[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





      FINANCIAL HARDBALL: CORRALLING TERRORISTS AND PROLIFERATORS

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

                                HEARING

                               BEFORE THE

         SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION, AND TRADE

                                 OF THE

                      COMMITTEE ON FOREIGN AFFAIRS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 6, 2011

                               __________

                            Serial No. 112-9

                               __________

        Printed for the use of the Committee on Foreign Affairs


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 Available via the World Wide Web: http://www.foreignaffairs.house.gov/

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                      COMMITTEE ON FOREIGN AFFAIRS

                 ILEANA ROS-LEHTINEN, Florida, Chairman
CHRISTOPHER H. SMITH, New Jersey     HOWARD L. BERMAN, California
DAN BURTON, Indiana                  GARY L. ACKERMAN, New York
ELTON GALLEGLY, California           ENI F.H. FALEOMAVAEGA, American 
DANA ROHRABACHER, California             Samoa
DONALD A. MANZULLO, Illinois         DONALD M. PAYNE, New Jersey
EDWARD R. ROYCE, California          BRAD SHERMAN, California
STEVE CHABOT, Ohio                   ELIOT L. ENGEL, New York
RON PAUL, Texas                      GREGORY W. MEEKS, New York
MIKE PENCE, Indiana                  RUSS CARNAHAN, Missouri
JOE WILSON, South Carolina           ALBIO SIRES, New Jersey
CONNIE MACK, Florida                 GERALD E. CONNOLLY, Virginia
JEFF FORTENBERRY, Nebraska           THEODORE E. DEUTCH, Florida
MICHAEL T. McCAUL, Texas             DENNIS CARDOZA, California
TED POE, Texas                       BEN CHANDLER, Kentucky
GUS M. BILIRAKIS, Florida            BRIAN HIGGINS, New York
JEAN SCHMIDT, Ohio                   ALLYSON SCHWARTZ, Pennsylvania
BILL JOHNSON, Ohio                   CHRISTOPHER S. MURPHY, Connecticut
DAVID RIVERA, Florida                FREDERICA WILSON, Florida
MIKE KELLY, Pennsylvania             KAREN BASS, California
TIM GRIFFIN, Arkansas                WILLIAM KEATING, Massachusetts
TOM MARINO, Pennsylvania             DAVID CICILLINE, Rhode Island
JEFF DUNCAN, South Carolina
ANN MARIE BUERKLE, New York
RENEE ELLMERS, North Carolina
VACANT
                   Yleem D.S. Poblete, Staff Director
             Richard J. Kessler, Democratic Staff Director
                                 ------                                

         Subcommittee on Terrorism, Nonproliferation, and Trade

                 EDWARD R. ROYCE, California, Chairman
TED POE, Texas                       BRAD SHERMAN, California
JEFF DUNCAN, South Carolina          DAVID CICILLINE, Rhode Island
BILL JOHNSON, Ohio                   GERALD E. CONNOLLY, Virginia
TIM GRIFFIN, Arkansas                BRIAN HIGGINS, New York
ANN MARIE BUERKLE, New York          ALLYSON SCHWARTZ, Pennsylvania
RENEE ELLMERS, North Carolina













                            C O N T E N T S

                              ----------                              
                                                                   Page

                               WITNESSES

Mr. Juan C. Zarate, Senior Adviser, Center for Strategic and 
  International Studies (former Deputy Assistant to the President 
  and Deputy National Security Advisor for Combating Terrorism, 
  and former Assistant Secretary for Terrorist Financing and 
  Financial Crimes, U.S. Department of the Treasury).............     7
David Asher, Ph.D., non-resident senior fellow, Center for a New 
  American Security (former Senior Adviser, East Asian and 
  Pacific Affairs, and Coordinator, North Korea Working Group, 
  U.S. Department of State)......................................    32
Professor Orde F. Kittrie, Sandra Day O'Connor College of Law, 
  Arizona State University.......................................    39

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

The Honorable Edward R. Royce, a Representative in Congress from 
  the State of California, and chairman, Subcommittee on 
  Terrorism, Nonproliferation, and Trade: Prepared statement.....     4
Mr. Juan C. Zarate: Prepared statement...........................    10
David Asher, Ph.D.: Prepared statement...........................    34
Professor Orde F. Kittrie: Prepared statement....................    42

                                APPENDIX

Hearing notice...................................................    62
Hearing minutes..................................................    63

 
      FINANCIAL HARDBALL: CORRALLING TERRORISTS AND PROLIFERATORS

                              ----------                              


                        WEDNESDAY, APRIL 6, 2011

              House of Representatives,    
                     Subcommittee on Terrorism,    
                           Nonproliferation, and Trade,    
                              Committee on Foreign Affairs,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 3:04 p.m., in 
room 2172, Rayburn House Office Building, Hon. Edward R. Royce 
(chairman of the subcommittee) presiding.
    Mr. Royce. This hearing of the Subcommittee on Terrorism, 
Nonproliferation, and Trade today will look at corralling 
terrorists and proliferators--financial hardball, in other 
words.
    Economic sanctions have long been a key diplomatic tool. 
Athens imposed a trade boycott on Sparta's ally Megara. And, of 
course, it is a long history, but in recent years the United 
States has increasingly relied upon reputational financial 
sanctions, particularly against North Korea and Iran. These 
sanctions target financial institutions employed by rogue 
states for illicit transactions. To preserve their reputation 
and protect their businesses, other banks shun the targeted 
institution, restricting the rogue's ability to finance 
proliferation or terrorist activities.
    This model was effectively used in 2005 with Banco Delta 
Asia hitting North Korea. Once BDA was identified as complicit 
in North Korea's money laundering and WMD activities, banks 
throughout the region shunned Banco Delta Asia and other North 
Korean transactions, effectively shutting the regime out of the 
international system. As Dr. David Asher, a key architect of 
this policy, will testify, this was a ``financial shot heard 
around the world.''
    The key to this action was Section 311 of the PATRIOT Act, 
which allows the Treasury Department to designate a particular 
financial entity as a ``primary money laundering concern,'' 
barring it from the U.S. financial system. One witness, Juan 
Zarate, pioneered the use of this sanction against ``bad 
banks'' during his tenure at Treasury.
    After being used against North Korea and BDA, this 
``unprecedented power'' took a 5-year vacation. That is until 
this year, when the Beirut-based Lebanese Canadian bank was 
sanctioned. Treasury found that as much as $200 million per 
month in drug money was laundered through this bank to the 
benefit of Hezbollah, financing weapons, financing logistics, 
financing training.
    The ``market-based financial isolation'' that was used 
against North Korea set the stage for Treasury's campaign 
against Iran. Beginning in 2006, senior U.S. officials visited 
some five dozen banks, seeking to persuade them to reconsider 
their business with Iranian financial institutions. Dubious 
transactions by Iranian banks, like the $50 million transmitted 
by Iran's bank Saderat through a London subsidiary to 
Hezbollah, were spotlighted. In this ``whisper campaign,'' 
Treasury officials revealed the high cost foreign institutions 
could bear if found to be facilitating illicit Iranian 
transactions.
    This has caused economic hassle and even pain for the 
regime in Iran, but it is yet to alter its nuclear weapons 
drive.
    But neither has our financial pressure been turned to the 
max. Treasury has yet to designate a single bank under Section 
311 of the PATRIOT Act for Iran-related sanctions. Nor has 
Treasury imposed any sanctions against Iran's Central Bank, 
which has reportedly assisted Iranian banks to sidestep U.S. 
financial pressure.
    Nor have new financial sanctions that were included in the 
Comprehensive Iran Sanctions, Accountability, and Divestment 
Act been fully implemented. Nine months after the bill was 
signed, Treasury is yet to issue regulations to bar foreign 
banks from doing business with designated Iranian entities from 
the U.S. financial market. If fully implemented, this would 
transform Treasury's whispers into a loud bark and a bite.
    Successive administrations have shown little interest in 
sanctioning firms investing in Iranian's energy sector. Last 
week's sanctioning of an already sanctioned and largely 
insignificant Belarusian energy firm was embarrassing for the 
Obama administration. It was just a gesture.
    Our witnesses today suggest that financial sanctions, if 
made a cornerstone of a coordinated campaign, could tip the 
playing field. In North Korea's case, one suggests they could 
have proven ``decisive'' had naive diplomats not demanded that 
they be dismantled.
    Lastly, I should note that our hearing comes as the 
Treasury Department is in transition. Under Secretary Stuart 
Levey left his post just days ago. He was innovative and 
aggressive. The administration insists his departure won't 
affect policy. Let's hope that is the case.
    I will now introduce our witnesses.
    Mr. Juan Zarate is a senior adviser at the Center for 
Strategic and International Studies. Mr. Zarate previously 
served as Deputy Assistant to the President and Deputy National 
Security Adviser for Combating Terrorism from 2005 to 2009. 
Prior to that, Juan served as the first Assistant Secretary for 
Terrorist Financing and Financial Crimes. He is actually from 
my county, Orange County, California.
    I am going to mention the ranking member after I go through 
the witnesses and then go to you for your opening statement, if 
that is all right.
    Mr. Sherman. Very good.
    Mr. Royce. Dr. David Asher is a non-resident senior fellow 
at the Center for a New American Security. Previously, Dr. 
Asher served as a Senior Asia Adviser at the State Department 
and was the Coordinator for the North Korea Working Group that 
attacked Kim Jong Il's illicit activities and finances. He is a 
coauthor of a new report, ``Pressure,'' in which he documents 
those efforts.
    Professor Orde Kittrie is professor of law at Arizona State 
University's Sandra Day O'Connor College of Law. He focuses on 
legal and policy issues relating to the proliferation of 
weapons of mass destruction. Prior to academia, Mr. Kittrie 
served for 11 years at the State Department as an attorney.
    I would like to turn now to our ranking member, Mr. Brad 
Sherman from California, for his opening statement; and then we 
will go to Mr. Zarate, Dr. Asher, and Mr. Kittrie, in that 
order, for their statements.
    Mr. Sherman.
    [The prepared statement of Mr. Royce follows:]
    
    
    

    Mr. Sherman. American national security depends upon our 
nonproliferation efforts, particularly against Iran. The issue 
is raised, can sanctions work? The answer is, obviously, of 
course, definitely, but only if you are willing to make our 
international businesses and trading partners angry. We have 
been absolutely unwilling to do that to any degree whatsoever, 
and our sanctions program has manifestly failed to slow the 
times centrifuges.
    Let me give an extreme example that demonstrates what I am 
saying. Imagine if the United States had a rule that you could 
not trade with the United States, not one paperclip, if you 
conducted any trade with Iran--a single paperclip, perhaps 
excluding medicine and food. The result would be an immediate 
shutdown of the Iranian economy, as it couldn't get spare parts 
for oil field equipment, elevators, et cetera. Iran would have 
to discontinue its program within weeks.
    And, of course, this would make all of our trading partners 
angry, not the least of which would be the Chinese. We would 
see our ports locked to their exports until such time as they 
bend to our nonproliferation strategy, which I think they would 
do within hours.
    Wall Street is simply too powerful, the business community 
is too powerful, the State Department is too deferential for us 
to do anything close to what I am talking about. So, instead, 
we have a policy of sanctions to the full extent that can be 
implemented without making anybody upset, except the Iranians. 
And within that range we have at least been able to annoy the 
North Koreans and the Iranians with our very limited efforts.
    Financial measures play an important role in applying this 
level of pressure, and financial institutions seem particularly 
concerned about their reputations and susceptible to things 
that pose reputational risks. You can demonstrate tactical 
results. A bank quits doing business for Iran, for example. But 
what does that mean? That just means they have got to go to 
another bank. Iran is not going to abandon its nuclear program 
just because they have to go to the bank with the high ATM 
fees.
    Big Western banks do tend to be wary institutions. They 
respond to pressure, to whisper campaigns. Stuart Levey did an 
outstanding job within the constraint that he couldn't make 
anybody angry. He accomplished all that could be.
    Financial institutions, in an effort to protect their 
reputation, often go well beyond letter of the law. At least 
initially the Bush administration designated Banco Delta Asia 
under the PATRIOT Act in September, 2005. The order only 
affected that one bank. Yet almost all reputable institutions 
stayed away from North Korea and its banking institutions, 
causing a cash crunch for the North Korean Government that led 
to a little bit of more reasonable negotiating from them for a 
while.
    We have to play financial hardball and will learn about 
that at these hearings. But we also have to impose trade as 
well as financial pressures.
    The fact that we are doing the exact opposite was 
illustrated a couple weeks ago when, on March 16th, the State 
Department sent notice to Congress saying that it was going to 
give a license to GE to repair the jet engines of supposedly 
civilian Iranian aircraft. Well, how civilian are these 
aircraft? We know that they are used to take weapons to 
Hezbollah. We know that they were used in intelligence 
operations involving Iranian dissidents and assassinations and 
assassination attempts. And we know that they were used, as 
shown on page 240, 241 of the 9/11 Commission Report, to ferry 
9/11 highjackers in and out of Afghanistan prior to the 9/11 
incident.
    These are their civilian aircraft. We are going to license 
their repair.
    What we should have the guts to do is simply tell Iran, 
ground your airplanes until you ground your nuclear program. 
Unfortunately, while many of us, including, I believe, the 
chairman, the chairwoman of the full committee, the ranking 
member of this full committee, are urging the State Department 
to do just that, I suspect that the administration will bow to 
corporate pressure and license this, while at the same time 
telling the American people that we are using all the economic 
power of the United States to try to prevent the Iranians from 
developing a nuclear weapon.
    We can and should go way beyond CISADA. Last Congress, 
joined by our chairman, I introduced the Stop Iran's Nuclear 
Weapons Program Act. That would, among other things, sanction 
those who would buy bonds from the Iranian Government. Recent 
news reports suggest that some $4.2 billion in bonds will soon 
be issued by an agency of that government, the Power Oil and 
Gas Company. I will be reintroducing that legislation next 
week, and I want to urge all our colleagues to cosponsor that 
legislation.
    Finally, I want to mention that some $33 billion was seized 
and frozen by Treasury because those assets were owned by Libya 
and the Qadhafi family. It is time that those assets be used to 
pay the costs of Operation Odyssey Dawn. That is an operation 
designed to protect the Libyan people.
    The fact that we have not even asked the Benghazi 
government--I don't think we need to ask, but we haven't even 
bothered to ask--for a clear declaration that those funds 
should be used to support our efforts shows a real lack of 
respect to the American taxpayers.
    I would point out that Libya produces more oil per capita 
than any country that you can find on the map without a 
magnifying glass.
    So there is still much to be done. I want to commend our 
Treasury Department for what they have been able to do under 
the political constraints they face, and I yield back.
    Mr. Royce. Thank you, Mr. Sherman.
    Mr. Zarate.

  STATEMENT OF MR. JUAN C. ZARATE, SENIOR ADVISER, CENTER FOR 
STRATEGIC AND INTERNATIONAL STUDIES (FORMER DEPUTY ASSISTANT TO 
    THE PRESIDENT AND DEPUTY NATIONAL SECURITY ADVISOR FOR 
    COMBATING TERRORISM, AND FORMER ASSISTANT SECRETARY FOR 
 TERRORIST FINANCING AND FINANCIAL CRIMES, U.S. DEPARTMENT OF 
                         THE TREASURY)

    Mr. Zarate. Thank you Chairman Royce, Ranking Member 
Sherman. It is an honor to be here with you today. Thank you 
for the invitation, always an honor to be with southern 
Californians.
    I submitted written testimony and ask that it be entered in 
the record, Mr. Chairman.
    Mr. Chairman, I was privileged to serve at the Treasury 
Department and the National Security Council after 9/11 with a 
team of remarkably dedicated public servants like Dr. David 
Asher sitting to my right, who are dedicated to deploying these 
innovative financial tools to promote and defend the national 
security of our Nation.
    David, in particular, was critical as the State 
Department's point man in devising new ways of integrating law 
enforcement, financial, and diplomatic tracks to squeeze the 
regime in Pyongyang.
    Mr. Chairman, I would also like to thank you for your 
consistent support on these issues, especially as we deploy 
targeted financial sanctions against international scofflaws 
like Viktor Bout and his international business empire.
    Mr. Chairman, between diplomacy and war lies the realm of 
economic influence and financial power. Over the past decade, 
we have developed a new brand of financial suasion used to 
constrict the budgets and global reach of terrorist networks 
and to isolate and diminish the international financial and 
commercial access of rogue regimes like North Korea and Iran. 
This new paradigm leverages the integration of complementary 
financial and national security objectives to protect the 
integrity of the international financial system and isolate 
rogue financial activity.
    What makes this approach so powerful is that it relies more 
on the risk-based calculus of global financial and commercial 
institutions than the policy decisions of governments. This is 
why we have seen banks and insurance companies end their 
dealings with North Korea and Iran, even absent government 
decrees or U.N. sanctions.
    Enabling this new power is the suspect or illicit behavior 
of rogue actors themselves. With sensitivities embedded in the 
financial system to illicit financial behavior, such activities 
become the Achilles' heel of rogue actors. This is why the 
Iranian Revolutionary Guard forces growing control of the 
Iranian economy is a central vulnerability.
    This system of financial suasion relies on a virtuous cycle 
where rogue behavior is exposed or targeted by governments and 
shunned by the private sector, reinforcing financial isolation. 
This then puts a premium on government exposure of masked 
financial transactions.
    Importantly, this new paradigm has done away with the old 
orthodoxy that defines sanctions as being either unilateral or 
multilateral. This new brand of financial power is multilateral 
by nature. This explains why a domestic proposed administrative 
rule under Section 311 of the PATRIOT Act can lead to the 
global financial isolation of the North Korean regime.
    Financial suasion is now central to our national security 
approach. It can cut off funding for rogue regimes, heighten 
scrutiny of suspect international activity, amplify the 
financial pressure and political fissures within regimes and 
societies, and anchor the international isolation of the rogue 
regime and its leadership.
    These financial campaigns also alter the strategic 
environment, and so we need to be aware of the trends that 
could dull the sharp edge of this new power.
    Criminal and terrorist networks and sanction states will 
continue to need access to the international financial system. 
This will breed innovation in circumventing sanctions and the 
creation of shadow banking networks. We then need to continue 
to shine a light on those actors engaged in illicit and suspect 
conduct, especially the financial facilitators.
    Governments need to remain acutely aware of the reliance on 
the private sector and maintain focus on conduct-based 
sanctions that have direct relevance to the integrity of the 
financial system. It is critical as well that we tend to the 
economic and enforcement environment that makes this power 
possible. In the first instance, it requires maintaining and 
using the tools and authorities we already have in place, 
drawing the sharp distinction between legitimate and 
illegitimate financial activity. It also requires strengthening 
the United States as a central financial and commercial center 
to ensure that what the United States says and does has global 
impact.
    And we can't remain static in our application of financial 
pressure against rogues. We need to integrate law enforcement 
and other tools to amplify the effects of these powers and 
launch new campaigns to address plutocracy and human rights to 
underscore the illegitimacy of rogue actors in the 
international financial arena.
    The recent steps taken to expose Hezbollah's international 
drug trafficking and money laundering activity is a welcome 
strategic move. We may also need to think more creatively about 
positive finance incentives, both to reward the right behavior 
by the financial community and punish illicit financial actors. 
It is important as well as not to view these powers as a magic 
bullet for all our hard transnational problems. This power 
needs to be an enabler for our broader national security 
strategies.
    Finally, Congress plays an important role in this realm. 
Congress should hold the executive's feet to the fire in 
implementing existing authorities to isolate rogue behavior. As 
it has done with CISADA, Congress can affect the international 
environment and pressure on foreign governments, the private 
sector nongovernmental organizations to ensure there is a clear 
dividing line between legitimate financial activity and 
activities that serve to circumvent controls on illicit 
behavior.
    As the world faces challenges from rogue states' networks 
and actors, there now exists a well-developed international 
system to use financial information, power, and suasion to 
isolate rogues from the legitimate financial system. If 
maintained properly and used aggressively, this new paradigm of 
smart financial power will remain an effective cornerstone of 
our national security approach, keeping both the financial 
system and our citizens safe.
    Thank you very much, and I look forward to your questions.
    [The prepared statement of Mr. Zarate follows:]
    
    
    
    Mr. Duncan [presiding]. Dr. Asher.

 STATEMENT OF DAVID ASHER, PH.D., NON-RESIDENT SENIOR FELLOW, 
CENTER FOR A NEW AMERICAN SECURITY (FORMER SENIOR ADVISER, EAST 
ASIAN AND PACIFIC AFFAIRS, AND COORDINATOR, NORTH KOREA WORKING 
                GROUP, U.S. DEPARTMENT OF STATE)

    Mr. Asher. Chairman Royce, Ranking Member Sherman, and 
members of the committee, thank you very much for the 
opportunity to testify here today.
    I had the great pleasure, as a colleague and counterpart of 
Juan Zarate during the Bush administration, to go to work on 
the North Korea problem set in particular but also to help 
develop the use of finance as a fulcrum element in applying 
nonkinetic pressure against some of our most difficult 
adversaries and most defiant regimes and networks.
    Recently, I had the pleasure of being a coauthor of this 
report from the Center for New American Security called 
Pressure, which reviews the history not only of the Bush 
administration's North Korea Illicit Activities Initiative but 
also the Clinton administration's path-breaking initiative to 
put financial pressure on Slobodan Milosevic, something which I 
encourage people to pay attention to.
    And with your permission, sirs, I would like to submit for 
the record at least the text as well as my written statement 
today. I would like to highlight five points briefly from this 
report.
    The first is essentially covering what Juan just mentioned. 
In the last decade, the Treasury Department has pioneered a new 
era of financial operations other than war and created what I 
would say is a revolution in financial affairs equivalent to 
the revolution in military affairs engendered by the use of 
precision-guided munitions and sort of smart warfare 
capabilities.
    We have the ability today, given the interconnectivity of 
the global financial system to apply nonkinetic pressure 
coercively against nations by combining economic sanctions, 
precision-guided financial measures using Treasury authorities 
and, really importantly, law enforcement, in my mind, in a way 
that you can essentially intimidate, deter, deny, coerce, and I 
think even defeat, in some cases, adversaries who may otherwise 
be difficult to have any effect on. And I think on the Iran 
problems set we would have to look at nonkinetic ways and means 
as the primary.
    The effectiveness, of course, of economic statecraft, a 
second point, really depends on the clarity of the desired end 
state. That is why, Ranking Member Sherman, I totally 
understand your point. I mean, the administration has to decide 
what it wants to achieve and what it is willing to do to 
achieve it.
    Because the stakes on the Iran problem set are so 
incredibly high they go well beyond just Iran's nuclear threat, 
which is considerable looking ahead, but also the threat of 
proliferation throughout the Middle East triggered by the 
Iranian regime's development, especially in the wake of this 
revolutionary sea change in the political environment in the 
entire Middle East.
    The third point, which I already sort of touched on, is I 
believe law enforcement remains the most neglected element of 
national power. One of the most important things we did 
together, working with the Department of Justice during the 
Bush administration, was launch global undercover 
investigations against the North Korean networks which were 
engaged in weapons proliferation and illicit procurement as 
well as the funding of the regime of Kim Jong Il.
    Law enforcement evidence is much more compelling than 
intelligence in convincing foreign governments to act; and by 
providing an evidentiary basis that is acceptable under 
national legal rules, as well as the rules of foreign partner 
countries, I think we can find we can freeze much more money 
than we can simply through Treasury designations or even the 
United Nations sanctions.
    But what is one very important point is that the financial 
actors that are complicit within the world of weapons 
proliferation, for example, have to be held accountable. The 
Department of Justice apparently has investigated maybe as many 
as a dozen banks for complicity and falsifying wire transfers 
on behalf of the Iranian regime, billions and billions of 
dollars. None of those bankers has been essentially taken away 
in handcuffs or with his head on a stick, in effect, as a 
criminal. Instead, they have been given fines. I don't believe 
that policy is a sound policy in the long haul.
    The fourth is the economic course of diplomacy has a very 
important role within the military context, and I think that 
these threat finance cells within Afghanistan and within Iraq 
are playing an important role and continue to play an important 
role within the military complex. It is not just a shaping 
mechanism. Denying the means of sustainment to our adversaries 
has been a fundamental principle of warfare since time 
immemorial. After all, Marcus Tullius Cicero wrote, I think in 
44 B.C., that endless money forms the sinews of war; and its 
insight remains very significant today.
    We can be doing a much better job I believe going after, 
for example, the financing of the Taliban, but the problem is 
we would have to look at Pakistan, and this is the problem set 
we are going to have to face.
    Finally, the power of economic and financial coercive 
diplomacy which we found in reviewing the history in this 
report can be underestimated. Had we known how successful our 
sanctions had been against Saddam Hussein there would never 
have been a need to invade that country. Not underestimating 
ourselves and having an accurate measure of the actual effects 
of our policies is critical.
    On that note, I turn over to you. Thank you, sir.
    [The prepared statement of Mr. Asher follows:]
    
    
    

    Mr. Duncan. Thank you.
    Professor Kittrie is recognized for 5 minutes.

  STATEMENT OF PROFESSOR ORDE F. KITTRIE, SANDRA DAY O'CONNOR 
            COLLEGE OF LAW, ARIZONA STATE UNIVERSITY

    Mr. Kittrie. Thank you, Mr. Duncan, Ranking Member Sherman. 
Thank you for the invitation.
    It is a pleasure to be here today. Since you have such 
great experts alongside me on North Korea and terrorism finance 
in David Asher and Juan Zarate, who literally have those topics 
covered from A to Z, and I primarily follow Iran issues, I will 
focus my remarks on the application of sanctions to Iran.
    U.S. Government officials have stated that the current 
sanctions on Iran are designed to both coerce and constrain 
Iran. How is the international community, led by the U.S., 
doing in achieving those goals?
    With regard to coercion, while sanctions on Iran have 
undoubtedly increased the costs to Iran of its illegal 
behavior, they have clearly not raised the costs sufficiently 
to outweigh the benefits to the Iranian regime of proceeding 
with its nuclear program and state sponsorship of terrorism. We 
know that because Iran is clearly still choosing to proceed 
with both.
    The bottom line with regard to the efforts to constrain 
Iran is that, while Iran's capacity to pursue its illicit 
behavior is undoubtedly being hindered, it is clearly still 
making progress, albeit somewhat more slowly, toward its 
illicit goals.
    What more needs to be done if we are to tip the balance and 
succeed in both coercing Iran and halting its capacity to 
conduct illicit activities? I have detailed in my written 
testimony several ideas for tipping that balance. The following 
are some highlights, which I would be happy to discuss in more 
detail during Q&A.
    In light of the hearing's title, I will start with some 
financial measures.
    Number one, sanctioning the Central Bank of Iran. In light 
of the key role played by the Central Bank of Iran in financing 
Iran's illicit state sponsorship of terrorism and illicit 
proliferation activities, the imposition of sanctions on the 
Central Bank, ideally in conjunction with key allies, is 
looking like an increasingly smart option.
    Number two, curtail Iran's ability to issue bonds. With 
most major international banks and energy companies having 
stopped doing business with Iran, it is harder for Iran to 
attract the investment it needs to develop its energy sector. 
In response, as Ranking Minority Member Sherman mentioned, Iran 
recently announced the issuance of billions of dollars in bonds 
to support development of its South Pars natural gas field.
    The Stop Iran's Nuclear Weapons Program Act, H.R. 6296, 
which was introduced in the last Congress by the chair and 
ranking member of this subcommittee, would address this by 
making sanctionable the buying or facilitating of Iranian 
bonds. I am glad to hear that excellent bill is going to be 
reintroduced soon, and I hope it gains the widespread support 
it deserves.
    Number three, probably the most important steps to be taken 
to ratchet up the pressure on Iran involve China. Only some of 
the steps involve financial sanctions, but I will mention them 
all because they are so important.
    China is reportedly failing to comply with the several U.N. 
Security Council resolutions which prohibit the transfer to 
Iran of proliferation-sensitive equipment and materials.
    Robert Einhorn, the State Department's Special Advisor for 
Nonproliferation and Arms Control, last month stated that, ``We 
continue to have concerns about the transfer of proliferation-
sensitive equipment and materials to Iran by Chinese 
companies.''
    Such transactions are crucially important to the Iranian 
nuclear program, which reportedly is still dependent on the 
import of high-strength maraging steel, vacuum pumps, and other 
critical items.
    In light of the continued contributions by some Chinese 
companies to Iran's proliferation activities, it may be wise to 
sanction those companies, for example, under the Iran, Syria, 
North Korea Nonproliferation Act and/or Executive Order 13382.
    It may also be worth considering a more systemic response, 
such as assessing whether China meets the criteria set forth in 
CISADA for designation as a destination of diversion concern.
    Chinese banks are also reportedly involved in violating 
sanctions on Iran, including by facilitating the provision to 
Iran of restricted technology and materials.
    A failure to take decisive action in response to Chinese 
violations and backfilling provides Iran with an important 
loophole in the sanctions regime. It also risks undercutting 
the more helpful compliance records of other companies and 
countries.
    A fourth and final idea I would highlight involves 
hindering Iran's ability to benefit from crude oil sales. Doing 
to Iran's crude oil exports what CISADA did to Iran's refined 
petroleum imports could have an enormous impact on Iran. Crude 
oil exports are the lifeblood of the Iranian regime, reportedly 
accounting for 80 percent of Iran's export earnings and a 
quarter of its GDP.
    In light of the current worldwide price of crude, I don't 
see much support out there for a blanket sanctioning of all 
companies that are involved with Iran's crude oil exports. 
However, there are measures short of such blanket sanctions 
that might be able to hinder the Iranian regime's ability to 
benefit from its crude oil sales without depriving the world 
market of so much Iranian crude.
    These measures include Treasury publicly identifying IRGC 
subsidiaries which are involved in Iran's crude oil export 
chain and enactment of the provision in H.R. 6296, introduced 
by the chair and ranking member that would sanction entities 
that pay in advance for oil deliveries or sign long-term 
contracts to purchase oil and gas from Iran. If members of the 
international community have to buy Iranian crude oil and 
natural gas, they should at least do so on a cash basis, 
without long-term commitment, lest they provide the Iranian 
Government with a financial lifeline it doesn't deserve.
    There is plenty of work to be done if we are to tip the 
balance and succeed in our efforts to peacefully coerce and 
constrain the Iranian regime and achieve a halt to its illicit 
nuclear weapons program and support for terrorism.
    Thank you.
    [The prepared statement of Mr. Kittrie follows:]
    
    
    
    Mr. Duncan. Thank you, gentlemen, for a very timely 
testimony today.
    And Mr. Zarate--have I pronounced that correctly? I wasn't 
here during the opening of that--you have written that China, 
Malaysia, Russia, Qatar, and Venezuela may serve as potential 
alternate banking outlets that would be willing to file U.S. 
pressure for economic or political reasons. And I know that was 
a few years ago, but the question I have for you is, have you 
changed your view, and if you could elaborate on your 
perspective there.
    Mr. Zarate. I have not. I think my diagnosis is that you 
have very real potential of the creation of alternate banking 
networks, what I call shadow banking networks or alliance of 
financial rogues, that are intended to circumvent existing 
legitimate financial controls on rogue behavior. And so could 
you very well have--and we have seen in the past--a merger of 
those rogues who are outside the legitimate financial system 
beginning to cooperate to provide each other the financial 
facilities to not only trade but then to reenter the financial 
system in a layered way, that is, to hide their activities but 
ultimately to gain access to the international financial 
system. That I think is a fundamental challenge to this very 
power that we developed.
    And as Professor Kittrie mentioned, a major dimension of 
that is the challenge of China, which is a major economy now, 
the second-largest economy the world, which has a thriving 
banking sector and which is playing both sides of the fence in 
many ways, both wanting to be a legitimate financial power and 
wanting to play by the rules but also then facilitating 
activity that skates the line in terms of its international 
obligations. It is not just with respect to Iran but it is also 
North Korea, with some of the mining contracts and deals that 
have been made recently.
    And so I think this is a major concern, and I think we need 
to not only shine the light on the individual entities that 
exist that are providing the services but also the regimes that 
provide the legitimacy for that kind of activity. That is why I 
think countries like Venezuela deserve greater scrutiny.
    Mr. Duncan. As a follow-up, other than the countries 
mentioned, would you identify any other countries that may act 
in that same capacity?
    Mr. Zarate. Well, the first thing I would do in looking at 
the strategy is look at where there are legitimate alternate 
banking centers around the world and where are there potential 
outlets or safety valves for illegitimate financial actors who 
are trying to avoid the scrutiny in New York or London or 
Frankfort but may find financial institutions in places like 
Kuala Lumpur, Beijing, or in other capitals. So the first thing 
I would do in this context is map the world in terms of where 
there are outlets. And then I would start to look at where the 
particular institutions are being used or misused for purposes 
of illicit financial behavior.
    We have seen some very good actions by the Treasury 
Department, for example, with joint ventures between Iran and 
Venezuela. I think that is helpful.
    So I would continue to look for those points in the system 
that are the manifestations of that vulnerability, and I would 
shine a light on it. And you can do it in a variety of ways. As 
David mentioned, you can use not only Treasury tools but State 
Department tools, law enforcement tools. And there is a real 
sort of all-of-government approach that can be applied to this 
problem.
    Mr. Duncan. I thank you for that.
    The chair will now recognize the ranking member, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. Thank you.
    For the record, I mentioned the importance of this proposed 
license to GE to repair the supposedly civilian aircraft. That 
would be bad enough. It certainly undercuts our argument that 
others should sanction Iran. But I should point out that four 
of the planes that will be the subject of this inspection and 
possible repair are owned by Mahan Air, which has already been 
designated by the U.S. Department of Commerce as a company of 
proliferation concern. It has already been designated similarly 
by the U.K. Government, and most in the field view it as an 
IRGC front company.
    So if American companies can make a buck providing jet 
aircraft engine repair to an entity so deeply involved in the 
terrorist activities and proliferation activities of Iran, then 
it makes a mockery of everything we are discussing here today.
    What I would like each of the witnesses to do is to submit 
by Friday, if at all possible, a list in as close to statutory 
language as possible of everything that should be added to the 
Stop Iran's Nuclear Weapons Program Act. Include mandatory 
designations of certain entities in Iran instead of leaving it 
to the administration to designate this or that bank or this or 
that company or this or that airline. Let's put them in by 
name.
    I think you know me well enough to know that you should not 
be shy in your draftsmanship, and I look forward to getting 
your comments, and hopefully this will just add to the 
enthusiasm of our cosponsors.
    One thing I want to focus on here are those sanctions that 
have an immediate affect. You know, the original idea of the 
Iran Sanctions Act, once known as the Iran-Libya Sanctions Act, 
was to deter investment in oil fields. Well, that affects 
revenue maybe a decade later, maybe a little less; and then the 
lack of revenue begins to pinch when you burn through your 
currency reserves. That is a long time.
    What acts much more quickly is when Iran cannot get 
replacement parts for every elevator, for every oil pump, for 
every aircraft, et cetera.
    I don't know which of the witnesses want to comment, but 
what can we do to have an immediate effect on whether things in 
Iran work or fail to work?
    Mr. Kittrie. Thanks, and thank you for the invitation to 
submit.
    My own sense is that with regard to Iran the two things 
that can be done most quickly would be, one, to respond 
vigorously to Chinese violations and backfilling, as I 
mentioned. Iran still needs to purchase parts----
    Mr. Sherman. Now, what would you tell the Chinese? You are 
going to be sending them a really strong letter or would we 
have to, say, find a day or a week when this or that boat 
filled with tennis shoes couldn't be inspected or unloaded in 
the L.A. Harbor. What do you do to China, other than point your 
finger and look stern?
    Mr. Kittrie. I think probably the first thing to do would 
be to consider sanctioning those Chinese companies, for 
example, under the Iran, Syria, North Korea Nonproliferation 
Act or Executive Order 13382, that are involved in this 
activity.
    Mr. Sherman. That would be a good first step. Although it 
is easy for companies to come up with aliases, even easier if 
their host governments cooperate. So that might work, depending 
upon how agile the company is.
    Mr. Kittrie. Well, it has been reported that at least some 
of the transfers to Iran may be taking place without the 
knowledge of the Chinese Government and are the result of a 
kind of lax oversight and weak enforcement. To the degree that 
that is true, it may help to encourage the Chinese to crack 
down. For instance, as I mentioned earlier it may be worth 
considering a more systemic response, such as assessing whether 
China meets the criteria set forth in CISADA for designation as 
a destination of diversion concern.
    It has been reported that it has not just been parts and 
components manufactured in China that have ended up in Iran, 
but also some of these parts and components apparently 
originate with European companies who are duped into selling it 
to Chinese companies that are fronting for Iranian smugglers. 
To the degree that that may be happening also--and I have no 
information on that--to the degree that that may be happening 
also with U.S. origin parts and components, that would 
certainly bring China--or might bring China within the criteria 
for designation as a destination of diversion concern.
    Mr. Sherman. Or maybe that should be specified by statute, 
which is more likely to occur than a State Department 
designation. I look forward to you including that on your list, 
even if you list it as nonrecommended.
    Mr. Zarate.
    Mr. Zarate. Ranking Member Sherman, I would take the 
approach of picking targets and actions that have a strategic 
impact and a ripple affect, as opposed to doing things, 
designations, other activities that appear to be more ``Whac-A-
Mole'' as you described with companies, individuals renaming 
themselves.
    So I would recommend three categories of activities.
    One, I think a Section 311 designation of the Central Bank 
of Iran, something I have been calling for a long time, I think 
that would have a dramatic ripple affect in terms of Iran's 
ability to finance its activities.
    Second, I would pick a Chinese bank that is of grave 
concern and not only use it as a prompt for diplomatic 
discussions with the Chinese but hold the Sword of Damocles of 
some sort of designation or action against that Chinese bank.
    Mr. Sherman. You want to pick one?
    Mr. Zarate. I am not in a position----
    Mr. Sherman. I look forward to talking to you.
    Mr. Zarate [continuing]. To know all the ins and outs. But 
I would say a good place to start, sir, is the March 10th, 
2011, letter from the senators concerned with this issue to the 
Secretary of State which lays out a number of companies and 
banks of growing concerns.
    Mr. Sherman. I would say if we want to actually do 
something we have got to pick one in Congress, and we have got 
to decide what sanctions would be applied and make them 
mandatory, with no waivers.
    Mr. Zarate. The one thing I would recommend, Congressman, 
is coordination with the administration. Because I think, 
again, this cannot be--in all seriousness, this cannot be a 
one-off action. It has to be part of an ongoing campaign.
    Mr. Sherman. Did I mention this is the administration that 
wants to take affirmative action to license the repair of the 
aircraft, the very aircraft that were used to ferry the 9/11 
highjackers in and out of Afghanistan?
    Mr. Zarate. Congressman, I don't disagree with you and sort 
of subscribe to your view of that decision as being a mistake, 
but I would say that a piece of legislation that has a singular 
action in it or a set of actions that doesn't have a commitment 
by the administration to make it part of a strategy and a 
pressure strategy that is going to be part of the leverage 
change to the decision making in Tehran----
    Mr. Sherman. Sir, if we leave the decision making to this 
or the last administration, we will see Iran have a nuclear and 
then a thermonuclear device. There is no doubt about that.
    Mr. Zarate. Well, I agree with you, sir. There is an 
important role, and I mentioned in my testimony, for Congress 
to not only hold the executive's feet to the fire but also to 
push particular actions. But, again, having one-off, Whack-A-
Mole actions is not the right approach. I think having 
strategic steps of the kind you mentioned and the kind that we 
are talking about here is really----
    Mr. Sherman. Do any harm to whack a few moles while you are 
taking the strategic steps? And I see no reason to have a short 
bill when they will print a long bill for me for the same 
price.
    Mr. Asher.
    Ms. Asher. Thank you very much, Congressman Sherman.
    I would add a focus on the potential sources of nuclear 
weapons. Because what is missing from our picture right now is 
an understanding, based on our own experience and personal 
experience, is that the Government of North Korea, for example, 
blasted through every redline we ever delivered in the Six-
Party Talks which I participated in and helped start as well as 
was involved in the pressure.
    They really just--it was very, very difficult to stop them. 
They are sanctioned under the United Nations Security Council 
now. But I would sense that many entities that are sanctioned 
are still actually in business. They are operating under 
diplomatic cover, through the network of North Korean Embassies 
around the world and their commercial officers in the Embassies 
or their intelligence service. And there really needs to be a 
look at the potential connection of the dots between North 
Korea's rapidly growing supply of apparently highly enriched 
uranium or at least certainly enriched uranium which could be 
highly enriched and Iran's demand.
    I just feel like the North Korea problems that have been 
sort of put off to the side, but you can't approach the Iran 
problem set as seriously as I know you do and I know Chairman 
Royce does without understanding North Korea is the most likely 
source of nuclear material and even weapons to the Iranian 
regime in the world. And the Iranians, the more they get 
financially squeezed and the more the North Korean's economy 
erodes, supply and demand seems to set the price. I urge to you 
consider adding that to your legislation.
    Mr. Sherman. Can you be more specific on the legislation? I 
realize the chairman has already indulged me with way too much 
time.
    Ms. Asher. Well, I think there should be serious review of 
the current sanctions and whether they actually have 
effectively crippled the companies which have been designated, 
to include Nom Chom Gong Corporation, ComEd, the missile 
company. Are these companies out of business or not?
    I mean, one simple thing I saw a reporter do was just start 
making phone calls looking up numbers in the phonebooks in 
different countries, and people were answering the phones. So, 
obviously, somebody must be in business to some degree.
    That is a problem, and that we may need to remedy perhaps 
through a further U.N. Security Council action or further 
unilateral U.S. action.
    Mr. Sherman. My bill to revoke MFN for China might be 
called for here, and I yield back.
    Ms. Asher. I yield back.
    Mr. Royce [presiding]. Thank you, Mr. Sherman.
    Dr. David Asher, you call for relaunching the Illicit 
Activities Initiative. Last summer on a trip to South Korea, 
Secretary Clinton announced that the administration would take 
steps to tackle the illicit activity coming out of the North. 
Is there evidence of the type of coordinated campaign that you 
led in the past, the type of success we saw? Is there evidence 
of that? Because I haven't seen any.
    Ms. Asher. The ultimate evidence of the Illicit Activities 
Initiative was evidence. We developed tremendous undercover 
investigations through the Department of Justice with the State 
Department's full support.
    And I sort of acted as a bit of an ambassador, opening 
doors for Department of Justice law enforcement officers 
globally, into 15 different countries, 5 global investigations. 
And at the end of the first term of the Bush administration--
actually, at the beginning of the second term, I should say--it 
was decided essentially to remove that evidence from the 
judicial process.
    We had two of the largest Asian organized crime cases in 
United States history, involving the Gambino crime family at 
one end, Chinese triads at the other, and the North Korean 
Government sort of in the middle. It was quite spectacular 
stuff. And although there were people arrested in some pretty 
interesting operations in the United States and elsewhere, the 
hand of North Korea was never fully identified.
    Mr. Royce. You think that was for diplomatic reasons?
    Ms. Asher. It was for diplomatic reasons, and I seriously 
objected to it. Because it wasn't like the North Koreans didn't 
know they were engaged in counterfeiting the U.S. dollar, 
cooperation with organized crime groups, including Chinese 
triads, and work on illicit proliferation, which we approached 
as a criminal activity as well. There was preparation to bring 
criminal charges against some of the proliferation networks 
down the road as well. So the question is, whatever happened to 
all that information?
    Mr. Royce. Right.
    Ms. Asher. At the very least, I would encourage this 
administration to consider briefing the American people on what 
we learned and perhaps briefing the United Nation's Security 
Council, probably in the context of reexamining whether they 
should be back on the terrorism list.
    I found the Cheonan incident, where the South Korean ship 
was sunk, vicious, savage, and absolutely inconsistent with a 
terrorist-type approach. I think that would cause North Korea 
some concern if it were coupled with revelations of some of the 
law enforcement information or restarting of an active 
initiative which involved, in our case, 14 different government 
agencies and departments and 15 government partners around the 
world. I can't imagine that is going on right now.
    Mr. Royce. This takes me to an issue that we have long 
talked about in this committee. But you note that the Illicit 
Activities Initiative could have had a much broader impact to 
affect North Korea's proliferation activities. And, as you 
said, ``we never were given sufficient latitude to have a 
deeper and sustained counterproliferation impact, and on 
repeated occasions were waved off from taking actions that were 
well within our mandate and authorities.'' You have laid out 
some of this, and I know a lot of it just from our engagement 
at the time. I remember how desperate the effort was to shut 
down what you were doing. What do you think drove that?
    Ms. Asher. I think there was--I have discussed this with 
several senior colleagues before. Part of it appears to be a 
misperception at the highest levels in the administration as to 
what was actually going on.
    I recall a conversation I had with Secretary Powell at the 
very end of his time where he said, what do you mean? We are 
not doing this stuff?
    I think that sometimes there were discussions--and this is 
in some of these memoirs which are coming out--at the 
principals' level during the Bush administration where they 
sort of agreed on something and then it sort of got--somehow it 
didn't quite happen.
    I did co-chair a coordinating committee at the National 
Security Council in addition to being at State, and it was 
directly involved in this issue set.
    Mr. Royce. It was a coordinated campaign that somebody shut 
down.
    Ms. Asher. We were essentially abbreviated, and then we 
were emasculated. And this was a problem. Because this was 
right when the North Korean Government was building illicitly a 
Syrian nuclear reactor. All sorts of very strange and extremely 
disturbing stuff was going on with Iran. We have heard about 
Burma in the press recently.
    Mr. Royce. And you had them dead to rights. I was in Macau. 
I have seen the phony Treasury notes that were counterfeited by 
the North Koreans, our Treasury notes.
    Ms. Asher. Yeah. That was really a tool. The fact that they 
were engaged in illegal activities put them in their own trap. 
We thought it was almost essentially self-sanctioning. So all 
we had do, without using sanctions, which we felt we couldn't 
get without the evidence coming out on nuclear proliferation, 
was just to start charging them for their own offenses, knowing 
that the leadership in North Korea itself was directly engaged 
in those activities.
    Mr. Royce. Right.
    Now, let me ask a question of Juan Zarate. You call in your 
testimony for deploying the 311 sanctions against Iran and its 
Central Bank. I talked about that in my opening statement. What 
is the holdup and does the fact that Section 311 sanctions were 
only just deployed after a 5-year hiatus reflect the difficulty 
of identifying targets, or is it the result of the restrictions 
that political considerations place on their use?
    Mr. Zarate. I think there are three issues, Congressman 
Royce.
    I think, first, that was a tendency not to use 311 after 
Banco Delta Asia. There was a string of 311 actions that we 
used against bad banks in my tenure at the Treasury. And I 
think a tendency was shifted to use other tools, executive 
orders and other tools of financial suasion, which is fine, but 
there was less of an emphasis on the development of the use of 
311.
    Second, you have a concern about using a financial tool of 
this magnitude against the central bank of a country, which has 
never been done before and would call into question how the 
mechanics of that would actually work. And I think there are 
ways of crafting a 311 regulation that would allow you to get 
around some of the sensitivities of targeting a central bank 
while getting at the illicit activity that the Central Bank of 
Iran is actually facilitating.
    Finally, I think there is a deeper policy question at play, 
which is how far are we willing to go to actually strangle the 
Iranian economy? Part of the challenge here has been a message 
and a policy decision that the efforts we would undertake 
publicly and diplomatically would be targeted at the regime 
itself.
    Mr. Royce. Yeah, but we targeted Iraq's Central Bank under 
Saddam Hussein, so----
    Mr. Zarate. That is right. Again, this goes to the deep 
fundamental policy question. Will this be a maximalist pressure 
campaign that ultimately impacts the people in Iran or will we 
constrain ourselves to the effect we really don't want to 
demonstrate we are going after the whole of Iranian society? 
And so I think that is at play as well in the context of the 
debate about 311.
    Mr. Royce. Mr. Zarate, I want to thank you and Dr. Asher 
and Mr. Kittrie and all of those who have been architects of a 
policy here that had great promise, great likelihood of success 
if fully deployed, in my opinion.
    I hope you will continue to work in this direction. Because 
I think it is the least confrontational way in order to engage 
and prevent the types of proliferation activities that we have 
seen, for example, in North Korea. If they can't get the hard 
currency--we know from talking to detectors who worked in their 
military and their civilian government, if they can't get the 
hard currency, it is very difficult for them to buy the 
gyroscopes on the black market that they need for their missile 
systems. It is very difficult for them to pay for the type of 
hardware that they need to go forward.
    So I want to thank you. We appreciate the time and 
expertise you brought to this; and when considering states like 
Iran and North Korea, the stakes for us, frankly, do not get 
any higher. So we appreciate your insights in how to tackle the 
challenges that these two states pose, and we look forward to 
pressing the Obama administration on many of the points that 
you made here today.
    This hearing is adjourned.
    [Whereupon, at 4 o'clock p.m., the subcommittee was 
adjourned.]
                                     

                                     

                            A P P E N D I X

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