[Senate Hearing 111-126]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-126
 
               ENGAGING IRAN: OBSTACLES AND OPPORTUNITIES

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



                                HEARING

                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 6, 2009

                               __________

       Printed for the use of the Committee on Foreign Relations


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate



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                COMMITTEE ON FOREIGN RELATIONS         

             JOHN F. KERRY, Massachusetts, Chairman        
CHRISTOPHER J. DODD, Connecticut     RICHARD G. LUGAR, Indiana
RUSSELL D. FEINGOLD, Wisconsin       Republican Leader designee
BARBARA BOXER, California            BOB CORKER, Tennessee
ROBERT MENENDEZ, New Jersey          JOHNNY ISAKSON, Georgia
BENJAMIN L. CARDIN, Maryland         JAMES E. RISCH, Idaho
ROBERT P. CASEY, Jr., Pennsylvania   JIM DeMINT, South Carolina
JIM WEBB, Virginia                   JOHN BARRASSO, Wyoming
JEANNE SHAHEEN, New Hampshire        ROGER F. WICKER, Mississippi
EDWARD E. KAUFMAN, Delaware
KIRSTEN E. GILLIBRAND, New York
                  David McKean, Staff Director        
        Kenneth A. Myers, Jr., Republican Staff Director        

                                     (ii)        




                            C O N T E N T S

                              ----------                              
                                                                   Page

Burns, Hon. R. Nicholas, professor in the practice of diplomacy 
  and international politics, Harvard Kennedy School, former 
  Under Secretary of State for Political Affairs, Cambridge, MA..    19
    Prepared statement...........................................    22
    Responses to questions submitted by Senator Robert P. Casey, 
      Jr.........................................................    35
Kaufmann, Adam, Bureau Chief, Investigation Division Central, 
  Office of the District Attorney, New York County, New York, NY.    12
    Prepared joint statement with Robert Morgenthau..............     6
Kerry, Hon. John F., U.S. Senator from Massachusetts, opening 
  statement......................................................     1
Morgenthau, Hon. Robert M., district attorney, New York County, 
  former U.S. attorney for the Southern District of New York, NY.     4
    Prepared joint statement with Adam Kaufmann..................     6

              Additional Material Submitted for the Record

Submitted by Robert Morgenthau and Adam Kaufmann:
    Deferred Prosecution Agreement...............................    36
    Exhibit A--Factual Statement.................................    38

                                 (iii)



               ENGAGING IRAN: OBSTACLES AND OPPORTUNITIES

                              ----------                              


                         WEDNESDAY, MAY 6, 2009

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:38 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. John Kerry 
(chairman of the committee) presiding.
    Present: Senators Kerry, Feingold, Cardin, Shaheen, 
Kaufman, and Risch.

            OPENING STATEMENT OF HON. JOHN F. KERRY,
                U.S. SENATOR FROM MASSACHUSETTS

    The Chairman. The hearing will come to order. Thank you all 
for being here and, again, thank you for being here at this 
early hour.
    Let me just announce ahead of time that we are going to 
have a little bit of a truncated hearing, and I'm going to try 
to expedite it, the reason being the U.S. Senate, in its 
wisdom, has scheduled 10 votes at about 10:40. And 10 votes, as 
we all know, takes about 1\1/2\ to 2 hours around here. So 
we're going to try to really move through this as expeditiously 
as we can. And I appreciate everybody understanding that. It's 
just one of those things that happens.
    It is a huge privilege to welcome our guests here today, 
and I'll say a few words about both of them in a minute. But 
let me just say that faced with a crowded field, the foreign 
policy challenges, we're here today to discuss one of the most 
complicated and important to all of us, and that is the 
question of how to engage with Iran and to prevent it from 
becoming a nuclear-armed nation.
    This is our third public hearing on Iran in the last 2 
months, and it is not going to be the last. We're very 
fortunate to have two panels of witnesses whose broad 
experience will help us look at the issues that are front and 
center in this relationship.
    Obviously, there are obstacles in our path as we pursue a 
new policy, but there are huge opportunities, and I want to 
emphasize the opportunities. Iran is a country with a huge and 
important history. We need to recognize that history and we 
need to understand the extraordinary skills and capabilities 
and heritage of the Iranian people.
    Theirs is a country with enormous history, with great 
literature, great art, great architecture, great 
accomplishment. And I think that it is important for us to view 
the Iranians and the country in its entire context, not just in 
the years of difficulty since 1979.
    All of us have a right to hope for a restoration of a 
relationship with Iran that reflects that history and the 
prospects of what a honest relationship, even with its 
differences, could bring to us in terms of our mutual interests 
and the interests particularly of the Middle East and of that 
region.
    As I've said before, I believe President Obama is 100 
percent correct to open the door to direct talks with Iran. We 
want to join with him here in this committee in seeking a new 
way forward based on mutual respect and mutual interests.
    We start with the reality recognized by the administration 
that merely expressing your desire to engage and then engaging 
is not in itself a strategy, and talks are not an end unto 
themselves. They're the beginning of what is a complicated 
effort, to forge a new relationship, a new era in United 
States-Iran relations.
    Clearly, progress is not automatic. Our efforts need to be 
reciprocated by the other side. It is important to note that 
Iran, for a number of years, has perceived that the United 
States policy is fundamentally regime change. And that 
perception drives a certain set of choices.
    That is not the current policy of this new administration, 
and it is important for Iran to understand that. Just as we 
abandoned calls for regime change in Tehran and recognize a 
legitimate Iranian role in the region, Iran's leaders need to 
moderate their behavior and particularly that of their proxies, 
Hezbollah and Hamas.
    And Iran's leaders must comply with the international 
community's requirements that its nuclear program is strictly 
for peaceful purposes, and meet its nuclear nonproliferation 
treaty obligations. Let me emphasize here: That is not a 
requirement that singles out Iran. That would be a requirement 
for any country that is a signatory to the NPT that has not 
complied with NPT requirements.
    We obviously can't succeed in this effort alone. We need to 
work with our allies to establish realistic goals for 
negotiating with Iran and reach a private agreement on a set of 
escalating measures, should Iran fail to respond to 
negotiations.
    I emphasize, again, our preference is engagement. Our 
preference is not to have confrontation of any kind, through 
sanctions or otherwise. But that will depend on choices that 
Iran itself makes. This is neither the time nor the forum to 
outline all of the contingencies available to the United States 
in the event that we fail. This is a time to reaffirm our 
commitment to giving meaningful negotiations with Iran's 
leaders a chance and not simply fall back on the stale rhetoric 
and failed strategies of the previous years.
    Still, as policymakers, we also need to understand the 
nature of the sanctions that have defined our relationship with 
Iran for more than two decades now, and understanding the past 
and the choices we have made in implementing it or enforcing it 
is really critical to understanding how we're going to build a 
new relationship or how we're going to deal with contingencies 
in the event we fail to.
    Sanctions, even coordinated multilateral sanctions, still 
remain a fairly blunt instrument with an imperfect track 
record. And when it comes to Iran, the verdict on them is mixed 
at best, and that's part of what we examine here today. 
Sanctions did slow Iran's nuclear program, but bottom line, 
they did not prevent it from acquiring the capacity to enrich 
uranium on an industrial scale.
    With the help of other countries, we've had more success in 
denying banks and companies involved in Iran's proliferation 
and terrorism activities access to the United States financial 
system. But as our first witnesses will explain, the firewalls 
and filters there don't always work.
    The most startling example came to light recently when 
Britain's Lloyds Bank settled a criminal case with the New York 
district attorney and Justice Department, and I emphasize, they 
did settle the case, so that is now a matter of court record. 
Lloyds agreed to pay a $350 million fine for helping Iranian 
banks wash hundreds of millions of dollars' worth of prohibited 
transactions through United States financial institutions.
    The scheme was so pervasive that bank employees were given 
a handbook on how to evade U.S. prohibitions. The CIA and FBI 
are reconstructing several hundred thousand individual 
transactions to determine whether they involved material and 
technology destined for Iran's nuclear and missile programs.
    We're going to hear about the case and others from a man 
whom I've known and respected for more years than either of us 
care to count, and that is Robert Morgenthau, the distinguished 
district attorney of New York.
    Let me say two things here. One, before I say a few words 
about District Attorney Morgenthau, the majority on the 
committee will be releasing today or tomorrow--it's more 
logistical, but it'll be either later this afternoon or 
tomorrow--a report on Iran's nuclear program, sort of 
establishing a baseline with respect to how we got where we are 
and where Iran is with respect to its nuclear program.
    Needless to say, we have been spending great efforts 
through the Treasury Department and the FBI and others to 
enforce those sanctions that are currently in place. I was 
first assistant district attorney in one of the largest 
counties in America back in the 1970s to 1980, and I will 
remind folks that there was a saying that crime knows no 
border.
    The truth is, there's one district attorney in the country 
who from the 1970s until today, has a reputation that knows no 
borders, and malefactors fear his name, not just in mob 
hangouts in New York or in the corridors of Wall Street, but in 
foreign capitals too.
    And I learned that full well when we worked very closely 
when the Foreign Relations Committee in the 1980s uncovered the 
Bank of Credit and Commerce International scandal, which 
involved not just General Noriega laundering money through it, 
but also had the bank account of a fellow who was to become 
well-known by the name of Osama bin Laden. That's when we first 
learned of this interconnected, interlocked series of fronts, 
shell companies, and various bank accounts that link arms 
trafficking with narcotics trafficking with terror.
    It's an important network for our criminal justice system 
and law enforcement authorities to understand. I'm grateful to 
Mr. Morgenthau for his role in helping to make that happen. But 
let me just say that from the first days I stepped into a 
responsible role in the district attorney's office, all of us 
in the country back then were modeling many of our efforts on 
what District Attorney Morgenthau had done. He was a 
groundbreaker in the way he organized his office, 
professionalized the office, created different task forces, and 
really reformed what until then had been a backwater of the 
criminal justice system. And he set an extraordinary example.
    After 35 years of service, he will be retiring at the end 
of his current term. Mr. District Attorney, we are really 
privileged to have you here today, and we're very grateful to 
you.
    Following his testimony will be another distinguished and 
familiar face and public servant. Ambassador Nick Burns was the 
Bush administration's point man on Iran as Under Secretary of 
State from 2005 to 2008, a very well-regarded and strong 
advocate for diplomacy. And many of the policies that Secretary 
Burns advocated and talked about with us are now being 
implemented. I'm sure he is pleased to see that, though some of 
it probably is a little bittersweet.
    He'll pick up on the other side of the coin and help us 
understand the diplomatic challenges and the opportunities for 
success. I might add that after serving many years overseas and 
wandering in the wilderness of Washington, DC, he is now 
teaching at Harvard, and I'm very pleased to welcome him here 
today, and back to his home State of Massachusetts. So we thank 
you for being here today.
    I should mention the district attorney's assistant, Adam 
Kaufmann, is here, and he will also present testimony with him, 
and we're delighted to have you here.
    Mr. District Attorney, thank you for being with us, sir.

STATEMENT OF HON. ROBERT M. MORGENTHAU, DISTRICT ATTORNEY, NEW 
YORK COUNTY, FORMER U.S. ATTORNEY FOR THE SOUTHERN DISTRICT OF 
                          NEW YORK, NY

    Mr. Morgenthau. Well, thank you for giving me the 
opportunity to testify here today. Twenty-one years ago, when 
you were the chairman of the Subcommittee of the Foreign 
Relations Committee on Terrorism and Narcotics, I had the honor 
of testifying before you in connection with the activities of 
BCCI.
    I learned that day the importance of disclosure, the 
importance of sunlight on corrupt activities. You asked me 
whether we were getting any cooperation from the Bank of 
England, and I said no, and that was in the papers the next 
day, and the following day, I got a call from Eddie George from 
Bank of England saying, ``How can we help you?''
    So a lot of people who do things in the dark, when there is 
sunlight--when this committee focuses attention--things change. 
So that's why I'm particularly grateful for the opportunity to 
be here today and to talk about two activities of Iran: One, 
the international money movement, hiding the sources of that 
money; and two, the people who are providing Iran, through 
dummy companies, with the material for long-range missiles and 
nuclear weapons.
    And this is an ongoing and serious problem, very serious. 
In addition to these first cases that we brought, we've had a 
number of investigations which have stopped Iranian activities, 
but we can't talk about those.
    But the Lloyds case, which we investigated in very close 
cooperation with--with the Department of Justice, Asset 
Forfeiture and Money Laundering Section, showed how the 
Iranians were moving money through a British bank, stripping 
the identification information so that the New York banks that 
were receiving that money did not know it was Iranian money.
    There was a settlement of that case. Lloyds paid a fine of 
$350 million, evenly divided between New York and the 
Department of Justice. But that matter had widespread 
repercussions because people suddenly realized, hey, you do 
this kind of illegal activity in the dark--eventually 
somebody's going to find out about it.
    And we have other similar investigations, fairly well 
along. We hope to stop--with the cooperation of the Department 
of Justice, we hope to stop the movement of Iranian money for 
the purchase of materials for long-range missiles.
    The second case we brought was against a Chinese provider 
of material. This company used six dummy corporations and the 
Iranians used four dummy corporations. And the Iranian military 
was buying serious material to be used for long-range missiles. 
Just to give you an idea of what was involved and to show that 
they are definitely serious about proceeding with their missile 
and nuclear programs.
    For instance, the materials shipped to Iran included 15,000 
kilograms of a specialized aluminum alloy used almost 
exclusively in long-range missile production; 1,700 kilograms 
of graphite cylinders used for banned electrical discharge 
machines, which are used in converting the uranium; more than 
30,000 kilograms of tungsten-copper plates; 200 pieces of 
tungsten-copper alloy hollow cylinders, all used for missiles; 
19,000 kilograms of tungsten-metal powder; and 24,500 kilograms 
of maraging steel rods. Maraging steel--and I must say, before 
we got into this, I'd never heard of it. But it's a specially 
hardened steel suitable for long-range missiles.
    And that's just the partial list. There were gyroscopes, 
accelerometers, armor piercing tantalum. Again, I had never 
heard of the tantalum, but we learned about it during the 
investigation. Tantalum is found in those roadside bombs that 
are being used against troops in Iraq and Afghanistan.
    So this is a serious problem. These missiles can reach 
anywhere in the Middle East. We have troops in Afghanistan and 
Iraq and elsewhere. And I just think that the work of this 
committee is so important to let the public know that the 
Iranians are deadly serious, and they're making good progress, 
and we've got to intensify our efforts to embargo the shipment 
of WMD, as it's called, to Iran. And equally important, we've 
got to let the public know what's going on. That's why the work 
of this committee is so valuable: To shed some light on this. 
To use the words of Justice Louis Brandeis,``The best 
disinfectant is, in fact, sunlight,'' and that's what this 
committee is showing.
    And I thank you for the opportunity to be with you.
    [The joint prepared statement of Mr. Morgenthau and Mr. 
Kaufmann follows:]

    Joint Prepared Statement of Hon. Robert M. Morgenthau, District 
 Attorney for New York County, and Assistant District Attorney Adam S. 
  Kaufmann, Chief of Investigation Division Central, New York County 
                District Attorney's Office, New York, NY

    We would like to express our appreciation for the work undertaken 
by the committee, and our gratitude to the committee, and Senators 
Kerry and Lugar, for the opportunity to appear on this important issue. 
There are few issues in international security policy more pressing 
than Iran's efforts to develop long-range ballistic missiles and 
nuclear weapons. The Manhattan District Attorney's Office has played a 
role in enforcing U.S. sanctions and the rule of law through the use of 
traditional law enforcement means, and we welcome the opportunity to 
discuss two recent investigations.
    The Office of District Attorney for New York County has a unique 
role in the law enforcement community. A local prosecutor is charged 
with maintaining the safety and security of the public he or she 
represents. However, in the case of New York County, the task of 
protecting the public and maintaining the public trust includes 
policing the most important financial markets in the world, watching 
over the biggest financial institutions on the planet, and ensuring the 
integrity of the global financial system. From Main Street to Wall 
Street, from Harlem to the Financial District, the Manhattan D.A.'s 
Office endeavors to maintain that public trust. To put it another way, 
there is nothing like a good beat cop to keep the streets safe, and the 
District Attorney's Office is the beat cop for Manhattan's city streets 
and its financial markets and institutions.
    Our international investigations have covered many areas, both in 
geography and criminal conduct. Our investigation and prosecution of 
members of BCCI in the early 1990s, a matter well known to Chairman 
Kerry from his investigation of the same group, shined a spotlight on 
corrupt banking practices and the undisclosed involvement in United 
States banking activities by secret interests in the United Arab 
Emirates and Pakistan. We could not have successfully prosecuted BCCI 
without the expertise and assistance of Senator Kerry and members of 
the staff of the Subcommittee on Terrorism, Narcotics and International 
Operations, which Sentator Kerry then chaired. We investigated and 
prosecuted the looting of a Venezuelan-owned bank by its wealthy owners 
in the early 1990s, and also discovered their payments of illegal 
campaign contributions to United States political interests through 
intermediaries in the United States. More recently, we have brought 
cases to highlight problems associated with black market casas de 
cambio in Brazil, Uruguay, Paraguay, and Argentina and the United 
States banks that turned a blind eye to their misconduct. These 
investigations tracked money flowing from the Tri-Border Area of South 
America to bank accounts associated with terror organizations in the 
West Bank; as well as the use of black market systems to launder 
millions of dollars of embezzled public funds from Brazil to secret 
accounts in Switzerland and the Isle of Jersey by Paulo Maluf, the 
corrupt former mayor and current Congressman from Sao Paulo, Brazil. 
Other cases have included the use of electronic digital currency and 
United States shell companies by Russian organized crime to perpetrate 
identity theft and fraud, the use of offshore shell companies by a 
securities fraud ring to launder its illegal proceeds and hide its 
activities, and our ongoing efforts to target and bring to justice the 
tax cheats who use offshore accounts and shell companies to avoid 
paying their fair share of taxes.
    All of these cases, and many others pursued by the District 
Attorney's Office, involve the misuse of New York banks by criminals to 
launder ill-gotten goods or otherwise violate the criminal laws of New 
York State. And, they share a common theme. In each case, the 
investigation of discrete criminal conduct by specific individuals 
served to illustrate black market or otherwise opaque financial systems 
that allowed criminals to move their money. Corrupt and illicit systems 
are often set up to facilitate tax evasion and capital flight, but are 
also susceptible to use for more sinister purposes by criminals and the 
financiers of terrorism. Once an underground system exists to help 
people move money anonymously, those in control of it become accustomed 
to not asking too many questions, and criminals and terrorists can, and 
will, take advantage of that. Bringing these criminal cases has exposed 
these systems to the strong light of day, and has contributed to the 
recognition of systemic problems by the financial industry and 
financial regulators. To borrow a phrase from Justice Louis Brandeis, 
all of these cases demonstrated that sunlight is the best disinfectant. 
This theme--of transparency--runs through all of these cases and is 
evident in the matters we will address today.
    More recently we turned our attention--and brought a degree of 
sunlight--to dangers well known to this committee: The threat to the 
United States and global peace posed by Iran's efforts to build nuclear 
and long-range ballistics missiles. Our focus today is not on United 
States policy toward Iran per se, rather it is on the enforcement of 
the rule of law and the implementation of transparency in cross-border 
payments in the international banking system. The two investigations 
highlighted today examine the efforts of Iran and its providers of 
weapons material to move money through the international markets, 
including banks in New York, through deceit and fraud. Our efforts 
uncovered a pervasive system of deceitful practices and fraud designed 
to let Iranian banks skirt United States and international sanctions 
and move money all over the world without detection. It is our hope 
that this hearing, and our testimony, will enhance efforts to curtail 
these practices and have an impact on the enforcement of sanctions and 
the adoption of transparent banking practices worldwide.
    Our efforts have, thus far, led to two publicly announced 
investigations that culminated in a deferred prosecution agreement with 
a British bank and with the indictment of a Chinese citizen and his 
corporation. We will refer to these two matters as the Lloyds 
investigation and the Limmt indictment, respectively.\1\
---------------------------------------------------------------------------
    \1\ Cases such as these are the result of difficult and long-drawn 
investigations. We wish to recognize the efforts of the following 
members of the District Attorney's staff for their contributions to 
these matters. For Lloyds: Senior Trial Counsel Richard T. Preiss, 
Assistant District Attorney Aaron Wolfson, Investigation Division 
Central Deputy Chief Gary T. Fishman, former Assistant District 
Attorney Laura Billings, former Intelligence Analyst Eitan Arusy, 
Financial Intelligence Director David Rosenzweig, and Paralegals 
Gregory Dunleavy, Aaron Davidowitz, Sarah Schoknecht, and former 
paralegals Melissa Clarke and Jamelia Morgan. In addition, the 
investigation was pursued jointly with the Asset Forfeiture and Money 
Laundering Section of the Department of Justice and the New York State 
Banking Department, and the efforts of the Federal prosecutors and 
Federal and State investigators assigned to the investigation should be 
recognized. For Limmt: Assistant District Attorneys Adam S. Miller and 
Aaron T. Wolfson, Investigative Analysts Lauren Lichtman and Max Adler, 
Intelligence Analyst Jasmine Sicular, Financial Intelligence Director 
David Rosenzweig and Investigators Jonathan Savel and Alex Arenas of 
the DANY Special Investigations Group. Assistant District Attorneys 
Marc Krupnick and Marc Frazier Scholl, Senior Investigative Counsel, 
also assisted. In addition, a parallel investigation was pursued by the 
Office of Foreign Assets Control of the Department of the Treasury that 
resulted in SDN designations for activities relating to weapons 
proliferation. The expertise of the staff at OFAC as well as at the 
Federal Reserve Bank of New York provided a tremendous contribution to 
the success of the investigation.
---------------------------------------------------------------------------
    One important goal of cases like the Lloyds investigation and the 
Limmt indictment is to encourage change from within the banking 
industry and bring change to the regulatory playing field. Regulatory 
schemes are generally, and appropriately, set up to work with industry 
to promote government policies. However, there is a degree of 
clarification brought by criminal prosecutions that differs from the 
results of any regulatory inquiry, particularly when addressing 
intentional misconduct. Targeted criminal prosecutions of serious 
misconduct can send a message of deterrence that regulatory schemes 
cannot match. And, as discussed below, it is the effect of this message 
of deterrence in the banking community that may prove to be the most 
valuable result of these prosecutions.
    Law enforcement plays an important role in cases involving 
violations of sanctions and intentional fraudulent conduct. If the 
United States imposes sanctions and requires U.S. banks to comply with 
them, then prosecutors should target and expose to the light of day 
those who intentionally violate the law and defraud our financial 
institutions. If foreign banks, businesses, and persons engage in 
conduct that violates New York and U.S. law, they should expect to be 
held accountable for their misconduct. And the threat of public 
accountability has a tremendous deterrent impact on the conduct of 
banks and financial institutions. A recent article in the periodical 
Foreign Affairs, by Rachel Loeffler, recognizes and articulates this 
point.\2\ Ms. Loeffler examines various sanctions and actions brought 
to enforce them, and notes the importance of interaction between 
government policy and financial institutions to curtail the access of 
rogue regimes to international money centers. She comments that 
enforcement actions such as the Lloyds deferred prosecution agreement 
``provide a lever of influence when fewer and fewer seem to exist.'' A 
foreign bank that might otherwise ignore U.S. sanctions in its business 
model might be reluctant to do so in the wake of the Lloyds settlement. 
As discussed further below, we have seen multinational banks change 
their behavior after the Lloyds settlement, which makes United States 
sanctions more effective, further isolates the Iranian regime, and 
hampers Iran's ability to obtain items needed for its weapons programs.
---------------------------------------------------------------------------
    \2\ ``Bank Shots: How the Financial System Can Isolate Rogue 
Regimes,'' Foreign Affairs (March/April 2009).
---------------------------------------------------------------------------
    These themes--transparency, accountability, and deterrence--are 
explored in the two case studies presented below.
 i. ``stripping'' of wire transfer data: the lloyds tsb investigation 
                   and deferred prosecution agreement
    The term ``stripping'' refers to the practice of removing wire 
transfer information that would reveal that the transfers originated 
from a prohibited source. By stripping out the originator information, 
the wire transfers can pass through the screening software used by U.S. 
banks that would otherwise reject or freeze them for further inquiry. 
The stripping of wire transfer information in this manner effectively 
conceals that the parties involved are sanctioned entities.
    The U.S. Government places restrictions on certain countries, 
entities, and individuals from accessing U.S. financial institutions 
and the U.S. banking system. These sanctions are administrated and 
enforced by the U.S. Department of the Treasury's Office of Foreign 
Assets Control (``OFAC''). OFAC imposes controls and administers 
economic sanctions against targeted foreign countries and regimes, 
terrorists, international narcotics traffickers, those engaged in 
activities related to the proliferation of weapons of mass destruction, 
and other threats to the national security, foreign policy or economy 
of the United States. Many of the sanctions are mirrored in United 
Nations and other international commitments, and involve close 
cooperation with governments around the world. The sanctioned entities 
are blocked from accessing the U.S. banking system and, with minor 
exceptions, U.S. citizens and institutions are prohibited from 
conducting financial transactions with them.
    In the spring of 2006, the District Attorney's Office discovered 
evidence of fraud in the processing of international wire transfers by 
certain European banks on behalf of their client Iranian banks. The 
Iranian banks maintained correspondent accounts with the European 
banks. Correspondent bank accounts constitute the relationships between 
banks that allow funds to move all over the world, and are a foundation 
of international commerce.\3\ In the case of Lloyds, Lloyds maintained 
correspondent accounts on behalf of a number of Iranian banks, all 
sanctioned entities banned from doing business in the United States or 
with United States financial institutions.
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    \3\ The role played by international correspondent banking in 
global finance and the risk of money laundering it can pose is ably 
described and analyzed in a report from the U.S. Senate entitled ``Role 
of U.S. Correspondent Banking in International Money Laundering,'' 
Senate Permanent Subcommittee on Investigations, July 15, 2004.
---------------------------------------------------------------------------
    The initial evidence of criminal conduct by Lloyds and other banks 
discovered by prosecutors from the District Attorney's Office consisted 
of information concerning individuals with close ties to the Government 
of Iran located in the New York area. These individuals received wire 
transfers from Bank Melli and other Iranian banks. However, the 
incoming wire transfers to the U.S. accounts of these individuals did 
not contain any reference to the Iranian banks or individuals that 
originated the funds transfers.\4\ Instead, the payment messages made 
it appear that the wire transfers originated from Lloyds (or from other 
European banks engaged in similar practices).
---------------------------------------------------------------------------
    \4\ These payment messages consisted of communications sent by the 
Society for World Wide Interbank Financial Telecommunication, or 
``SWIFT.'' SWIFT is the predominant system used for international funds 
transfers with over 80 percent of the world's transfers executed by 
SWIFT message, or almost 15 million payment messages per day on 
average. SWIFT can be likened to a secure e-mail system used by banks 
to ensure that payment orders are sent and received with accuracy and 
security.
---------------------------------------------------------------------------
    To ensure that the U.S. financial institutions that process 
international wire transfers do not unintentionally engage in 
prohibited transactions, they use sophisticated computer systems to 
monitor and screen all wire transfer activities. Banks in New York that 
process most of the world's U.S. dollar payments depend on these 
automated systems to prevent sanctioned entities as well as terrorists, 
money launderers, and other criminals from gaining access to the U.S. 
banking system. In this way, the financial institutions are the first 
line of defense to protect our financial system.
    The Lloyds investigation focused primarily on Lloyds' handling of 
accounts for financial institutions from three designated countries: 
Iran, Sudan, and Libya (Libya was removed from the list of sanctioned 
countries in 2004 and was less prominent in Lloyds' stripping scheme). 
Knowing that they could not legally access United States banks, Iranian 
and Sudanese banks with accounts at Lloyds sought to evade these 
sanctions. Beginning in the mid-1990s, Lloyds began removing any 
information from Iranian and Sudanese wire transfers that would trigger 
the detection systems at the United States correspondent banks. This 
was a systemic, across-the-board operation on behalf of the sanctioned 
banks. To execute this policy, Lloyds payment center personnel removed 
any Iranian and Sudanese wire payment messages from the automated 
processing system, stripped out the identifying data, and then manually 
reentered the payment information so that the transfer would be 
processed undetected by United States banks.
    From 2001-04, Lloyds' conduct allowed the illegal transfer of more 
than $300 million on behalf of Iranian banks and their customers to 
accounts in the United States. In addition, Lloyds sent billions of 
dollars in Iranian payments through United States banks in so-called 
``U-Turn'' payments (payments that begin and end in foreign banks and 
merely transit through the United States). For example, a
U-Turn payment would include a commercial transaction sent from the 
account of an Iranian bank at Lloyds, through a correspondent account 
at a United States bank, for payment to an Italian company for a 
commercial invoice. U-Turn payments also included overnight time 
deposits sent on behalf of the Iranian banks themselves from Lloyds 
through correspondent accounts at United States banks to banks in 
Cayman and elsewhere, and then processed back to Lloyds via the same 
route the next day. In our opinion, the U-Turn exemption constituted a 
glaring hole that undermined both the enforcement of, and the rational 
behind, the Iranian sanctions program. Effective November 10, 2008, the 
authority for the U-Turn exemption was revoked.
    While Lloyds voluntarily exited the Iranian business by 2004, the 
Sudanese business, which resulted in the illegal transfer of 
approximately $30 million, continued into 2007 (after the beginning of 
the investigation by the District Attorney's Office and the Department 
of Justice). Also during the period from 2001-04, Lloyds' conduct 
allowed one Libyan customer to transfer approximately $20 million to 
United States banks.
    The District Attorney's Office and the Department of Justice agreed 
that the appropriate resolution of the Lloyds investigation was through 
joint Deferred Prosecution Agreements. As a result of the settlement 
and Deferred Prosecution Agreements with the District Attorney's Office 
and the Department of Justice, Lloyds agreed to adhere to best 
practices for international banking transparency, to cooperate with 
ongoing law enforcement investigations, to conduct an internal review 
of past transactions, and to pay $350,000,000 in fines and forfeiture.
    The message of deterrence from the Lloyds resolution should not be 
underestimated. In many of the financial industry's international 
antimoney laundering conferences in the past few months, the top item 
on the agendas is cross-border payment issues and the Lloyds case. 
While somewhat apocryphal, this observation highlights the deterrent 
effect of a successful criminal investigation, which goes well beyond 
the deterrent effect of a regulatory finding. This is not intended to 
undermine the value of regulatory work. To the contrary, most matters 
involving financial institutions are best handled by regulators who can 
identify problems and work with the banks to rectify them. However, 
intentional and systemic misconduct resulting in fraud constitutes 
criminal conduct and should be treated as such.
    As we assess the deterrent effect of the Lloyds settlement, we have 
begun to observe a ripple effect move through the international banking 
community. At a recent antimoney laundering conference, one of the 
assistant district attorneys from the Lloyds investigation participated 
in a debate as to whether the Lloyds matter was an unwarranted extra-
territorial application of U.S. sanction laws to a non-U.S. bank. We 
argued that the Lloyds case was simply the application of domestic 
(U.S.) fraud provisions to conduct that originated in Europe but 
exercised its fraud on correspondent banks in the United States. From 
the prosecutorial analysis, the violation of sanctions law was the 
motive and reason for the fraud, but the fraud perpetrated on the U.S. 
clearing banks was the gravamen of the criminal conduct. The charge in 
the state deferred prosecution agreement reflects the duality of this 
analysis. The charge admitted by Lloyds was a violation of the New York 
State Penal Law crime of Falsifying Business Records in the First 
Degree, alleging that Lloyds caused false entries to be made in the 
records of the U.S. clearing banks, in furtherance of and to conceal 
the commission of another crime, specifically, the Federal sanctions/
IEEPA violation.
    The final assessment of success for the Lloyds investigation and 
resolution will come from the deterrent effect and whether we 
successfully change behavior on the part of international banks. 
Already we have seen some impact as Lloyds becomes the topic of the day 
in conferences and industry periodicals. The impact on the 
international banking community was well reflected in comments from the 
head of global antimoney laundering for a major U.K. banking 
institution. This gentleman, who is a leader in the field of global 
compliance, explained that it mattered not whether one agreed with this 
application of U.S. law, or whether one viewed it as a criminal fraud 
case, or whether one viewed it as a violation of U.S. sanctions, or 
something in between. As he saw it, what mattered was that the world 
was now on notice that it could not disregard any country's sanctions 
without running afoul of the analysis employed in Lloyds. The result 
for his bank, as he explained it, was two-fold. First, his bank was now 
looking at sanctions with a fresh eye to make sure that cross-border 
transactions originating in one country and transiting another did not 
violate any local sanctions regimes. Second, his bank was withdrawing 
or curtailing international payment services for banks from sanctioned 
countries such as Iran and Sudan. When we speak of deterrent effect and 
making sanctions more effective, this may be the ultimate model of 
success.
  ii. the proliferation of weapons of mass destruction: china to iran
    In April of this year, the District Attorney's Office announced the 
indictment of a Chinese businessman named Li Fang Wei and his 
metallurgical production company, Limmt Economic and Trade Company, 
Ltd., on charges that they falsified the records of banks in New York 
and conspired to send illegal payments through New York banks (a copy 
of the indictment is attached*). Defendant Li Fang Wei is the manager 
of Limmt, a provider of metal alloys and minerals to the global market. 
The investigation revealed that Limmt has two primary lines of 
business. First, Limmt sells standard metallurgical products to 
commercial customers throughout the world. Second, Limmt sells high-
strength metals and sophisticated military materials, many of which are 
banned from export to Iran under international agreements, to 
subsidiary agencies of the Iranian Defense Industries Organization 
(DIO).
    In June 2006, the United States Department of the Treasury, Office 
of Foreign Assets Control (OFAC) sanctioned Limmt for its support of 
and role in the proliferation of weapons of mass destruction (WMD) to 
Iran. As a result of the sanctions, Limmt was banned from engaging in 
transactions with or through the U.S. financial system, and remains 
banned to this day. Subsequently, Li Fang Wei and Limmt used aliases 
and shell companies to continue Limmt's international business.\5\ Li 
Fang Wei and Limmt's purpose in doing so was to use fraud and deception 
to gain access to the U.S. financial system, to deceive U.S. and 
international authorities, and to continue the proliferation of banned 
weapons material to the Iranian military.
---------------------------------------------------------------------------
    \5\ Aliases used by Limmt and Li included Li Fang Wei a/k/a Karl 
Lee, a/k/a Patric, a/k/a Sunny Bai, a/k/a K. Lee a/k/a KL, a/k/a David 
Li, a/k/a F.W. Li) and Limmt Economic and Trade Company, Ltd., a/k/a 
Limmt (Dalian ftz) Metallurgy and Minerals Co., Ltd., a/k/a Limmt 
(Dalian FTZ) Minmetals and Metallurgy Co., Ltd., a/k/a Limmt (Dalian 
FTZ) Metallurgy and Minerals Co., Ltd., a/k/a Ansi Metallurgy Industry 
Co. Ltd., a/k/a Blue Sky Industry Corporation, a/k/a SC (Dalian) 
Industry & Trade Co., Ltd., a/k/a Sino Metallurgy and Minmetals 
Industry Co., Ltd., a/k/a Summit Industry Corporation, a/k/a Liaoning 
Industry & Trade Co., Ltd., a/k/a Wealthy Ocean Enterprises Ltd.
---------------------------------------------------------------------------
    The indictment charges that during the period from November 2006 
through September 2008, Limmt sent and received dozens of illegal 
payments through U.S. banks by using aliases and shell companies. 
Because Limmt was banned from transacting with U.S. banks, any 
transfers sent in its real name would have been detected by the 
sophisticated wire transfer monitoring systems at the U.S. banks and 
blocked. By substituting aliases in the place of its true name, Limmt 
deceived U.S. banks into processing its transactions. Thus, Limmt's 
conduct was specifically designed to defeat these filters through the 
use of false information. The result was the falsification of the 
records of banks located in Manhattan relating to dozens of illegal 
transactions.
    The investigation revealed that in the almost 3-year period since 
Limmt's designation, Limmt used its aliases to continue sending banned 
missile, nuclear, and so-called dual-use materials to subsidiary 
organizations of the DIO. The investigation identified subsidiary 
organizations set up by the DIO to procure and produce high-tech 
weapons systems, including: Amin Industrial Group, Khorasan Metallurgy 
Industries, Shahid Sayyade Shirazi Industries, and Yazd Metallurgy 
Industries.\6\
---------------------------------------------------------------------------
    \6\ As a result of our joint effort with OFAC, these entities are 
now on the Treasury Department's list of sanctioned entities.
---------------------------------------------------------------------------
    Some of the materials shipped from Limmt to the DIO front companies 
included:

   15,000 kilograms of a specialized aluminum alloy used almost 
        exclusively in long-range missile production;
   1,700 kilograms of graphite cylinders used for banned 
        electrical discharge machines;
   More than 30,000 kilograms of tungsten-copper plates;
   200 pieces of tungsten-copper alloy hollow cylinders;
   19,000 kilograms of tungsten metal powder;
   24,500 kilograms of maraging steel rods;
   450 metric tons of furnace electrodes; and
   1,400 metric tons of high carbon ferro-manganese.

    In addition, Limmt and the DIO engaged in negotiations to have 
Limmt send the DIO 400 Gyroscopes, 600 Accelerometers, and 100 pieces 
of Tantalum. Gyroscopes and Accelerometers are crucial technology for 
Iran's development of long-range missiles, and Tantalum in the form 
indicated can be used to manufacture armor-piercing projectiles of the 
sort found in improvised explosive devices (IEDs).
    Limmt conducted its nonmilitary commercial business primarily with 
U.S. dollar payments. These payments were processed, or ``cleared,'' by 
U.S. banks. These payments, although from non-military customers, were 
nonetheless illegal under U.S. law because of Limmt's status as a 
proliferator of WMD. Limmt's Iranian military shipments were paid for 
primarily in euros. For all of these payments, from both the Iranian 
military subsidiaries and Limmt's commercial customers, Limmt used its 
aliases to complete the transactions. The District Attorney's Office 
has been in contact with European law enforcement personnel to continue 
the investigation into Iran's use of European banks to clear its euro 
transactions. Many of the euro transactions relate directly to the 
procurement of weapons materials by the Iranian military front 
companies in clear violation of international law. It is unclear at 
this time whether the European banks acted intentionally or whether 
these transfers violated any laws of the countries where they occurred. 
We are working with foreign law enforcement and regulatory authorities 
in the specific countries to find answers to these questions.
    In addition, the District Attorney's Office has made preliminary 
contact with the Chinese Government concerning both the role of the 
Chinese banks as described in the indictment and the illegality of 
Limmt's conduct under Chinese law. In all of Limmt's transactions, the 
wire payments were sent to and from a limited number of Chinese banks 
that handled the accounts of Limmt's front companies. It is unclear 
whether these banks acted intentionally or knew the true identity of 
Limmt as the true interest behind the alias/front companies. However, 
it is clear that some of Limmt's shipments to Iran violated Chinese 
export control laws. We have stated our willingness to share this 
information with the Chinese authorities. We note that there is no 
extradition treaty between the United States and China, so that if Mr. 
Li is to face justice, it will be before a Chinese tribunal for his 
violations of Chinese law.
    Many of the items shipped by Limmt in China to Iran were so-called 
``dual-use'' items, suitable for both civilian commercial as well as 
military uses. In this case, certain communications made clear that the 
items were intended for military use by the Iranians, but the 
circumstantial evidence was equally strong. When the materials are sent 
to front companies set up by the Iranian military, and Limmt procured 
false end-user certificates for the shipments, the intent to use these 
materials for military purposes is readily inferred.
    One communication from Li Fang Wei to an agent of the Iranian DIO 
in 2007 was especially telling. Li Fang Wei discussed with the Iranian 
agent the difficulties in producing certain aluminum alloys as 
requested by the Iranians. He went on to relate that there should be 
little doubt as to the quality of the alloy, as Limmt's factory had 
supplied the alloy for customers for many years, including for the 
Chinese military and for the Iranian Aerospace Industries Organization 
[another part of the Iranian military, responsible for development and 
procurement of long-range ballistic missiles]. Certainly this 
conversation demonstrates that despite his public protestations to the 
contrary, Mr. Li and his company were, in fact, intentionally selling 
weapons materials to the Iranians. In public statements to the media, 
Mr. Li denies his relationship with the Iranian military and denies 
supplying them with weapons materials. The factual record developed by 
our investigation and presented to a grand jury belies these self-
serving claims. Mr. Li has supplied the Iranian military with weapons 
material for years while scoffing at international agreements 
restricting such trade. For Mr. Li and his co-conspirators, ``business 
as usual'' meant violating the law and providing materials for weapons 
of mass destruction to a dangerous regime.
                            iii. conclusions
    Sanctions, both from the United States and from the international 
community, are an important tool to deter rogue regimes and encourage 
the path of diplomacy. Nations such as Iran need to be engaged in 
dialogue, and need to be invited to become responsible members of the 
global community, but also need to know there are ramifications for 
ignoring the path of responsibility. Sanctions provide an important 
arrow in the quiver of diplomacy. The question we face is how best to 
make sanctions effective, to deter misconduct, and to encourage 
adherence by the private sector. Regulatory actions are an important 
part of enforcement, but some matters, criminal in nature, need to be 
redressed through the mechanisms of criminal justice. OFAC does a 
tremendous job identifying threats to the national security and 
bringing civil enforcement actions. Prosecutors should not become 
involved in this area lightly. Slight violations or ambiguous behavior 
do not lend themselves to criminal enforcement. But where there is 
systematic and pervasive intentional misconduct, criminal prosecutions 
are necessary. Criminal prosecutions of financial institutions send a 
strong message of deterrence.
    Banks that provide access to the world's financial systems to 
criminals, proliferators and terrorists should expect that they will be 
found out and prosecuted. Sanctions are effective only if they are 
enforced. We may not be able to shut down Mr. Li's factories, but we 
can shine a spotlight on his conduct and the conduct of the foreign 
banks that permit these types of operations to flourish.
    This fight will be won only if there is strong resolve on the part 
of the world's major economic and military powers to stand firm against 
Iran's efforts. We are working with Federal law enforcement, regulatory 
and intelligence agencies to develop more leads and to use the 
information we have already gathered, and we are also reaching out to 
law enforcement agents in foreign countries to target this conduct and 
to shut down the pipeline of weapons to Iran.
    These are important matters that need to be addressed in a global 
framework. Law enforcement efforts should be part of the global 
equation to make sure that sanctions are enforced and illegal conduct 
deterred. Through strong and resolute action, this crisis may still be 
averted, but we do not have the luxury of waiting any longer.

[*Editor's note.--The copy of the indictment submitted with 
this prepared statement was too voluminous to include in the 
printed hearing but will be maintained in the permanent record 
of the hearing. A second article submitted for the record 
``Deferred Prosecution Agreement'' can be found in the 
``Additional Material Submitted for the Record'' section of 
this hearing.]

    The Chairman. We thank you very, very much for that 
summary.
    Mr. Kaufmann, did you want to add to that?

    STATEMENT OF ADAM KAUFMANN, BUREAU CHIEF, INVESTIGATION 
  DIVISION CENTRAL, OFFICE OF THE DISTRICT ATTORNEY, NEW YORK 
                      COUNTY, NEW YORK, NY

    Mr. Kaufmann. Senator, very briefly, if I may. What we 
found, to just give you an overview of the conduct that we 
looked at in the Lloyds investigation with the Department of 
Justice, so you understand exactly what Lloyds was doing and 
what its criminal conduct was, essentially, Lloyds offered 
banking services to Iranian banks to help the Iranian banks 
move money all over the world to pay for--at times, commercial 
transactions; at other times, military-related transactions.
    The majority of contracts between international companies 
are denominated in U.S. dollars, which means that to clear--or 
execute those transfers--they have to transit through banks in 
the United States. That is generally the case.
    What Lloyds did was to say to the Iranian banks, ``Look, 
you're banned from transacting through the U.S. by the 
Department of Treasury regulations and the Office of Foreign 
Assets Control.'' United States banks--all of the major United 
States banks that operate in this business of clearing United 
States dollar transfers--have very sophisticated systems that 
if a transfer came in referencing Iran, the bank would block it 
and then investigate it and either reject or freeze or block 
the money.
    Lloyd's provided a service to the Iranian banks to make 
sure their transfers went through the United States banks 
undetected, to effectuate Iranian commerce. And the way they 
did this was by what we've referred to as ``stripping.''
    Every wire payment message that came in from an Iranian 
bank to Lloyds would be taken out of the automated payment 
processing system. Then, any information that would identify 
the payment as being Iranian would be removed. Then that 
altered payment message would be sent by Lloyds to the U.S. 
banks to complete the transaction.
    I have here--it was going to be on a PowerPoint 
presentation, but since that's a--we're a little 
technologically disabled at this table, we have a sample. This 
is not an actual stripped SWIFT message. It's one that I put 
together as an example or a hypothetical.
    But I'll pass it up to the committee. And you'll see what 
it shows is an incoming message sent from Melli Bank, which is 
a banned Iranian bank, to Lloyds, asking for a payment message 
to be sent on in United States dollars.
    You'll see in the bottom field, which is a--this is a SWIFT 
message, which is an international payment system. At the 
bottom, it says, ``Please do not mention our name''--that's 
Bank Melli's name--``to any bank in the U.S.A.'' And then 
underneath that, you'll see an outgoing SWIFT message that is 
sent to a correspondent bank in the United States. When this 
payment message was reviewed by the automated filtering systems 
at the United States bank, not only does it not mention 
anything about Melli Bank or Iran, it actually gives the 
appearance of having originated with a Lloyds customer.
    So in terms of the conduct, it was an intentional effort to 
defraud the systems of the U.S. banks, and that was the 
gravamen of the criminal conduct that we investigated.
    Now, what we did with the Department of Justice was 
determine that it was appropriate to resolve the case with a 
deferred prosecution agreement and a rather large fine. One of 
the important things about this case that we've seen, in terms 
of the deterrent effect, is the impact it's having on other 
banks that are handling accounts for Iran. And I should note it 
wasn't just Iran. It was also Sudan and, for a time, Libya.
    What we're hearing from other banks is that they are taking 
a very hard look--and not just U.S. banks, but more 
significantly, international banks, foreign banks--they are 
taking a hard look at how they handle international payments to 
make sure that the payments do not violate any sanctions, not 
only U.S. sanctions, but also sanctions in other countries that 
might be involved in the transiting of these international wire 
transfers.
    So the deterrent impact that we are starting to see from 
Lloyds--and as the district attorney mentioned, we have a 
number of similar cases coming in--I think we're going to see a 
new respect on an international level, an effect on the 
international banking system of respecting and minding these 
sanctions, so as not to get caught as Lloyds did.
    The Chairman. You've got a certain standard in England and 
a certain capacity to be able to investigate, as you did. What 
about some other locations? I mean, the same stripping and the 
same camouflaging can take place in any of the Gulf States or 
in any Far Eastern States, South Asian State, could it not, and 
then be transferred from one of those banks--a bank in Bahrain, 
a bank anywhere, into the New York finance system, correct?
    Mr. Kaufmann. That's correct, Senator.
    The Chairman. And the only real way to prevent that from 
happening ultimately is to have their cooperation in this 
sunshine effort. I mean, you've got the banks knowing your 
customer, the international standard of the banking community, 
that is essential here, is it not?
    Mr. Kaufmann. It is. I think one answer is that there are 
two kinds of cooperation. There's truly voluntary cooperation, 
and there is an appeal to enlightened self-interest. And if we 
can--what we're starting to see in regards to the China 
proliferation case, we've spoken with some of the Chinese banks 
that were involved in handling those accounts. And it is--it 
may not be the world's most voluntary cooperation, but if 
people or banks think they're going to get caught or exposed, 
they'll hopefully straighten up their act. And it can't be a 
universal impact, but----
    The Chairman. I've often wondered about this, going way 
back to the BCCI days--is it possible that we should be asking 
that the U.S. financial system, which is a critical hub in the 
flow of funds from various places--ought to demand a higher 
standard of scrutiny of those funds to make commingling more 
difficult, to make the stripping effort less simple.
    Mr. Morgenthau. Well, I think the U.S. banking system is--
in these cases that we've seen, has acted responsibly. The weak 
link is these foreign banks that are happy to facilitate 
illegal transactions, provided they don't get found out. And 
that's why this committee, you turn the spotlight on them, and 
then it goes away.
    In several transactions--eight total--we've started an 
investigation and the transaction has halted completely, 
because they don't want to be found out, and they don't want to 
be held up to international ridicule for dealing with WMD and 
Iran.
    The Chairman. What I'm wondering----
    Mr. Morgenthau. The more we can expose this activity, the 
better.
    The Chairman. I couldn't agree with you more. The question 
is how--in this case, you had information which empowered you 
to investigate. If you don't have the information that empowers 
you to investigate, the question is, What's the standard by 
which people are operating day to day?
    And I'm thinking that as we look at the world financial 
crisis and the demands of the G20 and others to really sort of 
reform the effort and to rewrite how we do this, a little more 
scrutiny with respect to some of the securitized entities, a 
little more sunshine with respect to the kinds of transactions 
that we're being sold in the marketplace would have prevented a 
lot of damage from being done.
    So this doesn't only go to Iran. It doesn't only go to the 
question--it's the whole question of blind masked financial 
transactions that purport to be one thing are really another. 
And it could be in housing. It could be in derivatives. But it 
can also be in the illegal network to support the nuclear 
program.
    Mr. Morgenthau. In the case of Lloyds, the bank actually 
printed a manual explaining exactly how to strip identification 
and avoid disclosure in the United States. So, I mean, this was 
not kind of an accidental rogue operation, but this was a major 
bank operation, and then so----
    The Chairman. How did you discover that? How did this come 
to you, Mr. District Attorney?
    Mr. Morgenthau. I'm sure we can--the United States banks 
can tighten up, but we have not seen a case where United States 
banks will knowingly handle Iranian money. I'm not saying it 
hasn't happened, but we haven't seen that.
    The Chairman. How did you discover this?
    Mr. Morgenthau. How what?
    Mr. Kaufmann. He asked how we discovered it.
    Mr. Morgenthau. We were looking at the Alavi Foundation. It 
was a major Iranian foundation in New York. And we found money 
going overseas to suspect people. And then we were looking at 
their banking transactions, and we discovered Lloyds through 
that.
    We went to the CIA because we thought they would be 
primarily interested, and they said, ``Well, that's within the 
FBI's jurisdiction.'' So we then talked to the FBI. And then 
they said, ``Maine Justice is interested in this.'' So we then 
got in touch with Maine Justice, and we formed a partnership 
and did the work together.
    The Chairman. And you're saying that the international 
banks have, in fact, been cooperative with you in this effort?
    Mr. Morgenthau. No.
    Mr. Kaufmann. Sometimes yes; sometimes no. I think, 
Senator, to go back to your point, if I may for a moment, about 
what do we do and transparency across the board in the 
financial sector, you're certainly preaching to the choir to 
this table, where we've been battling issues, especially the 
district attorney, for 35 years against secrecy, opaque 
systems.
    A lot of the cases we look at--and you spoke in your 
introductory remarks about the interconnectedness of different 
types of criminal systems. Again and again and again, we see 
that. We see opaque networks being used--set up for tax 
evasion, being used by narcotics money launderers. We see those 
same systems sending money to accounts associated with Hamas on 
the West Bank, so the need for transparency is great.
    The Chairman. Is that the single most important weapon in 
efforts to fight this?
    Mr. Kaufmann. I think it is. I think at a macrolevel, the 
more transparency you have in financial systems, the more 
difficult you make it for criminals to use systems to move 
their money and hide it. You're never going to legislate to 
address fraud. We already have fraud laws, and this was a case 
of fraud.
    In this area where you talk about how do we--what can the 
U.S. banks do, I think Mr. Morgenthau is right. The U.S. banks 
are primarily doing a pretty darn good job of screening for 
this type of behavior. This was fraud and it was difficult to 
detect.
    I think you have to be careful. There certainly is a need 
to screen and have a high level of certainty by the banks, but 
you also can't make it so difficult that you shut down 
international commerce. We're talking trillions of dollars a 
day in wire transfers. So it's a very difficult matter to 
address proactively.
    The Chairman. Which is why it came down to this question of 
this international standard adopted at the Basel Convention 
with respect to banking, which is ``know your customer.'' I 
remember, that's when we put into place--it was a result of our 
early investigation that we put in place the $10,000 reporting 
requirement and subsequently went after some of the cooperative 
agreements, the mutual legal assistance treaties and other 
efforts in order to require countries to cooperate with us when 
we had probable cause.
    And I think the cooperation has been raised significantly. 
The financial syndicate office down at Treasury Department has 
done a darn good job with too little resources, frankly, in 
pursuing some of this. We could do more, I think, to hold 
people accountable if we put more resources into that effort.
    Mr. Kaufmann. The----
    The Chairman. Senator Shaheen. I'm going to call Senator 
Shaheen in a minute.
    Mr. Kaufmann. I'm sorry.
    The Chairman. Go ahead. Make a comment.
    Mr. Kaufmann. The MLAT system has improved matters. I will 
tell you that the view from the trenches, it is still very slow 
and difficult to obtain information. Any efforts that would 
encourage direct cooperation between prosecutors without 
necessarily going through a centralized clearing system would, 
I think, go a long way to enhance and expedite matters. It can 
take--in a criminal investigation, 6 months is the end of the 
world, and it can take 6 months, a year for us to get anything 
from the most cooperative countries.
    The other thing I'll just say--you speak of Basel. There is 
one significant happening this year that will go a long way 
toward promoting transparency in international wire transfers, 
and that's a movement put forth under the Wolfsberg principles 
to require originator information on SWIFT payment messages of 
a certain type between banks.
    Right now, the way it's--it's a little technical, but 
basically, 202 Cover Payments are bank-to-bank transfers. 
They're messages between banks to effect money transfers that 
do not have originator information contained in them.
    In November of this year, there's a new message system--and 
it was as simple a matter as creating a new form and a new 
computer field so the automated system will require originator 
information on those payment messages. In terms of 
transparency, that is tremendously significant.
    The Chairman. Good. Senator Shaheen.
    Senator Shaheen. I just want to follow up on Senator 
Kerry's question about what more can be done to close the 
loopholes that exist, and wanted you to talk a little bit more, 
if you would, about what you meant when you said prosecutor-to-
prosecutor cooperation without going through a centralized 
system. What more could be done to encourage that kind of 
cooperation?
    Mr. Kaufmann. Right. About the MLATs?
    Mr. Morgenthau. Well, I mean, the problem with MLAT is even 
with phenomenal cooperation, I mean, we have to go to the 
Justice Department. That has to go to the State Department. 
That has to go to the Embassy. And by that time, not only has 
the horse been stolen, but the barn has been burned down.
    So it's a very cumbersome operation, even with the best of 
intentions. It takes--I mean, recently we had a case where we 
had to get information on London, and it took us a year and a 
half before the MLAT information came back. So we've got to 
figure out a way to speed that system up, both internally and 
with our cosigners. It's a very, very cumbersome process, and 
by the time you get the information, usually it's too late to 
do anything about it.
    Senator Shaheen. And is the difficulty the system that's 
been set up, the process itself, or is it that the players who 
are part of that use this as a convenient excuse for delaying 
information?
    Mr. Kaufmann. It can be both, Senator. Some countries are 
more hypertechnical about their requests than others, and that 
can provide difficulties, or as you say, cover. Some MLATs 
contemplate direct cooperation between local prosecutors or 
police. And that is a very simple--it's usually just a 
paragraph within the treaty that both country parties are 
recognizing that while there is a treaty mechanism, there can 
also be a direct cooperation mechanism.
    And where that exists, we are much more able to reach out 
directly to our foreign counterparts and establish the kind of 
direct working relationship where if I can pick up the phone 
and talk to the prosecutor in Poland and explain to him exactly 
what I need, or find out directly from him what he needs from 
me to allow him to help me. Having some framework that allows 
that type of direct communication and cooperation is very 
helpful.
    Senator Shaheen. So are you suggesting that we should have 
that kind of a provision as a matter of course in our treaty 
agreements or our cooperation agreements?
    Mr. Kaufmann. I would respectfully suggest that, yes, 
ma'am.
    Senator Shaheen. Thank you.
    The Chairman. That's a good idea. As a matter fact, I've 
just been prompted by your comments and I think we're going to 
request that the State Department formally see if we can't try 
to get some kind of a direct bypass. I couldn't agree with you 
more. I mean, you can take forever before you get to what you 
need to do.
    You ought to be able to go directly and there ought to be 
an understanding through this process, since it's agreed upon, 
and
if they have a problem, then there ought to be a stoppage 
route, rather than an access route. It seems to me it could 
become pro forma that way and we could proceed much more 
rapidly.
    Mr. Kaufmann. Just remember, sir, to include State 
authorities in those provisions and not just Federal. I'll 
throw that in for the local guys.
    The Chairman. I'm very sensitive to that.
    Mr. Morgenthau. Senator, if I can make--emphasize one 
point, and that is, I mean, we have Iran's shopping list for 
materials related to weapons of mass destruction. We have 
literally thousands of records.
    We have consulted top experts in the field from MIT and 
from private industry and from the CIA, and the one thing that 
comes out loud and clear is that, one, the Iranians are deadly 
serious about proceeding with this program, and No. 2, that 
it's later than a lot of people think. Frankly, some of the 
people we've consulted are shocked by the sophistication of the 
equipment that they're buying.
    So we don't have a lot of time to waste. I'm not an expert 
on proliferation, but we've consulted a lot of people--and it 
comes out loud and clear. It's late in this game, and we don't 
have a lot of time to stop Iran from developing long-range 
missiles and nuclear weapons.
    The Chairman. Well, Mr. District Attorney, that's a very, 
very important statement that you've just made. And it is a 
significant reason that we really wanted to have you here 
today, is so people can see inside--you know, take away the 
opaqueness and see what's really going on here. It's 
uncomfortable for some people, but it's necessary.
    The report that we're going to issue from the committee 
builds on what you've just said and kind of lays out the 
realities of where we see the Iranian program now. Now, that 
has to be, in our democracy, discussed here. And the Senate and 
the various committees of jurisdiction here, the intelligence 
committee and armed services, need to really confront this 
question.
    Your documents are very important, and we're going to make 
the committees aware of their existence to the degree that 
they're not yet, because it really does help shed light on the 
seriousness of purpose of their program and of how deep it runs 
and of what they're getting, in terms of materials, and how 
concentrated it's been.
    And I think it's a great service that you're providing us 
through a law enforcement agency that in many cases would never 
have dared to touch this. That's been true of so many of the 
cases that you've taken on in the New York jurisdiction, and 
again, I thank you for that.
    So with that note, because of our time constraint, what I'm 
going to do is leave the record open for any questions that may 
be submitted. We might just ask you for the lessons of the 
Chinese case particularly, but I don't want to go into it right 
now just because of the time constraints. But I would like to 
have that in the record so we can also see another side of the 
coin here, of how this plays.
    But Mr. District Attorney, I know it's a long way to travel 
for a shortened testimony. I hope you'll forgive the committee 
for that fact. Or maybe you're thrilled. Maybe the Senate saved 
you. But at any rate, again, I can't say enough about your 
years of service and your friendship, and we thank you very, 
very much for coming in here today.
    Mr. Morgenthau. Thank you for the opportunity, and thank 
you for putting some sunlight on this problem.
    The Chairman. Well, we're going to keep doing that, I 
promise you, in your tradition.
    Mr. Morgenthau. Thank you.
    The Chairman. Thank you, sir.
    Mr. Kaufmann. Thank you, Senator.
    The Chairman. If I could ask Secretary Burns to come up to 
the table, we'll have a transition here without interrupting 
the hearing, hopefully. Again, Secretary Burns, we're grateful 
to you for coming. I know this is an area you've thought about 
a lot.
    [Off-the-record discussion.]
    The Chairman. Mr. Secretary, thank you for coming. We look 
forward to your statement.

STATEMENT OF HON. R. NICHOLAS BURNS, PROFESSOR IN THE PRACTICE 
   OF DIPLOMACY AND INTERNATIONAL POLITICS, HARVARD KENNEDY 
SCHOOL, FORMER UNDER SECRETARY OF STATE FOR POLITICAL AFFAIRS, 
                         CAMBRIDGE, MA

    Ambassador Burns. Thank you, Mr. Chairman. I think, as you 
know, I've submitted my written testimony for the record. I 
will not--I'll be merciful and not read that. But with your 
permission, I'd just like to make a few points to start off. 
First, I'd say--and as I said in my written testimony--I fear 
that we are on a collision course with the Iranian Government. 
We've had a 30-year deep freeze in our relationship.
    We've had no substantial or meaningful discussions from the 
Carter administration to the Obama administration with a series 
of Iranian governments. There's no real understanding of each 
other, and we see each other as adversaries. So this is a 
situation that is fraught with a lot of danger for both 
countries.
    I do see the Iranians as a real threat to our country. 
There's no question they're seeking a nuclear weapons 
capability. No one doubts that. They're the principal funder of 
most of the Middle East terrorist groups that are shooting at 
us, shooting at the Israelis and the moderate Palestinians, and 
they're influential in Iraq and Afghanistan, sometimes in ways 
that are very negative for United States interests.
    So they pose a challenge for us in the most important 
region of the world to us, in the Middle East and South Asia. 
That's the dilemma. I do think, however, that our past 
policies, not just the George W. Bush administration, but for 
many administrations, of isolating Iran, of refusing to meet 
with its officials, of calling for regime change, have not 
worked. They've not influenced the behavior of the Iranian 
Government. So I see a twin test----
    The Chairman. Could it have influenced them the wrong way?
    Ambassador Burns. Excuse me?
    The Chairman. Could it have influenced them the wrong way?
    Ambassador Burns. Hard to say. Hard to say. I mean, the 
Iranians have been fairly consistent in their support for 
terrorism. They've been trying to build this nuclear-weapons 
program for a long time. This predates the Bush administration. 
So it's very hard to say that calling for a regime change had 
an additional negative impact on them.
    But I do think that this poses a twin test for the Obama 
administration. On the one hand, we've got to counter, and if 
we can, roll back the more pernicious aspects of Iranian 
policy. On the other hand, I do think it makes sense for us to 
try to seek engagement, not because, as you say, diplomacy is 
an end. It's not an end. It's a means to an end. But because it 
might be a vehicle for us to exert greater influence on the 
Iranians, particularly in conjunction with other countries, 
like Russia and China and the European countries.
    So I frankly think it's time for a new approach, and that 
the Obama administration ought to think very seriously of a 
policy of engagement reinforced by the threat of sanctions and 
by the threat of force.
    Now, I do not believe it's time for the use of military 
force by the United States or by anyone else. I don't think it 
would work. I'm not familiar with any scenario where military 
force could actually fully stop a program that is based on 
scientific research and whose most important elements are 
really in the minds of the scientists of Iran.
    Second, we have to worry about unintended consequences. We 
learned in Iraq that sometimes when you start a war, you don't 
know where it's going to end. That would certainly be the case 
with Iran.
    Third, there is every reason to indicate that if we use 
force now, the Iranians would use asymmetric force back against 
us, through Hamas and Hezbollah, and certainly through the 
Shiite militant groups in Iraq. I just can't see it being in 
our best interest to start a third war in the Middle East and 
South Asia at this time without having tried diplomacy for 30 
years.
    So, I do think that leaves diplomacy as our best option. I 
think what President Obama has been trying to do--and we only 
see at this point the outlines of his policy--has been fairly 
impressive. In a way, I think he is probably outpointing the 
Iranians, and he has put them on the defensive, which is a good 
thing.
    I mean, the fact that he has offered to send a diplomat to 
these P5 talks, the fact that Secretary Clinton invited the 
Iranians to the U.N. conference on Afghanistan, the fact that 
President Obama says that he wants and is willing to sit down 
and talk about a variety of issues, I think has probably 
puzzled the Iranians, and you have not seen any kind of 
consistent response from the Ahmadinejad government. And if we 
are putting them on the defensive for the first time in a long 
time, I think that is favorable, and it is a good start for the 
Obama administration.
    I would say, however--and you mentioned this in your early 
March--your March 3 hearing--we've got to negotiate from a 
position of strength. We can't go, hat in hand, to these 
negotiations and think that just by talking, we're going to 
make progress. Therefore, I think we've got to have an 
agreement with Russia and China in advance of sitting down for 
draconian sanctions on Iran.
    Put it another way. If we're going to give up a long-held 
American position that we should not talk to Iran, if we're 
going to give that up and talk to them, then our partners in 
this process, particularly the Russians and Chinese, who are 
very influential, ought to be with us, agreeing beforehand that 
if the talks fail, they will join us in very, very tough 
sanctions. I think that makes sense.
    And I do think it makes sense to keep the threat of force 
on the table. I don't see Iran negotiating seriously if there 
isn't a marriage between diplomacy and the threat of force. 
It's a language they understand, and it's certainly language 
that if we took it off the table, I think would probably injure 
our negotiating position.
    So, just two final thoughts. Why should we then support 
diplomacy, and what reason do we have to feel that diplomacy 
might be useful? First, it may be the only way we'll ever know 
if there's a peaceful outcome here--if it's possible to have a 
peaceful outcome. I don't know if it is. But it is the only way 
we'll ever be able to test that proposition.
    Second, I think it would be unconscionable to go to war 
without having tried diplomacy first, given the record of the 
last 30 years. Third, it could actually work. There's a 
possibility--probably not a high probability--that a 
combination of American, Chinese, Russian, European influence 
and pressure on Iran could alter its behavior.
    But fourth, even if that does not become the result, even 
if negotiations fail, we will be in a much stronger position 
having tried negotiations. We will be much more credible with 
the international community to then say to the rest of the 
world, to all the trading partners of Iran, ``If you don't want 
to leave us with just one option, a military option, you need 
to join us in much tougher sanctions than those that we have 
tried in the past.''
    The three sanctions resolutions that I negotiated for the 
United States, for the Bush administration, are just the 
beginning. They haven't really made a dent in Iran's armor. We 
need to go far beyond that.
    But a final thought. If we are going to try diplomacy, we 
need as a country to be patient enough to let diplomacy work. 
And what I would predict is if President Obama embarks on 
diplomacy, there will be the inevitable attempts by the hard-
liners in Iran to try to deflect that by intemperate statements 
or even violent actions.
    I'm sure there'll be rhetorical attacks on President Obama 
in our own country. They'll say that diplomacy is weakness, 
that diplomacy is naive, that diplomacy is appeasement, and I 
would reject that. I think that diplomacy can be an effective 
tool for the United States, even in a situation as perilous as 
this, and we're going to have to give the President some time 
and some flexibility to negotiate what is going to be an 
extremely complex diplomatic negotiation with lots of different 
countries involved, perhaps with a new Iranian Government. 
We'll see what happens in their elections after June.
    And finally, I would suggest that as a country, in addition 
to trying to negotiate with the Government of Iran, we try to 
open up to the people of Iran. We should bring thousands of 
Iranian students to the United States, if it's possible to get 
them out to study in our universities.
    I hope it will be possible for Members of Congress to be 
able to travel to Iran, for journalists and businesspeople to 
do that. We haven't had that kind of normal relationship in a 
long time. I think the combination of trying to open up to the 
people of Iran and trying to engage this very tough Government 
in Iran is probably the right way to go at this point.
    Since 9/11, we've often led with the military, and at least 
in the case of Afghanistan, that was appropriate. Sometimes 
it's better to lead with diplomacy, with the military in 
reserve. I think this is one of those times.
    That I think fairly summarized what I said in my written 
testimony.
    [The prepared statement of Ambassador Burns follows:]

   Prepared Statement of Ambassador Nicholas Burns, Professor in the 
   Practice of Diplomacy and International Politics, Harvard Kennedy 
    School, Former Under Secretary of State for Political Affairs, 
                             Cambridge, MA

    Chairman Kerry, Senator Lugar, and members of the committee, thank 
you for the invitation to testify today on United States policy toward 
Iran.
    I have testified to this committee in the past as a government 
official. This is my first appearance as a private citizen and thus the 
views that follow are entirely my own.
    In many ways, I fear that the United States is on a collision 
course with the Government of Iran. How we counter the multiple threats 
that Iran poses to our most important interests in the Middle East is 
surely one of our highest policy objectives. But, whether we can find a 
way to communicate more effectively with the Government of Iran and to 
agree to negotiations on the issues that divide us is another important 
goal. This twin test of American effectiveness with Iran will be an 
early and central concern for the Obama administration.
    Consider the following ways in which American ambitions clash with 
those of the Government of Iran:

--The Iranian leadership seeks a more powerful and perhaps even 
    dominant role in the Middle East. In nearly every arena, it poses 
    the major challenge to America's own power in the region. Iran's 
    pursuit of a nuclear-weapons future is a direct threat to Israel 
    and our Arab partners. Its intrusion into the politics of Lebanon 
    has been unhelpful and often destructive. Its opposition to a two-
    state solution between the Palestinians and Israel is a significant 
    impediment to progress on that overarching priority;
--As the United States has sought to blunt and defeat the terrorist 
    threat in the Middle East, we have found that Iran is the principal 
    funder and even director of some of the most violent groups that 
    sponsor terrorism in the region--Hezbollah, Palestinian Islamic 
    Jihad, Hamas, and some of the Shia militant groups in Iraq;
--Iran is an influential neighbor of the two countries where we are at 
    war--Afghanistan and Iraq. It sometimes uses that influence in ways 
    that are directly contrary to American interests. Is it possible to 
    find common ground with Iran as we seek to promote stability in 
    both countries?

    Everywhere we look in the greater Middle East, Iran often plays a 
negative and troublesome role. As this region is now, along with South 
Asia, the most critically vital for American foreign policy, it is 
essential for the United States to fashion a more effective strategy 
toward Iran. For three decades, Iran and the United States have been 
isolated from each other and we presently have no real ability to 
communicate effectively. This is surely a situation we should not wish 
to see continue.
    I therefore believe the Obama administration has been correct in 
undertaking a full review of the present poor state of relations 
between our two countries. The time has come for new and more creative 
thinking so that we might, as a country, defend where we must against 
Iran's more pernicious influence in the world but also find a way to 
engage its government and people where and when we can.
    With this in mind, I suggest three guideposts for American policy 
that may help to frame this issue for Congress.
    First, given the lethal nature of Iran's challenge to the United 
States, we must respond to it with seriousness of purpose, toughness, 
and strength. One of our highest long-term priorities should be to 
maintain America's leading role in the Middle East and to deflect 
Iran's own ambitions.
    Second, we need to recognize that the 30-year deep freeze in our 
relations with Tehran has resulted in an extraordinary situation--we 
know precious little about the very government and country that looms 
so large as a negative influence on all that is most important to us in 
the Middle East. Isolating Iran, resisting any contacts between our 
governments and threatening regime change have not resulted in positive 
changes to its behavior on issues critical to our security. In the 
absence of diplomatic relations and the lack of a substantial American 
business or journalistic presence in Iran, we have no real basis to 
understand its government, society, and people. It does not serve 
American interests for this deep freeze to continue.
    Third, I therefore support a policy of strength but also realism 
and engagement with the Government of Iran. We need to be firm in 
defending Israel and the interests of the Arab States uneasy with 
Iran's rise to power. We should continue to oppose Iran's pursuit of 
nuclear weapons. But, we should do so while simultaneously opening a 
dialogue with the Iranian Government and people to test whether 
progress is possible through peaceful means.
    Such a dialogue is most important on the most serious issue that 
divides us with Tehran--its pursuit of nuclear weapons. Some continue 
to argue that the only way to halt Iran's accelerating nuclear research 
effort is through American or Israeli air strikes. But, there is no 
convincing scenario where such use of military force would work 
effectively to end the Iranian nuclear program. Even worse, air strikes 
would undoubtedly lead Iran to hit back asymmetrically against us in 
Iraq, Afghanistan, and the wider region, especially through its 
proxies, Hezbollah and Hamas. This reminds us of Churchill's maxim 
that, once a war starts, it is impossible to know how it will end. An 
America that is already waging two difficult and bloody wars should be 
wary of unleashing a third. Choosing military power at this stage would 
surely be precipitous and unwise.
    That leaves diplomacy as the most plausible way to blunt Iran's 
nuclear ambitions. I have some familiarity with the difficulties and 
tradeoffs of a diplomatic approach. For 3 full years, between 2005 to 
early 2008, I served as the point person on Iran for Secretary of State 
Condoleezza Rice. We worked hard to find a path to the negotiating 
table with Iran.
    In June 2006, we launched the most serious and ambitious American 
attempt since the Iranian revolution of 1978 to establish meaningful 
discussions with Iranian officials. Along with Russia, China, Britain, 
France, and Germany, we offered Iran negotiations on nuclear and other 
issues. We were determined to begin talks with Iran and expected that 
negotiations would take place. Unfortunately, Iran rejected over the 
next 2 years repeated offers by the United States and its partners for 
talks. Iran walked away and missed a rare opportunity to pursue a 
better relationship with the United States.
    Since then, Iran has accelerated its nuclear research efforts 
despite three United Nations Security Council sanctions resolutions. As 
you stated in your March 3 hearing on Iran, Mr. Chairman, the recent 
IAEA report indicates that Iran has expanded significantly the number 
of operational centrifuges at its uranium enrichment plant at Natanz. 
Iran has also continued construction of the Arak reactor. These 
developments and its ballistic missile tests all point to a future 
nuclear capability that could cause further instability and pose 
another risk to peace in the Middle East and beyond.
    How should the new American Government led by President Barack 
Obama respond to this open challenge? While I am not in a position to 
know what our Government will ultimately do, I am frankly encouraged by 
the initial statements of the President and his team to take the 
offensive against Iran through strong and active diplomacy. In this 
sense, I believe we are fortunate, indeed, that President Obama and 
Secretary of State Hillary Clinton have asked Ambassador Dennis Ross to 
coordinate our policy toward Iran. He is one of the most skillful and 
experienced public servants in our country and one of our foremost 
experts on the problems of the Middle East.
    I think the Obama administration has made the right decisions on 
Iran in its first months in office. President Obama's new and positive 
appeal to Moslems worldwide, his video message to the Iranian people, 
his invitation for Iran to attend the U.N. conference on Afghanistan 
and his pledge that the United States will now participate in the P5 
nuclear talks with Iran, have all put us back on the diplomatic 
offensive with the Iranian regime. The absence of a clear Iranian 
Government response to these steps is telling--accustomed to keeping 
the United States off balance in recent years, the Iranian leadership 
appears to not know how to respond to these more positive American 
initiatives. That is not an insignificant accomplishment at this early 
stage of the new administration.
    Unfortunately, many in the Moslem world saw the United States, 
incorrectly, as the aggressor in the conflict with Iran in past years. 
They believed the United States was unwilling to meet with Iranian 
officials. They criticized the United States and its P5 partners for 
imposing a condition on talks--the prior suspension of Iran's 
enrichment activities.
    With the benefit of 20/20 hindsight, it would have been more 
effective in 2006-07 if we had offered unconditional talks. Such an 
offer would have deprived Tehran of the excuse it used subsequently to 
some effect that such a conditional offer was unacceptable and unworthy 
of a true breaking of the ice between our two countries. And, the fact 
that there were no diplomatic contacts with Iran whatsoever during my 3 
years as Under Secretary of State for Political Affairs was a 
reflection of the limitations of our approach.
    In my judgment, President Obama has put the United States in a 
stronger position as he considers how best to proceed with Iran. He has 
taken a different path with the Iranians, showing openness and respect 
to the people of Iran and offering to have United States diplomats 
participate routinely in the P5 talks with Iran for the first time 
without conditions.
    The work ahead, however, will be even more challenging. The key 
question now is how to frame negotiations with Iran so that they have 
the strongest possibility of delivering the outcome we should want to 
have--engagement but with a resulting decision by the Iranian 
leadership to slow and stop altogether its pursuit of nuclear weapons 
and to accept intrusive international oversight of all of its 
activities.
    As Senator Lugar mentioned in your March hearings, Iran is not in a 
strong international position as these talks begin. The decline in the 
world price of oil, the U.N. sanctions and the Ahmadinejad government's 
disastrous economic policies have all contributed to weakening Iran in 
the last year. Its transparent aim to become nuclear capable has caused 
nearly all its neighbors to seek its isolation. The new Iranian 
Government to be elected in June may have to reconsider the type of 
offer most likely to be made by the international community--expanded 
economic ties and a return of Iran to the community of nations in 
return for a halt to its nuclear efforts.
    While agreeing to negotiations, President Obama should not want to 
go hat in hand to the Iranians. As you stated in the March 3 hearings, 
Mr. Chairman, we must negotiate with Iran from a position of strength. 
President Obama would be wise to set a limited timetable for talks. He 
should make clear that the United States and others would walk away and 
impose much tougher financial and economic sanctions if progress in the 
negotiations is not made in a reasonable period. This would prevent 
Iran from running out the clock until they become nuclear capable.
    It will be crucial that the President agree on the automaticity of 
these sanctions with the P5 countries, especially Russia and China, in 
advance of talks. China has violated the spirit of the U.N. sanctions 
by becoming Iran's leading trade partner at the same time that our 
European allies have begun to withdraw from Iranian markets. Russia 
sells Iran arms and is helping Iran to construct its first nuclear 
reactor. If the United States is to break with past policy by meeting 
Iran halfway at the negotiating table, then it is only reasonable that 
our P5 partners, most especially China and Russia, pledge to join us in 
draconian sanctions on Iran should the talks break down.
    Most importantly, the President should renew his campaign position 
that all options will remain on the table. This marriage of diplomacy 
with the threat of force is essential, in my view, to convince Tehran 
it needs to make a difficult choice and soon. Without this threat, I 
doubt Iran's leaders would take the talks seriously. The Iranian 
leadership wants more than anything else security guarantees from the 
United States. We should not give them such guarantees until they have 
met our core aims. This does not mean that the United States should 
default to the use of force if diplomacy and new sanctions fail. And, 
as I have said in this statement, it is in our overriding national 
interest to resolve our differences with Iran peacefully. Let us hope 
that will be possible.
     Any negotiations with Iran will likely be frustrating with only a 
modest probability of success. So, why does President Obama's 
diplomatic approach now make sense for the United States?
    First, it may be the only way we will ever know if there is a 
chance for a peaceful outcome in our long-running feud with Iran. 
Before contemplating the use of force, it is in our clear interest to 
see if we can avoid war by peaceful means. Diplomacy's great promise is 
that one can never predict where discussions will lead once they are 
begun. Certainly, it would be unconscionable to start a war with Iran 
without having first given negotiations a serious and sustained effort.
    Second, a negotiation may now be the most effective way to slow 
down Iran's nuclear progress. One of the first tactical aims of a 
negotiation should be to prevail upon Iran to freeze its nuclear 
research as the talks proceed. Otherwise, Iran may steam ahead 
unimpeded.
    Third, negotiations would serve to isolate Iran even further 
internationally and put it on the defensive. An unconditional offer 
deprives Iran's leaders of the excuse not to negotiate. Our sitting 
down with Iranian leaders brings another advantage--it will 
significantly undercut Iran's ability to posture as the leader of the 
anti-American front among the radical governments and movements of the 
Middle East.
    Finally, we will be no worse off if we try diplomacy and fail. In 
fact, we might be stronger internationally. Having made a good faith 
effort at diplomacy, the United States would be in a far stronger 
position to convince Russia and China and other countries to join us in 
tougher sanctions. It would not be in their interest to see President 
Obama left only with the military option. I also believe we would be 
more credible around the world if countries saw that we had tried in 
good faith to resolve the crisis peacefully.
    A diplomatic opening to Iran will require patience on the part of 
Americans. Progress is unlikely to be made in the early stages. As 
Karim Sadjadpour testified to this committee in March, there will 
certainly be those in Iran who seek through intemperate statements to 
derail the process. There will undoubtedly be criticism by some in the 
United States that diplomacy is naive or even appeasement. We would do 
well to ignore these all too predictable attacks and to give President 
Obama the time and flexibility he will need to sustain a complicated 
and difficult diplomatic negotiation with Iran.
    Ultimately, Mr. Chairman, conflict with Iran is neither inevitable 
nor desirable. A first, serious negotiation with Iran in three decades 
makes much more sense for the United States than risking the awful 
calculus of war. Having placed too much of the burden in recent years 
on our military to sort out the most difficult global security 
challenges, Americans need to have greater faith in our diplomatic 
power to resolve crises. This is such a crisis. It is the right place 
to begin anew with Iran.
    Mr. Chairman, once negotiations begin, we should not limit them to 
the nuclear issue. As we did with North Korea, our Government should 
use the vehicle of multilateral talks to enable our own bilateral 
discussions on the margins. There are many issues to discuss with Iran. 
We need to find a way to convince the Iranian leadership that it is in 
its interest that Iraq emerge united and stronger as America brings 
home our troops. And, we know that Iranian interests would be served by 
greater stability in Afghanistan and the weakening of the current 
Taliban offensive. These issues and the dramatic struggle for stability 
and peace in Lebanon are all reason for us to begin a wide-ranging 
discussion with the Iranian leadership in the months ahead.
    I have one final suggestion for the committee, Mr. Chairman. We 
should also want to have a much more open and diverse relationship with 
the Iranian people. One of the great ironies of America's position in 
the Middle East is that the Iranian people demonstrate consistently in 
opinion polls their high regard for the United States. While the pace 
and nature of our talks with the Iranian Government are difficult to 
predict, it is a much more certain bet that opening up channels to the 
people of Iran will benefit both of our countries for the long term.
    It is also almost certain that an eventual normalization of 
relations with Iran and a peace between our governments--and those 
should be our most important long-term ambitions--will take some time. 
We have every reason to build bridges to the people of Iran in the 
meantime. Our Iranian-American community in the United States is 
evidence enough of the richness, energy, and talent of the Iranian 
people. We should have as primary objectives bringing thousands of 
Iranian students to study in our universities. We should want our 
religious leaders of all faiths to continue the interfaith dialogues 
that have begun tentatively in recent years. I hope it will be possible 
for Members of Congress and journalists to travel to Iran in much 
greater numbers in the coming months and years. Greater openness 
between us and more frequent people-to-people contacts will serve us 
and the cause of peace well as President Obama negotiates the trickier 
shoals of government-to-government diplomacy in the period ahead.
    Thank you for the opportunity to testify before this committee 
today.

    The Chairman. Well, it's a good statement, and we very much 
appreciate it. Let me explore a few of the implications of it, 
if I may.
    What did you learn from your experience, and what do you 
believe as a result of it, China's and Russia's attitudes are 
about this?
    Ambassador Burns. I am sorry to say that based on my 3-year 
experience of negotiating with the Chinese and Russians, which 
was a weekly and sometimes daily occurrence for me to be on the 
phone with them, to meet them, I think both have approached 
this from a fairly cynical point of view.
    For whatever reason, the Russians decided to withhold their 
full support from the P5 effort. I can't see it any other way. 
They continue to sell arms to Iran. Most of these sanctions and 
negotiations in the United Nations took 2 or 3 months longer 
than they should have because of Russian foot-dragging.
    And so Russia, in an odd sort of way, is the one country 
among the P5 that has the most to risk, because it's closest 
geographically to Iran. It cannot be in Russia's interest to 
see Iran become nuclear capable. And yet, they held back. The 
Chinese I think probably more cynical----
    The Chairman. Let me just stay with Russia for 1 minute.
    Ambassador Burns. Uh-huh.
    The Chairman. I have had various Russian officials say to 
me point-blank, ``We don't want Iran to be a nuclear power.'' 
They believe--at least they expressed to me that they believe 
it's a little further off than we believe it. Did you conclude 
that their sense of timing is different here, or are they just 
playing a double game, or is it, in fact, in their interest not 
to have an Iranian nuclear capacity?
    Ambassador Burns. Oh, I think it's very much in Russia's 
interest not to have.
    The Chairman. And do they perceive that? Do they believe 
that?
    Ambassador Burns. I believe that some of their officials 
do, but for whatever reason, the leadership did not give the 
Bush administration the support that I think the Bush 
administration deserved from them.
    So my hope would be that if the Russian Government sees an 
Obama administration willing to go the extra mile toward 
negotiations, Russia will choose to put its influence with the 
United States. But here is the only way I think we should 
proceed, Mr. Chairman. I don't believe it is in our interest to 
sit down with Iran unless we work out a deal with Russia and 
China ahead of time that when talks fail, Russia and China will 
show up at the sanctions effort.
    So, the Russians, I think, are acting out of fairly cynical 
purposes, the Chinese even more so. What's happened with China 
is that as the Europeans have reduced their export credits to 
Iran--they were at =22 billion in 2005. They've more than 
halved that right now.
    The Europeans are doing the right thing. They're pulling 
away from Iranian markets. The Chinese are rushing to fill the 
void, and China has become Iran's leading trade partner in the 
process.
    So I do think that perhaps the most important element of 
the diplomacy is not with Iran at this stage; it's with Russia 
and China, the Europeans being largely supportive of the 
direction in which the Obama administration, I think, is 
heading.
    The Chairman. Well, that's an important statement and an 
important concept, and I don't disagree with you. I believe we 
have to go two tracks here, and I hope the Iranians understand 
the genuineness of the American outreach to engage in a real 
dialogue, and that we are not in regime change mode.
    I would say that again and again. This is not about regime 
change. It is about finding a relationship that meets the needs 
of the region and satisfies the global interests with respect 
to the nuclear program.
    That said, we need to prepare for the possibility that 
things don't work. I'm convinced that the economic sanctions 
have far more likelihood of actually doing something than any 
potential military option that I've seen, which I think carries 
with it dramatic potential downsides.
    But anyway, let me, since we have time constraints here 
because the vote's coming up, I want to let my colleagues go 
right at it, and we'll just sort of do a truncated round, if we 
can.
    So, Senator Feingold.
    Senator Feingold. Thanks, Mr. Chairman, for holding our 
third Iran hearing in the last 2 months. There's a great deal 
to discuss. I continue to be very concerned by the threat that 
Iran poses, whether with regard to its nuclear ambition, its 
support for terrorism, or its general unwillingness to 
cooperate with the international community.
    I am pleased that the Obama administration has tried to 
address the current impasse with a new approach--by calling for 
strong diplomatic engagements, and speaking directly to the 
people of Iran. I think that extending an open hand on multiple 
levels, while still keeping all options on the table, has 
strengthened the new administration's position and undermined 
any efforts by the Iranian Government to blame others for not 
coming to the table.
    That said, tackling our longstanding tensions and problems 
with Iran is a considerable task, and the administration needs 
to continually reassess the situation in order to develop a 
realistic model for engagement that does not put our national 
security--or that of our friends and allies in the region--at 
risk.
    Mr. Secretary, the State Department's recently released 
``Country Reports on Terrorism'' notes that the ``Quds Force 
provided aid in the form of weapons, training, and funding to 
Hamas and other Palestinian terrorist groups, Lebanese 
Hezbollah, Iraq-based militants, and Taliban fighters in 
Afghanistan.''
    These activities obviously affect our national security 
interests on a broad range of fronts, including not only the 
terrorist threat to the United States and our partners and 
allies, but also our policies with regard to stabilizing 
Afghanistan, redeploying from Iraq, and building support for a 
two-state solution for the Middle East.
    So as we consider our options for engaging with Iran, how 
do we most effectively confront its support for terrorism--as a 
single overriding problem, or do we confront it as one of a 
number of problems--and what can we reasonably expect, in terms 
of marginal improvements in the behavior here?
    Ambassador Burns. Well, Senator, I agree with the way 
you've framed the problem. I think we've got three major 
threats from Iran. One is the nuclear threat. The second is the 
support for terrorism. The third is Iran's influence in Iraq 
and Afghanistan.
    So as I said in my opening comments, in the region of the 
world which is arguably the most important to the United 
States, we see Iran everywhere as a negative force. I said in 
my testimony that I think we have to proceed in two ways.
    One is I think it is time to have a policy of engagement 
with the Iranian Government, not because we believe it is 
highly probable it will succeed, but because we haven't tried 
it before in 30 years. It may be that through a process of 
negotiation and engagement and pressure on them, along with 
pressure from other countries, we're able to maneuver them to a 
different place.
    If that is not possible, then particularly on the nuclear 
issue, we're going to have to consider other options. They 
would be much tougher sanctions than we've seen before. And it 
will be a real test for the Obama administration, and I wish 
them well, to put together an international consensus for those 
sanctions.
    And if we believe that Iran is close to becoming nuclear 
capable, obviously, there will be this extraordinarily 
difficult choice. Do we consider the use of force, or do we 
consider constructing some type of containment regime of the 
Iranians? There will be lots of countries who would want to see 
that happen. The moderate Arab States. Israel certainly would 
want to see that happen.
    That is a very compelling and very difficult choice for any 
American President to make. We're not there yet. But if you 
play this out, that's certainly something that we have to think 
is a set of choices that we may face down the road.
    Senator Feingold. Thank you, Mr. Chairman. In fairness to 
my colleagues, I'm just going to ask that question. I had many 
other questions, but I want them to have a chance.
    The Chairman. Well, thank you, Senator Feingold.
    Senator Cardin.
    Senator Cardin. Thank you, Mr. Chairman. Ambassador Burns, 
it's a pleasure to have you back before our committee. I share 
the concerns of my colleagues. If Iran were to become a nuclear 
weapons power, it would be a game-changer that would cause 
major impact in that region--something we cannot allow to 
happen. We have to use every tool we have at our disposal 
effectively to try to make sure that doesn't happen. So I 
appreciate your observations.
    I want to get your best advice as to how much time we have 
here. June elections are upcoming in Iran. We know that the 
Foreign Minister of Israel, Mr. Lieberman, suggested that 3 
months might be the appropriate time to continue negotiations. 
After that, I don't know what he was implying, but that 
certainly raises some time issues.
    We've all heard about the urgency of this issue to make 
progress, and we know that one of Iran's strategies may well be 
delay. The longer they can delay issues, the more they can 
advance toward achieving their goal of becoming a nuclear 
weapons power.
    So I'd just like to get your advice to us as to how urgent 
these issues are, how much time we have, and what you would 
suggest as the next steps.
    Ambassador Burns. Well, Senator, as you know, I've been out 
of government for more than a year, so I am probably not the 
best person to ask, on an authoritative basis, how much time. 
But my assumption is that there is time. Now, how much is an 
open question, and that might be a dynamic question that you 
have to reassess from time to time.
    I have not heard anyone else say that 3 months is the 
amount of time that we have. I've not heard anyone else support 
that statement of the Israeli Foreign Minister. So I assume 
there is a degree of time.
    Now, having said that, and having read some of the 
testimony that was given to you in March, I very much agree 
with those who say--in fact, the chairman said it--that we have 
to impose a timetable on whatever negotiations we get into with 
the Iranians. If we just had an open-ended negotiation, they 
could run out the clock. They could continue to enrich, build 
those centrifuges and simply keep us at the table until they 
were ready to declare themselves nuclear capable.
    So, I think the Obama administration would be well advised, 
if they go into negotiations, to do it in a very--a set basis. 
A couple of months; if there's no progress, then move on to 
sanctions. I think that would be the best course of action.
    Senator Cardin. Thank you. Let me just ask very quickly a 
second question about Syria. We know that Syria has gotten much 
closer to Iran. We know that there are open discussions now 
taking place between the United States and Syria, or at least, 
there's been better communication.
    And we also know historically, it's odd to see a close 
relationship between Syria and Iran, and we know that Israel 
was making some progress through Turkey in negotiations with 
Syria, which would be inconsistent with the relationship with 
Iran.
    So is there hope that Syria, in fact, could be independent 
of Iran, and we could make progress in isolating Iran through 
Syria?
    Ambassador Burns. I certainly think that should be one of 
our objectives. I read in the paper this morning that Secretary 
Clinton is sending two senior diplomats to Damascus for their 
second round of talks, the paper said this morning. I think 
that's a good sign. And I frankly think that you might look at 
this--we all might look at this not just as a United States-
Iran issue, how do we deal with Iran, but as a triangular 
issue. Israel is involved, too.
    On Israel, our responsibility to safeguard Israel, protect 
its security, is an important, vital American interest. If 
Israel could make progress with the Syrians, if the United 
States could open up a better diplomatic relationship with the 
Syrians, that might help the diplomacy that we're conducting 
with Iran.
    My own judgment would be that Syria's long-term interests 
are going to be much more involved with the Arab States and 
with Israel than they will be with the present Government of 
Iran.
    Senator Cardin. Thank you. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Cardin.
    Senator Kaufman. Mr. Chairman, I want to thank you for 
these hearings on Iran. They have really been very, very 
helpful in terms of clarifying what we're about.
    You know, we've talked about, and I agree with all the 
problems we have with Iran, serious problems, if we're going to 
do negotiations, we've got to start talking about some common 
interests. What kind of common interests do you think we have 
in Iran?
    Ambassador Burns. With Iran today?
    Senator Kaufman. Yes.
    Ambassador Burns. It's hard to find them, but I think there 
are some. I certainly think that the Iranians have benefited 
strategically from the removal of the Taliban in power in 
Afghanistan in 2001. The Iranians have certainly benefited from 
the removal of Saddam Hussein in Iraq.
    And so what we tried to do in the Bush administration was 
to open up some talks between our Ambassador, Ryan Crocker, and 
the Iranian Ambassador in Iraq. They didn't go very far. I 
would hope that we might look at those potential interests that 
we can share with Iran, try to work with the Iranians 
productively.
    It was a good decision by Secretary Clinton to invite the 
Iranians to this conference in The Hague on narcotics in 
Afghanistan because there is another interest. The Iranians 
have a major drug problem in their country that emanates--drug 
usage that emanates from Afghanistan.
    So in this case of diplomacy, we know where we oppose the 
Iranians. Perhaps by building on some common ground, we might 
be able to make some progress that could have some benefits 
elsewhere. I'm not predicting that will be the case. I don't 
see diplomacy as an absolute panacea here.
    But I think it's worth a try because we have not done this 
in the past, and as the chairman said, and I agree with him, we 
ought to make it clear we're not out to change the regime of 
Iran. We ought to make it clear that we find them distasteful, 
the government, that we oppose much of what they stand for, but 
we're willing to work with them if we can find common ground, 
and certainly willing to work with them if we can convince them 
to roll back their nuclear efforts.
    Senator Kaufman. You know, we all have talked ad infinitum 
about how so many other of the Arab States--Saudi Arabia, 
Jordan, Turkey--they're all very much in fear of Iran getting a 
nuclear weapon. I mean, is this--do you see them stepping 
forward and doing something substantial to actually help us in 
this process?
    Ambassador Burns. I hope so. I think what you did not see 
between 2006 and 2008 when the United States launched a 
diplomatic initiative to try to get Iran to negotiate--and Iran 
walked away. You didn't see a lot of the Arab countries or 
Turkey significantly diminishing their trade with Iran the way 
that we had done, the way that France and Germany were doing.
    And so if sanctions are to work, and if economic pressure 
is going to work as an inducement to Iran, you have to look at 
all the trade partners: China, Russia, Japan, South Korea, 
United Arab Emirates, Saudi Arabia, Turkey. And I do think it 
is in the interest of some of the Arab States now to speak up a 
little bit more boldly than they've been willing to do in the 
past. Because privately, what you'll hear--as anyone who 
travels the Arab world--a lot of anxiety about the rise to 
power of Iran. But we haven't seen, at least in my judgment, 
the actions, particularly on economic sanctions, that would be 
very helpful.
    So these sanctions will only work if they're nearly 
universal. They are nowhere close to that right now. And that's 
the real diplomatic challenge for the Obama administration.
    Senator Kaufman. Thank you.
    The Chairman. Thank you, Senator Kaufman, for your usual 
good probing questions. How far do you believe the Russians and 
Chinese are willing to go with respect to economic pressure?
    Ambassador Burns. Well, I think we're about to test that as 
the Obama administration sets out to participate in 
negotiations.
    The Chairman. But you don't have a--I mean, your sense is--
well, let me ask it this way, because I think it's a tricky 
question. I mean, it's not meant to be, but it is hard to get 
your hands around that.
    Is it your sense from the discussions that you had that 
conceivably, over a period of time in the past administration, 
that there were enough other issues floating around, Georgia, 
missile defense, other kinds of things, that the climate just 
wasn't right for them to be able to be brought into an effort 
with respect to Iran, but if those dynamics are somehow further 
away in history and/or being approached differently, whatever 
the dynamics may be, does that open up an opportunity in your 
judgment for them to say, ``You're right. This will be our 
primary area of cooperative focus with the United States, and 
we're going to get something done''?
    Ambassador Burns. Well, I think you're right, Mr. Chairman, 
to say this is the key issue. If sanctions are to work, these 
two countries have to be involved. So why didn't they help us 
over the last 3 years? One reason might be that they were 
linking our interest in this with their interest on other 
issues, like missile defense.
    A second possible explanation--and this is just really 
speculation on my part--is that they feared the United States 
was really out to use force against Iran, and they didn't want 
to participate in that process. I think they were mistaken. 
They misread us.
    I know, working for Secretary Rice, that we were very much 
determined to get into negotiations in 2006. We were planning 
for negotiations, hoping for negotiations. So I do think the 
Russians may have--particularly the Russians--may have 
miscalculated and misread and misunderstood the United States.
    So the challenge now, for the present United States 
administration, for President Obama, is to convince the 
Russians and Chinese we are willing to give diplomacy a try. 
But there should be a price for that. The Russians and Chinese 
should, therefore, be willing to give sanctions a try. That 
might be the closing of a circle here that we've all been 
looking for the last few years.
    The Chairman. Well, I might add to that that it seems to me 
that time is of the essence here, as we've heard. District 
Attorney Morgenthau has talked about the seriousness of the 
evidence that he's been seeing. And so it seems to me that as 
much as you might like to begin at some lower level of talking 
about just narcotics or the Taliban or whatever we have 
interests in that regard, we may have to get right at the 
nuclear issue pretty quick, I think. Do you agree with that?
    Ambassador Burns. I do. And I think that the signals are 
from the administration that it intends to send an 
administration official to the next round of talks. That would 
be a good thing. But I do agree that if we can, perhaps on the 
margins of those talks, engage in some of these other bilateral 
issues, that would be of use as well.
    The Chairman. And in addition to that, I might add, people 
forget that only 8 years ago, in 2001, when we launched our 
efforts against al-Qaeda in Afghanistan, Iran was very helpful. 
In fact, there was significant cooperation on a number of 
issues. I know they're not fond of the Taliban, and I know 
they're not happy with the narcotics situation on their border.
    It seems to me there are legitimate interests, not to 
mention the possibility of a regional partnership. The fact is 
that under the right circumstances, unless they desire a 
confrontation, there are many, many things to cooperate on.
    That said, I've been asked to go to the floor because I've 
got to lead off with my amendment. So Senator Risch, I'll 
recognize you for questions, and Senator Kaufman, could you 
close out the hearing, and you'll chair in my absence? Thank 
you. Thanks for being with us.
    Ambassador Burns. Thank you, Mr. Chairman.
    The Chairman. I really appreciate it. Thank you.
    Senator Risch.
    Senator Risch. Ambassador Burns, you believe that the 
Iranians understand that at the end of the day, however this 
comes out when it comes to negotiations, that the Israelis will 
never allow them to create a nuclear weapon and possess a 
nuclear weapon one way or another. Do they understand that, do 
you think?
    Ambassador Burns. You know, I don't know the level of 
sophistication in the Iranian Government in determining the 
Israeli position or our position. I think there may be a 
problem here of Iranians continually misunderstanding both 
Israel and the United States.
    I certainly have heard both the past Israeli Government in 
their public statements, the current, the new Israeli 
Government of Prime Minister Netanyahu, say that this is an 
existential threat to Israel. And I think one of the 
obligations that the United States has, and the interest that 
the United States has, is to safeguard Israel, and to try to 
work in such a way that that threat never materializes to 
Israel.
    My judgment is that the best way to do that would not be 
the immediate use of force against Iran, but this two-track 
policy that we've been discussing in this hearing of engagement 
and negotiations, but backed up by the threat of force and 
backed up by draconian sanctions. And at some point, if the 
negotiations fail, it would then be this very difficult 
decision that our President would have to make as to which 
direction to go in.
    But you have asked a very good question. I think the 
Iranians have isolated themselves from us, from Israel, from a 
lot of other countries. It is unclear to me if they fully 
understand how angry and how worried many of their neighbors 
are, including Arab neighbors, about their rise to power, about 
their support for terrorism, particularly about the nuclear 
program.
    Senator Risch. And I don't disagree with that. It seems to 
me that the Iranians lump the United States and Israel together 
as far as those two countries' edginess toward the ultimate 
resolution of the issue. And I'm not so sure--I'm not only not 
so sure, I'm confident after discussing--that we aren't exactly 
on track with how close we are to that.
    Having said that, it also seems to me that the Government 
in Iran seems to be the only people on the face of this planet 
that don't have a clear realization of what the Israeli 
position ultimately will be on this issue. And I frankly don't 
understand it. I don't know why they don't understand it. I 
mean, it seems to me to be clear to just about everyone except 
them as to what the ultimate resolution's going to be if they 
continue on the course that they're on.
    Ambassador Burns. Well, it's a regime that has isolated 
itself, not just from us, but from many other countries. And I 
think that strategic isolation is one of its dilemmas right 
now. So the test for our diplomacy is: Could we help them 
relieve that strategic isolation?
    Essentially, what the Bush administration and the P5 
countries offered Iran on this two-track policy was that we 
would be willing to have an economic relationship with them, we 
would be willing to facilitate their entry into the WTO, for 
instance, if they stood down on their nuclear efforts. The 
Iranians never took us up on that two-track offer, 
unfortunately.
    But it would seem to me that the long-range interest of the 
Iranian Government, a government that is suffering 
economically--the price of oil is falling, and they're having a 
hard time domestically just taking care of their own people--
that opening up trade and investment is in their long-term 
interests. They seem to be putting other issues first right 
now.
    So the task of these negotiations should be to focus on 
that issue. The Iranians need to halt their nuclear weapons 
development effort, in return for which there should be 
incentives by the international community to them to have a 
greater measure of trade and investment.
    One other word on Israel. I think it is one of our central 
interests here to help Israel. I do think the United States is 
right to take the lead here, and I think leading 
diplomatically, not through military force, is in the best 
interest of both Israel and the United States at this point.
    Senator Risch. Thank you. I appreciate that. The other 
thing that seems to be wound up in this is there seems to be, 
when you read what comes out of Iran, almost--not almost--an 
actual national pride somehow tied in with this nuclear 
enrichment, and it permeates not only the government, but it 
seems the Iranian people--the Iranian people seem to be more 
reasonable than their government is, but both of them seem to 
be somehow tied up in this national pride thing, almost like a 
soccer team or something like that, that they have this 
national pride tied to nuclear enrichment, which really 
complicates matters, it seems to me.
    Ambassador Burns. It does, and President Ahmadinejad 
unfortunately has made this one of his central initiatives, to 
try to build this sense of pride out of the nuclear project. I 
think that the Iranian people ought to feel pride in trying to 
build a civil nuclear capacity.
    It has been the position of the United States for a long 
time, including in the Bush administration, that we would have 
no objection to the properly monitored and regulated civil 
nuclear capacity of the Government of Iran, but they shouldn't 
take pride in unleashing proliferation in the Middle East, 
unleashing a situation where they might become nuclear weapons 
capable. Because the impact on the Iranians will be, as you 
said, to anger Israel, the United States, and nearly all their 
neighbors.
    So helping the Iranian people understand that civil nuclear 
power is one thing, nuclear weapons are another, is really a 
task for our public diplomacy and for Arab public diplomacy as 
we go ahead, I think.
    Senator Risch. Thank you, Mr. Burns.
    Ambassador Burns. Thank you.
    Senator Risch. Thank you.
    Senator Kaufman [presiding]. Mr. Ambassador, you've said 
several times today about we'd lead with diplomacy, we'd have 
the military--do you have any doubt that the Iranian Government 
understands that militarily, we would use what we have to use 
if we have to use it?
    Ambassador Burns. That's a good question, a hard question 
to answer. I do think it would be important for the Obama 
administration to reaffirm our willingness to use force if 
necessary, if absolutely necessary. Not that we would default 
to it, not that we wouldn't go through an agonizing process 
before doing it. But I don't see diplomacy succeeding unless 
that threat of the use of force is clearly visible. And I'm not 
sure, given the change of administration, and given the fact 
it's early days, given the fact that the policy as I've seen it 
publicly is not completely rolled out, I think we need to see 
more definition on that policy. And that would be my advice.
    And I am someone who very much supports the direction that 
President Obama is heading in, and think that what he has done 
tactically has been very astute. His openness to the Arab 
world--the Nowruz message, the video message that he sent to 
the Iranian people over Nowruz, the fact that he said that 
we'll be at these talks. I think President Obama has done all 
the right things here, but as we get into the negotiations, the 
consequences of sanctions and the possible use of force, I 
think, need to be very clearly spelled out. That would be my 
judgment.
    Senator Kaufman. I have two questions I just can't let you 
get away without answering, if you can do anything. The 
Ayatollah Khomeinei's comment yesterday rebuking Ahmadinejad, 
do you read anything into that?
    Ambassador Burns. It is hard to say. It was interesting to 
see that during an election campaign, he chose to rebuke 
Ahmadinejad. The Supreme Leader chose to rebuke Ahmadinejad 
publicly. It has happened a few times in the past. I don't know 
what it means ultimately. We haven't seen him come out for or 
against--the Supreme Leader--any other candidates.
    Obviously, what happens in June in their elections will be 
a major determinant of whether President Obama's policy of 
seeking a diplomatic approach can be successful.
    Senator Kaufman. Well, that brings the second question, 
what do you think is going to happen in June?
    Ambassador Burns. It is hard to say.
    Senator Kaufman. I know, and I realize this.
    Ambassador Burns. But, I do think that Ahmadinejad, 
unfortunately, has succeeded in some respects in the Muslim 
world in depicting himself as a champion of the Palestinian 
people, which he has not been, as Iran has not been much 
interested in the Palestinian cause until very recently. But at 
home, as best as I can see, Ahmadinejad is not as popular as he 
may want to be. His economic policies are largely considered to 
have been a failure at home. The Iranian people are hurting.
    You have this incredible irony. It is a wealthy country. It 
is the second-largest gas producer in the world. It is a major 
oil producer. They can't even refine their own gasoline. They 
are importing nearly half of their gasoline needs. And average 
people are having a tough time in Iran.
    Whether we see that expressed in the voting booths in Iran 
is an open question. But obviously, my own personal view is 
that Ahmadinejad has been a disaster for the Iranian people and 
for Iran's long-term interests.
    Senator Kaufman. Great. Thank you for your usual 
spectacular testimony. And I'm going to adjourn the meeting.
    Ambassador Burns. Thank you.
    [Whereupon, at 10:58 a.m., the hearing was adjourned.]
                              ----------                              


              Additional Material Submitted for the Record


  Responses of Hon. R. Nicholas Burns, to Questions Submitted for the 
                 Record by Senator Robert P. Casey, Jr.

efficacy of international sanctions targeted to iran's gasoline imports
    In your opening statement, you made the following statement 
endorsing the value of international sanctions as an effective 
handmaiden to diplomacy:

          While agreeing to negotiations, President Obama should not 
        want to go hat in hand to the Iranians. As you stated in the 
        March 3 hearings, Mr. Chairman, we must negotiate with Iran 
        from a position of strength. President Obama would be wise to 
        set a limited timetable for talks. He should make clear that 
        the United States and others would walk away and impose much 
        tougher financial and economic sanctions if progress in the 
        negotiations is not made in a reasonable period. This would 
        prevent Iran from running out the clock until they become 
        nuclear capable.

    Due to an inadequate domestic reprocessing capacity, Iran must 
import up to 40 percent of its domestic gasoline consumption, despite 
the fact that it is one of the world's leading oil producers. Last 
week, a bipartisan group of Senators introduced S. 908, the Iran 
Refined Petroleum Sanctions Act, a bill that would authorize the 
President to impose additional economic sanctions against those foreign 
firms that export reprocessed gasoline products to Iran. I am a 
cosponsor of this bill.

    Question. How do you view the potential efficacy and viability of 
international sanctions that seek to target Iran's so-called Achilles 
heel--its dependency on imports of reprocessed gasoline for the 
functioning of its domestic economy?

    Answer. As I stated in my testimony, I support President Obama's 
determination to begin negotiations with the Iranian Government. But, 
should those negotiations not produce progress toward ending Iran's 
quest for a nuclear weapons capability, the United States should then 
lead an effort to impose much tougher sanctions on Iran. To be 
successful, those sanctions would have to be supported and implemented 
by Iran's major trade partners, including China, Russia, Japan, South 
Korea, neighboring Arab States and European governments. In the event 
of failed negotiations with Iran, I believe sanctions on importation of 
reprocessed gasoline should be among the options the United States and 
other countries consider.

    Question. Do you have specific thoughts on congressional 
legislation recently introduced to empower the President to levy 
sanctions on foreign companies that facilitate the export of 
reprocessed gasoline products to Iran?

    Answer. To be successful, sanctions will need to be draconian in 
nature. Sanctions on reprocessed gasoline products would fit this 
definition. I would not favor tying the President's hands by having the 
Congress mandate sanctions automatically. Rather, it would be more 
effective, in my judgment, for the President to have the authority to 
decide when and if such sanctions should be imposed.

    Question. Do you think it is useful for the administration and the 
Congress to play a ``good cop, bad cop'' routine when it comes to 
balancing diplomacy with coercive pressure?

    Answer. I believe the administration should be given maximum 
flexibility and freedom of action in conducting the difficult diplomacy 
ahead with Iran, including determining how long to conduct diplomatic 
negotiations with Iran. It will surely be helpful for Congress to 
support negotiations with Iran but also to make clear that harsh 
sanctions would follow failed discussions. Such a determined posture on 
the part of Congress would be very valuable, in my judgment, to the 
administration in its talks with Iran. But, given the complexity of the 
U.S. relationship with Iran and the difficulty of holding together the 
international coalition of countries opposed to Iran's nuclear research 
efforts, I suggest President Obama be free to determine the timetable 
for both negotiations and the imposition of sanctions.
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       Material Submitted by Robert Morgenthau and Adam Kaufmann






















































                                  
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