
credits, raising the costs and risks for those considering investing in 
Iran.
    A number of factors have helped create this perception; but the 
most important are perhaps Iran's being found in noncompliance with its 
IAEA Safeguards Agreement, and the fact that an unprecedented 
international effort is underway to deal with this threat, including 
within the U.N. Security Council. There is also growing international 
concern over the Iranian regime's support for terrorism, its brutal 
repression of the rights of the Iranian people, and its aggressive 
foreign policies and actions that threaten our allies and friends in 
the region.
Iran's Pursuit of Nuclear Weapons
    I would now like to outline in more detail steps the Administration 
is taking to deny Iran a nuclear weapons capability; stop its 
sponsorship of terrorism; blunt its aggressive regional ambitions; and 
extend support to the Iranian people who suffer under the regime's 
repression and economic misrule. Secretary Rice said on May 31 that the 
vital interests of the United States and our friends and allies in the 
region are at risk because of Iran's continued defiance of the 
international community, and that the United States will act 
accordingly to protect those common interests.
    There is no doubt about Iran's determination to develop a nuclear 
weapons capability. For 18 years, Iranian leaders pursued a clandestine 
enrichment program and other undeclared nuclear activities that they 
hid from the world, in violation of their international commitments and 
obligations. The international community's serious concerns about 
Iran's nuclear program led the IAEA Board of Governors to adopt a 
resolution on February 4 that reported Iran to the U.N. Security 
Council, a decision not only supported by the United States and Europe, 
but also by Russia, China, Brazil, Egypt, India, and many others. In 
response, the U.N. Security Council adopted unanimously on March 29 a 
Presidential Statement calling on Iran to fully suspend all enrichment-
related and reprocessing activities and cooperate fully with the IAEA's 
ongoing investigation. The world is still waiting for the Iranian 
government to take those steps.
    To underscore the U.S. commitment to a diplomatic solution, the 
President authorized Secretary Rice on May 31 to announce that if Iran 
fully and verifiably suspends all of its enrichment-related and 
reprocessing activities, the United States will join the EU-3 (British, 
French, and German) negotiations with Iran to give diplomacy the 
greatest chance of success. This step would make possible the most 
significant negotiations involving the United States and Iran in over a 
quarter century.
    On June 1, Secretary Rice agreed with our P-5+1 partners--France, 
Germany, Russia, China, and the United Kingdom--on a reasonable offer 
to the Iranian regime in the form of a package of positive and negative 
incentives to end its pursuit of nuclear weapons. On June 6, EU foreign 
policy chief Javier Solana conveyed to the Iranians the package on 
behalf of the P-5+1 countries. The P-5+1 is presenting a clear choice 
to the Iranian leadership--two paths that have vastly different 
consequences for the Iranian people. On one path, the Iranian regime 
would alter its present course by immediately resuming suspension of 
all enrichment-related and reprocessing activities, as well as full 
cooperation with the IAEA, and returning to implementation of the 
Additional Protocol. This path would lead to real benefits and longer-
term security of the Iranian people, the region, and the world.
    On the other path, the Iranian regime would maintain its pursuit of 
nuclear weapons in defiance of the international community and its 
international obligations. We and our international partners agree that 
this path will lead to greater international isolation and 
progressively stronger political and economic sanctions against Iran.
Sponsor of Terrorism and Regional Ambitions
    A second critical U.S. and international concern is Iran's 
continuing role as a leading state sponsor of terrorism in the world 
and destabilizing role in Iraq, Afghanistan, Lebanon, and elsewhere. 
Iran provides money, weapons, and training to Hamas, Lebanese 
Hizballah, and Palestinian rejectionist groups--which undermines 
prospects for Israeli-Palestinian peace.
    The groups Iran supports are some of the world's most deadly 
terrorist organizations, responsible for the killing of hundreds of 
innocents, including Americans. Hizballah caused more American deaths 
than any other terrorist organization until al-Qaida's attack on the 
United States in 2001.
    We see continuing--and deeply troubling--indications of Iranian 
interference in Iraq, particularly its provision of weapons, training, 
and explosives-related components to militants who target Iraqis and 
Coalition forces in Iraq. We will continue to work closely with the new 
Iraqi government to address these and all issues related to Iraq's 
stability and security.
    Iran also remains unwilling to render to countries of origin, bring 
to justice, or provide information on, senior al-Qaida members it 
detained in 2003. We call on the Iranian regime to immediately turn 
over all al-Qaida related terrorists to appropriate jurisdictions, in 
accordance with its international obligations under U.N. Security 
Council Resolution 1267.
    We have sanctioned Iran as a State Sponsor of Terrorism, and called 
for the regime to abide by the requirements of U.N. Security Council 
Resolution 1373 to deny safe haven to those who plan, support, or 
commit terrorist acts, and to affirmatively take steps to prevent 
terrorist acts by providing early warning to other states by exchange 
of information.
    We also continue to urge other governments--including the European 
allies and Arab states of the Middle East--to press Iran on its support 
for and sponsorship of terrorism, and on its generally threatening 
behavior toward its neighbors. At the same time, we will continue to 
work with our friends and allies in the region to strengthen their 
defensive capacity, counterproliferation and counterterrorism efforts, 
and energy security capabilities.
State of Iranian Democracy and Human Rights
    As we work to end the threat posed by Iran's nuclear ambitions and 
sponsorship of terror, we are standing with the Iranian people in their 
aspirations for freedom. Iran is a vastly important nation and is home 
to one of the greatest civilizations of the world. Iran has a rich 
history, a vibrant culture, and has contributed much to civilization. 
Through the centuries, Iranians have achieved distinction in medicine, 
science, poetry, philosophy, and countless other fields.
    Tragically, the hardliners in Iran have solidified their corrupt 
hold on the regime and its people--culminating in last June's flawed 
election of Mahmoud Ahmadinejad as its president. The regime's poor 
human rights record worsened throughout 2005 and has continued to 
deteriorate in the first half of 2006. Summary executions, 
disappearances, use of torture, and other degrading treatment remained 
a tragic reality. Juvenile offenders have been executed, and sentences 
of stoning continue to be handed down.
    The regime has arrested and tortured pro-democracy protesters. 
Journalists and webloggers continue to be arrested and mistreated for 
publishing their views. In February the Iranian regime answered the 
pleas of Tehran bus drivers for better working conditions by sending 
paid thugs to beat them. Journalist and political activist Akbar Ganji 
spent nearly 6 years in prison for reporting on the murders of Iranian 
dissidents and for his advocacy of a secular Iranian republic. The 
Baha'i faith has been singled out for harsh treatment since before the 
Iranian revolution and lately has become subject to a new round of 
persecution, arrest, and harassment.
    We oppose the regime's continued hostility toward its own people's 
efforts to have their voices heard. It is important that the ability of 
every person to criticize the government and contribute to the 
country's debates about the future be respected--regardless of where he 
or she lives. We are deeply saddened that this fundamental right is 
denied to the people of Iran. This is why the United States--in 
cooperation with the international community--is seeking to help 
Iranians to bring about peaceful democratic change, so the Iranian 
people can choose the government they want. They deserve no less.
    We welcome Congress's partnership in this effort. For FY06--
including the supplemental budget--Congress authorized $76.1 million to 
support the cause of freedom and human rights in Iran. This includes 
$30 million for democracy and human rights promotion, $5 million for 
educational and cultural exchanges, $5 million for public diplomacy 
efforts, and $36.1 million for the Broadcasting Board of Governors' 
Persian-language broadcasting. We greatly appreciate Congressional 
support for this important priority.
    Since FY04, with the support of Congress, we have awarded $4 
million to programs that support civil society and nongovernmental 
organizations. With the FY06 funding, we will expand outreach to 
Iranians who have never experienced a democratic government that 
respects the rule of law. We will foster development of respect for 
human rights and religious freedom, promote greater understanding of, 
and affinity for, Western culture and values, and provide the Iranian 
people unbiased sources of information.
    We also plan to augment professional, cultural, sports, and youth 
exchanges to build bridges between our two nations. Our programs will 
bring hundreds of new Iranian visitors--including teachers, religious 
scholars, journalists, athletes, and musicians--to the United States.
    We already reach out to Iranians through our Farsi language 
website, which had over 100,000 visitors from Iran last month. In 
addition, we plan to develop further cutting edge initiatives--what we 
call e-Diplomacy--to promote active connections between Iranians and 
Americans.
    One such innovative outreach effort is our planned Virtual Gateway 
program. Content on the Virtual Gateway sites will include scheduled 
online chats with officials, academics, popular artists, actors and 
musicians, information on educational opportunities, accurate 
information about events inside Iran, and online consular services to 
ease the process for Iranian visa applicants.
    Additionally, we will work with the Broadcasting Board of Governors 
to expand the quality and quantity of our Persian-language television 
broadcasting into Iran to penetrate Iran's government-dominated media 
in the short to medium term. While we look forward to the day when 
Iran's behavior will permit us to have normal diplomatic relations, we 
will not let this obstacle prevent us from reaching out to the Iranian 
people in the meantime.
Conclusion
    Let me conclude by thanking the Congress for the effort and 
interest that you have devoted to Iran, and for your support. As we 
move forward, we will need your help on a variety of fronts:

    To continue to support the Administration as we seek to 
        stop Iran's pursuit of nuclear weapons, its support for 
        terrorism, its harmful meddling in the affairs of the region, 
        and end its repression of its own citizenry;

    To help our friends and allies protect themselves from the 
        danger posed by Iran and the terrorists it sponsors and 
        harbors;

    To reauthorize the Iran-related provisions in ILSA in their 
        current form. Doing so will facilitate the strengthening of the 
        broad global coalition that is already achieving real progress 
        in addressing Iran's nuclear ambitions; and

    To remove references from the law to Libya--which is 
        meeting its international commitments.

    We are under no illusions about the difficulties we face in 
blocking Iranian ambitions in each of the areas I have outlined, and in 
rolling back Tehran's dangerous policies. But we are resolute in our 
determination to achieve a better, more democratic future for the 
Middle East and greater security for U.S. interests across the world. 
The challenge of dealing with an authoritarian Iranian regime has 
become entrenched over the course of an entire generation, and it may 
require a generational struggle to address it; but we have no choice 
but to do so in a serious, committed, and effective way.
                                 ______
                                 
                 PREPARED STATEMENT OF PATRICK O'BRIEN
    Assistant Secretary for Terrorist Finance and Financial Crimes,
                       Department of the Treasury
                             June 22, 2006
    Chairman Shelby, Ranking Member Sarbanes, thank you for the 
opportunity to address you today on a very important issue that 
presents us with a tremendous challenge.
    Iran is a state sponsor of terrorism that has demonstrated a 
reckless intention to support, facilitate, and direct global terrorist 
activity. In addition to its blatant sponsorship of global terror, Iran 
intends to acquire weapons of mass destruction. Exacerbating an already 
worrisome pattern of dangerous behavior was the election of hardline 
Iranian President Ahmadinejad in June 2005. His provocative comments 
about wiping Israel off of the map and Iran's continued activities to 
destabilize the region and pursue a nuclear weapons capability have 
heightened the world's concern.
    We have been working very closely with our interagency counterparts 
to consider these threats and develop an appropriate strategy to 
confront them. Both terrorism and WMD proliferation require vast 
support networks through which money and material flow. The Treasury 
Department--working with its interagency partners--has unique tools to 
address this potent mix of money, terror, and WMD, and has been 
devoting considerable time and attention to addressing this Iranian 
threat.
    We are now in a particularly crucial moment. The United States, the 
United Kingdom, France, Germany, Russia, and China have presented a 
package of incentives and disincentives to Iran to resolve the problem 
posed by the Iranian nuclear weapons program. As the President and 
Secretary of State have said, we are dedicated to resolving this issue 
diplomatically and will exhaust the diplomatic channel accordingly. But 
if the diplomatic path is not successful, the international community 
has a range of options to make clear that Iran's pursuit of nuclear 
weapons will come at the cost of its own isolation.
    I would like to provide an overview of the various threats posed by 
Iran and the relevant authorities we have at Treasury, both with 
respect to proliferation and terrorism, and with respect to Iran in 
general.
The Threat Posed by the Iranian Regime
    The scope of Iran's perilous activity is enough to warrant 
significant concern. Iran's sponsorship of these activities is even 
more troubling because of the vast resources it has to facilitate this 
threatening conduct. Be it the spread of WMD, the funding of terrorist 
and militant groups in Lebanon, the Palestinian territories, and Iraq, 
Iran has the resources to invest substantially in violent projects. We 
are working steadily with the interagency community, to target the 
networks that move these funds and prevent them from abusing the 
integrity of the world's financial system.
Nuclear Weapons Development and Missile Technology
    There is now widespread understanding that the Iranian regime is 
dedicated to acquiring a nuclear weapons capability, in addition to 
other kinds of weapons of mass destruction capabilities and the means 
to deliver them.
    As a complimentary measure to the international diplomatic process 
to press Iran to end its pursuit of nuclear weapons, the Administration 
will continue to protect ourselves and our financial system against 
companies engaged in WMD proliferation, including those facilitating 
Iran's pursuit of WMD technologies. In June 2005, the President issued 
Executive Order 13382, aimed at undercutting firms involved in 
proliferation of WMD and their support networks. Proliferators traffic 
in expensive and sophisticated technologies, and depend heavily on 
international trade. The President's Executive Order authorizes us to 
cutoff proliferators and their supporters from the U.S. financial 
system and to encumber their international commerce.
    E.O. 13382 authorizes the imposition of strong financial sanctions 
against not only WMD proliferators, but also against entities and 
individuals providing support or services to them. Designation under 
this Order prohibits all transactions between the designated entities 
and any U.S. person and freezes any assets the entities may have 
located under U.S. jurisdiction.
    Since June 2005, the U.S. Department of the Treasury has designated 
six Iranian entities for their support of the proliferation of WMD and 
their missile delivery systems, including Iran's pursuit of nuclear 
weapons under the guise of a peaceful nuclear energy program:

    The Atomic Energy Organization of Iran (AEOI), which 
        reports directly to the Iranian President, is the main Iranian 
        institute for research and development activities in the field 
        of nuclear technology, including Iran's centrifuge enrichment 
        program and experimental laser enrichment of uranium program, 
        and manages Iran's overall nuclear program.

    The Aerospace Industries Organization (AIO), a subsidiary 
        of the Iranian Ministry of Defense and Armed Forces Logistics, 
        is the overall manager and coordinator of Iran's missile 
        program. AIO overseas all of Iran's missile industries.

    The Shahid Hemmat Industrial Group (SHIG) is responsible 
        for Iran's ballistic missile programs, most notably the Shahab-
        3 medium range ballistic missile which is based on the North 
        Korean No Dong missile. The Shahab-3 is capable of carrying 
        chemical, nuclear, and biological warheads and has a range of 
        at least 1500 kilometers. SHIG has received help from China and 
        North Korea in the development of this missile.

    The Shahid Bakeri Industrial Group (SBIG) is an affiliate 
        of Iran's AIO. SBIG is also involved in Iran's missile 
        programs. Among the weapons SBIG produces are the Fateh-110 
        missile, with a range of 250 kilometers, and the Fajr rocket 
        systems, a series of North Korean-designed rockets produced 
        under license by SBIG with ranges of between 40 and 100 
        kilometers. Both systems are capable of being armed with 
        chemical and possibly other types of warheads.

    The Novin Energy Company has transferred millions of 
        dollars on behalf of the AEOI to entities associated with 
        Iran's nuclear program. Novin operates within the AEOI, and 
        shares the same address as the AEOI; and

    The Mesbah Energy Company is a state-owned company 
        subordinate to the AEOI. Through its role as a front for the 
        AEOI, Mesbah has been used to procure products for Iran's heavy 
        water project. Heavy water is essential for Iran's heavy-water-
        moderated research reactor project, which when completed, could 
        provide Iran the capability to produce plutonium for nuclear 
        weapons.

    Just this past week, we designated four Chinese companies and one 
U.S. representative office, which supplied Iran's military and Iranian 
proliferators with missile-related and dual-use components. No 
reputable company or institution should be doing business with these 
entities.
Support for Terrorism and Violence
    Iran also actively sponsors terrorism and violence across the 
Middle East. The Islamic Revolutionary Guard Corps (IRGC) and Ministry 
of Intelligence and Security (MOIS)--both Iranian government bodies--
are directly involved in the planning and support of terrorist acts by 
nonstate actors and continue to sponsor and train a variety of violent 
groups that act as surrogates on Iran's behalf.\1\
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    \1\ Country Reports on Terrorism.
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    The Administration is or will, as appropriate, draw on all 
instruments of national power to combat the very real threat posed by 
Iran's sponsorship of terrorism. At Treasury, we are focused on the 
support networks, trying to identify and sever the lines of support 
that fuel terrorist activities. Stopping the money flows is 
particularly challenging in this instance, as Iran draws upon a large 
network of state-owned banks and parastatal companies, which is 
difficult to penetrate and thwart. We are also hampered by the fact 
that many of our key allies have yet to recognize Hizballah as a 
terrorist organization. Nevertheless, there remain opportunities for 
disruption, and we continue to pursue them vigorously.
Broad Sanctions Against Iran
    At the Treasury Department, we have also been enforcing a set of 
far-reaching sanctions against Iran that have been in place since 1995. 
Pursuant to the Iranian Transactions Regulations, 31 C.F.R. Part 560 
(the ``ITR''), Treasury's Office of Foreign Assets Control (OFAC) 
administers commercial and financial sanctions against Iran that 
prohibit U.S. persons from engaging in a wide variety of trade and 
financial transactions with Iran or the Government of Iran. The term 
U.S. person means any U.S. citizen, permanent resident alien, entity 
organized under the laws of the United States (including foreign 
branches), or any person in the United States.
    The ITR prohibit most trade in goods and services between the 
United States and Iran or the Government of Iran. U.S. persons are also 
prohibited from dealing in Iranian-origin goods overseas or in goods 
for export to Iran from third countries. Non-U.S. persons are 
prohibited by the ITR from reexporting controlled U.S. origin goods to 
Iran. However, the import and export of information and informational 
materials to and from Iran is exempt by statute. In addition, the Trade 
Sanctions Reform Act provides for specific licenses to be issued for 
the export of certain agricultural products, medicine, and medical 
devices to Iran.
    Aside from the trade-related sanctions described above, the ITR 
prohibit any post-May 7, 1995 investments by U.S. persons in Iran. U.S. 
persons are also prohibited from facilitating transactions by third-
country persons that could not be engaged in by U.S. persons 
themselves. Finally, the ITR prohibit U.S. persons from evading or 
attempting to violate any of the prohibitions contained in the ITR.
    OFAC also maintains in effect the Iranian Assets Control 
Regulations, 31 C.F.R. Part 535 (the ``IACR''), which governed the 
freezing of Iranian assets at the time of the hostage crisis. Pursuant 
to the 1981 Algiers Accords, most Iranian assets in the United States 
were unblocked and transferred to various escrow accounts. The IACR 
remain in effect to facilitate the resolution of claims before the 
Iran-U.S. Claims Tribunal in The Hague. Certain assets related to 
claims before the Iran-U.S. Claims Tribunal remain blocked in the 
United States and consist mainly of diplomatic and consular property.
Private Sector Reaction
    Perhaps as important as governmental action is the response that we 
are seeing from the international private sector to the Iranian 
regime's destabilizing activities. As it witnesses firsthand the 
disturbing direction in which the Iranian regime seems to be headed, 
the financial sector has begun to reassess whether it is appropriate or 
prudent to do business with Iran. The words and signals coming out of 
Iran have led observers to worry about Iran as an investment arena and 
have prompted reputable members of the international financial 
community to curtail or cut ties with Iran altogether.

    In the international banking community, UBS ceased its 
        activities with Iran. Credit Suisse announced that it would no 
        longer establish new business relations with Iran. ABN Amro and 
        HSBC have also curbed their dealings with Iran.

    Energy firms Baker Hughes, ConocoPhillips, and BP PLC have 
        reportedly suspended dealings with Iran.

    In May, the Organization for Economic Cooperation and 
        Development (OECD) downgraded Iran's credit rating for official 
        credits and now assesses Iran at the same level of risk as 
        countries with active insurgencies, such as Colombia and Sri 
        Lanka.

    These are just the decisions that have been publicly reported. 
Reputable institutions around the world are making quiet decisions to 
cut back or sever their dealings with Iran, having decided that they do 
not want to do business with this state sponsor of terror and 
proliferator. We in the government can inform this process by 
identifying specific threats that private firms might otherwise be 
unable to detect and protect against.
Conclusion
    We are in a critical moment with Iran now. The Treasury Department 
along with all members of the U.S. Government, is lending its full 
support to the State Department's work to bring about a successful 
outcome to this recent round of multilateral efforts. In the meantime, 
we will continue to use our tools and leverage to dismantle networks 
that support terrorism and weapons proliferation, wherever they may be. 
We can not afford to alleviate any pressure on sponsors of terrorism 
and supporters of WMD proliferation, and we will continue to do 
everything in our power to deny these networks access to the financial 
system.
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