[Senate Hearing 110-908]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-908

 
MINIMIZING POTENTIAL THREATS FROM IRAN: ASSESSING THE EFFECTIVENESS OF 
                     CURRENT U.S. SANCTIONS ON IRAN

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

                                HEARING

                               before the

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

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

OVERSIGHT OF IRAN POLICY INCLUDING EFFORTS TO ISOLATE AND CONTAIN IRAN 
ECONOMICALLY; TO ASSESS PROGRESS, AND TO STRENGTHEN THESE EFFORTS WHILE 
CONSIDERING ADDITIONAL DIPLOMATIC, ECONOMIC, POLITICAL AND OTHER STEPS 
 TO ENGAGE THE INTERNATIONAL COMMUNITY MORE EFFECTIVELY IN EFFORTS TO 
 PROMPT IRAN'S LEADERS TO RECONSIDER THEIR REPORTED NUCLEAR AMBITIONS, 
  THEIR SUPPORT FOR TERRORISM, AND THEIR CONTINUING OPPOSITION TO THE 
                       MIDDLE EAST PEACE PROCESS


                               __________

                       WEDNESDAY, MARCH 21, 2007

                               __________

  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


               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania        ELIZABETH DOLE, North Carolina
JON TESTER, Montana                  MEL MARTINEZ, Florida

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
         Janice M. O'Connell, Senior Professional Staff Member
              Neal J. Orringer, Professional Staff Member
       Skip Fischer, Republican Senior Professional Staff Member
        John V. O'Hara, Republican Senior Investigative Counsel
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                         George Whittle, Editor


                            C O N T E N T S

                              ----------                              

                       WEDNESDAY, MARCH 21, 2007

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     5
    Senator Tester...............................................    24
        Prepared statement.......................................    50
    Senator Hagel................................................    27
    Senator Reed.................................................    30
    Senator Allard...............................................    32
    Senator Bayh.................................................    35
    Senator Casey................................................    38
    Senator Carper...............................................    40
    Senator Menendez.............................................    43

                               WITNESSES

Nicholas Burns, Under Secretary for Political Affairs, Department 
  of State.......................................................     6
    Prepared Statement...........................................    51
    Response to written questions of:
        Senator Menendez.........................................    75
Stuart Levey, Under Secretary for Terrorism and Financial 
  Intelligence, Department of the Treasury.......................     9
    Prepared Statement...........................................    64
Mark Foulon, Acting Under Secretary for the Bureau of Industry 
  and Security, Department of Commerce...........................    12
    Prepared Statement...........................................    68
    Response to written questions of:
        Senator Dodd.............................................    79


MINIMIZING POTENTIAL THREATS FROM IRAN: ASSESSING THE EFFECTIVENESS OF 
                     CURRENT U.S. SANCTIONS ON IRAN

                              ----------                              


                       WEDNESDAY, MARCH 21, 2007

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:05 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Christopher J. Dodd (Chairman of 
the Committee) presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order.
    Before I begin the hearing this morning, I want to make a 
point, if I can. I have talked to my Chairman, my fellow 
chairman, the former chairman, Senator Shelby, about this issue 
as well very briefly here this morning.
    For many years this Committee and most committees here have 
had the policy of having witnesses submit their testimony at 
least 24 hours before a hearing. The reason for this, in fact 
you can make a case that actually it should be 48, but at least 
24, so that when we sit down to have these conversations that 
we call hearings between the executive and legislative 
branches, there is an opportunity for the members here to be 
familiar with what the testimony will be so that we can have a 
good deep discussion about the issues in front of us.
    I know that the witnesses here this morning understand 
this. They are professionals and have been through this on 
many, many occasions. And yet I regret that, despite knowing 
this, the Department of Treasury submitted its testimony 
yesterday, late yesterday, as I understand it. And Secretary 
Burns of the State Department's testimony arrived about an hour 
ago or 2 hours ago here. That is just unacceptable. We have got 
to have this stuff earlier.
    I do not know whether members will be here or not but part 
of what I suspect is that their staffs have not had a chance to 
look at this, brief their members about it. When we come in 
here, it just does not lend itself to a very productive session 
where you have the opportunity to get a clear understanding of 
where--because I know that time is spent, and I think this 
haring was noticed about 2 weeks ago. Sometimes hearings are 
noticed earlier than that, I realize that, with 10 days. But 
nonetheless, this is a very, very important hearing involving a 
very critical issue. And it is an issue that comes up all the 
time among our constituents and others, the subject of Iran and 
what our policies are going to be.
    So I would urge the departments here not to let this happen 
again under my stewardship here. I just do not accept it. And I 
am being relatively mild about it today but it just does not 
help me at all do a good job from this side of the dais if I do 
not have that information ahead of time. So please do not let 
that happen again, if I can.
    Let me welcome all of you here this morning. Secretary 
Burns, Under Secretary Levey, and Secretary Foulon. Am I 
pronouncing that correctly?
    Mr. Foulon. Yes, sir
    Chairman Dodd. I want to thank you for joining us here 
today.
    Let me lay out some of the ground rules here how we will 
proceed here this morning, if we can. Secretary Burns has a 
meeting later this morning I have been told--we were noticed 
about this early enough, that you have a meeting with the 
President later this morning. And I do not want to be 
disruptive of your schedule or the President's schedule.
    So I am going to propose that Senator Shelby and I make 
openings statements here this morning. We do not have other 
members here yet but I am going to ask them to defer, should 
they show up, to make any opening comments until their round 
occurs during the questioning period. And then we are going to 
begin, if we can, with Secretary Burns. We will finish that 
round with you, sir, in order you to allow then to make your 
schedule later this morning, then we will move very directly to 
our other witnesses, as well.
    I recognize that responses to certain foreign policy 
related questions have to be tightly coordinated by the 
agencies represented here, and I presume that has been the 
case. So this arrangement means that once Secretary Burns 
leaves, some of the questions related directly to the States' 
role in all of this will have to probably be submitted in 
writing. And we will certainly leave the record open for 
several days so that you have a chance to do that so we can 
have full record and response from the Department of State 
regarding that.
    What that in mind let me begin. I will make some brief 
opening comments and then I will turn to Senator Shelby.
    The purpose of today's hearing is to assist the Congress 
and the American people to try and understand and make a 
judgment about the Administration's policies toward Iran. The 
Administration has publicly stated, appropriately in my view, 
that Iran's leaders must--and I think I have these correct--
scale back its nuclear ambitions, reverse its support for 
destabilizing and terrorism-related activity in Iraq and 
throughout the region, mitigate its opposition to the Middle 
East peace process, and stop efforts to undermine the 
legitimate government in Lebanon. I share those publicly stated 
aspirations.
    The issue, obviously, before us is how do we get from here 
to there? What steps do we take to try and effectuate the goals 
that I have just enumerated?
    This morning the Committee will receive testimony from key 
Administration officials charged with implementing U.S. policy 
with respect to Iran to determine whether current policies are 
likely to achieve satisfactory policy results or whether 
additional measures should be taken by the Administration and/
or by the Congress to achieve those policy goals.
    It is well-known that there are currently many laws on the 
books providing authority to the Treasury Department, the 
Commerce Department, the State Department, and other Federal 
agencies and financial regulators to undertake steps to 
increase economic pressures on Iran including by threatening or 
imposing sanctions on foreign firms supporting Iranian 
activities, tightening export and re-export controls, 
accelerating Treasury's current campaign to press U.S. and 
foreign private sector entities, including business and banks, 
not to deal with the government of Iran and taking other 
similar steps.
    I support the Administration's efforts to engage 
systematically the private sector, including businesses and 
banks, in efforts to economically isolate and pressure Iran.
    Having said that, I fear that a larger coherent 
Administration strategy and vision is lacking in this regard. 
As Members of Congress, we cannot ignore the ongoing public 
debate as to whether critical dialog, calibrated economic 
pressure, and constructive engagement with Iran could bear 
fruit or whether the wisest policy is one of containment, 
sanctions, and ultimately regime change.
    There has been a similar debate with respect to our 
policies toward North Korea, I might add.
    I would hope that our witnesses this morning would play a 
constructive role in that ongoing debate with respect to our 
U.S. policy toward Iran. U.S. economic sanctions are a critical 
component of our policy toward Iran, as they have been for some 
time in this and previous administrations.
    But sanctions alone, in my view, are not sufficient. They 
must be used as effective leverage undertaken as part of a 
coherent, coordinated, comprehensive diplomatic and political 
strategy which tips the scale such that it is more beneficial 
for Iran to forswear its nuclear weapons ambitions and other 
behavior that is undermining regional peace and stability.
    I do not know if a strict policy of coercion and sanctions 
will be enough eventually to bring about a more responsible 
Iranian government. But I do know that strong international 
reaction against the Iranian president's disgusting 
declarations about the Holocaust and Israel's right to exist, 
the public rebuke of a president by the supreme leader for his 
reckless posturing on Iran's nuclear ambitions, the president's 
parties weak showing in recent local elections, and other 
similar recent developments offer reasons for hope. Hope that 
if we work more intensively with our allies we might be able to 
identify and engage with Iran's more moderate leadership inside 
and outside of current government that could eventually be 
persuaded to step back from its nuclear ambitions.
    But all of our strategic partners, including the Europeans, 
the Russians, the Chinese, the Indians, and moderate Arab 
states throughout the Middle East must agree on an approach 
that will take sustained diplomatic work to achieve.
    Recent U.S. diplomatic political efforts to develop such a 
unified front against Iran are coming very late in the game. It 
was very unfortunate, in my view, that European efforts to 
secure agreements with the more moderate Khatami government 
were not encouraged or supported by the Administration at a 
time when the United States international leverage was 
decidedly greater than it is today.
    Moreover, comments by Administration officials hinting at 
the possibility of military actions against Iran, and these 
were faceless names obviously, and leaks about plans being 
drawn up by the Pentagon to target Iranian sites, all play into 
the hands of extremist forces, in my view, in the region and 
raise questions about U.S. intentions even among our allies who 
might otherwise be with us.
    The Administration is in a catch up mode, in my view, in 
the diplomacy department with respect to Iran. After years of 
sitting on the sidelines diplomatically, as with most 
international efforts, only coordinated, effective, 
multilateral efforts have any likelihood, in my view, of 
success. The Administration's recent efforts at the U.N. seem 
to be bearing some fruit in a second and tougher U.N. sanctions 
resolution. But it remains to be seen how tough the Security 
Counsel will be with respect to Iran.
    U.S. representation at the United Nations, until recent 
changes in personnel, has made American efforts to galvanize 
international support with respect to Iran and other issues of 
importance to the United States more difficult, in my view. It 
is my hope that with the appointment of Ambassador Khalilzad, 
that will change.
    Over the years this Committee has provided various 
statutory tools for U.S. administrations to use as leverage in 
their efforts to induce change in Iran's behavior. With 
modifications to the Bank Secrecy Act, Congress has empowered 
the Department's Under Secretary of Treasury for Terrorism and 
Financial Intelligence, working with the Office of Foreign 
Asset Controls to freeze funds and recommend the prosecution of 
entities and individuals who seek to exploit the domestic or 
global financial system to support international terrorism and 
weapons proliferation.
    Congress has also endeavored, through the enactment and 
reenactment of the Iran Sanctions Act, to provide the executive 
branch with clear authority to, among other things, sanction 
foreign companies to invest in Iran's principal economic 
sector, the energy industry. Yet today, despite more than $125 
billion in reported investments in Iran's energy sector by 
foreign investors, not one foreign energy concern has been 
sanctioned. I and other members of the Committee are anxious to 
hear from our witnesses this morning why this has been the 
practice.
    To sum up, it is my hope that today's hearing will help us 
to better understanding the Administration's policy goals as 
they relate to Iran, what part economic sanctions play in 
advancing those goals, what if any additional bilateral or 
multilateral sanctions would accelerate the achievement of 
those goals, and what the U.S. Congress ought to do to advance 
that process.
    I know that we have set an ambitious agenda for our 
witnesses today, but this is a terribly important subject that 
demands difficult questions and warrants honest answers. I am 
sure that we will have both this morning from my colleagues and 
the witnesses.
    Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman.
    Since the Banking Committee last met to hear testimony on 
Iran's support for terrorism and its determination to develop a 
nuclear capability, I believe the situation has only worsened. 
Not only does Iran continue to defy overwhelming international 
opposition to its nuclear related activities but in recent 
weeks we have seen evidence of Iranian complicity in attacks on 
Americans in Iraq.
    Iran's intransigence on all three fronts clearly 
demonstrate the severity of the situation confronting the U.S. 
and our allies. Iran's continued support for the Hezbollah and 
Palestinian terrorist organizations dramatically illustrate a 
strong desire to remain on the wrong side of the war on terror.
    Because there is virtually no region throughout the world 
that has not been a target of a terrorist attack we must all 
remain vigilant and employ every available means to detect and 
to stop future attacks both here and abroad.
    As we learned with illicit North Korean financial 
activities, the U.S. has a powerful weapon in its arsenal, 
financial sanctions. Properly employed, sanctions can restrict 
a rogue regime's ability to operate with impunity. Treasury's 
use of Section 311 of the PATRIOT Act in the case of North 
Korea and its new authorities under Executive Order in the case 
of Iran, I believe have proven effective.
    We have enjoyed some success at both restraining the 
ability of these regimes to finance illicit activities and 
communicating to the world of international finance that 
business as usual may carry risk.
    Unfortunately, terrorism remains disturbingly cost-
effective. In other words, relatively small amounts of money 
can support very large attacks. Terrorists deadly efficiency is 
one of the major challenges that we face.
    I am interested in hearing, Mr. Chairman, from today's 
witnesses how current authorities are working and whether any 
additional authority is needed to meet this challenge. In other 
words, what can this Committee do to help in this regard?
    Thank you for calling this hearing.
    Chairman Dodd. Thank you very much, Senator Shelby.
    I would say to my colleagues, Senator Tester and Reed and 
Hagel have arrived, we are going to move right to the witnesses 
if that is all right with you. And then any opening comments 
you want to make I will make sure we get to you as quickly as 
we can.
    Secretary Burns has got a schedule. We are going to focus 
on him until he has to leave and then we will submit questions. 
But he is going to be here for a good round of questioning from 
the members. It is not, I do not want to suggest, that 
abbreviated. So you will have a good chance to focus on their 
issues.
    Secretary Burns, we welcome you here this morning and we 
appreciate your willingness to participate, and thank you for 
your work, by the way. I am someone who admires the job that 
you do and I want you to know that. So thank you for coming.

  STATEMENT OF NICHOLAS BURNS, UNDER SECRETARY FOR POLITICAL 
                  AFFAIRS, DEPARTMENT OF STATE

    Mr. Burns. Mr. Chairman, thank you. Senator Shelby, 
Senators, thank you very much for inviting me and inviting my 
colleagues from Treasury and Commerce to be here.
    First of all, Mr. Chairman, thank you very much for 
agreeing to allow me to depart a little bit early. I can stay 
until about 10:30. I just have to be with the President and the 
New Zealand Prime Minister at the White House. So I apologize 
for that.
    I also want to say that I very much apologize for the fact 
that my testimony was late. That is no sign of disrespect for 
you and your Committee. It is rather a sign of my particular 
inefficiency yesterday in getting that out to you. So that will 
not happen again and I think you were right to make the point.
    Mr. Chairman, I have submitted a written testimony. I will 
not read it to you because I think that might take up too much 
of the time. But with your permission I would just like to give 
you an idea of how we do believe that we have an overarching, 
concerted policy to block and contain Iranian ambitions in a 
number of areas. I would like to go through that a little bit 
and I would be very happy to respond to your questions and that 
of the other members.
    I would first say that there is no question that the United 
States is facing, in the Middle East today, a set of four great 
challenges. And Iran is tied up in all of them. The effort that 
we need to make to be successful in Iraq, where Iran has had a 
perfidious and negative influence, in our judgment. The effort 
to support the democratically elected government of Lebanon, 
and Iran and Syria and Hezbollah have been trying to bring that 
government down by extraconstitutional means. The effort to 
produce a final peace after nearly 60 years of effort between 
the Israelis and Palestinians, which the President and 
Secretary Rice are currently engaged, following on the good 
work of many past administrations, included that President 
Clinton. Iran has been the primary international force 
operating against such a peace. It does not believe in such a 
peace and it has rejected all of the body of work that we know 
of as the Middle East peace process over four to five decades.
    And finally the effort by Iran itself to create a nuclear 
weapons ability of its own. Iran is the leading state sponsor 
of terrorism in the Middle East. It is the central banker of 
the terrorist organization.
    So in those four areas, arguably now the most critical set 
of foreign policy challenges that the United States faces, Iran 
is a problem in each of those areas.
    Now we have devised over the past several years a 
multifaceted effort to try to block the Iranian government in 
each of these areas relying on the establishment of diplomatic 
coalitions. And here, Mr. Chairman, as far back as February of 
2005, more than 2 years ago, our Administration put our weight 
behind the EU-3 and we supported the negotiations of the EU-3 
with the Khatami government. We have been very much at the 
heart of building an international coalition of countries 
against Iran and the nuclear issue since then.
    And that coalition is quite broad. It is the EU-3, it is 
Russia and China, our Perm-5 members. It is India and Brazil 
and Egypt, all of which have voted with us in the IAEA to 
repudiate the Iranians and to sanction them.
    So I do believe that we have been able to put together an 
international diplomatic coalition that is shrinking the 
diplomatic space for the Iranians, that has the Iranians 
isolated, and that has some prospect of being successful in the 
future. Although we need to see that diplomacy play out in the 
future.
    But we have taken a number of steps to try to limit Iran's 
options. On the nuclear sphere, as you know, we are in the 
Security Council this week on the nuclear issue. We are just 
about to pass, we hope by the end of this week, a second 
Chapter 7 resolution with the support of countries from all 
across the world. That resolution will go into some new areas.
    Second, my colleague, Stuart Levey, has been leading the 
effort, as Senator Shelby recognized, to put forward financial 
actions against Iranian state banks which we think have been 
particularly effective.
    Third, the Treasury and the State Department have been 
combining efforts to try to convince international financial 
institutions, lending institutions, that they ought to shut 
down a business as usual approach with the Iranians. And that 
has been successful, in part, as well. I am sure Stuart will 
speak to that.
    Fourth, we are now stationing two carrier battle groups in 
the Persian Gulf in order to send a message to the Iranians. It 
is not your lake. It is an international waterway. And free 
commerce and free shipping and the security of our friends in 
the Gulf is important to the United States.
    Fifth, as you have seen, and the President talked about 
this in his address back on January 10th, we have begun to push 
back on those networks of Iranian intelligence and paramilitary 
forces who have been providing sophisticated IED technology 
that Sunni insurgent groups have used to kill our soldiers and 
to wound our soldiers.
    And so in these five areas, the United States is pushing 
back against the Iranians.
    I think it is important to note that because I think the 
conventional wisdom was, about mid-autumn, just after our 
congressional elections, but there was a sense around the world 
that Iran was on the march, that Iran was proceeding unfettered 
in each of these errors, nuclear and terrorism and in the 
region. And I think we have had a fair measure of success and 
now containing them and in limiting their options.
    Iran is a country very much on the defensive right now. It 
has very few friends in the world. Very few countries are 
sticking up for it. And so the ability to fashion this 
diplomatic coalition is important.
    Second, Mr. Chairman, I would like to say this. We ought to 
invest in diplomacy concerning Iran. Iran is a dangerous threat 
to our country and we should not take that lightly nor should 
we underestimate it. But there is no question that diplomacy 
has a chance of succeeding.
    We need to be patient in applying diplomacy. It has taken 
us 2 years to buildup his coalition of countries on the nuclear 
issue. And if we are consistent and steadfast in diplomacy, we 
do not have a certainty of success. And of course, the 
President and many other Administration officials have said 
that all options remain on the table, as they should in dealing 
with a country that could pose a mortal threat to our own in 
the future. But we are accenting and stressing diplomacy. And 
that is where the great preponderance of our efforts are today.
    We believe that we should be patient, that we should apply 
this, that we should have as big a tent as possible of 
countries around the world to block the Iranians in each of 
these areas. And I, for one, believe that conflict with Iran is 
not inevitable. It is not inevitable if we play our cards right 
and are smart about the application of diplomacy.
    On the nuclear issue, as I said, we hope to have a Security 
Council resolution by the end of the week. It would be 
different from the first Chapter 7 resolution of December in 
three different respects. It would, for the first time, open up 
Iran to prohibitions on arms transfers by Iran to any other 
state or organization. That would be quite significant if we 
can get this by the end of the week.
    Second, it would sanction the IRGC, the Iranian 
Revolutionary Guard Corps command, which is the institution 
that not only runs the Quds Force, which has been the force 
opposing us in Iraq, it is also the institution that has been 
bankrolling and directing the development of Iran's ballistic 
missile and weapons of mass destruction industry which we are 
directly concerned about.
    And third, it would open up financial sanctions against 
Bank Sepah, a bank that the Treasury Department has paid 
particular attention to, and Stuart will talk about that, as 
well as open up and encourage countries to begin to diminish 
their export credits to Iran.
    One of the problems we have had in trying to build an 
effective sanctions regime is that not everybody is in it. 
United States, of course, had has sanctions on Iran for the 
better part of three decades. Many of our European allies have 
put billions of dollars out to their firms to sponsor trade and 
commerce between Germany and Italy and Spain and France, to 
name four countries, and Iran itself. We are encouraging those 
European allies to diminish their export credits.
    I think as recently as 2005 there were $22 billion in 
export credits made available by OECD countries. And we have 
begun to see that come down in Japan, Germany, Italy, and 
France. We would like to see it come down more. Because our 
view is that American firms have paid the price, have made the 
sacrifice. Every American administration since President Reagan 
have made the sacrifice in trying to send this stiff message to 
the Iranians. We need some help from our allies in Europe and 
Japan and around the world in repressing on that front.
    So I want to assert today, I will not belabor this point, 
that we do have a diplomatic strategy, that I believe it is 
beginning to work because Iran is increasingly isolated. We are 
working inside the Security Council but we are also working 
outside in what Treasury and Commerce have been doing on the 
financial measures and financial sanctions. And we are 
encouraging the EU and Japan to think of what they can do 
outside of the Security Council, as well.
    Finally Mr. Chairman, I would just say this, we are trying 
to block Iran in other ways. It is the leading state sponsor 
and central banker of terrorism, of Hamas, Hezbollah, 
Palestinian Islamic Jihad and the Popular Front for the 
Liberation of Palestine-General Command.
    So we are trying to press against the Iranian ability to 
destabilize the Israeli government, the moderate Palestinian 
leadership, and the Lebanese government by choking off their 
ability to be successful in funneling arms and funds to those 
terrorist groups. That is an American national interest.
    Finally, I would just say that we have an obligation to try 
to reach out to the Iranian people. We do not have diplomatic 
relations with the Iranian government. We have not since the 
hostage crisis of 27 years ago. But we have made a big effort, 
with support from the Congress, and Congress has been very 
generous in giving the Administration $76 million last year, to 
fund 24-hour Persian language radio, United States radio into 
Iran to fund now 12 hours of Persian language TV into Iran, to 
bring Iranian citizens on exchange to the United States many 
for the first time, to send the U.S. national wrestling team--
wrestling is their national sport--to Iran. And they were 
received very enthusiastically in January. And now we have a 
program of inviting groups of professionals, health experts, 
disaster relief experts, from Iran to visit our cities, our 
medical institutions, our government offices so that there is a 
degree of normalcy in the people-to-people relationship. 
Because we appreciate that the people of Iran, by and large, 
think well of the United States. One of the great ironies in 
our Middle East situation right now is the United States is 
popular, it seems to be popular in one country, Iran. The 
Iranian people tend to like Americans.
    And so we want to accentuate that people-to-people contact 
while we stiff arm, block, contain, oppose the policies of the 
Iranian government. And we think that this comprehensive policy 
can work for the United States. It does rely on bipartisan 
support. I have been very pleased in my conversations with 
members of the Senate and House. I think we do have that 
bipartisan support for our policies.
    So I want to thank you for holding this briefing and I am 
open to any question that you would like to ask me about any 
aspect of this very difficult problem for us.
    Chairman Dodd. Thank you very much, Mr. Secretary, and I 
appreciate that. Your prepared remarks will be included in the 
record, as will all of the prepared remarks and any supporting 
data and information you want the Committee to be aware of, we 
will include.
    Secretary Levey.

 STATEMENT OF STUART LEVEY, UNDER SECRETARY FOR TERRORISM AND 
       FINANCIAL INTELLIGENCE, DEPARTMENT OF THE TREASURY

    Mr. Levey. Thank you, Mr. Chairman, members of the 
Committee, Senator Shelby. Thank you for the opportunity to 
speak with you today. I echo what Nick said about apologizing 
for the lateness of our testimony. I, too, will promise you 
that will not happen again.
    You have just heard about our overall strategy with respect 
to Iran from Under Secretary Burns. And as he mentioned, the 
diplomatic efforts have yielded significant successes and a 
unanimously adopted Security Council resolution and a follow-on 
resolution that appears set to pass.
    That our partners are now pressuring Iran to comply with 
its international obligations is a real credit to our 
diplomatic efforts and to Under Secretary Burns' patient and 
persistent diplomacy, in particular, which I have been 
privileged to witness firsthand.
    I would like to give you an overview of Treasury's role in 
this overall strategy. Working with State and Commerce and 
other agencies, we have crafted what I think is an innovative 
strategy to combat the dangerous and illicit conduct of the 
Iranian regime. Our strategy involves the use of targeted 
financial measures, as well as consultations with foreign 
governments and with the international private sector about the 
risks of doing business with Iran. Our initiatives and the 
State Department's diplomatic efforts, I believe, are mutually 
reinforcing.
    Iran uses its integration into the world's financial system 
to support and facilitate its proliferation, terrorism, and 
other illicit activities. The regime disguises its hand in 
terrorism and proliferation through an array of deceptive 
techniques specifically designed to avoid detection and 
suspicion by the law-abiding international community. It uses 
front companies to engage in what are ostensibly innocent 
commercial transactions but that are actually related to its 
WMD programs.
    We have also seen Iranian banks and other Iranian entities 
request that financial institutions take their names off and 
take other references to Iran off of transactions when they are 
processing them in the international financial system. This 
practice is specifically designed to evade controls put in 
place by responsible financial institutions and it has the 
effect of threatening to involve those financial institutions 
in transactions that they would never willingly choose to be 
engaged in.
    So it is our approach to target those individuals and 
entities that are engaged in this dangerous and deceptive 
conduct. These kinds of targeted measures have several 
advantages. Because they single out those responsible for 
terrorism, proliferation, and other criminal activities, and 
they make public their dangerous behavior, they are more apt to 
be widely accepted around the world than sanctions that are 
applied to an entire country.
    Targeted financial measures also act as a deterrent by 
warning people and businesses not to deal with the specific 
designated target and sending a clear message that if they do 
deal with them they could be next to be targeted.
    We are using various types of targeted measures, as Senator 
Shelby pointed out, to combat Iran's pursuit of nuclear weapons 
and the development of ballistic missiles, as well as its 
support for terrorism. In September of 2006, we cutoff one of 
Iran's largest state-owned banks, Bank Saderat, from any direct 
or indirect access to the U.S. financial system. When we did 
so, we publicly explained why, because the government of Iran 
was using Bank Saderat to transfer significant sums of money to 
Hezbollah and was also being used to get money to terrorist 
organizations that are recognized as terrorist organizations by 
the EU like Hamas, the Palestinian Islamic Jihad, and the 
Popular Front for the Liberation of Palestine-General Command.
    In addition to that, we have acted against 19 separate 
entities and individuals supporting Iran's WMD and missile 
programs including Bank Sepah, as mentioned by Under Secretary 
Burns, under Executive Order 13382. This Executive Order allows 
us to target proliferators in exactly the same way that we have 
been targeting terrorist supporters under executive orders. 
Bank Sepah provides extensive financial services to Iranian 
entities responsible for developing missiles that are capable 
of carrying weapons of mass destruction. We hope to see Bank 
Sepah added to the list at the United Nations this week.
    Five of the Iranian entities that we have designated under 
13382 have already been designated by the United Nations. When 
our designations are not matched by U.N. designations, I can 
tell you that they still receive a great deal of international 
attention. I have traveled all over the world sharing our list 
of Iranian designated entities with not only foreign 
governments, but also with the private sector around the world 
and stressing the importance of ensuring that these 
proliferators are not allowed to access the international 
financial system.
    What I have found is that our list of proliferators is 
indeed incorporated into the compliance system of the major 
financial institutions around the world even when there is no 
legal obligation to do so because they simply do not want to be 
involved in the business of proliferation.
    That leads to the private sector outreach and why it is so 
effective, because aside from the formal actions that we have 
taken, we have engaged in what I think is an unprecedented, 
high level outreach to the private sector on this. Along with 
the State Department, we have met with over 40 leading banks 
worldwide to discuss the threat that Iran poses to the 
international financial system and to their institutions. 
Secretary Paulson personally kicked off this effort in 
Singapore in discussions at the annual IMF/World Bank meetings 
when he met with executives from major banks from Europe, the 
Middle East, and Asia.
    By doing this, what we have done is share information about 
Iran's deceptive financial behavior and raised awareness about 
the high financial and reputational risk of doing business with 
Iran. Our use of targeted measures has allowed us to highlight 
specific threats. This has yielded results. As the evidence of 
Iran's deceptive practices as mounted, financial institutions 
and other companies worldwide have begun to reevaluate their 
business relationships. As I think the Committee knows, many 
leading financial institutions have either scaled back 
dramatically, or terminated entirely, their Iran-related 
business. They have done so of their own accord, concluding 
that they simply did not wish to be a banker for a regime that 
deliberately conceals the nature of its illicit business. A 
number of them have cutoff Iranian business in dollars but have 
not done so in other currencies.
    Regardless of the currency, though, the core risk with 
Iranian business, which is that you simply cannot be sure that 
the party that you are dealing with is not engaged in illicit 
cavity, is the same. So scaling back dollar business reduces 
but does not eliminate their risk.
    Mr. Chairman, I think our overall approach is producing 
results. Countries are implementing U.N. Security Council 
Resolution 1737, support is coalescing behind a follow-on 
resolution, and all of this is reinforced by the private sector 
momentum I described. The indications are, as you mentioned in 
your opening statement, Mr. Chairman, that this is having some 
impact in Iran both financially and by stirring debate about 
the direction in which that country is being led, internal 
debate in Iran.
    Thank you for the opportunity to testify and I look forward 
to answering your questions.
    Chairman Dodd. Thank you very much, Mr. Secretary.
    Secretary Foulon.

STATEMENT OF MARK FOULON, ACTING UNDER SECRETARY FOR THE BUREAU 
        OF INDUSTRY AND SECURITY, DEPARTMENT OF COMMERCE

    Mr. Foulon. Thank you, Mr. Chairman, Senator Shelby, 
members of the committee.
    First of all, let me thank you for the support that you 
have given the Commerce Department and the Bureau of Industry 
and Security over they ears as we pursue our nationals security 
and economic mission. Thank you for today for the opportunity 
to appear before you to discuss U.S. export control and 
sanctions policies toward Iran.
    I am pleased to be here with my colleagues from the 
Departments of State and Treasury, with whom we work closely to 
implement the Iran sanctions.
    As you know, the United States has maintained sanctions 
against Iran since 1979 with the reinforcing trade embargo 
starting in May 1995. Iran has been designated as a state 
sponsor of terrorism since 1984. And because of Iran's 
continued active support for terrorism and concerns that it is 
pursuing weapons of mass destruction, U.S. actions were 
increased until a comprehensive embargo was put in place.
    Under the embargo, the Departments of Commerce and Treasury 
prohibit virtually all exports of U.S. origin goods to Iran. 
Due to the comprehensive nature of the embargo, the Treasury 
Department is the agency with primary jurisdiction for export 
licensing to Iran. This approach is often used when the broad 
nature of an embargo requires not only a prohibition on exports 
of items under the Commerce Department's jurisdiction but also 
comprehensive restrictions on financial transactions and 
investments under the jurisdiction of the Treasury Department, 
as Under Secretary Levey has just discussed with us.
    Thus, the Commerce Department's primary role in the 
licensing process is to provide technical assistance to 
Treasury on the proper classification of items proposed for 
export or re-export to Iran under a Treasury Department 
license.
    The Commerce Department also plays an important role in the 
enforcement of the Iran sanctions by investigating for possible 
prosecution and penalties violations of the Export 
Administration Regulations. These investigations are conducted 
by the Bureau of Industry and Security's Office of Export 
Enforcement, which has approximately 100 Federal agents in 10 
locations throughout the United States. Currently, more than 20 
percent of our open investigations, around 150, involve Iran.
    Since October of 2004 our investigations, which we often 
take in conjunction with sister enforcement agencies such as 
Immigration and Customs Enforcement or the FBI, have resulted 
in 13 Iran-related criminal convictions with five more cases 
pending sentencing.
    Let me just point out two cases, in particular, as 
representative of the types of activities and the types of 
enforcement cases that Commerce agents have been bringing.
    The first one is last November the sales director of United 
Calibration Corporation was sentenced to 5 years probation, 6 
months home confinement, 100 hours of community service, and a 
fine of $10,000 for attempting to export machinery and 
calibration software that could be used to measure the tensile 
strength of steel. One use of such items could be to test the 
chemical properties of metals that are used in the 
manufacturing of nuclear materials.
    A second example of the kind of cases we bring was last 
December when a man named Ernest Koh was sentenced to 52 months 
in prison for exporting parts for C-130 military transport 
planes and P-3 naval aircraft. These parts were first diverted 
to Malaysia and then illegally transshipped to Iran. The 
investigation also found that Koh had laundered millions of 
dollars from bank accounts in Singapore through accounts in the 
United States to promote this illegal scheme.
    In addition to criminal penalties, violators of the Iran 
Sanctions Regulations can also face administrative penalties. 
Last year our investigations led to such penalties in 16 cases, 
totaling $1.6 million in fines.
    I would like to make one additional point with regard to 
penalties, particularly relevant to the point that Senator 
Shelby made about whether we have all of the tools necessary to 
do the job we are trying to do. Our underlying statute, the 
Export Administration Act, has been in lapse since 2001. While 
that act is in lapse we implement the Sanctions Regime, our 
authorities, under the President's emergency authorities under 
IEEPA. The important point to remember is that under IEEPA 
penalties are substantially less than they would be under an 
Export Administration Act, thereby negating some of the 
deterrent effect of the penalties we are able to bring.
    As the examples I cited also illustrate, enforcement of our 
comprehensive embargo against Iran involves more than just 
stopping direct shipments from the United States to Iran. We 
are also focused on preventing the illegal transshipment of 
U.S. goods through third countries to Iran and other embargoed 
destinations. This effort takes two major forms.
    The first is in coordination with the State Department, 
Commerce works with other countries to identify foreign 
entities that are trying to evade our embargo and our export 
control laws to divert U.S. origin goods to Iran.
    Second, the Commerce Department, the State Department, 
Treasury, and other agencies are working to help foreign 
governments improve their own export control regimes and their 
own export control practices so they will block those types of 
shipments going into Iran.
    Now recently, in an effort to increase the options at our 
disposal for combating such illicit transshipment to Iran and 
elsewhere, we published last month an advance notice of 
proposed rulemaking to amend our Export Administration 
regulations to define a new group for countries, which we call 
Country Group C. This group would be reserved for countries 
that pose a diversion concern based on certain criteria such as 
the amount and types of materials that transit through and the 
strength of their own export controls.
    At this point, this is still an idea we are working out and 
a policy we are still developing. So no countries have been 
identified yet for inclusion in this new Country Group C.
    Mr. Chairman, as our presence here today demonstrate, 
administering and enforcing the Iran sanctions involves many 
agencies of the U.S. Government working together. These two 
gentlemen to my right are no strangers to me as we work on Iran 
issues.
    We at the Commerce Department are pleased, and in fact 
honored, to be a part of the Administration's Iran sanctions 
team.
    Thank you for this opportunity and thank you for your 
questions.
    Chairman Dodd. Thank you all very, very much.
    What I am going to do here, if I can, we are going to ask 
the clock go on for 7 minutes. I did a quick math count here 
and I think, Secretary Burns, we can get every member to get a 
least a round in here with you before you have to depart. And 
then we will move to the other witnesses, as well. But during 
the questioning, obviously, if there is a response that either 
Secretary Foulon or Secretary Levey feel they want to 
contribute to, please do not resist.
    I have a couple of charts here I am going to put up. And 
one is here, which I want to ask Secretary Burns about. This is 
sort of a flowchart because I think a lot of people get 
confused about who is in control, who is really--in Iran where 
the power centers are.

[GRAPHIC] [TIFF OMITTED] T0311A.001

    I was going to ask you to take a look at this and share 
with us sort out how this breaks down. What are the key 
intersections with these various agencies in the Iranian 
government, the economic sector, the nuclear sector, the 
military sector, and how they kind of relate.
    Obviously, a great deal of attention has been focused on 
the presidency here. In fact, I would argue to some degree we 
have probably inflated the role of the presidency as a result 
of our focus and attention on Mahmoud Ahmadinejad over the last 
number of months, whereas power centers--there are other power 
centers in Iran. It goes to the point I think you were raising 
earlier about pursuing this diplomatic approach in Iran, which 
I welcome the information from the Administration that that 
door is now opening for us. And it might be worthwhile to run 
through this a little bit and give us some sense of it.
    Before I do that though, I want to ask you about the news 
that we saw the other day and the Russian decision to 
apparently be more supportive on the sanctions issue. The news 
story reported that it was unclear what the motivations were 
here. Is it one, to get paid for the contracts that they have 
already had with Iran that are not forthcoming? Or are they 
moving more to recognition of the larger question here, and 
that is that the dangers posed by Iran possessing a weapons 
capability here?
    Can you share with us what the Administration's 
observations are about this? How serious is it? And where is it 
likely to lead?
    Mr. Burns. Mr. Chairman, thank you. I will be happy to 
answer that question and then go on to the very interesting 
organizational chart behind you.
    On the nuclear front, I do think that the weight of 
international opinion is now shifting against the Iranians. It 
has been very interesting to see the Russian government over 
the last week decide that they are not going to provide fuel 
for the Bushehr power plant. They have delayed the 
implementation schedule in 2007. The very clear message, as we 
translate it, from the Russian government to the Iranian 
government is it is not going to be business as usual. This 
mirrors a change that we have seen over the past few years.
    You referred, in your opening remarks, Mr. Chairman, of the 
fact that as recently as 2 years ago there were just three 
countries negotiating with Iran: Britain, France, and Germany. 
That was with the prior Iranian government before this radical 
regime of Ahmadinejad took power.
    And now you have a large international coalition. The 
Russians were part of the sanctions decision in December. The 
Russians are sponsoring, with the Chinese, the sanctions 
resolution that the United States, is Britain, and France put 
on the table just a week ago in New York. And so Russia is very 
much our partner. Russia is bringing its weight to bear against 
Iran. I think that countries are worried.
    This Iranian government is just proceeding right down the 
track toward the ability to master the enrichment and 
reprocessing process. They have strung together, we think, the 
IAEA thinks, about 160 or so--they are trying to--centrifuges. 
Their ambition is to engage in P2 centrifuge research and also 
to get to 3,000 centrifuges within a year.
    If that happens and if the Iranians proceed without being 
blocked, then their scientists and nuclear engineers will have 
the intellectual capacity to design and fabricate a nuclear 
weapon. It is our opinion that Iran must not be able to secure 
a nuclear weapons capability.
    That is also how we appreciate the Chinese and the Russian 
and the European attitude. It has really been extraordinary to 
see the dimensions of this international coalition.
    In the U.N. it is the five permanent measures now 
sponsoring one resolution. In the IAEA, as I said before, India 
and Egypt and Brazil and Argentina and Japan have all voted 
against Iran. Iran essentially has four friends in the world: 
Syria, Belarus, Venezuela and Cuba. And with friends like that, 
compared to this large coalition, I think they are rather 
isolated. So I think the Russian actions over the last week 
have been very important.
    Chairman Dodd. They go beyond just an effort to get paid?
    Mr. Burns. Is our appreciation of the Russian government 
does not wish to see Iran possess nuclear weapons. So that is a 
point of agreement.
    On your organizational chart, if you would like----
    Chairman Dodd. By the way, all members have a copy of this 
chart in front of you, as well. I presume if you have any 
additions you want to make to this chart, please let us know.
    Mr. Burns. I think the important message from your chart 
would be this to me, in that Iran is not a monolithic power 
structure. It is not one person. It is not one ideology. It is 
not one set of motivations. If anything, your organization 
chart shows competing power centers.
    The most important person is the person at the center at 
the top, the Supreme Leader, Ali Khamenei. He is the successor 
to the Ayatollah Khomeini. Iran is, in many ways, a 
theologically based state. It is a mullocracy, of sorts, and 
the Supreme Leader is by far the most important political, 
economic and military leader in the country.
    The title is accurate. He has supreme power over all 
others.
    But underneath him there are competing power centers. The 
person directly below him, the president of Iran, is Mahmoud 
Ahmadinejad. He is this radical, in our view irresponsible 
demagogue who has said that the Holocaust did not happen, that 
Israel should be wiped off the face of the earth, that Iran 
should become a nuclear weapons state.
    He is opposed, we think, by many of the other power centers 
on your chart. Certainly, the Expediency Council chaired by Mr. 
Rafsanjani, the former president if Iran. Most, I think, 
analysts would say that there are not friends, that they are 
not partners, and that they are rivals. The National Security 
Council, I believe--yes, the National Security Council appears 
on the upper right of your chart. And that is headed by Dr. Ali 
Larijani, who we also believe is a competing figure to 
Ahmadinejad.
    So I think we look at Iran as a divisive government with 
different power centers, different motivations. I think you see 
that in the actions of the government.
    The most significant thing we have done, in my judgment, 
over the last 27 years is to offer negotiations on the nuclear 
issue last June 1st. Secretary Rice was the first Secretary of 
State since 1979 to say she would sit down with the Iranians at 
the negotiating table about with the Chinese, Russians, and 
Europeans on our side in an attempt to forestall a nuclear 
weapons capability by Iran.
    They did not answer that offer for four-and-a-half months 
because we think they were fighting among these various power 
centers over the offer. We do think that there are elements in 
the power structure who want to negotiate with the Perm-5 
countries, including the United States. We know there are 
others, including President Ahmadinejad, who do not want 
negotiations.
    So it is a tumultuous political scene, as best as we can 
understand it. I want to be a little bit humble here because we 
have not had an American diplomat in Iran since the hostages 
left on January 20th, 1981. We have no embassy there. So we are 
peering into the country from the outside, trying to understand 
it with a lot of help from friends around the world. There are 
very few American academics or business people there. So we are 
somewhat limited, but that is our appreciation.
    And finally, Mr. Chairman, the last box that I would draw 
attention to is the Revolutionary Guard, which is in the center 
right of your chart. The Revolutionary Guard was created after 
the revolution to be the arm of the religious ideologues, of 
the Ayatollah Khomeini and others. They are the people who have 
sponsored the terrorist attacks against the United States, in 
1983 against our Marine barracks and against our Embassy in 
Lebanon, in 1996 against Khobar Towers in Dhahran, Saudi 
Arabia.
    It is the Quds Force, a subset of the Revolutionary Guard, 
that are right now providing this explosive IED technology that 
we believe Shia militant groups have used to target our 
soldiers in Iraq. So that is a particular interest of ours, and 
it is a particularly malevolent branch of the Iranian 
government.
    Chairman Dodd. You mentioned the diplomatic efforts. It 
seems to me I heard that we had actually made an offer to 
establish diplomatic relations or at least to establish an 
embassy in Tehran once again. Is that accurate?
    Mr. Burns. We have not made such an offer, no. We do not 
seek, at this point, normal diplomatic relations with Iran.
    The problem is, Mr. Chairman, as you know well, they are 
trying to build a nuclear weapons capability. They are the 
leading state sponsor of terrorism. They have directed that 
against the United States. And then they are the leading force, 
radical force, against what we want in Israel, in Lebanon, and 
in Iraq.
    So our appreciation as we are better off, and I think this 
unites the last few American administrations, President 
Clinton's and President Bush's especially. We are better off 
trying to isolate them and pressure them from the outside than 
trying to make nice to them and do business with them from the 
inside.
    Chairman Dodd. My time is expired.
    I had a chart here I wanted to raise about the existing 
contracts with other countries that you have addressed here 
earlier. I will leave it up and presumably you want to address 
it.

[GRAPHIC] [TIFF OMITTED] T0311A.002

[GRAPHIC] [TIFF OMITTED] T0311A.003

    But these are the $126 billion of agreements that have been 
reached with other nations, many of whom are allies of ours, 
ongoing and no action has been taken on them. I see Secretary 
Levey reacting to this already. This has to be explained to 
some degree.
    The Iranian Sanctions Act does allow us to have tools to 
deal with some of these issues. You have got a present when 
here in January of 2007, at least it was on my chart earlier, 
2007 here for $20 billion with the Malaysian government here.
    I am very interested in--jawboning works to some degree. 
But we have given you tools up here now, the Congress has, over 
the years. These are very specific tools that allow you to take 
much more specific actions than just asking people not to do 
certain things.
    I am very interested at some point here this morning that 
you address the issue of why over $126 billion in contracts in 
the energy-related areas, totaling more than 1.3 billion 
barrels of oil per day, not to mention some 13 billion cubic 
feet of natural gas going forward.
    That is not exactly a modest amount coming out. If these 
tools exist, why we are not using them more definitively, more 
accurately.
    But let me turn to Senator Shelby and you can respond to 
this at some point in your questions.
    Senator Shelby. Thank you, Mr. Chairman.
    Secretary Burns, the Administration has worked very hard to 
get resolutions condemning Iran's nuclear activities and 
imposing sanctions through the U.N. Security Council. What 
additional measures, either within the confines of Security 
Council Resolution 1737 or in a new resolution, do you believe 
are necessary to ensure that foreign companies and financial 
institutions refrain from doing business with Iran as banks, 
oil, gas, you name it, the big ones.
    And given the scale of Islamic Revolutionary Guard business 
activities and the Corps' major role in supporting terroristic 
organization, why is it not listed in Resolution 1737's Annex? 
I understand the commander of the Corps is listed but not the 
entire Corps.
    You brought up the Revolutionary Guards and I thought I 
would respond.
    Mr. Burns. Senator Shelby, thank you very much.
    First, let me just, if I could, unite your question with 
that of the chairman. I had the pleasure of testifying before 
you, Senator Shelby, last summer to say that the Administration 
agreed with the reauthorization of the Iran Sanctions Act. And 
we do. I think that we find this Act has been useful in 
deterring some foreign investment in the oil and gas sectors in 
Iran but obviously not all, as your chart shows. There has 
still been significant activity.
    In that respect, Mr. Chairman and Senator Shelby, I know 
that the last two administrations--and I served in President 
Clinton's Administration--have essentially taken the view that 
this Act is useful as a deterrent.
    The problem comes in application. I just want to be very 
frank here. I think that the last two administrations, Clinton 
and Bush, have used the waiver authority once, very 
infrequently. The problem is as you try to build a diplomatic 
coalition to oppose the Iranians, we want to the pressure of 
the sanctions to be on Iran itself and not so much on our 
allies. Because that would disrupt and maybe even disassemble 
our coalitions.
    So right now we have succeeded in getting France and 
Britain and Germany and Russia and China all on the same music 
sheet with us. And yet, if we turn around and sanction them but 
not the Iranians, they might be less willing to support us on 
some of these diplomatic efforts like denying Iran a nuclear 
weapon.
    And so that is the dilemma that I think both of the last 
administrations, if I can say as someone who has served in 
both, have felt. We would like to see the legislation as it 
progresses--and I know there is new legislation in the House 
being considered by Chairman Lantos and Congresswoman Ros-
Lehtinen. We would like to see it focus on Iran, on the Iranian 
government, and on the state structures of Iran, and not so 
much on our allies.
    But I would say this, if you give us a law and if you pass 
a law, we will implement the law to the best of our ability. 
That is our obligation.
    In this case, I think there have been no new final oil and 
gas investment deals, I am told, since 2004. I can check that 
figure, Mr. Chairman, and get back to you in writing, if you 
would like. But we are now beginning to jawbone Shell and the 
China National Oil Company and the Malaysians involved in a 
prospective deal. In all three areas, they have announced the 
interest to conclude a deal but have not concluded one. We have 
gone to the CEOs and major financial officers of those 
corporations just in the last few weeks and months to say this 
is a bad idea. You should not do it. And if Congress does pass 
tougher sanctions legislation, you will be subject to our law 
and we will not be able to protect those companies.
    So we have made that point to all of them.
    Senator Shelby. But Mr. Secretary, to be effective they are 
going to have to believe you are going to do something, the oil 
companies and everybody else. Otherwise they probably will not 
blink.
    Mr. Burns. We have asked--I think that your legislation and 
whatever comes through the House and Senate this year, new 
legislation, is coinciding with a general trend, I think, 
toward sanctions by our allies. Until about a year ago, the 
European allies and Japan were not interested in sanctions 
against Iran.
    Senator Shelby. What about China?
    Mr. Burns. I do not think the Chinese are there yet, 
unfortunately. We differ with the Chinese. We think the Chinese 
have too much of a business as usual attitude with Iran, too 
much trade going on.
    But I think that as your legislation proceeds, you are 
going to see the EU and Japan consider what they can do to shut 
off some of this normal commerce that has been underway. We are 
in favor of the Europeans doing less and we are not in favor of 
any of these oil and gas deals.
    Senator Shelby, on the IRGC, we have worked very hard over 
the last few weeks to put into this second Chapter 7 resolution 
that is being debated today in New York a specific set of 
sanctions against IRGC front companies and individuals that are 
important in the ballistic missile and WMD area.
    Senator Shelby. Secretary Burns, as sanctions have taken 
effect, have they weakened the Iranian leadership? Or have they 
given the Iranian people a rallying point behind their 
president?
    Mr. Burns. I think, for the most part, the sanctions and 
the international efforts against Iran have weakened the 
government of Ahmadinejad and put him on the defensive in his 
own political system because their policy is not working.
    The Chairman referred to this extraordinary episode when 
the newspaper controlled by the Supreme Leader Khamenei 
criticized Ahmadinejad about a month ago for his handling of a 
nuclear issue. So we think this policy of pressure, the 
financial sanctions by the Treasury Department, the financial 
measures, banks stopping lending, the U.N. Security Council 
sanctions, are beginning to have an effect. And we hope they 
will not becoming a rallying point for the people of Iran, 
because we want the people of Iran to know that we want them to 
have civil nuclear power. We would be willing to participate in 
a consortium with the Russians and the Europeans to build a 
nuclear power center but without access to the fuel cycle.
    Senator Shelby. Secretary Levey, in 1998, I was in 
Islamabad and I had the opportunity to spend some time with the 
infamous Dr. Khan. We talked about nuclear proliferation, among 
other things. I asked Dr. Khan, I said doctor, in your 
judgment, how long will it be before Iran has nuclear weapons? 
And he did not blink at all and hesitate at all. He said 10 to 
12 years. That has been nearly 9 years.
    Are they on track from the statement of Dr. Khan to me?
    Mr. Levey. I think what Under Secretary Burns said in his 
opening statement about where they would be within a year is 
something we need to take very seriously and why we are working 
so diligently to stop the proliferation in Iran's nuclear 
program. I would not hazard a guess about exactly how long they 
have but it is not off by orders of magnitude.
    Senator Shelby. Is the recent Russian attitude, is this 
about payment of money from Iran? In other words, are they 
behind in their payments to the Russians for aid and help in 
the construction of the power plant or whatever you want to 
call it? Or is this a change of heart? Or is it too early to 
say?
    Could it be about both?
    Mr. Levey. I do not have much more to say than what Nick 
said about that. I think we are seeing that they are standing 
with us in terms of sponsoring this new resolution. I have been 
to Russia twice, once with Under Secretary Burns, to talk to 
them about this. And we have been engaging them very 
diligently. My Assistant Secretary was just there last week.
    We would like to think that there is a change of heart and 
if they stand with us on this resolution that would be an 
excellent sign.
    Senator Shelby. But you have not seen a 180 degree turn yet 
have you, Secretary Burns, on the part of the Russians?
    Mr. Burns. We have a very different relationship with Iran 
than does Russia. Russia trades with Iran. Russia sells 
military arms, and we disagree with that, to Iran. Russia has 
diplomatic relationships. We do not have a similar exact 
policy. But the Russians have been turning toward applying 
pressure, sanctions. They voted for one resolution and they are 
sponsoring the second. That is a pretty good indication of 
where they are going.
    Senator Shelby. Secretary Levey, is the level of support 
that you receive from the intelligence community sufficient to 
allow for additional sanctions if warranted? Do you have what 
you need as far as information? I know you work with the intel 
community.
    Mr. Levey. Senator Shelby, yes, I think we have been 
getting really excellent cooperation from the intelligence 
community, not just because of the intelligence office that you 
helped us create within Treasury, but also because, I think, of 
the successful integration of that office into the overall 
intelligence committee. We have been getting excellent support.
    Senator Shelby. How is your office that we created in 
Treasury doing?
    Mr. Levey. Well, I like to think it is doing quite well. 
You will be the judges of that, I suppose, in many ways.
    Senator Shelby. I think you are making a lot of progress.
    Mr. Levey. I appreciate that. We are working well with the 
whole interagency. I think we have been putting pressure here 
in the Iran area but also, as the Chairman pointed out, we have 
worked very hard on the North Korea issue and on terrorism as 
well. We have a lot more to do but I think we are making good 
progress.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much.
    Senator Tester.

                STATEMENT OF SENATOR JON TESTER

    Senator Tester. Thank you, Mr. Chairman, and I want to 
thank the members here who testified today. I appreciate the 
work you folks have done and appreciate the potential of 
continuing your good work into the future.
    I was particularly heartened by Secretary Burns's statement 
that aggressive diplomacy may really bring Iran to a situation 
where they become regular good citizens within the world. We 
can only hope.
    Back in 2003, and this is for Secretary Burns, back in 2003 
I think I read this in the Post last month, that Iran came 
forth with a proposition to deal with the nuclear issue. I do 
not want to put words in your mouth but I think you had said 
that you did not think that that was a genuine offer.
    I guess my question is what would constitute a genuine 
offer? Now that we have got more people in the fold today, what 
would make it a genuine offer if Iran were to come forth with 
such an offer again?
    Mr. Burns. Thank you, Senator.
    I was at NATO in 2003 so I did not participate in this 
series of discussions. But from talking to people who were in 
the White House and the State Department at the time, there was 
a lot of doubt about whether or not that particular offer 
reflected the views of the Iranian leadership. I know I have 
seen arguments on both sides of that.
    I guess I would say to you that what is really important is 
what they are doing now. We have put this big offer out there, 
June 1 of last year, 2006, by Secretary Rice. We, the United 
States, will sit down at the negotiating table with you. The 
offer was made with Russia, China, and the Europeans and us. We 
only asked one thing: suspend for the life of those 
negotiations your enrichment program. And the Iranians have 
refused to do that.
    So I think the ball is in their court. We are willing to 
negotiate on the nuclear issue. And you have seen on Iraq we 
just sat down with the Iranians and the Syrians 10 days ago in 
Iraq, our Ambassador Zal Khalilzad did, to talk about Iraq. And 
those meetings will continue in the future. So there are lines 
open to them.
    Senator Tester. And just for my information, had Iran been 
closing off the shipping lanes?
    Mr. Burns. The Iranians, of course, call it the Persian 
Gulf. We call it the Gulf.
    We have had the American fleet in the Gulf since 1949 to 
protect the waterways. And since the Iranian revolution of 
1979, there been times when we have had to have a show of naval 
force to keep the Gulf open and to send the signal that we do 
not want and we will not support and we will not tolerate any 
interdiction of international shipping in that area.
    So the deployment of two carrier battle groups to the Gulf 
by the United States in the last 2 months is an expression of 
that policy.
    Senator Tester. I appreciate that answer and appreciate the 
conciseness of it.
    Talked about $22 billion trade credit at one point in time. 
You said it is smaller now than it was then. Specifically what 
level is it at now? And these are credits, correct me if I am 
wrong, that are used to enhance and encourage trade with Iran. 
What level are they at now?
    Mr. Burns. Of course, the United States has been out of the 
trade business for 27 years with Iran. These are our allies, 
the European allies, the OECD countries, Japan.
    The 2005 figure is $22 billion of various types of export 
credits available. And we have been leaning on the European 
governments to reduce that because we say to the Europeans, you 
know, it cannot be business as usual with Iran. You cannot try 
to sanction them on a nuclear issue but make profits on the 
economic side.
    So the Italians, Germans, French, and Japanese have told us 
that their export credit levels are coming down. I do not have 
2006 figures. Maybe Mark or Stuart do.
    Senator Tester. It would just seem to me, and I know you 
guys are doing the best you can, but it would just seem to me 
if our allies that understand what is going on with Iran, why 
aren't they just zeroing these trade credits out? I know that 
is what your wish is, certainly what mine is. But it does not 
make a lot of sense to me that if they understand what kind of 
impact Iran and their nuclear capabilities can have on our 
world, that they do not just say enough.
    Mr. Burns. You know, we just have a fundamentally different 
relationship, we the United States, then the European allies 
do. They all trade with Iran. They all have diplomatic 
relations. We have began to see that comity break down, 
however. I think the European governments are now of the mind 
that they should reduce the level of what they do with the 
Iranians and they have been good partners on the nuclear issue. 
I must say that.
    Senator Tester. If, in fact, you can find out what those 
trade credits are at, I would sure like to know. It would be 
great if you could.
    It is my understanding that half the population of Iran is 
under the age of 25. You talked about radio and TV as being 
used as a method for outreach to contact the regular citizenry. 
What role can the Internet play in this? And does it play in 
it? Are you utilizing it? Where are they at technologically?
    Mr. Burns. The have the same view that you do. The younger 
portion of the Iranian population is Internet savvy and a lot 
takes place on the Iranian blogs that they cannot do out in the 
open because the government is so repressive.
    And so Congress was good enough to give us $5 million last 
year, and we are using that to fund what we call a virtual 
presence embassy, a virtual presence post. We have a computer 
network that allows us to speak to young Iranians. We have 
webpages for different cities in Iran that talk about--that 
give the honest truth about U.S. Government policy. We are 
really encouraging a dialog with young people through the 
Internet.
    Senator Tester. Is there any way you can monitor how 
effective that is, as well as radio and TV too?
    Mr. Burns. Yes, and I think actually we have to report to 
the Congress on how we are spending that money. And we have 
established a set of metrics that would give us a rough 
indication--because the problem is we are not there--but a 
rough indication of a type of impact we are having. But we are 
convinced that reaching out to young people through the 
Internet is a good way to go.
    Senator Tester. Just one more, if I might.
    The situation with Korea and their nuclear--and then they 
backed off. And I was told it was because of financial 
sanctions that were put on. I do not know if that was all of it 
or not, but it seemed to me that working with our allies 
evidently something happened and it was more than just business 
as usual.
    Can you apply what happened to Korea and the fact that they 
backed off on or apparently backed off on their nuclear 
development to Iran? And can we use that as a template to apply 
pressure to Iran to get the same results, assuming those 
results are accurate?
    Mr. Burns. Senator, I think we can in a rough sort of way, 
I do. It is ironic that a lot of countries criticize the United 
States for not being willing to engage in one-to-one talks with 
North Korea. We always felt it made much more sense to have the 
pressure of China and Russia and Japan and South Korea with us. 
And that worked. And we have now seen progress in the North 
Korea talks. My colleague, Chris Hill, is in Beijing pushing 
that today.
    We have the same view of Iran. This is not about the United 
States and Iran, this argument over nuclear weapons on 
terrorism. We have been able to have this coalition of China, 
Russia, Britain, France, Germany and a wider coalition 
including India, Brazil this has been very effective. So I 
think it is a template of sorts. This multilateral pressure, we 
think, is the way to go. And diplomacy, we think, can be 
effective.
    I cannot guarantee that. It is going to take some time to 
play out. But it certainly is the preferred option right now.
    Senator Tester. Thank you. Thank you, Mr. Chairman. I will 
let the other members have at it.
    Chairman Dodd. Thank you very much.
    Senator Hagel.

                STATEMENT OF SENATOR CHUCK HAGEL

    Senator Hagel. Mr. Chairman, thank you. Gentlemen, welcome.
    Secretary Burns, in the Regional security conference 
setting in Baghdad almost 2 weeks ago, did we take any 
initiatives or did the Iranians approach us for any off-line 
conversations, meetings, opportunities to engage?
    Mr. Burns. Senator, we had two representatives in that 
meeting, Ambassador Zal Khalilzad and Ambassador David 
Satterfield, and I have spoken to both of them.
    It was one of his first pro forma organizational meetings. 
There was a lot of talk about whether or not we create working 
groups to work on particular issues concerning Iraq's security, 
for instance, being first and foremost, and whether there be 
further meetings.
    The United States took the position in that meeting that 
there should be further meetings. There should be meetings of 
the neighbors of Iraq with the U.S. in Iraq. And there should 
be meetings of a larger group of countries, including some of 
our Perm-5 and G-8 allies.
    And so we are hopeful that at the Ambassadorial level and 
perhaps even at the ministerial level Secretary Rice might 
engage with the Iranians and Syrians and the other countries in 
the configuration.
    To the best of my knowledge, and I have not had exhaustive 
conversations with both of them but I have had good enough 
ones, that is pretty much how the meeting went. And so we have 
the ability now to not talk to them and let them know how 
unhappy we are with their policy in Iraq.
    And in another channel, we have this offer to negotiate on 
the nuclear issue, which they keep turning down, which is also 
the offer that we have made with China, Russia, and the 
Europeans together.
    Senator Hagel. Does that mean we did not have any off-line 
conversations, meetings, engagement with the Iranians at the 
conference?
    Mr. Burns. Senator, as I understand it, Ambassador 
Khalilzad had a quick conversation with the Iranian Deputy 
Foreign Minister, but very quick and I think rather 
perfunctory, kind of standing around before the meeting was to 
take place.
    Senator Hagel. To your knowledge, is there a follow-up 
effort planned by either side? Or is there a discussion of this 
as we get to the next meeting at the ministerial level between 
the Iranians and the United States? Or any initiatives on our 
side for that to happen?
    Mr. Burns. We are not anticipating, at the present time, 
any one-to-one meetings between Iran and the United States. But 
we do have this multilateral configuration where Iran and the 
U.S. are around a table talking about Iraq. And we have the 
prospect of nuclear negotiations.
    That is where our real emphasis is. The two aspects of 
Iranian behavior that are the most injuries to the United 
States and to our interests are will they get a nuclear weapon 
and therefore disrupt the balance of power in the Middle East 
in a negative way to our interests? And two, will they stop 
being such a negative influence in Iraq?
    So we are focusing on those two channels. But they are both 
multilateral. Neither of them is a singular conversation 
between the two countries.
    Senator Hagel. You noted in your testimony and some of the 
responses you have given to the questions, as well as Secretary 
Levey, that we, the United States, are looking at diplomatic 
initiatives, engagements which is, I think your term was, 
Secretary Burns, a more comprehensive policy, which some of us 
have been advocating for some time using all of the instruments 
of power: military, economic, and diplomatic.
    Can you tell this Committee whether we are thinking through 
what we might be in a position to suggest or offer in the way 
of diplomatic initiatives to Iran if, in fact, we were able to 
get some agreements? For example, opening up a consulate, not 
necessarily formal diplomatic relations yet. You noted, I 
believe, in your comments about engaging. You have noted that 
the younger generation it appears, I think in your words, that 
country is probably--at least by the latest poll numbers--the 
one country in the Middle East that actually might like 
Americans.
    So what are we doing? What are we contemplating? What are 
we thinking through in the way of trying to take advantage of 
that situation in the way of initiatives? Now I know a number 
of things have to come together for that to happen. But what 
can you share with us on that front?
    Mr. Burns. Thank you, Senator.
    I think the most important thing we have done is to put in 
writing an incentives package for Iran should they come to the 
negotiating table on the nuclear issue. We gave them a written 
document on June 1st, 2006, the Permanent 5 and Germany. That 
document essentially said there are two paths for Iran and the 
way you relate to us on the nuclear issue. If you continue to 
try to build a nuclear weapons capacity, we will sanction you. 
You have seen as now, we are on the verge of a second 
resolution in New York.
    We said there is another path, and that would be a 
negotiation. Now what would be the subject of that negotiation? 
We would be willing, the six countries including Russia and 
China, to help you build a civil nuclear power industry so that 
the people of Iran have the benefit of nuclear power. But we 
are not willing to give you access to the more sensitive 
aspects of the fuel cycle, the enrichment and reprocessing. 
That would be done offshore.
    We also added in that package a relief from some sanctions 
provisions, normalization of some economic ties between a lot 
of us, including the United States, with Iran. We thought it 
was a very substantial package because we thought that the 
Iranians needed to know what might be put on the table when 
they got to the table. We thought it would be an incentive.
    But as I described, we think there has been this rather 
tumultuous internal debate which has prevented them from 
accepting that offer.
    Second, Senator, we are not anticipating at this time the 
establishment of normal diplomatic relations between the United 
States and Iran. There is too much bad blood. There is too much 
that Iran has to account for, including attacks on our military 
personnel and on our diplomats.
    But we are proceeding, with the help of the Congress and 
with financing from Congress, to try to open up the people-to-
people ties between Americans and Iranians in a way that we 
have never tried before.
    Senator Hagel. For example? Give me an example of a 
program.
    Mr. Burns. Well, I know wrestling is a big sport in the 
Midwest and our national wrestling team went to Iran at our 
suggestion to compete in a tournament against the Iranians. 
They were received very enthusiastically, a standing ovation by 
the crowd in Iran. One of our wrestlers actually won his weight 
class, which is also a nice benefit.
    Senator Hagel. He must have been from Nebraska.
    Mr. Burns. He must have been, or Iowa.
    And we are trying very hard to bring Iranians here. So we 
brought a group of health professionals Harvard Medical School 
and to Washington. We are bringing disaster relief experts. We 
are trying to break down the barriers that have separated us 
from the Iranians for the better part of three decades. So that 
is very much a part of our policy.
    Senator Hagel. Would you give us a quick glimpse into what 
is going on at the U.N. today regarding the Security Council 
debate on this resolution? It appears obviously, as our 
colleagues have noted, that the Russians have come a 
considerable way in this. But where that, you believe, is going 
to go? And then how would that enhance our position, bringing 
together our allies in using not just a unilateral sanction 
which there is some question, as the chairman has noted and I 
suspect he is going to get back to you on that, on why 
unilateral sanctions maybe in this case are not a particularly 
effective.
    If you could give us a sense of what you believe is going 
to happen today and where that goes from today.
    Mr. Burns. Thank you, Senator.
    We hope to have a resolution passed in the Security Council 
by the weekend. This is a resolution sponsored by the U.S., the 
UK, France, Germany, China and Russia. We are all together on 
it. It would substantially increase the type of sanctions 
placed on Iran from the first resolution passed on December 23. 
It would add arms sales as a sanction. It would add sanctions 
on the IRGC, the Revolutionary Guard Corps Command. It would 
open up a process to eventually make progress on export 
credits. So we think it is a good one.
    We are working now with the other members of the Council, 
the non-permanent members, and we hope very much that South 
Africa, the current president of the Security Council, will 
want to negotiate with us in a productive way. But we are 
prepared to push this through because it is the right thing to 
do, to apply this kind of multilateral pressure on the 
Iranians.
    Senator Hagel. Thank you.
    Chairman Dodd. Thank you very much, Senator.
    Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman. Thank you, 
gentlemen.
    Secretary Levey, as I understand the statute, subsidiaries 
of U.S. firms are not barred from dealing with Iran as long as 
the subsidiary has no operational relationship to the parent 
company. Is that an accurate assessment of the current status 
of the law?
    Mr. Levey. Basically you are right, Senator, that currently 
foreign subsidiaries are not cutoff in that same way.
    Senator Reed. Do you have a current list and do you 
deliberately go out and identify those foreign subsidies of 
American firms that are trading with Iran? And can you give us 
that information?
    Mr. Levey. We do not have a comprehensive list of this. 
This is something which there is some ongoing effort in the 
Government, as you may be aware. The SEC has an Office of 
Global Risk where they require companies to make disclosures of 
information and then they try to put it out in the public 
domain so that investors are aware of information the SEC deems 
to be material of that purpose. But that is the status of kind 
of a governmentally created set of information.
    Senator Reed. It would just seem to me that that would be a 
very productive use of your time, to identify subsidiaries of 
American companies that are dealing in Iran, profiting from 
Iran, and taking those profits and sending them back to the 
parent company in the United States.
    Just simply, I think, that knowledge, publicly might go a 
long way in curtailing the activities of these companies.
    I presume from your response, there are a number of 
companies operating in Iran that have--there are subsidiaries 
of American corporations; is that correct?
    Mr. Levey. There certainly are some. I think there is 
probably a lot less than some people might imagine. I obviously 
do not know for certain.
    What I have been able to glean from sort of an anecdotal 
perspective is that a lot of companies are pulling out of Iran 
for much of the same reasons that we have already been 
discussing here, including moving subsidiary operations. Some 
of the ones that I think are more significant are making that 
same decision.
    Senator Reed. I think the tempo might increase if public 
attention was more focused, and you might be able to do that 
through your office.
    Just one other question about trade with Iran. Is Turkey 
still buying gas directly from Iran?
    Mr. Burns. I believe so, Senator.
    Senator Reed. Is there any effort on our part to talk to 
our NATO ally and convince them not to do that?
    Mr. Burns. We are trying to convince all companies seeking 
investment in oil and gas with Iran to not do it. We are 
jawboning pretty heavily, pretty seriously.
    A number of our allies, Turkey is a prominent one, a 
partner like India is another, have long-term oil and gas 
relationships. And we are trying to suggest that there are 
alternatives for the future.
    For instance, with Pakistan, India, and Afghanistan the 
alternative to Iranian gas would be Kazakhstan. And so we are 
trying to produce a movement toward a systemic shift away from 
reliance on Iranian energy. It is very difficult, obviously, in 
a neighborhood where countries are energy dependent.
    Senator Reed. Secretary Burns, again thank you for not only 
your testimony today but for your service over many years.
    You suggest, I think with some credibility, that in one 
sense the position of the Iranian government has weakened 
because of their growing isolation from the world powers. But 
in another sense, they have seen their strategic position 
enhanced. The regime in Tehran is now an ally of them. They 
have quite an active participation in western Afghanistan, 
contrary to the Taliban years, where they have councils with 
economic issues, they are building roads.
    The issue I have is Senator Dodd has shown this chart of 
the Revolutionary Guard and I think you have talked about it. 
But the long-term relationship between organizations like the 
Badr Brigade with the Quds Force with the Revolutionary Guard, 
now those people have been transformed into significant members 
of the Iraqi government. How does that complicate our 
relationship with Iraq and Iran?
    You talk about the Iranian influence in Iraq. Some of it is 
clearly hostile to our purposes. But much of it seems to be at 
the invitation of Iraqi political figures that we support and 
deem legitimate. And how do you parse that very difficult 
dilemma?
    Mr. Burns. I think it is a bit of a mix, as you suggest. On 
the one hand, the Iranians have clearly profited from the fact 
that Saddam Hussein has fallen from power and now no more. They 
have clearly profited from the fact that the Taliban 
disappeared as a power center in Afghanistan.
    But on the other hand they are more isolated on the nuclear 
issue than they were a year ago or 2 years ago. They have 
played their cards wrong. They have not given any indication of 
interest in negotiations, which have stiffened the spine of 
countries like Russia. So I think they have actually 
miscalculated on the nuclear issue.
    I think their credibility has been hurt in the Middle East 
and around the world by Ahmadinejad. Now he is popular in some 
parts of the Middle East because he was seen to be Hezbollah's 
protector in those parts of the Middle East where Hezbollah is 
popular.
    But on the other hand, he is the guy who says that another 
state, a member state of the United Nations, should be wiped 
off the map of the world, Israel. He has denied the Holocaust. 
T hat has hurt him very much in Europe.
    And I think that Iran now has responsibilities in Iraq that 
it did not have before. So we are suggesting that they have to 
meet those responsibilities. You are right that many of the 
Shia leaders in power in Baghdad sought refuge in Iran during 
the Saddam years. And so there are personal and institutional 
and official links between some of the Shia leaders and their 
institutions and Iran.
    But now Iran has to act as a normal state and help keep 
Iraq together and be more responsible than it has been. And I 
am not sure Iran is meeting that test either.
    So overall while their strategic position is improved in 
some ways, I think on balance they are weaker today than they 
were a year ago, and they have got much more international 
opposition to them on a number of fronts.
    Senator Reed. Is that weakness a function of declining oil 
prices in some respects?
    Mr. Burns. They have got a problem with energy because they 
are importing about 40 percent of their gasoline, which is a 
great irony considering the fact that they are the second 
leading oil producer in the world. They have set prices 
artificially low and so that has been a major expense for the 
state. There is a profligate use of energy by people in terms 
of the use of automobiles, for instance, in Tehran itself.
    Senator Reed. It sounds familiar.
    Mr. Burns. And so they are facing an energy challenge. And 
as the energy prices dip over time, their ability to finance 
Hezbollah and Hamas is going to be decreased.
    Senator Reed. Thank you, Mr. Secretary. Thank you, 
gentlemen.
    Chairman Dodd. Thank you, Senator Reed.
    Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Thank you, Mr. Chairman. Welcome, Secretary 
Burns. I have a question for you.
    The media has recently reported a chlorine gas aspect to 
the explosive devices in Iraq, and I made note of your comments 
here on the Revolutionary Guard that they were making many of 
the explosive devices in Iran and then exporting them into 
Iraq. Is that chlorine coming out of Iran?
    Mr. Burns. Senator, I just have no way of knowing. It was 
very worrisome to see this chlorine gas explosion a couple days 
ago. It is not the first that we have seen and so we are trying 
our very best to do what we can to diminish the IED and the 
bomb threats but they are continuous.
    What we know about Iran, what we do know, is that they have 
provided these explosively formed projectiles, the 
sophisticated IED technology, to Shia militant groups. We have 
seen the markings of the Iranian government. We know that for 
sure. And we know that the Shia militant groups have used those 
devices to attack American soldiers.
    We think we have a general rough estimate of how many 
soldiers have been killed by that and we saw the level of 
frequency increase in the latter part of 2006.
    But we have no indications that I know of that Iranians are 
actually conducting the attacks. These are Shia militants 
inside Iraqi doing so.
    Senator Allard. If we should happen to tie that to Iran, 
how does the chemical weapons treaty kick in? Or does it at 
all?
    Mr. Burns. Senator, I just have no indication whatsoever 
that Iran is behind the chlorine gas attacks. Obviously we are 
investigating it with the Iraqi authorities. I just would not 
want to speculate on a hypothetical basis because it would be a 
very serious charge I would be making and I do not want to do 
that today. I do not have the intelligence knowledge to do 
that.
    Senator Allard. I understand. Let me structure that 
differently.
    How does the chemical weapons treaty handle sanctions?
    Mr. Burns. Senator, I would be very happy to reply to that 
question in writing. I, myself, am not an expert on that 
particular treaty. But it is a good question and I will be 
happy to give you a written answer on it.
    Senator Allard. Good. I am glad we have got your attention 
on that. It is something I have thought about. If you could get 
a written response I think it would be helpful both to me and 
the Committee.
    Also, I would like to follow up a little bit on Senator 
Reed's line of questioning on the importation of natural gas 
from Iran to Turkey. My information is that is occurring. But 
when they built the pipeline across Iran to carry Turkmenistan 
natural gas over to Turkey, and I guess the countries built 
their respective parts of that pipeline, do we have any 
monitoring going on as to whether Iran is injecting any natural 
gas into that line that is transporting from Turkmenistan over 
to Turkey?
    Mr. Burns. Senator, I do not know the answer to that 
particular question, but again I would be glad to investigate 
that for you, see what we know inside of our Government, and 
report it back to you.
    Senator Allard. I would like to know just what level of 
monitoring is going on there, if any. That is the bottom line 
on that question. So again, if you can provide that in writing, 
I certainly we would appreciate it and probably the Committee 
would, too, also if you would, please.
    Let me ask you this question: how does the State Department 
make the determination to provide a waiver of sanctions? What 
is the process? And what criteria are used? Can you share that 
with me?
    Mr. Burns. We have a waiver provision under the law that 
has been given to us by the Congress, the first Iran Sanctions 
Act, and now the reauthorization of 2006. If we believe that a 
particular foreign company has violated the provisions of the 
Act, then we have a responsibility to report that to you, and 
the president has the possibility of using the waiver authority 
in that instance.
    As I said to the Chairman earlier, I also served in the 
Clinton Administration. I am a foreign service officer. I can 
check this but I believe that the Clinton and Bush 
Administrations have only used that waiver authority once.
    Senator Allard. Where I am driving my question is to 
establish that belief what criteria do we rely on?
    Mr. Burns. We have a very active effort that encompasses a 
number of departments, and both Mark and Stu can speak to this, 
to try to track what companies are trying to invest or seeking 
investments with Iran in oil and gas.
    As I said before, we have asked our Ambassadors to be very 
active. I know we have in the case of Shell, Royal Dutch Shell. 
I know we have with the Chinese, because I made the demarche to 
the Chinese to say to these companies and countries we think it 
would be a mistake for you to finish an investment deal.
    A number of the deals that are on the chart that the 
Chairman had of more recent vintage are ideas on paper or 
preliminary deals that have not yet been consummated. So we do 
have an opportunity here to try to convince these companies not 
to go forward.
    And frankly, we also tell them that there is the Iran 
Sanctions Act, that the Congress is considering modifications 
in it. And so the specter of that is useful to the 
Administration, as I think it was to President Clinton's 
Administration.
    Senator Allard. I did not want to get into a repeat 
response that you had given to Senator Reed. My understanding 
is the source is the SEC records and what they have online.
    I guess to pursue this issue a little further, could we be 
accused, in any way, of having a double standard in the way 
that we deal with various countries?
    Mr. Burns. I would not say that. I think that we have 
applied pressure fairly across the international political 
spectrum. We have been as tough on some of our West European 
allies as we have been on the Chinese in terms of these 
prospective oil and gas deals, if that is what the question is.
    Senator Allard. Yes, that is.
    Mr. Burns. We are pressing on all fronts. We think that oil 
and gas investment with Iran is wrong. It is contrary to the 
international interest to isolate and pressure that regime.
    Senator Allard. I just bring that question up because I 
would be concerned about how our allies might react when we 
deal with some of these sanctions.
    Mr. Chairman, my time is about ready to expire, so thank 
you
    Chairman Dodd. Thank you. And by the way, the written 
questions and requests for submissions we have already raised 
with the Secretary, and he has promised to comply with that.
    Mr. Secretary, we have about three or four members and I 
know the time is getting beyond what we promised you could 
leave. If we could maybe ask my colleagues, instead of 7 
minutes, 5 minutes at least to try to get these questions in so 
that everyone has a chance.
    You have some interest. We had over two-thirds of the 
members of this Committee show up this morning to be a part of 
this. So I will try and move along here. You let us know when 
the hour has arrived you just have to leave and we will respect 
that. So if you can stay a few more minutes, we would 
appreciate that.
    Mr. Burns. Mr. Chairman, if you would permit me, I am very 
open to talking to members and I would be happy to see you 
individually, too.
    My problem is I have a boss who is always on time and I am 
expected in his office, in the Oval Office, at 11. And I have 
got to get by car from here to there.
    And I do not mean to be disrespectful, but I am supposed to 
attend this meeting with him with the Prime Minister of New 
Zealand.
    I would be happy to come to each of the Senator's office to 
talk to them, or I would be happy to come back to this 
Committee at anytime to testify in open testimony.
    I apologize for the situation.
    Chairman Dodd. No, not at all. In fairness to the 
Secretary, he did promise at the beginning that was going to be 
the circumstances. And I appreciate that very much.
    Our other two members will stay here and so we will 
continue pursuing this.
    But thank you very much. I must say, Secretary Burns, the 
Administration is very fortunate to have you. You are a voice 
of moderation and rationality in all of this and we appreciate 
it. I do certainly, anyway.
    So thank you very much.
    Senator Carper. Mr. Chairman, I would be delighted to 
accept the offer from the Secretary.
    When you have a chance to come by and visit with us, I hope 
before the end of this month, I would be especially interested 
in talking about a piece that was written by Walter Isaacson in 
Time Magazine about a week or so ago, following his visit with 
the Iranian ambassador to the U.N.
    Thank you.
    Chairman Dodd. Thanks very much.
    Senator Bayh.

                 STATEMENT OF SENATOR EVAN BAYH

    Senator Bayh. Thank you. And Mr. Secretary, thank you. 
Gentleman, I am grateful for your efforts. This is an important 
challenge facing our country.
    You have had some success. I think you hear from this 
Committee and on my own behalf, I urge you to do more.
    Secretary Levey, I would like to start with you. As I 
understand it, we have been bringing pressure to cutoff 
transactions with regard to two of the Iranian banks; is that 
correct? Why not all of them?
    Mr. Levey. That is an excellent question, Senator. Here is 
what our thinking is on that. We are trying to establish, as 
Under Secretary Burns said, an international coalition to bring 
pressure on Iran.
    What we found as the most effective way to do that is not 
just to exercise power--and I think you will find that this is 
going to be the theme of a lot of answers--not just exercise 
the power that we have, but to exercise it in a way that brings 
others on board.
    So, what we have done with respect to the two banks that we 
have taken action against is not just cut them off, but to 
explain why we have cut them off. So with Saderat, it was about 
terrorist financing. With Sepah, it was about proliferation 
finance.
    The result of that has been to really cause others around 
the world to take a close look at whether they are going to do 
business with these banks.
    Senator Bayh. Are you telling us there is no evidence that 
the other three Iranian banks have been involved in similar 
activities?
    Mr. Levey. Not at all, and I certainly do not want to 
suggest that we will not take further actions at the 
appropriate time.
    What I am saying is that we thought it was the appropriate 
time and we had evidence that we could put in the public domain 
with respect to those banks. As Under Secretary Burns 
mentioned, we are about to see the possibility of Bank Sepah 
listed at the United Nations and in the Security Council Annex, 
which would be a very dramatic step, something which I do not 
think would have been possible if we had just said we are going 
to cutoff all Iranian banks.
    Senator Bayh. Perhaps. Again, I think what you have done to 
date is good. But I think we need to keep the pressure on and 
be even more aggressive. The clock is ticking. We do not know 
with precision when Iran will reach the point of no return with 
regard to a nuclear capability. The effort here is to try and 
avoid the necessity to resort to military force.
    And so we want to be a aggressive sooner rather than later 
when it comes to this situation.
    And so I would encourage a very thorough scrutiny of these 
three additional banks. And if the actions taken with regard to 
the two have had a beneficial impact, as I understand it, with 
regard to increasing the inconvenience and cost to Iran, why 
not do more with regard to the other three?
    Mr. Levey. I take your point and I think in principle we 
are very much in agreement. We want to be as aggressive as 
possible and as effective as possible.
    Senator Bayh. Which of the international banks that you 
have been trying to convince to not do business with the two 
Iranian entities have not been cooperative?
    You spoke about the beneficial impacts of risks to 
reputation. Let us put that on the table here. Who has not been 
cooperating?
    Mr. Levey. I think generally speaking, I think that all of 
the banks have been taking this seriously. And every single 
bank that we have engaged with has told us that they are either 
cutting back or cutting off entirely their business with Iran 
or with respect to these specific banks.
    Senator Bayh. Is there a way to verify that when they make 
those statements? Or are they just facilitating transactions in 
euros rather than dollars?
    Mr. Levey. Some of them have been straightforward with us 
that they are cutting off only dollar transactions. I am glad 
you asked this. Some of them say we got your message, we are 
cutting off the business in dollars.
    That is what I think they think they need to do in order to 
comply with our law. But that is the beginning of the 
conversation, not the end, from my perspective. Because then I 
ask them, what is the difference in the risk of the 
transactions. If you really want to stay away from the 
terrorist financing transactions or the proliferation financing 
transactions, how can you be sure you are doing that if you are 
doing it in euros?
    I do not think there is a really intellectually coherent 
response to that question.
    Senator Bayh. When we encounter that situation, since they 
do not have an intellectually coherent response, what do we do? 
What is the sanction for them at that point? We cutoff a Macao 
bank for facilitating a North Korean business. If European 
banks are just doing a bait and switch, why shouldn't they pay 
some consequence?
    Mr. Levey. I think--there is a large step--to be honest 
with you, my inclinations are the same as yours, Senator, I can 
assure you. But what was going on in the Macao bank was----
    Senator Bayh. I am trying to help you here.
    Mr. Levey. I understand.
    What was going on in the Macao bank was illegal under the 
domestic law of any country and also putting--facilitating 
criminal activity. What is going on when a bank in Europe 
decides to do business in euros with an Iranian bank is not 
illegal under European law. And so it is a big step for us to 
then take the dramatic action that we took against Bauco Delta 
Asia in Macao against a European bank for doing that.
    I think what we have to do, at least in the first instance, 
is really try to persuade----
    Senator Bayh. Should it be illegal under American law, 
facilitating transactions with a state that facilitates 
terrorist acts, that is attempting to acquire a nuclear 
capability. Should that be illegal under American law?
    Mr. Levey. I think that while it is tempting to say yes to 
that question, I think we are getting into an area where the 
reaction to that would be real hostility for the 
extraterritorial application of U.S. law.
    What we are doing by trying to persuade these banks is 
already, I think, viewed by some as trying to project our own 
policies internationally. It is having some effect. If we were 
to make it illegal for banks to do business in the United 
States if they did business with Iran, I think that would be a 
very, very----
    Senator Bayh. So we have to weigh the risk of a backlash to 
the attempted extraterritorial application of U.S. law versus 
the facilitation of Iran obtaining a nuclear capability. Those 
are the two risks we have to weigh?
    Mr. Levey. I think--that is one way of putting it. I think 
the way others would describe that is that they will say we do 
not want to do any business with Iran that we think is 
advancing their proliferation efforts. But we want to do what 
we think is legal business with Iran.
    And that is what I run into when I have this discussion, 
that the business they are doing is not advancing their 
proliferation, it is not advancing terrorism, that they are 
being very careful. That is the way the conversation actually 
goes when we have it.
    Senator Bayh. The reason we are here today is the national 
security interests of the United States of America are 
implicated. I understand the possible financial backlash. But 
there are greater stakes in this dialog than that.
    Mr. Chairman, my time is expired. I did have one question 
for Secretary Burns, but I guess I will have to follow up on 
that later.
    Secretary Levey, you are not as involved as Secretary Burns 
would be with the application or the lack thereof of the 
Iranian Sanctions Act; is that correct?
    Mr. Levey. That is correct.
    Senator Bayh. Lucky you. I did have some questions about 
that, Mr. Chairman, why in the last decade there has only been 
finding of violation. I find that to be rather incredible. But 
I guess that will be a conversation for another day.
    I would just conclude, Mr. Chairman, by thanking you for 
conducting this hearing. I think it is very important.
    And gentleman, I would urge you on. This seems to be having 
some impact but we need to extend that.
    Chairman, I am grateful to you for emphasizing that today.
    Chairman Dodd. Thank you, Senator.
    We raised the issue earlier, in fact we had the chart up 
here talking about the $126 billion in various transactions 
where there has been zero sanctions against that kind of 
business.
    Your questions were excellent. Thank you very much.
    Senator Casey.

              STATEMENT OF SENATOR ROBERT P. CASEY

    Senator Casey. Chairman Dodd, thank you very much for this 
hearing. And I want to thank both of our witnesses for your 
testimony and for your public service.
    Chairman Dodd. By the way, let me just point out to Senator 
Bayh, as well, Secretary Burns has agreed by the way, in a very 
prompt fashion, to respond, knowing his time was going to be 
limited here, to written questions. So I would urge you to 
frame those questions, submit them to the Secretary so we can 
get some answers right back to complete the hearing so we have 
a full record on these issues.
    Thank you.
    Senator Casey. Thank you and I, too, had questions for 
Secretary Burns and will meet him at another time.
    I wanted to get back to the issue of terrorism because it 
was cited not only in your testimony, Secretary Levey, but also 
in Secretary Burns's testimony. He said, and I'm quoting from 
age 10, this is a summary of the section on terrorism. He 
concludes with this sentence in the section. He says, and I am 
reading halfway through the sentence, ``We are disrupting 
Iran's ability to support groups such as Hezbollah and Hamas 
while increasing the political costs of the support.''
    You say, in your testimony, which I guess is on page two, 
that you speak of Tehran arming and funding and advising 
Hezbollah, as well as supporting the Palestinian Islamic Jihad 
and Hamas. You go through there.
    The question I have is based upon the information we have 
to date, and based upon that long history that you point to, 
what has happened in the last year in terms of Iran's support 
for those organizations due to, or maybe there is no connection 
here, but due to the fact that Iran has been let us say 
distracted because of the international pressure on the nuclear 
question. Is there any indication that they been distracted 
from that? Or has that support intensified or increased? Just 
say in the last year.
    Mr. Levey. Senator, the information that I have is not what 
I would like to be able to report to you. I do not think that 
their support for terrorism has decreased in any way. All the 
estimates that we have in our assessment is that they are 
sending over $200 million a year in that general amount to 
Hezbollah alone. They remain the primary funder for Hamas, and 
the Palestinian Islamic Jihad.
    With respect to the Palestinian Islamic Jihad, they even 
condition their funding on attacks, is the information we have.
    So their support for terrorism is not waning in any way.
    Now the action that we took with respect to Bank Saderat, I 
would just take 1 minute to mention that, is disruptive in 
terms of making that support more difficult because that really 
was the node that they were using to supply this money, 
particularly to Hezbollah.
    As I think some of the Senators understand, with respect to 
Hezbollah, it is difficult for the United States to get at that 
as effectively as we would like to because the European Union 
does not recognize Hezbollah as a terrorist organization, which 
is something we would very much like to see changed. And so 
that is something we are working on quite diligently.
    Senator Casey. You said that with regard to Hezbollah, $200 
million per year?
    Mr. Levey. Yes.
    Senator Casey. What do you know about the other two? Do you 
have a specific number you can apply or attach to Hamas or 
Islamic Jihad?
    Mr. Levey. I do not have a specific number that I can give 
you, Senator, but it is our information that they are the 
primary funder, particularly with respect to Palestinian 
Islamic Jihad, and that, as I mentioned, that they condition 
their funding on the use for attacks.
    Senator Bayh. With regard to those two or frankly any other 
terrorist organization, if it is not part of the record of this 
hearing, if you are able to calculate and determine that and 
then submit it as part of your testimony, then I would ask you 
to that.
    Mr. Levey. We will do the best we can. It may have to be, 
as you might understand, it may have to be a classified answer.
    Senator Casey. OK.
    Also, with regard to these questions that center on 
terrorism, I know that when Secretary Burns said the sentence I 
read before ``We are disrupting Iran's ability to support these 
organizations.''
    What, in particular, has been done, if it is not 
classified? And second, what can you tell us in terms of 
amplifying the answer to that question about the impact it has 
had?
    In other words, what strategies are in place and how are 
they worked?
    Mr. Levey. The fact that Iran is a state sponsor of 
terrorism, designated as such by the United States, as Under 
Secretary Foulon indicated in his opening statement, subjects 
them to formal sanctions by the United States in terms of what 
can be exported to Iran. So there is that.
    In addition to that, we have been highlighting exactly what 
Iran is doing. That is something that is important. We took the 
action against Bank Saderat that I mentioned, which cut off the 
easiest way that they were funneling the money to these 
terrorist organizations which is a way of disrupting their 
support. They have to go to something that is much more 
cumbersome like shipping cash in trucks across Syria into 
Lebanon in order to fund this, which is much riskier, for 
obvious reasons.
    But I think maybe the most effective thing that we can be 
doing is focusing on the IRGC. Under Secretary Burns mentioned 
that we are trying to get the IRGC mentioned in this follow-on 
resolution. But as I think Senator Shelby said earlier, the 
commander of the IRGC was already listed in the first 
resolution.
    So one thing that I have been doing is making the point to 
my colleagues around the world, both in the private sector and 
the public sector, that under 1737 that already has been passed 
calls for the freezing of assets not just for the individual, 
Safavi, who is listed, but for all the entities under his 
ownership and control, which obviously already includes the 
IRGC.
    So we have been sharing lists of companies that we think 
are controlled by the IRGC and trying to put pressure on the 
IRGC as that organization within Iran that is its coercive arm, 
that is being used to sort of export terrorism around the 
world.
    Senator Casey. My last question is this, I have 1 minute 
left, With regard to your ability individually but also 
obviously our Government, our ability to have a positive and 
constructive impact on the question of how we disrupt their 
terrorist links what, if any, and I am assuming there are some, 
but what, if any, stumbling blocks or obstacles are in our way 
with regard to the Europeans? What is the basic impediment to 
doing that in terms of our ability to engage the Europeans to 
do what we think they must do in terms of combating this 
terrorist threat?
    Mr. Levey. The major stumbling block, the one that looms 
larger than all the others combined, is that the Europeans will 
not recognize Hezbollah as a terrorist organization. It is a 
terrorist organization. I think that some in Europe agree with 
that but the Europeans will only act as a unanimous body by 
consensus. And so they have not been willing to recognize 
Hezbollah as a terrorist organization.
    Since Hezbollah is often the first stop for Iranian support 
for other terrorist organizations, that eliminates sort of our 
best opportunity to stop that external support for terrorism 
coming from Iran. That would be the most effective change if 
that could be done.
    Senator Casey. Thank you.
    Chairman Dodd. Thank you very much, Senator.
    Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thanks, gentlemen. And thanks for staying. 
You do not have a meeting with the President at noon, do you?
    Mr. Levey. No such luck for me.
    Senator Carper. This may have been covered before I 
arrived, and if it has been I would just ask you to bear with 
me and comment on it, if you will. This may be more in the 
purview of Secretary Burns, but if you could cast some light on 
it, I would appreciate it.
    I have been following the back and forth between Russia and 
Iran with respect to Russia's support and willingness to go 
forward to enable Iran to complete the work on their nuclear 
power plant, which is a project I think may have been in the 
works for several decades. I think the Russians have been 
involved in for a number of years. The Russians are asserting 
that they are not prepared to go forward because Iran has not 
been making payments, I guess, since January.
    I am not sure in reading the press accounts who struck John 
or who struck Ivan or what is going on here. Do you all have a 
sense for what is happening here? What is going on?
    Mr. Levey. To be honest with you, Senator Carper, I think--
all I would be doing is reflecting what Under Secretary Burns 
tried to express on this issue before, which is that we have 
seen a change, a slow change in Russia, in terms of their 
willingness to stand up against Iran's nuclear program. The 
most significant thing being that they are currently sponsoring 
this resolution that is being considered at the United Nations 
right now. They voted for the first resolution to sanction Iran 
for its defiance on the nuclear program.
    I do not know the details of this particular dispute 
between Russia and Iran and how that plays into it, but this is 
an encouraging sign that at least on the resolutions they are 
standing up against it.
    There is certainly a difference, as Under Secretary Burns 
said, between our view of Iran generally and our relationship 
with Iran than Russia's, which has a long-standing trade ties 
and so forth. But we are starting to see that, at least on the 
nuclear issue, they are more on the same page with us.
    Senator Carper. There is a question whether or not Iran has 
actually been making their payments. Do we have any ability to 
monitor that or to know?
    Mr. Levey. I am not sure that we do. I would only be 
speculating. I do not know whether we do or not.
    Senator Carper. Thank you.
    Is it Secretary Foulon?
    Mr. Foulon. Foulon.
    Senator Carper. Foulon.
    Mr. Foulon. It embarrassed me when I used to play 
basketball.
    Senator Carper. Welcome to this March madness here.
    According to your testimony, I think there are a couple of 
instances in which Commerce is, I believe, involved in the 
sanctions against exports to Iran. First, when transferring 
sensitive technologies to Iranian nationals, I think those are 
deemed exports within the U.S.
    And second when sensitive technologies are exported to 
another country and that country wants to re-export those 
technologies to Iran.
    In both cases exports wanting to export need to receive, I 
believe, special licenses from your department, from Commerce. 
A couple of questions if I could.
    First of all, to what extent has commerce evaluated how 
well export controls work for Iranian nationals and re-exports?
    Mr. Foulon. Let me take it in the two different pieces, the 
first piece around deemed exports which, as you pointed out, is 
the transfer of controlled technology to non-U.S. citizens in 
the United States. In terms of how that program works, just so 
you are clear and everybody on the Committee is clear, is that 
we are trying to implement the regulations in such a way that 
American research institutions, universities, laboratories have 
access to Iranian citizens without those Iranian students then 
being able to take that information back.
    As we evaluate the program through our intelligence open 
source and other ways follow the careers of the various Iranian 
students or researchers who receive the deemed export licenses, 
then we are able to evaluate the effectiveness. Last year we 
provided 38 licenses to Iranians.
    To this point, without going into details in open session 
that we cannot do, in closed session we would be delighted to 
do so, we believe the program is being implemented successfully 
with respect to those applications that we receive. The gap 
that we need to fill now is to make sure that universities, 
industries, businesses, research laboratories fully understand 
the regulations, fully understand the need for this extra 
deemed export license screening.
    That is why we do over 100 outreach events every year, to 
universities, to industries, to others to make sure they are 
aware.
    In terms of the re-exports, for most re-exports of 
controlled items by American companies or by American persons 
into Iran, those are covered by the Department of Treasury and 
the OFAC licenses.
    Where we, where the Department of Commerce has a role is if 
it is an item that we call EAR99. It it one that does not 
appear on any the control lists but is kind of all other 
things, a catchall category. If a non-American citizen outside 
the United States is exporting an EAR99 item to an end user 
with proliferation or terrorism concerns, then we must do the 
licensing for that with a presumption of denial.
    Since I have checked back as far back as 2000, we have had 
no instances of that occurring, Senator.
    Senator Carper. Thank you.
    A question both, if I could, for you and Secretary--do you 
pronounce your name Levey?
    Mr. Levey. I pronounce it Levey but I do not take it 
personally. So whatever you call me.
    Senator Carper. I know a fellow whose last name is spelled 
closely to yours and he pronounces it Levy, so you guys have to 
get together and straighten this out.
    A question for both of you, if I could. The Iranian regime 
has sought, I think for some time, to acquire as we know, 
technology for its nuclear program, its nuclear program, and 
its aging military platforms by using a middleman, if you will, 
I think in this country, I think in Canada, maybe Europe to 
purchase technology and illegally export it to Iran.
    I believe in the middle of December last year a report to 
the Financial Times quoted a U.S. Administration official 
saying something to the effect that increasing numbers of 
controlled items are being diverted from ports in the United 
Arab Emirates to Iran.
    I was wondering if you all might detail for us the 
cooperation you are receiving from the international community 
in combating the exporting of sensitive technologies to Iran? 
And specifically, is the United Arab Emirates taking the 
necessary measures they need to control, to ensure that 
controlled export items are not being diverted to Iran?
    Mr. Foulon. Thank you, Senator. You put your finger on a 
very important issue, the issue we call the transshipment 
issue. It is one we have given great attention to over the last 
four or 5 years. We have tried to develop a tool kit of 
policies, procedures that we can use in dealing directly with 
the countries of transshipment concern, the areas of 
transshipment concern.
    So before I turn to the United Arab Emirates, let me lay 
out in a little bit more detail kind of how we view the tool 
kit and how we implement those policies, which we tailor to 
each of the individual transshipment countries. It is 
everything from, with Hong Kong for example, we have annual 
meetings, close enforcement, data exchange, close enforcement 
cooperation. Hong Kong has a very sound export control law and 
they implement it very well.
    So countries have a law, they have how well they implement 
the law, they have cooperation with us in terms of data 
sharing, in terms of enforcement cooperation. In some we had 
actually have Bureau of Industry and Security Commerce 
Department people on the ground who do spot checks, end use 
checks to identify the magnitude of the diversion concern.
    With respect to the United Arab Emirates, we have been in 
close contact for the past several years in terms of 
encouraging them to implement, to pass and implement an 
effective export control law that would help screen out 
sensitive items going into Iran. As you know, geography is 
destiny. And no one's geography is more destined than that of 
the United Arab Emirates.
    We were delighted 2 weeks ago when the UAE Minister of 
Economy, Sheikha Lubna bint Qasimi, announced that their export 
control law was in the final stages. So we will look forward to 
seeing that export control law passed. We will provide 
technical assistance to help them implement it and enforce it. 
We have an officer on the ground and we will continue to 
cooperate and exchange data.
    So based on the statements that the Minister of Economy 
said 2 weeks ago, the United Arab Emirates is on the right 
track, we believe.
    Let me just close by saying that we are always looking at 
the list of tools, the types of policies we have. Which is why 
2 months ago we first raised the idea of creating a new country 
group. Our exports controls divide countries into groups. A is 
the NATO allies and so on. To create a new Country Group C, 
which would be countries of diversion concern.
    So if we find that there are countries that are not 
adequately protecting it from their side we will protect it 
from our side, using Country Group C.
    Senator Carper. Thanks very much.
    Mr. Chairman, thank you for your indulgence.
    Chairman Dodd. Not at all. Thank you.
    I am going to come back to this, Secretary Foulon, because 
we have one agent in the United Arab Emirates. With all due 
respect, this is not what I call a very aggressive program 
considering this is a major port of entry and transit. The idea 
that we have one person on the ground there to monitor all of 
this is--well anyway, it speaks for itself, quite obviously 
here. We have to do a better job than that. We will come back 
to it.
    Senator Menendez.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman.
    I want to thank you for calling what I think is an 
incredibly important and timely hearing early on in the 
Committee's agenda.
    I appreciate the fact that we did not let the Iran 
Sanctions Act expire the end of the last session. But I am one 
of those, Mr. Chairman, that as I listened to the testimony 
here and the testimony that preceded before I got here but I 
got a good sense of it, it seems to me that it is not enough 
that our current sanction law permits foreign subsidiaries of 
United States companies to violate the spirit of the U.S. law 
by investing in Iran's energy sector. That the current 
sanctions law against Iran continues to allow U.S. pension 
funds to invest in foreign companies which invest in Iran 
without informing their investors. That, in fact, the current 
sanctions law allows a Presidential waiver that is so huge and 
broad that it does not provide even for true congressional 
oversight.
    And that it is not enough to have renewed current sanctions 
that allows the administration to ignore certain investments in 
the Iranian energy industry so as to avoid either applying 
sections or waiving them. And that is the point I want to pick 
up with you, Secretary Levey.
    There has only been one determination of a violation. I 
know that is done by the State Department. But nonetheless, 
there has only been one determination of violation in nearly a 
decade of what was ILSA.
    But in the same period of time the Energy Information 
Agency, a part of the Department of Energy, and the 
Congressional Research Service have both reported major 
investments. It seems to me that how can we totally dismiss the 
findings of another arm of the U.S. Government and ignore them 
in pursuing sanctions against those companies?
    Mr. Levey. I had a feeling I was going to be upset that 
Under Secretary Burns got away when he did.
    As you indicated in your question, the Iran Sanctions Act 
is administrated by the State Department, but I think----
    Senator Menendez. I know you all said you work so closely 
together in the comprehensive nature of enforcing this that I 
am sure that you have some insights into it.
    Mr. Levey. I am not going to be able to hide.
    I think the general answer applies to the Iran Sanctions 
Act, it applies to a lot of the other things you mention in 
your question about what we do with respect to foreign subs, 
forced divestment, a lot of the other things I know people are 
thinking about.
    I think the basic response, and then we can perhaps discuss 
it in more detail, is we want to put as much pressure as 
possible on Iran. The best way to do that, as Under Secretary 
Burns said at the outset, is to have a broad coalition that 
will all work together to put pressure on Iran.
    If we start sanctioning European companies or Japanese 
companies or fill-in-the-blank companies for investing in Iran, 
then there will be a kind of backlash against us and it has the 
chance of disassembling the coalition.
    Senator Menendez. You mean we will get weaker sanctions 
than the ones that we have right now?
    Mr. Levey. I think the theory is that potentially we would 
not get any sanctions at the United Nations without having a 
coalition.
    Senator Menendez. As I look at the language even of what is 
going to be ratcheted up now, it is all a suggestion that 
member companies not do X, Y, or Z. But it is not a ban against 
doing X, Y, or Z.
    Mr. Levey. I think you are right, Senator. And as I think 
you know, we have been advocating for stronger resolution at 
the U.N. in the first instance, and I think would support a 
stronger resolution in the second instance. What we are trying 
to do essentially is this is what we think the market will 
bear.
    Senator Menendez. Can I ask you this? There are media 
reports that suggest the Administration is considering 
sanctions against companies investing in Iran's oil sector. Can 
you shed any light on that? Have you been part of those 
discussions?
    Mr. Levey. I have seen the same media reports. What I do 
know, and I do not know whether there is anything internally 
going on in the State Department, there may be. But I do know 
that we have been talking to these companies that are 
considering these oil investments. I know that the Treasury 
Department has been part of some of those discussions where we 
are explaining to them, frankly, that if they do go forward 
with these investments that sanctions are certainly a 
possibility.
    And even aside from the sanctions that one of the things 
that we say to them is if you invest in this oil sector, what 
you are doing is helping this regime generate income that will 
be put toward all the policies that we have been discussing 
here today that are so negative, their nuclear program, 
terrorism, et cetera. So we do try to persuade.
    And with some success, as the Chairman said. Not complete 
success, but with some success.
    Senator Menendez. Let me ask you something that maybe you 
can help me with here, understand the nature of the law a 
little better.
    Under existing U.S. law if a U.S. company invest $20 
million over the course of a year in Iran's energy sector, the 
president would have to impose sanctions; is that correct?
    Mr. Levey. I do not know that that is the case. As I 
understand it, that is not the case, that it is not a 
mandatory----
    Senator Menendez. He could waive it?
    Mr. Levey. There is a waiver provision and there is also 
investigations that have to go on.
    Senator Menendez. But assuming there is a determination 
that a U.S. company invests $20 million over the course of a 
year in Iran's energy sector. Does the president have 
discretion from imposing sanctions?
    Mr. Levey. I could be wrong with this. I do not think a 
U.S. company is permitted to do that.
    Senator Menendez. But if a U.S. company does that through a 
foreign subsidiary?
    Mr. Levey. The rules with respect to foreign subsidiaries 
are somewhat different, that essentially if a U.S. company is 
using a foreign subsidiary to evade our sanctions--and this is 
something we have to determine on a case-by-case basis--then we 
can investigate that and take action against them.
    But if their foreign subsidiary is actually acquired for 
other purposes and is not being used specifically to evade our 
sanctions, then it is permitted to do business with Iran.
    Senator Menendez. But if they have a foreign subsidiary and 
make that investment through that foreign subsidiary, you are 
telling me that if that is not their primary purpose then they 
can avoid the sanctions regime?
    Mr. Levey. I think you are right. I do not know whether the 
standard is primary purpose or not. So I would not want to say 
that but I think you are right.
    Senator Menendez. I think, Mr. Chairman, this is one of the 
big problems we have, U.S. foreign subsidiaries, as I 
understand it, can actually make such investments. They go 
basically without the purview of the sanctions regime. And so 
therefore those who believe that an economic enterprise is more 
important than the security of the United States are allowed to 
do so.
    This is just one of the many problems that we have with a 
law that is not vigorously applied, it has had only one finding 
in a decade, and that we talk about we want to act tough with 
Iran. And it seems to me we act like a pussy cat along the way.
    I will save the rest of my questions for Secretary Burns, 
since I think that is where the bulk of them might have to be 
answered.
    Chairman Dodd. Thank you, Senator.
    Let me point out, as I understand it on this last point 
that Senator Menendez has raised here, is there can be no U.S. 
personnel involved in the subsidiary and its efforts have to be 
totally independent of the parent. I think those are additional 
criteria that are included in that.
    But obviously, at the end of the day, it could have these 
additional criteria if the resources continue to flow and 
provide an economic support for activity and increase the 
coffers of Iran, then obviously the purpose behind it seems to 
be circumvented. If the intention here is to limit the amount 
of financial support for this government and its activities 
then these provisions--I want to pick up on the point Senator 
Menendez has raised, and others, Senator Bayh raised it. I 
think all of us have to one degree or another here, Senator 
Reed.
    And that is this call. This chart, I do not have it up here 
any longer, but you have got it in front of you, going back to 
1999. As Secretary Burns pointed out, some of these are 
apparently not yet contracts but discussions, the latest being 
with a Malaysian company for $20 billion by the way. This is 
providing a revenue source of $126 billion in the last 6 or 7 
years to Iran, companies that clearly would be subject to 
sanctions based on the Iranian Sanctions Act. You can waive 
them and so forth. Not a single one has been called on this.
    If we are trying to get, and again you can make a case, and 
you have here, that the reaction to this could be a negative 
one on the part of various allies around the world. But I think 
Senator Menendez raises a very legitimate point, in the absence 
of not doing anything here we are not getting stronger 
sanctions out of the multilateral group here, but weaker ones, 
in fact.
    And that if you want to get serious about it, or the 
administration ought to take the view that the section of the 
law ought to go. And instead of having this myth up there that, 
frankly, we are going to take actions and never do, it seems to 
weaken our position in my view in terms of building that kind 
of international support. If, in fact, we use some examples 
here, getting very serious about this.
    The point that Senator Bayh made, I think needs to be 
repeated. We are talking about a government here that is deeply 
involved in the financing of global terrorism, of organizations 
and individuals who are determined to do us great, great harm, 
who are trying to acquire a capability that poses incredible 
risk to the world, incredible risk to the world.
    Here we are talking about some economic sanctions for many 
of us here who would like to do everything we possibly could to 
avoid that option that none of us are going to take off the 
table, that some apparently may be trying to rush to a little 
bit more quickly, and that is the military option in Iran, the 
dangerous implications of that step.
    And one certain way it seems to avoid having to get to that 
point is to get very, very serious about the sanctions we are 
talking about. In the absence of doing that, I think history 
will be a very tough judge, that you have $126 billion in 6 or 
7 years flowing into the coffers of the government by allies of 
ours around the world who are refusing to join in a serious 
effort here to bring a halt to this.
    And you have got to get a lot tougher of this, in my view, 
or we are going to pay an awful price in the end.
    You have explained it to the best of your ability here and 
Secretary Burns obviously has some more responding to do to 
these issues. But I think you have heard here from a good 
percentage of this Committee here this morning that is very, 
very concerned about what this is all headed.
    Mr. Foulon. Mr. Chairman, just bearing to the question that 
Senator Menendez raised and that you also have raised 
concerning the sufficiency of legal authorities, and it also 
bears on your comments on the adequacy of having only one 
export control officer in the United Arab Emirates.
    I would just revert back to the comments I made in my 
opening statement that there is one area where we do not have 
the legal authorities that we might otherwise have, which is 
the fact that the Export Administration Act is in lapse. As a 
result of that, for example, our attache in the United Arab 
Emirates does not have overseas investigative authority but 
must work through Immigration and Customs Enforcement.
    Again, the penalties are not sufficient to be an adequate 
deterrent.
    So I would just flag that as an area in which there is 
opportunity to strengthen our ability to achieve our common 
goals on this.
    Chairman Dodd. I thank you for that.
    Let me raise a couple of additional quick questions, if I 
can, for you here. Concerns have been raised over the FBI's use 
of national security letters as authorized by the PATRIOT Act. 
The Banking Committee added provisions, later incorporated in 
Title III, to expand information access and sharing authorities 
for financial institutions, regulators and law enforcement.
    I wonder if you could assure the Committee, this is for 
you, Secretary Levey, assure the Committee that you have 
implemented reasonable standards to enforce these provisions 
and that the Treasury Department has complied with both the 
spirit and letter of the law on that point.
    Mr. Levey. I think I very definitely can give you that 
assurance, Mr. Chairman. The expansions of authorities that we 
received in the PATRIOT Act, for the most part, were not 
information collection in the sense of the FBI national 
security letter authority that I think you are referring to.
    But all of the--the one provision in there that does allow 
us to collect information, we have very strict standards in 
place for how it is used. And it is 314(a) of the PATRIOT Act 
where we are able to get information from financial 
institutions is response to law enforcement requests so that 
they can identify which institution has an account for someone 
that a person that law enforcement is looking for or is 
investigating that they can follow up with.
    The 314 authority works in a way where law enforcement then 
has to take that lead and acquire the actual underlying 
information through legal process. There is no other PATRIOT 
Act authority that we were given that I think implicates any of 
the concerns that you are referring to.
    Chairman Dodd. I appreciate that.
    Let me go back if I can, Secretary Foulon, to the question 
that was raised earlier by Senator Carper dealing with the 
number of agents on the ground, and your response to it here.
    What we are talking about here, as all of us, I think most 
people are aware, products can be shipped and end up going 
through three or four or five different countries before they 
get to their ultimate destination is what we are talking about 
here. Foreign governments may or may not cooperate. And that is 
what we are trying to drive at here, and the overseas export 
control investigations or arrests here.
    How does the Commerce Department ensure effective 
enforcement of re-export requirements toward Iran? And how many 
enforcement cases have involved illegal re-exports of U.S. 
controlled technology to Iran?
    I am not necessarily expecting you to have that data at 
your fingertips, so you may want to submit it in writing. 
Unless you have it, I would be interested in hearing, or some 
broad response to it.
    And are there any cases that suggest a pattern of what 
technology Iran is seeking and who is supplying it? Can you 
answer that?
    Mr. Foulon. Thank you, Senator. As I--one of the cases I 
referred to in my opening remarks was a case of a transshipment 
from Malaysia, as you will recall. There are other cases of 
transshipments through the United Arab Emirates and other 
economies in the area.
    I would be happy to get back to you with a greater 
compilation based on the cases we have had, how many of those 
involve transshipment.
    Chairman Dodd. And also whether or not you are getting 
patterns here. It seems to me that is a very important 
question, to determine whether or not--it may not exist but it 
seems to me that may be an interesting question to pursue, the 
patterns of technology that are being sought and requested by 
Iran, as well.
    Mr. Foulon. I think there are clearly patterns of 
technology. Certainly various types of aircraft parts for civil 
and military aircraft. But let me get back to you with a more 
structured analysis of the patterns we see.
    In terms of how do we know how we are doing? How do we know 
we are capturing the transshipments that go through? We use all 
of the tools of law enforcement. I would say it is not just the 
Commerce Department and the Bureau of Industry and Security. We 
work very closely with Immigrations and Customs Enforcement. We 
work with Customs and Border Protection, with the FBI. We work 
very closely with the intelligence community. We look through 
the shipper's export declarations. All exporters are required 
to file a declaration. We have a staff that analyzes those and 
tries to determine are there trends, are there vulnerabilities? 
Do we see a pattern of certain types of exports going through?
    And so it is the full panoply of law enforcement.
    And then the great benefit we have as well, Senator, is 
because in the Bureau of Industry and Security we have the 
licensing officers together with the enforcement people. They 
talk. And licensing officers see things that enforcement people 
may not see otherwise, a certain number of licenses going in a 
certain way or types of commodities going to a certain----
    Chairman Dodd. Have you requested more personnel in the 
UAE?
    Mr. Foulon. We have not at this point. As we have looked at 
the authorities our person there has, the amount of licensed 
exports through the United Arab Emirates----
    Chairman Dodd. Is it your sense you need more people on the 
ground there, your personal opinion?
    Mr. Foulon. From the Commerce Department perspective, which 
is all I can speak to, as I do not know the larger issues, as 
we evaluate the workload against the resources against the 
amount that a person can do, we are confident that our person 
there is doing the job that he needs to do.
    Chairman Dodd. And you do not need any additional personnel 
there?
    Mr. Foulon. We believe that the workload and the personnel 
match at this point, Senator.
    Chairman Dodd. Thank you both very, very much.
    Again, we will leave the record open here for a few days 
for some additional questions that may be forthcoming.
    This is a very, very important hearing, a very important 
subject matter, and one the Committee is going to pay a lot of 
attention to in the couple of days with a possibility for 
additional legislation in this area, as well. So we are going 
to want to be in communication with all of you as we move 
forward here.
    The Committee will stand adjourned.
    [Whereupon, at 11:24 a.m. the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]

                  PREPARED STATEMENT OF SENATOR TESTER

    Mr. Chairman, thank you. I welcome the witnesses, especially 
Ambassador Burns, whose resume includes a career in the foreign service 
and work for both Secretary Albright and Secretary Rice. That is the 
kind of very rare non-partisan commitment to making our country better 
that I believe public service is really all about. Thank you for your 
service and for your testimony today.
    I am heartened by the testimony I have heard today about the 
efforts that are being made to prevent Iran from gaining nuclear 
capabilities and about the importance of giving diplomacy every last 
chance to succeed. I absolutely agree with that. And this really is 
probably one of the most important hearings that we can have in the 
Senate, because we have to get our Iran policy just right.
    We have almost 200,000 U.S. troops involved in combat on the east 
and west borders of Iran. Iran is led a by a president who is, I am 
afraid, a real madman who is funding Hamas and Hezbollah, and who 
appears bent on developing some kind of nuclear program--something we 
cannot allow. So this is a very dangerous situation. There is no margin 
for error when it comes to dealing with these issues.
    I understand that the Congress, mostly supported by both the 
Clinton and Bush administrations, has done a great deal to impose and 
then tighten sanctions against Iran. Given the stakes and the 
continuing level of President Ahmadinejad's rhetoric, I think most 
Americans can understand why these sanctions have been needed, and I 
think most people support these sanctions.
    But as much as I support these sanctions, it seems to me that we 
have a very delicate task ahead of us. On the one hand, we should 
continue to use every element of diplomatic pressure, and every 
workable sanction program to move the Iranians away from the nuclear 
program. On the other hand, we absolutely must not lose the Iranian 
people. It is my understanding that between the various ethnic 
minorities, half the population being under 25, and an unemployment 
rate of more than 11 percent, you have all the makings of a 
considerable, though still quiet, opposition to the current 
government--opposition that may even be felt by some of the mullahs 
that oversee the government. It does not make sense to push these folks 
back toward supporting the current regime.
    So I hope that we can have a good discussion about how to ensure 
that our message gets through to the Iranian people. I understand that 
there is money in the FY 08 budget to increase people-to-people 
contacts--that is a good start. But I look forward to hearing from our 
witnesses about what else we can do, from making increased use of the 
Internet as a means of reaching the Iranian people to finding new ways 
to reach the 50 percent of the population under age 25. Thank you.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM NICHOLAS 
                             BURNS

Q.1. Is it not true that under current U.S. law, if U.S. 
Company X invests $20 million over the course of one year in 
Iran's energy sector that the President must impose sanctions?

A.1. A U.S. firm would be subject to the restrictions of the 
Iran Transactions Regulations (ITR) which prohibit virtually 
all commercial dealings by U.S. persons with Iran or Iranian 
entities. A U.S. firm would thus be unable, under ordinary 
circumstances, to make such an investment. If a U.S. firm were 
somehow to make such an investment despite the prohibitions in 
the ITR, it would be subject to criminal and/or administrative 
penalties.

Q.2. Is it also not true that under current U.S. law, if a 
foreign subsidiary of that same U.S. Company X invests $20 
million of the course of one year in Iran's energy sector that 
there would be no consequences for U.S. Company X (meaning the 
U.S. parent company)?

A.2. It is true that in general, foreign subsidiaries of U.S. 
firms are not directly subject to the provisions of the Iran 
Transactions Regulations (``ITR'') (which apply to U.S. 
persons), and thus are able to engage in activities that would 
be forbidden to the parent company. It is also true that in 
general, parent firms are not penalized for decisions 
independently made by their foreign subsidiaries. However, the 
parent company would be subject to the penalties of the ITR if 
the parent were involved in any way--financially, or in terms 
of decision-making--in a transaction by a subsidiary that 
contravened the Regulations. In addition, a parent company that 
deliberately created or used a foreign subsidiary in order to 
evade the restrictions of the ITR would be subject to 
penalties.

Q.3. Is it not true that this allows U.S. companies to do 
business in Iraq [sic] through their foreign subsidiaries?

A.3. In a situation of this kind, the ``business'' concerned 
would be done by the foreign subsidiary, acting independently, 
not by the U.S. parent. If the U.S. parent is involved in, for 
example, setting up or running the subsidiary's business in 
Iran, the U.S. parent would be subject to penalties.

Q.4. My understanding of our sanctions program is that the goal 
is to make sure that Iran cannot use money from its petroleum 
sector to fund its development of a nuclear weapons program.
    Would you not, then, advocate for a change in current U.S. 
law to close this loophole?

A.4. Entities established under the laws a particular foreign 
country are generally regarded as ``nationals'' of that country 
and are subject to its laws. This is true even if most or all 
of the equity in the entity is owned by nationals of another 
country. While we understand your concerns, we believe that an 
attempt, direct or indirect, to make foreign-incorporated 
subsidiaries subject to U.S. law rather than to the laws of the 
country of incorporation would be roundly condemned and stoutly 
resisted by other countries, and would set an undesirable 
precedent that could destabilize the structure of international 
commerce. Certainly we would not want to see foreign 
governments assert that U.S.-incorporated subsidiaries owned by 
their companies are subject to their laws rather than to U.S. 
laws. Such a step would also likely be ineffective because 
other countries may have on the books or may enact blocking 
legislation that would prohibit subsidiaries located in their 
countries from complying with U.S. sanctions laws. The likely 
result then would be a dispute between us and countries in 
which U.S. subsidiaries are located, taking the focus off of 
united action against Iran.

Q.5. In the ten plus years since the Iran-Libya Sanctions Act 
(ILSA) was enacted, there has been one determination of a 
violation of ILSA. In that case, sanctions were waived as 
provided for in law.
    Since that time the State Department has made no other 
determinations of foreign investments in Iran that violate the 
ILSA standard. However, in this same period the Energy 
Information Agency, a part of the Department of Energy, and the 
Congressional Research Service have both reported major 
investments.
    If the U.S. Department of Energy has made such findings, 
how can another arm of the U.S. government ignore them?

A.5. In the Iran and Libya Sanctions Act (ILSA), now the Iran 
Sanctions Act (ISA), there are specific definitional 
requirements. By delegation from the President to the 
Secretary, the Department of State has responsibility for 
determining whether particular activities constitute investment 
within the meaning of the Iran and Libya Sanctions Act (ILSA), 
now the Iran Sanctions Act (ISA).

Q.6. Does the State Department disagree with the Department of 
Energy report?

A.6. The Department of Energy report is a useful survey of 
energy matters in Iran. However, by delegation from the 
President to the Secretary of State, the Department of State 
has responsibility for determining whether particular 
activities constitute investment within the meaning of the Iran 
and Libya Sanctions Act (ILSA), now the Iran Sanctions Act 
(ISA).

Q.7. There have been reports in the media that the State 
Department is considering sanctions against companies investing 
in Iran's oil sector.
    In your opinion, what effect would such sanctions have on 
those companies?

A.7. As you indicate, there have been recent reports referring 
to the possible imposition of sanctions in connection with 
deals being discussed or contemplated that have not yet been 
finalized. We hope that the many financial, legal, and 
reputational risks of investment in Iran's petroleum sector, 
and our vigorous efforts to highlight these risks, will 
continue to make companies wary of going forward with such 
deals.

Q.8. The U.S. Ambassador to India recently warned that the Iran 
gas pipeline to India/Pakistan may be a violation of the Iran 
Sanctions Act.
    Has the State Department reviewed the transaction to see if 
it is a violation?

A.8. We have repeatedly made clear at senior levels of the 
governments of India and Pakistan, our opposition to this 
project and the concerns it raises under U.S. policy and U.S. 
law--the Iran Sanctions Act. We have also stressed that Iran is 
an undependable supplier, and that relying on gas piped from 
Iran will not enhance the energy security of either country. 
Despite years of discussion, no firm agreement has been signed, 
and the project has not yet reached a stage for a determination 
under ISA. Major issues concerning the pipeline--including 
structure, financing, routing, and gas prices--remain to be 
resolved.

Q.9. We heard at the hearing about the broad international 
coalition to deny Iran a nuclear weapons capability, to stop it 
from sponsoring terrorism, to help build democracy in Iran to 
counter the totalitarian regime of Ahmadinejad. All of these 
measures, all of the sanctions contained in ISA, all of the 
sanctions that may be leveled at Iran in the Security Council, 
are targeted to give Iran a message, a strong message that 
developing a clandestine nuclear weapons program, that 
deceiving the international community, deceiving the IAEA is 
not acceptable. Here's the problem: Iran continues to enrich 
uranium. Iran has not dismantled its nuclear program. The goal 
of the original ILSA sanctions was to cut off funding from 
Iran's energy sector which would be used to fund its nuclear 
weapons program.
    Don't you think it's time to turn up the heat, to tighten 
the noose on Ahmadinejad's regime?

A.9. The Department considers the threat of a nuclear-armed 
Iran one of the most important issues facing our nation today. 
It has implemented a broad diplomatic strategy over the past 
year and will continue to do so. The strategy has multiple 
pressure points, including a steady increase in action at the 
UNSC, which has adopted two unanimous resolutions imposing 
sanctions against Iran under Chapter VII of the UN Charter in 
three months; designating Iranian individuals and entities 
associated with WMD and missile programs, effectively denying 
them access to the U.S. financial system; terminating the 
ability of two Iranian banks to conduct transactions in 
dollars; working with foreign governments to curtail business 
transactions with companies tied to Iran's nuclear activities; 
and encouraging the reduction of official export credits for 
Iran. Our strategy also includes the disruption of Iran-backed 
militant networks which threaten our troops in Iraq; and 
increased people-to-people outreach.
    We have engaged senior levels of government and companies 
to make clear our opposition to oil and gas investment in Iran, 
the damaging effect of such activities on our common diplomatic 
efforts with Iran, and the potential implications under U.S. 
sanctions laws. As a consequence, Iran has enjoyed little 
recent success in finalizing deals with international oil and 
gas companies to develop its fields.

Q.10. Don't you think it's time to expand the sanctions in ISA 
and to actually implement them?

A.10. Last year, we worked with Congress on amending and 
extending the Iran Libya Sanctions Act (ILSA), which became 
ISA, the Iran Sanctions Act. As Secretary Rice has said, ISA 
has proved a useful tool, particularly in emphasizing to 
foreign governments and companies the risks of investing in 
Iran, including the potential implications under U.S. law. Iran 
continues to experience difficulty in finalizing investment 
deals, and in recent years, few foreign companies have 
committed to developing Iranian oil and gas fields. Still, our 
allies remain crucial to the success of our diplomatic efforts 
against Iran, as evidenced by their support for two recent UN 
Security Council Resolutions imposing sanctions on Iran. It is 
imperative that we keep the focus on Iran, rather than 
modifying ISA to turn the weight of sanctions against allies.

Q.11. What exactly has the State Department done to press the 
Libyan government to fulfill its obligations to the Pan Am 103 
families and the $2 million per family?

A.11. Claims filed by American citizen victims of Libyan 
terrorist acts and their families, including Pan Am 103, have 
been at the top of our bilateral agenda both before and since 
the reestablishment of direct bilateral relations between the 
U.S. and Libya.
    In 2002, 269 of the 270 estate representatives of the Pan 
Am 103 families entered into an out-of-court settlement of 
their pending lawsuit against Libya that linked payments to the 
lifting of various sanctions within a stipulated time period. 
Pursuant to that settlement, the Government of Libya paid each 
of the participating claimants $8 million. There is currently a 
legal dispute over whether the settlement requires Libya to pay 
$2 million in additional compensation to each claimant. The 
United States is not a party to the settlement, but legal 
counsel for the Pan Am families has advised the State 
Department that the families have initiated court proceedings 
to resolve this matter. We have always encouraged, and will 
continue to encourage, the Libyan Government to deal with 
pending lawsuits in good faith. At the request of the families' 
legal representatives, we are also seeking to facilitate direct 
contacts between the two sides in an attempt to bring the case 
to closure outside of a potentially lengthy judicial process.

Q.12. What steps does the State Department plan to take to 
carry out that sense of the Senate and make sure the Libyans 
honor their obligations?

A.12. Our commitment to our citizens is unwavering and we 
remain very active in promoting the resolution of pending 
claims out of court wherever possible to allow claimants to 
avoid the burden and delay of litigation. At the same time, 
Libya continues to reaffirm its commitment to deal with the 
court cases in good faith and is actively participating in the 
U.S. legal proceedings brought by American citizens.
    To improve our liability to pursue resolution of pending 
claims and other pressing bilateral interests, we have asked 
for agrement from the Libyan Government so that the President 
may appoint an Ambassador to Tripoli. The appointment of an 
Ambassador to a country is not a reward. Rather it is one of 
our most important tools. A fully functioning embassy, headed 
by a confirmed ambassador, is critical to pursuing the most 
pressing bilateral issues, including pending claims.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD FROM MARK FOULON

Q.1. What patterns do you see of diversions to Iran through 
third countries?

A.1. BIS's Office of Export Enforcement (OEE) has observed in 
the course of our investigations several patterns of Iranian 
diversions. The major pattern involves the establishment of 
Iranian controlled trading companies in United Arab Emirates 
(UAE) and utilization of free trade zones. These trading 
companies procure U.S.-origin items, usually concealing the 
fact that the items are destined for Iran.
    Until recently, Singapore and Hong Kong had also been 
significant diversion points to Iran. While several significant 
diverters still operate out of Hong Kong and Singapore, OEE has 
observed the majority of diverters that we are aware of 
shifting their routing of goods through Malaysia for diversion 
to Iran. OEE believes this is occurring because Hong Kong and 
Singapore have adopted and implemented export control regimes, 
while Malaysia has not. OEE is also investigating incidents of 
diversion to Iran through the United Kingdom, France, and 
Spain.

Q.2. What technologies are the Iranians seeking in this way?

A.2. Since October 2004, investigations by OEE, at times 
working with U.S. Immigration and Customs Enforcement or other 
law enforcement agencies, have resulted in 13 criminal 
convictions related to illegal exports of dual-use items to 
Iran, with five more cases pending sentencing. A review of 
these cases provides insight into some of the commodities being 
sought by the Iranians.

     Computer equipment
     Aircraft parts and components
     Fork lifts
     Alloyed piping
     Nickel alloyed piping
     Night vision lenses
     Oil burning nozzles
     Submersible pumps

    In addition, of the 136 open investigations involving 
Iranian transactions for which an ECCN has been identified as 
part of the ongoing investigation, the below listed commodities 
make up the top five commodities.

    10-- Category 3 Electronics [includes generation 2 night 
vision goggles]
    10-- Category 9 Propulsion Systems, Space Vehicles and 
Related Equipment [includes aircraft engines]
    7--Category 2 Materials Processing [includes cryogenic 
pumps]
    6-- Category 0 Nuclear Materials, Facilities, and Equipment 
(and Misc. Items) [includes riot shields and centrifuge]
    5--Category 5 (Part 1) Telecommunications [includes 
satellites]

Q.3. How many of your Iran cases and investigations involve 
diversions, and through which countries?

A.3. OEE has 136 open investigations involving Iranian 
transactions. Of these 136 cases, the following is a break down 
of cases depicting known countries used as transshipment 
points:

     58--UAE
     10--UK
     10--Singapore
     5--Malaysia
     6--France

    A further break out of the 13 criminal convictions and the 
five cases pending sentencing reveals multiple transshipment 
countries. Oftentimes these cases reveal that multiple 
diversion points have been used in furtherance of the alleged 
illegal exports.

     4--UAE
     3--UK
     3--Singapore
     3--Malaysia
     1--France
     1--Taiwan
     2--Canada
     1--Austria
     3--Germany
     1--Canada
     1--Netherlands
     1--Australia
     1--Israel

                                  
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