[Senate Hearing 114-417]
[From the U.S. Government Publishing Office]
S. Hrg. 114-417
UNDERSTANDING THE ROLE OF SANCTIONS UNDER THE IRAN DEAL
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE NATURE OF THE SANCTIONS RELIEF THAT IS BEING PROVIDED TO
IRAN, INCLUDING THE RECENT FOCUS ON THE POTENTIAL FOR GIVING IRAN
ADDITIONAL ACCESS TO THE U.S. FINANCIAL MARKET IN RETURN FOR ITS
PREVIOUSLY NEGOTIATED TEMPORARY NUCLEAR-RELATED COMMITMENTS SET FORTH
IN THE ``JOINT COMPREHENSIVE PLAN OF ACTION''
__________
MAY 24, 2016
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Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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22-429 PDF WASHINGTON : 2016
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
MIKE CRAPO, Idaho SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
DAVID VITTER, Louisiana CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois JON TESTER, Montana
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina JEFF MERKLEY, Oregon
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
JERRY MORAN, Kansas
William D. Duhnke III, Staff Director and Counsel
Mark Powden, Democratic Staff Director
Dana Wade, Deputy Staff Director
Jelena McWilliams, Chief Counsel
John O'Hara, Senior Counsel for International Terrorist Finance
Laura Swanson, Democratic Deputy Staff Director
Graham Steele, Democratic Chief Counsel
Colin McGinnis, Democratic Policy Director
Dawn Ratliff, Chief Clerk
Troy Cornell, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, MAY 24, 2016
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
WITNESSES
Juan C. Zarate, Chairman and Cofounder, Financial Integrity
Network........................................................ 4
Prepared statement........................................... 31
Mark Dubowitz, Executive Director, Foundation for Defense of
Democracies' Center on Sanctions and Illicit Finance........... 7
Prepared statement........................................... 46
Michael Elleman, Consulting Senior Fellow for Regional Security
Cooperation, International Institute for Strategic Studies--
Americas....................................................... 8
Prepared statement........................................... 72
Elizabeth Rosenberg, Senior Fellow and Director, Energy,
Economics, and Security Program, Center for a New American
Security....................................................... 10
Prepared statement........................................... 78
Responses to written questions of:
Senator Heitkamp......................................... 84
(iii)
UNDERSTANDING THE ROLE OF SANCTIONS UNDER THE IRAN DEAL
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TUESDAY, MAY 24, 2016
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:30 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Richard C. Shelby, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
Today the Committee will receive testimony on the
repercussions of lifting economic sanctions from the world's
leading State sponsor of terrorism--Iran.
In particular, it is important for this Committee to
understand the effects of implementing the Joint Comprehensive
Plan of Action, or more simply, the ``Iran deal''. Time and
again, Iran's actions have demonstrated that this deal has
placed the U.S. in a position of weakness and given Iran the
upper hand.
As U.S. and global sanctions evaporate, Iran continues, and
in some cases appears to expand, its dangerous behavior. It
continues to express its commitment to the destruction of
Israel. It continues to operate its aggressive ballistic
missile programs, including testing these missiles five times
since the Iran deal's implementation date.
Yes, it continues to conduct illicit financing, sending
hundreds of millions of dollars to groups like Hezbollah. It
continues to promote severe and widespread human rights abuses,
including record numbers of executions and oppressive
restrictions on civil liberties.
We are now more than 4 months into the implementation of
the Iran deal in which Iran promised to refrain from building a
nuclear weapon in exchange for significant sanctions relief.
There is already a growing belief that this Administration
has little interest in preserving the tools it would need to
reimpose sanctions, should Iran violate the terms of the deal.
And while the world relies on the promises of a rogue
Nation, Iran has begun to see immediate benefits from the
agreement, despite its claim that they are not accruing fast
enough.
For example, the deal gave Iran prompt access to
approximately $100 billion in previously frozen overseas
assets. The deal also suspended virtually all European Union
and United Nations sanctions imposed since 2010, including
those on Iran's valuable energy sector.
In addition, it lifted most U.S. secondary sanctions on
foreign entities and countries that transact business with
Iran, including in the energy and banking sectors.
Still, the Obama administration continues to actively
engage in further opening Iran's economy to the world. In March
of this year, Treasury Secretary Lew said that the
Administration would continue to seek ways to ``make sure Iran
gets relief.''
In particular, the Administration has indicated its
willingness to create avenues for a legitimate dollar trade
with Iran, notwithstanding assurances that no Iranian
transactions will touch the U.S. financial system in any way.
Undoubtedly, access to the world's strongest and most
liquid currency would allow the Iranian economy to flourish in
comparison to current levels. But with such new-found wealth,
there would be no restrictions on how Iran would spend their
windfall.
Many fear that there is absolutely no way to restrain a
growing Iranian economy from funding Hezbollah, the Islamic
Revolutionary Guard, Iran's missile program, and other
priorities of Iran's Supreme Leader.
It is no surprise that, despite the misguided efforts of
the Administration to put the global banking system at ease,
financial institutions are reluctant to do business with Iran,
as well they should be. Not only are international banking
sanctions extremely--and purposefully--complicated to unwind,
but the reputational risk that Iran poses remains significant.
Issues like these illustrate how the Iran deal was sealed
before it was clear on how it would be implemented and, thus,
whether or not it would work.
And while Iran has not changed any of its non-nuclear
reckless behavior, it has become apparent that the
Administration will bend over backwards to try to make the
agreement even more attractive to Iran. During last year's
negotiations, the White House gave the impression to Iran and
the world that it thought any deal was better than no deal.
Unfortunately, it is taking extreme measures to try to make a
bad deal work.
I look forward to the testimony here today of our witnesses
as the Committee evaluates the important issues before us and
considers necessary and appropriate actions.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. For the next 2
days, this Committee will examine the continuing role of U.S.
sanctions on Iran, those lifted under the terms of the Joint
Comprehensive Plan of Action and those still in place, to
combat Iran's ongoing malicious behavior.
Iran is a State sponsor of terrorism. It destabilizes the
region. It violates the human rights of its people. That is why
the United States and our ally policymakers decided to focus on
preventing the single greatest threat to the region and to the
world--its nuclear program. They knew a nuclear-armed Iran
would pose grave risks to us in our country, to Israel, and to
the region. This original rationale is worth bearing in mind
given the partisan rancor on this effort in the last 2 years.
Long before the JCPOA, there had been a broad bipartisan
consensus in the Bush administration and the Obama
administration on using tough economic sanctions to force Iran
to the negotiating table and to agree to steps to block its
pursuit of a nuclear weapon. In 2008, President Bush's National
Security Adviser, Condoleezza Rice, signed a memorandum with
P5+1 allies stating that, in return for Iran agreeing to limit
its nuclear program, the U.S. was ready to recognize its right
to peaceful nuclear energy, to work with its leaders to build
confidence to begin to normalize trade and economic relations,
and allow for civil aviation cooperation. A number of my
colleagues have forgotten that position taken by an
Administration not named Obama. That served as the basis for
future discussions in the Obama administration.
That is why I was so disappointed--and I think most people
in this country were so disappointed--in the partisan nature of
the debate last year, including from colleagues who opposed the
JCPOA even before reading it. Contrary to opponents' dire
predictions, Iran complied with its commitments under the 2013
Interim Agreement, and the International Atomic Energy Agency
has verified that Iran has met its JCPOA obligations.
Critics said our sanctions regime would unravel. They
exaggerated the amount of sanctions relief Iran would receive.
They claimed Iran would never shut down its centrifuges or
disable its plutonium reactor or ship out its uranium or allow
real-time monitoring of its nuclear sites. More recently, some
allege that the Administration was preparing to provide Iran
direct access to the U.S. financial system. Wrong on every
count.
The nuclear agreement was one of the most significant
national security achievements in a generation. It was
accomplished without dragging the United States into another
war in the Middle East.
This history underscores two points:
First, economic sanctions are means, not ends. Whether
applied to Iran or Russia or Burma, they are meant to bolster
diplomacy and force concrete changes in a Nation's behavior. In
Iran's case, economic sanctions strengthened our national
security and that of allies like Israel by forcing Iran's
leaders to abandon key elements of their nuclear program--think
back to Condoleezza Rice and President Bush--by forcing Iran's
leaders to abandon key elements of their nuclear program that
could have led to a bomb.
Second, whether we support it or oppose the JCPOA, we all
understand the need to continue to combat the threat that Iran
continues to pose to the United States or our allies. That
requires the Administration to enforce existing sanctions, to
designate new sanctions targets, to block Iran's pursuit of
military technologies, and to take other steps to confront Iran
and its terrorist proxies like Hezbollah.
It requires Congress to confirm immediately our chief
sanctions enforcer from whom we will hear today. Just
parenthetically, we know that Acting Under Secretary Szubin was
originally a Bush appointee. Now he is an Obama appointee, and
his confirmation has been blocked. He should be in place with
full powers and the full support of the Senate. This nomination
has been blocked for over a year, first by this Committee, now
by Republican leadership on the Senate floor.
Congress must continue to provide close oversight and
support robust military and other aid to regional partners like
Israel. We should be focused on holding Iran's feet to the fire
to ensure strict implementation of the agreement and to
pressure leaders to change their own destabilizing behaviors.
I hope my colleagues will not try to relitigate the JCPOA
by trying to reimpose old nuclear sanctions under new labels.
Broad new sanction legislation that contradicts our commitments
and tries to tie the President's hand would undermine the unity
we have developed with our P5+1 partners around the world, and
we should remember that. That will not help confront the
threats Iran continues to pose or help the cause of regional
stability. It will be seen as transparently political. It will
invite a Presidential veto.
I welcome our witnesses. I look forward to hearing their
perspectives.
Chairman Shelby. Thank you, Senator Brown.
First, we will receive testimony from the Honorable Juan
Zarate, chairman of the Financial Integrity Network, who also
served as the Deputy Assistant to the President and Deputy
National Security Adviser for Combating Terrorism from 2005 to
2009.
Next we will hear from Mr. Mark Dubowitz, executive
director of the Foundation for Defense of Democracies.
Then we will hear from Mr. Michael Elleman, consulting
senior fellow for regional security cooperation at the
International Institute for Strategic Studies.
Finally, we will receive testimony from Ms. Elizabeth
Rosenberg, a senior fellow and the director of the Energy,
Economics, and Security Program at the Center for a new
American Security.
Mr. Zarate, we will start with you. All of your written
testimony will be made part of the hearing record in its
entirety, and if you have been here before, you know you can
sum up your remarks. Thank you.
STATEMENT OF JUAN C. ZARATE, CHAIRMAN AND COFOUNDER, FINANCIAL
INTEGRITY NETWORK
Mr. Zarate. Chairman Shelby, thank you for that kind
introduction and the honor to be here today before you. Ranking
Member Brown, thank you. Distinguished Members of the Senate
Banking Committee, it is an honor to be back before you today,
as well as to be testifying with this distinguished panel whom
I count as friends as well as colleagues.
Chairman, when the JCPOA was being debated, I expressed
deep concerns about the structure, demands, and effects of the
nuclear deal on U.S. interests, especially in anticipation of
increased Iranian belligerence and adventurism. Predictably, we
have seen that belligerence continue.
Iran remains the leading State sponsor of terror and has
continued its direct support to terrorist and militant proxies
from the Golan to Yemen. Iran has conducted repeated ballistic
missile tests in violation of U.N. sanctions. Iran has deployed
troops and dispatched Shi'ite militias from around the world to
fight for the Assad regime in Syria. Iran has continued to
engage in human rights abuses. Iran continues to hold two
American citizens unjustly while Robert Levinson remains
unaccounted for.
In January of this year, Iranian naval forces arrested
American sailors at gunpoint, broadcasting the video of their
detention. And, Mr. Chairman, Iran continues to develop its
cyber capabilities and has engaged in malicious cyberattacks
against U.S. Government sites, the private sector, specific
individuals, and sites like the Bowman Dam in the suburbs of
New York.
Last year, Mr. Chairman, I explained that the JCPOA was
fundamentally flawed, in part because it would empower and
enrich the regime and ultimately constrain our ability to use
the most effective financial and economic tools of isolation to
counter dangerous Iranian behavior. Those deficits are
revealing themselves.
I think it is important for this Committee to consider
three fundamental issues with respect to the important role of
sanctions and the nuclear deal moving forward.
First, Mr. Chairman, there is inherent tension and even
contradictions in what the JCPOA promises. Ultimately, what we
negotiated and promised was reintegration of Iran into the
global economic system. Though non-nuclear sanctions were
supposedly off the table, the agreement neuters U.S. ability to
leverage one of its most powerful tools: its ability to exclude
and unplug rogue Iranian actors' activities from the global
financial and commercial system. Promising Iranian
reintegration into the global system was not possible unless we
were willing to defang our sanctions regime and ignore Iranian
behavior, rehabilitate the perception of the Iranian regime
ourselves, and take the most effective tools of financial
isolation off the table.
The constriction campaign that was applied over the course
of years--and I appreciate Senator Brown's reflection on that--
was intended to use the illicit, dangerous, and illegitimate
nature of Iranian activity as the driver for unplugging Iran
from the global financial and commercial system. That
underlying conduct has not changed. If anything, the risks have
increased, especially as Iran uses the financial and commercial
system to pursue all its goals. The Iranian system is corrupt,
lacks transparency at all levels, and is centrally controlled
by the regime. This explains why legitimate businesses are wary
of reentering the Iranian market and why the Iranian leadership
continues to complain that the United States has not satisfied
its side of the bargain.
Second, Mr. Chairman, and unfortunately, the United States
is falling into the trap of rehabilitating the Iranian economy.
Throughout this deal, the onus should remain solely on Iran to
alleviate concerns about its activities, lack of transparency,
and failure to meet heightened global standards of financial
integrity in the banking and commercial worlds. Iran should not
get a free pass. This posture should force the Iranians to turn
inward to determine how they can meet international
expectations instead of trying to compel the United States and
Europe to alter their standards or dictate to the private
sector where and with whom they should do business.
Some recent U.S. actions have created the impression that
the U.S. and European Governments have assumed the burden of
reintegration of the Iranian economy into the global system.
There have been reports that the U.S. might offer Iran the
ability to access offshore dollar-clearing facilities, to allow
for dollar-denominated transactions, and ease Iran's ability to
trade internationally. The United States should not be offering
special exemptions of measures to assist Iran with access to
dollars while Iran remains a leading State sponsor of terror,
subject to serious sanctions, and designated as a primary
money-laundering concern.
The U.S. Government has been sending delegations around the
globe to clarify existing sanctions and obligations, and
apparently to explain how business with Iran may be undertaken
with the Iranian regime. The burden instead should fall on Iran
to demonstrate that its activities, policies, and use of its
system is legitimate, transparent, and meets international
standards.
The U.S. has announced that it plans to buy heavy water
from the Iranian nuclear system. The U.S. should not usher Iran
into the global economy, especially not in the nuclear markets.
Finally, the U.S. Treasury officials have reiterated their
commitment to enforcing existing sanctions vigorously and
maintaining the ability to use these tools effectively. These
commitments, however, are undercut when the U.S. modifies its
message to suggest that our sanctions regime should not
constrain or affect the risk calculus of the private sector.
Quite to the contrary, Mr. Chairman, the U.S. should be doing
everything possible to reinforce the power and reach of U.S.
measures.
Third, Mr. Chairman, we should continue to view the use of
sanctions and the process of unwinding itself as critical and
strategic levers to effect Iranian behavior. The U.S. should
treat the JCPOA and its implementation as an ongoing process
and evolution where sanctions and sanctions unwinding form a
strategic part of U.S. and international efforts to not only
enforce the deal but maintain economic and financial leverage
against Iran, to push back on dangerous Iranian activity, and
force the Iranians to make hard decisions about their role in
the world.
Mr. Chairman, the Iranian regime has needed access to
capital, new technologies, and connectivity to the markets
globally. That is what it lost over the past decade. It is what
the negotiated to regain in the JCPOA. And it is now the source
of Iran's most significant complaint.
The United States must be willing to use its financial and
economic toolkit to constrain dangerous Iranian behavior and
encourage responsible Iranian activity. In fact, this is an
alternative to war.
And just briefly, Mr. Chairman, this means forcing Iran to
deal with the demands of the international marketplace on their
own and addressing the underlying conduct that has proven
problematic and continuously risky.
The United States will need to rely on sanctions and
financial measures even more in the future, and we should be
doing everything possible now to reinforce the strength and
endurance of these powers--against Iran, against its proxies,
and against other rogues in the international system.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you.
Mr. Dubowitz.
STATEMENT OF MARK DUBOWITZ, EXECUTIVE DIRECTOR, FOUNDATION FOR
DEFENSE OF DEMOCRACIES' CENTER ON SANCTIONS AND ILLICIT FINANCE
Mr. Dubowitz. Chairman Shelby, Ranking Member Brown,
Members of the distinguished Committee, on behalf of the FDD
and its Center on Sanctions and Illicit Finance, thank you for
the opportunity to testify. And it is certainly an honor to be
testifying with Juan and Michael and Liz, whose work I greatly
admire and whose service to our Nation I am thankful for.
Iran is engaged in a robust effort to legitimize its
financial sector despite a decades-long rap sheet of financial
crimes that it shows no sign of curbing. Since the conclusion
of the JCPOA, the Obama administration has missed numerous
opportunities to push back against this legitimization
campaign. Instead of using non-nuclear sanctions to deter and
punish Iran's continuing malign activities, the Administration
runs the risk of being seen as the Islamic Republic's Trade
Promotion Authority.
Iran complains that it has not received the sanctions
relief it was promised, and the White House seems to think that
it is our responsibility to deliver. But the regulatory and
economic realities are very different. The Administration
honored its commitments on Implementation Day in lifting or
suspending the entire ``nuclear-related'' sanctions
architecture. Iran, in fact, has already received an economic
windfall: The JCPOA (as well as the interim agreement) provided
Iran with economic relief that helped Tehran avoid a severe
economic crisis and even initiate a modest recovery. The
lifting of restrictions and access to $100 billion in overseas
assets and Iran's return to oil markets have all given Tehran
hard currency to settle its outstanding debts, begin to repair
its economy, build up its foreign exchange reserves, and ease a
budgetary crisis. This has now freed up funds for financing
terrorism.
Meanwhile, Iran continues ballistic missile development,
regional destabilization, and egregious human rights abuses,
and all of these have become just as problematic or, in fact,
have gotten worse since the agreement.
Administration officials repeatedly pledged to you that
they would continue to enforce non-nuclear sanctions to deter
and punish Iran's dangerous activities. But in response, Iran
has threatened to walk away from the deal and snap back its
nuclear program if any meaningful sanctions are imposed for any
reason.
Congress should reject this nuclear blackmail and hold the
Administration accountable for its commitments. Sanctions
against Iran's many malign activities are not JCPOA violations,
as Iran claims, but, rather, an affirmation of U.S. policy as
Secretary Kerry himself as articulated to ``oppose Iran's
destabilizing policies with every national security tool
available.''
But it does not appear that the Administration is going to
stand behind its own policy. Since the nuclear deal was signed,
only nine individuals and nine entities have been added to
Treasury's sanctions for all of Iran's ongoing illicit
activities. These measures include ineffectual missile
procurement sanctions imposed in response to repeated missile
tests, and at the United Nations, the Administration has backed
away from using the term ``violations,'' instead arguing that
the missile tests are inconsistent with Security Council
Resolution 2231.
I would note Iran is in flagrant violation of 2231, which
is the implementation resolution of the JCPOA. So I ran is not
in compliance unless you draw an artificial distinction between
the deal and the U.N. Security Council resolution that
implements the deal.
Moreover, while the Administration has talked about human
rights sanctions as a necessary tool to counter the regime's
domestic oppression, that oppression has only intensified. And,
in fact, the Administration has designated no individuals or
entities for human rights abuses since the nuclear deal was
reached and, in fact, only one individual and two entities
since President Rouhani came into power in the summer of 2013.
And now in response to Iranian pressure, as Mr. Zarate has
said, the Administration is considering a new unilateral
concession: direct or indirect access to dollarized financial
transactions. This concession undercuts the effectiveness of
our entire non-nuclear sanctions strategy which depends on the
private sector's fear of the risks involved in transacting with
Iran because of its illicit financial conduct. Allowing
dollarized transactions aids Iran's push to legitimize its
financial sector without ceasing the terrorism and missile
financing, money laundering, and sanctions of Asian activities.
The JCPOA gave Iran a patient pathway to nuclear weapons
capability by placing limited, temporary, and reversible
constraints on its nuclear activities. It turned the regime
from a nuclear pariah into a nuclear partner, without requiring
it to come clean on its illegal weaponization activities. The
regime is now trying to follow the same legitimization strategy
by trying to gain international acceptance without demonstrable
change in its illicit conduct. Change has to go far beyond a
mere exercise in checking the box on technical requirements
from the Financial Action Task Force related to money
laundering and terror financing, and it has to require
substantive changes in behavior. As long as Iran continues to
fund Hezbollah, Tehran should never be legitimized as a
responsible financial actor.
Let me conclude with this: Secretary Lew recently argued
that sanctions are an effective instrument to address illicit
activities, but they must be lifted when the illicit behavior
changes. This is a very important principle, but it misses a
crucial detail: Iran has not addressed the underlying illicit
behavior that prompted many of the U.S. sanctions in the first
place.
Thank you for the opportunity to testify today. I look
forward to your questions.
Chairman Shelby. Thank you.
Mr. Elleman.
STATEMENT OF MICHAEL ELLEMAN, CONSULTING SENIOR FELLOW FOR
REGIONAL SECURITY COOPERATION, INTERNATIONAL INSTITUTE FOR
STRATEGIC STUDIES--AMERICAS
Mr. Elleman. Yes, thank you. Chairman Shelby, Ranking
Member Brown, distinguished Members of the Committee, and the
panel, I thank you for the opportunity to speak before you
today.
As background, I wanted to say that my statement is
informed by over two decades working as a missile scientist at
Lockheed Martin's research laboratories and more than 25 years
observing and writing about ballistic missile proliferation. In
2010, I authored a dossier by the International Institute for
Strategic Studies on Iran's ballistic missile capabilities. I
continue to monitor missile developments around the world.
Ballistic missiles are central to Iran's deterrence posture
and will remain so for the foreseeable future. This priority
assigned to ballistic missiles is reflected by the size and the
scope of Iran's arsenal. Given this importance, Iran is highly
unlikely to surrender its current stockpile of systems. Even if
Iran acquires advanced military aircraft, ballistic missiles
will continue to play a primary role in Iran's force structure.
Iran's missiles can reach targets throughout the region.
When armed only with conventional warheads, the missiles have
limited military utility because they lack the accuracy to be
able to predictably and reliably destroy a specific target.
They can, however, be used to disrupt operations at key air
bases, ports, and military facilities. Missile strikes against
major cities could sow terror, potentially weaken the political
resolve of Iran's adversaries and our partners. Iran exploits
this fear of missile attacks by frequently brandishing its
capabilities, including flights tests. In so doing, it seeks to
deter, decouple the U.S.-Gulf partnership and intimidate
regional rivals.
Ballistic missiles no doubt would be the preferred delivery
platform should Iran ever acquire an atomic weapon. There is no
formal definition of what constitutes a nuclear-capable
missile, although the range-payload thresholds established in
the Missile Technology Control Regime offer a broadly accepted
classification measure. The MTCR restricts the transfer of
missiles capable of delivering a 500-kilogram warhead to 300
kilometers.
Iran's Shahab, Qiam, Ghadr, Emad, and developmental Sajjil
missiles all fit under this threshold definition. Iran
possesses more than 300 nuclear-capable ballistic missiles.
Flight tests are an essential element of any missile
program. Because Iran views ballistic missiles as a critical
instrument of statecraft, deterrence, and warfighting, it will
continue to test missiles. Sanctions are unlikely to prevent
them from testing.
The pace of missile testing by Iran last year and this year
is consistent with past practices. But Iran did not conduct any
nuclear-capable missile launches in 2005, 2013, and 2014, when
serious nuclear negotiations were underway. From 2006 to 2012,
when the talks were going nowhere, Iran averaged roughly five
tests per year. Three tests were performed last year, and five
have occurred this year.
I have seen no evidence to suggest that Iran is trying to
actively develop an intermediate- or intercontinental-range
ballistic missile. I cannot speak to a covert program. The need
to flight test missiles before they are made operational
provides advanced warning of any new capabilities. Flight
trials historically require 3 to 5 years, sometimes many more.
Available evidence, including the recent debut of the Emad
missile in October of 2015, indicates that enhancing missile
accuracy supersedes Iran's quest for longer-range systems.
Iran has used large rockets, however, to launch satellites
into space. Satellite launch activity could in principle be
used as the springboard to developing an intercontinental-range
missile. But no country has ever converted a satellite launcher
into a long-range missile. Iran is highly unlikely to develop
and deploy an operationally ready intermediate-range missile
before the end of this decade or an ICBM before 2022.
Iran possesses the technical, project management, and
industrial capacity to develop and field ballistic missiles
that it desires within reason. However, Iran is not fully self-
sufficient. It must still import key components, materials, and
technology to support the production and development of
missiles. These vulnerabilities can and should be exploited.
Containing the program. Past multilateral sanctions appear
to have slowed the development of Iran's Sajjil medium-range
missile. The U.N. Panel of Experts on Iran sanctions played an
important role in this success by enhancing international
awareness and investigating violations of Resolution 1929. The
Panel does not exist under Resolution 2231. It should.
The success of unilateral sanctions against Iranian
enterprises and individuals is historically ambiguous. As Iran
enters into the international trade, unilateral sanctions may
or may not be more effective. It is difficult to predict.
The Proliferation Security Initiative, initiated under the
Bush administration, is an international effort to disrupt the
flow of WMD items, technologies, and related materials and
could be an effective tool for intercepting shipments from
North Korea, Iran's principal if not sole source of liquid
propellant missile engines. Joint missile defense exercises
with our Gulf partners--and Israel--offer a tangible counter
narrative to Iran's missile tests and will enhance defense
effectiveness in the long run.
And, finally, Iran has said that it does not need missiles
with a range exceeding 2,000 kilometers. The U.S. should
explore options that, at a minimum, would codify legally that
range limit. Other limitations may be ripe for negotiation,
including those that increase the transparency of Iran's space
program, which would limit its ability to break out and create
an ICBM.
Thank you. I look forward to your questions.
Chairman Shelby. Thank you.
Ms. Rosenberg.
STATEMENT OF ELIZABETH ROSENBERG, SENIOR FELLOW AND DIRECTOR,
ENERGY, ECONOMICS, AND SECURITY PROGRAM, CENTER FOR A NEW
AMERICAN SECURITY
Ms. Rosenberg. Chairman Shelby, Ranking Member Brown, and
distinguished Members of the Committee, thank you for the
opportunity to testify today on the role of sanctions under the
Iran deal.
The Iran sanctions regime was, and remains, the most
comprehensive program of U.S. and international sanctions
commensurate with the grave security concerns regarding Iran's
nuclear proliferation activities, its regional destabilization,
ballistic missile program, support for terrorism, and abuse of
human rights. Many U.S. and international sanctions on Iran
were waived on Implementation Day, the milestone of the nuclear
agreement, recognizing Iran's completion of its major initial
nuclear commitments.
However, the United States maintains sanctions authorities
relevant to Iran as part of the deal as well as a wide array of
sanctions on Iran outside the scope of the deal, and the
existing architecture of Iran's sanctions remains very powerful
and affords an enormous amount of leverage to pursue Iran's
security provocations and destabilization.
Following Implementation Day, Iran was able to expand its
oil sales and has established new oil trading contracts in
Europe and more deliveries to Asia. It also now has access to
$100 billion of its formerly frozen assets, as has been
mentioned by my fellow panelists. Additionally, the United
States, the EU, and the U.N. together removed hundreds of
designated Iranian entities from sanctions lists, including
Iranian banks, that then gained access to European financial
institutions. Some Iranian banks are reestablishing branch
licenses and correspondent relationships in Europe and are
renewing their ties with Asian counterparts as well. Iran's
charm offensive to market new deals for trade and investment,
including in areas such as automobiles and airplanes, has also
met some success internationally.
However, there are various reasons why Iran will expand its
links to the international financial system only very slowly.
The cumbersome unraveling of nuclear sanctions restrictions at
banks and companies around the world in order to engaged in now
permitted business with Iran is only one factor. Remaining
sanctions on Iran for its terrorist and ballistic missile
activities are a deterrent to those who would contemplate
business with Iran along with prudential concerns related to a
history of corruption and a lack of transparency and
maneuverability for foreign firms in Iran's financial system.
So for reasons of political and security risk, existing
sanctions, and the serious financial challenges associated with
attempting business in Iran, many global banks have made it
clear that they do not plan on doing business in this
jurisdiction.
In pursuing Iran's sanctions now and in the future, U.S.
policymakers must prioritize the important work of isolating
Iranian entities engaged in dangerous and illicit behavior
through aggressive implementation of existing sanctions
authorities. This means continuing and expanding sanctions
designations targeting Iran's provocative and dangerous
ballistic missile program and its reprehensible support for
terrorism and abuse of human rights. This is particularly
important with regard to the work of targeting the insidious
and dangerous activities of the IRGC within and beyond the
borders of Iran, including exposing the financial activity and
holdings of the IRGC, its agents and instrumentalities, and
Iran's regional terrorist proxies whenever feasible. The U.S.
Government should designate the IRGC under its terrorism
authorities, and it should urge EU counterparts to deny access
to European airports for Mahan Air, given its involvement with
Iranian support for terrorism.
Beyond designating more targets independently and in tandem
with international partners, U.S. policymakers should also
continue and expand educational outreach to highlight Iran's
self-imposed financial problems, and this should be paired with
a strategy to facilitate and encourage remediation of these
problems by U.S. and foreign experts.
With regard to sanctions relevant to oversight of the
nuclear deal, policymakers will now want to ensure that
sanctions authorities are primed for use so that the United
States and international allies are able to reimpose sanctions,
in part or in whole, if Iran violates its nuclear commitments.
Keeping authorities up to date means reauthorizing the Iran
Sanctions Act before it expires at the end of the year.
Additionally, it means readying potential additional
contingency measures, including new approaches to sanctions
enforcement or possible new sanctions authorities if Iran fails
to uphold its commitments under the nuclear deal and if such
new authorities are deemed absolutely necessary.
Thank you for the opportunity to testify today. I look
forward to answering any questions you may have.
Chairman Shelby. Thank you very much.
I will start with Mr. Dubowitz. In your testimony, Mr.
Dubowitz, you discuss in detail a campaign run by Iran to
legitimize its financial structure. Would you elaborate on what
Iran is trying to accomplish and why we should be concerned?
Mr. Dubowitz. Thank you, Chairman Shelby. Iran is trying a
legitimization strategy similar to the one that it did on the
nuclear side, which involves basically denying, deceiving, and
then demanding. And on the nuclear side, it denied illicit
conduct, it deceived the international community, and it
demanded escalating concessions.
On the financial track, Iran is doing the same thing. They
are denying their illicit financial conduct, they are
continuing that conduct, and now they are demanding new
concessions to legitimize their financial sector. And
greenlighting the greenback or dollarizing transactions using
our currency would be a big win for Iran. It would give them
the legitimacy that they seek without actually changing that
fundamental conduct.
Chairman Shelby. Mr. Zarate, in recent months both Acting
Under Secretary Szubin and Secretary Lew denied that Iran would
be given access to the dollar. In fact, Mr. Szubin testified
before this Committee right here, and I quote, that ``no
Iranian banks can access the U.S. financial system, not even to
execute a dollarized transaction where a split second's worth
of business is done in a New York clearing bank.'' Those are
his words.
Secretary Kerry, however, is on a worldwide mission to
clarify how large non-U.S. banks can engage with the Iranian
financial system.
My question: Do you believe there is a disconnect between
Treasury and State or the White House with regard to the
implementation of the Iran deal? And what is going on here? If
so, and why?
Mr. Zarate. Mr. Chairman, I think what is reflected in
those comments that are contradictory and in tension is the
fundamental tension in the JCPOA, which is that we intend to
continue to use sanctions, and if that is the case--against
underlying illicit conduct of the Iranian regime, then that
means we are going to not only have to deny Iran access to the
dollar and the U.S. financial system but actually proactively
try to encourage others to unplug them from the international
financial system. That has been the essence of the financial
constriction campaigns post-9/11 that have been so effective.
And that has been, frankly, Treasury's playbook.
That does not meet neatly with the diplomatic demands that
the Iranians are placing on the U.S., and I think the Secretary
of State and the State Department are doing their best to
demonstrate that the U.S. is adhering to the spirit and letter
of the JCPOA, in part by encouraging reintegration of the
Iranian economy. And so there is a disconnect in that regard.
With respect to the specific dollar issue, I think the one
question that remains is whether or not the U.S. is going to
encourage offshore dollar clearing. There are ways of allowing
Iran access both for reputational reasons, as Mr. Dubowitz
mentioned, but also for transactional reasons, to have access
to dollars offshore which would not touch the U.S.
Chairman Shelby. In other words, go in the back door, not
the front door?
Mr. Zarate. The back door, with layers of opacity, which
makes it even harder to understand the transactions, and given
the track record of the Iranian Government to use shell
companies, front companies, that is a dangerous proposition and
incentive for them to do business globally.
Chairman Shelby. Mr. Elleman, you have testified that Iran
already has shorter-range nuclear-capable missiles in its
arsenal, which it continues to test. Could Iran develop and
field a long-range missile capable of delivering a nuclear
weapon to Europe or the United States before the Iran deal
sunsets?
Mr. Elleman. The short answer is probably, and probably
yes. Iran has two pathways to developing an intercontinental-
range missile or one that could strike Western Europe. They can
use their existing systems that they have and just cluster them
together, such as they have done with their space launch
vehicle. Or they could pursue a more difficult, challenging,
but fruitful path, and that is, leverage the solid propellant
technology it is working on today. That would allow them to
build missiles that are optimized and designed to need.
Chairman Shelby. Thank you. Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Ms. Rosenberg, I would like to ask you a series of
questions--and I would prefer short answers, if you can--on
JCPOA. By Implementation Day, had Iran dismantled two-thirds of
the installed centrifuge capacity and reduced its enriched
uranium stockpile by over 95 percent?
Ms. Rosenberg. Yes.
Senator Brown. Did Iran destroy the core of its heavy-water
reactor by filling it with concrete, cutting off its path to
producing significant amounts of weapons-grade plutonium? And
did it ship out excess heavy water to meet its commitments to
hold no more than necessary for research?
Ms. Rosenberg. Yes.
Senator Brown. Did Iran implement all the JCPOA's
verification measures, including allowing continuous monitoring
of its necessary facilities and subjecting its centrifuge
production in uranium mills and mines to surveillance by
inspectors?
Ms. Rosenberg. Yes, as confirmed by the IAEA.
Senator Brown. In your view, do these actions move Iran
further away from a nuclear weapon, making Israel and the
region safer?
Ms. Rosenberg. Yes, and I think proliferation security
experts around the world all consider that the case.
Senator Brown. Finally, has there been any indication from
IAEA that Iran has cheated on its commitments under the JCPOA?
Ms. Rosenberg. Not to our knowledge.
Senator Brown. OK. Thank you for that.
Let me ask you a more detailed question. I know it is
complicated because it is Iranian internal politics, but it
seems that in Iran there are hardliners who have never
reconciled with the nuclear agreement and are trying to
sabotage it, and there are others who want more economic
engagement with the outside world. That is the sort of
political tension in that Nation's politics.
You have warned that new congressional sanctions could
threaten JCPOA implementation. As you may know, there are bills
before this Committee that would require additional mandatory
sanctions against Iran and in some cases would reimpose a
version of the old sanctions that the Administration agreed to
waive as part of JCPOA.
How do you see such measures that some want to move through
Congress, how do you seem them threatening JCPOA, the
international community's agreed-upon process for dismantling
and monitoring Iran's nuclear program?
Ms. Rosenberg. So new sanctions, particularly if they are
mandatory, will be broadly perceived as sanctions that
undermine the deal. So the signatories to the deal agreed that
they would not reimpose sanctions removed--nuclear sanctions
removed as part of the deal. So reimposing those would
undermine it and could potentially cause Iran to walk away from
the deal.
However, the problems also exist with the other parties,
the P5+1 parties. So these are important--they include
important security allies, international allies of the United
States. And if they perceive that the United States has
willfully attempted to undermine the deal in this way, it will
undermine transatlantic political cooperation as well as
potentially the ability for those partners to work together to
monitor evasion of sanctions and go after it.
Senator Brown. If these bills were to pass the Senate and
the House and become law, what would that mean in domestic
Iranian politics? Which side in Iran would be bolstered by
enactment of these sanctions bills?
Ms. Rosenberg. Well, it certainly strengthens the narrative
of hardliners in Iran who believe that the United States was
disingenuous in negotiating this deal and causing Iran to make
the concessions it has on its nuclear program and that the
intent was never to see a successful case of nuclear diplomacy
and the deal move forward.
Senator Brown. So the hardliners in Iran would have
fulfilled what they predicted all along if we were to do that.
Ms. Rosenberg. Yes, and it would strengthen the narrative
of others outside of Iran who also believe that to be the case.
Senator Brown. The questions I asked you, the first series
of questions--and thank you for answering them concisely--would
the P5+1, if I were to ask the Ambassadors and the foreign
ministers and the experts on sanctions in their countries,
would they have given the same answer, by and large?
Ms. Rosenberg. Yes, and they have indicated previously that
they would view the U.S. imposing new sanctions as unhelpful
and a serious act of undermining the deal.
Senator Brown. OK. Thank you. One last question. I know you
have written about why you think existing U.S. legal authority
for sanctions are sufficient to combat Iran's continuing
destabilization activities outside of the nuclear arena.
Briefly describe the full range of these legal authorities.
Ms. Rosenberg. They are vast. There are terrorism
authorities, proliferation authorities, which include not just
nuclear capabilities but missile and other weapons capabilities
as well; authorities related to Syria that would block support
for Assad and the Syrian Government. There are authorities that
deal with Yemen and support the Houthis there. Kingpin,
narcotrafficking authorities; transnational organized crime;
cyber; the gravity EO that deals with--the word escapes me at
this moment, but human rights authorities, the sanctions evader
EO, as well as the variety of statutes passed by this Congress
and the previous one and before that which also deal with the
variety of authorities the Administration can implement with
regard to Iran.
Senator Brown. And these sanctions are sufficient?
Ms. Rosenberg. They cover basically the entirety of
concerns that we would have with Iran and want to pursue, and
they are not limiting. The IEEPA and TWEA also give additional
authorities to the Executive to go after new instances of
evasion or activities of threat and concern that we might want
to target with such authorities.
Senator Brown. Thank you.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
As I am listening to the testimony here, I think there are
short-term and there are long-term consequences to any deal
that you make. Our country turns 250 years old in the year
2026, less than 10 years away. And yet we are looking at a deal
with has been put together here, which was designed to slow
down the Iranian nuclear program.
Mr. Elleman, as you know, under the JCPOA, Iran's U.N.
ballistic missile restrictions will be lifted 8 years after the
JCPOA adoption day or until the IAEA confirms the broader
conclusion. My question is: If Iran continues testing missiles
and satellites at its current rate, how would you assess Iran's
ballistic missile capability at the completion of the JCPOA?
Mr. Elleman. Well, it's difficult to predict, primarily
because there will be decisions for Iran to make over the
course of the next decade. Iran presently is focused on trying
to increase the accuracy or the military utility of its
ballistic missiles. In fact, we are seeing an evolution in
their missile doctrine from one of just simply being able to
punish an adversary or foe to one where they can actually deny
an adversary military, you know, space, territory, or
capability.
This is going to be a long, difficult process for them. I
do not see them achieving it within the next decade to actually
make them accurate enough with some sense of reliability. We
have seen no evidence, at least in the public domain, of them
pursuing an ICBM yet. That could change tomorrow. There could
be a covert program.
What I can say is that if they were to attempt to develop
longer-range systems that could threaten Western Europe or the
United States mainland, they would have to do some testing of
that system, and that test program would last likely in the 3-
to 5-year time span, sometimes more.
Senator Rounds. How much would assistance from another
Nation State help Iran progress toward a nuclear-capable
missile?
Mr. Elleman. Well, in my view--and not all of my colleagues
support this conclusion, but in my view, Iran is not capable
yet of manufacturing on its own the liquid propellant engines
that power almost all of their missiles. That shortfall can
really only be filled by importing engines from Korea, North
Korea. It is possible they could import them from Russia, but I
do not think Russia is in any mood to sell that type of weapons
system, at least in the open market.
So I would say that this is one of the fundamental
limitations that they will have, and this is why I made the
point that the Proliferation Security Initiative could be a
very effective tool in denying them the ability to produce
greater numbers of missiles than they already have.
Senator Rounds. Thank you.
Mr. Dubowitz, the Iran deal suspended sanctions on Iran's
economy in exchange for a reversible rollback of certain
Iranian nuclear activities. It does not, however, preclude the
United States from enforcing non-nuclear sanctions.
As Iran has made abundantly clear through its repeated
provocative actions, the nuclear deal did not address Iran's
illicit activities, including ballistic missile development,
support for terrorism, regional destabilization, and human
rights abuses. What is the message Congress should be sending
international businesses that seek to reenter the Iranian
market?
Mr. Dubowitz. Well, Senator, I think it is the complete
opposite of the message that was part of the last exchange with
Ranking Member Brown, which is that the JCPOA does not preclude
non-nuclear sanctions, and the notion that Iran can threaten to
snap back its nuclear programs and, therefore, deter us from
using those non-nuclear sanctions actually contradicts the
commitments that President Obama, Secretary Kerry, Under
Secretary Sherman, then-Under Secretary Cohen, and Acting Under
Secretary Szubin have made to Congress and to the American
people, which is that they are going to use the full course of
power of American economic and nonmilitary might to deter Iran
from these destabilizing and dangerous activities. That is the
message we should be sending not only the Iranians, but we
should be sending it to the international community that Iran
is engaged in dangerous, malign, and illicit conduct, and that
the U.S. Government and U.S. Congress is not going to be shy
about using all instruments, of course, of powering, including
sanctions, to stop that activity.
Senator Rounds. Thank you.
My time has expired. Thank you, Mr. Chairman.
Chairman Shelby. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. And thank you
all for your testimony.
Let me ask, we have had Secretary Kerry, we have had
Assistant Secretary--I think that is his title, the number two,
Tom Shannon, and we have had others probably most significantly
before the Senate Foreign Relations Committee, and they have,
in the questions that I have posed to them and others, said
that any new sanctions that are not within the nuclear
portfolio but continue to pursue the issues of Iranian malign
actions, whether that be missile technology in violation of
U.N. Security Council resolutions, whether that be its
promotion of terrorism, whether that be the destabilization of
the region, that those are not a breach of the P5+1. Is that
your understanding, Mr. Zarate?
Mr. Zarate. Yes, Senator.
Senator Menendez. And how about you, Mr. Dubowitz?
Mr. Dubowitz. Absolutely, Senator.
Senator Menendez. Mr. Elleman.
Mr. Elleman. I would agree.
Senator Menendez. Ms. Rosenberg.
Ms. Rosenberg. Using existing authorities to go after those
activities you were talking about?
Senator Menendez. Using any new sanctions to go after those
activities outside of the nuclear portfolio. They are not a
violation of the JCPOA. Is that correct?
Ms. Rosenberg. I do not view them as such.
Senator Menendez. OK. So it is a reaffirmation by the
private panel of what the Administration itself has told us.
Now, would it be fair to say that one of the driving
elements of what brought Iran to the negotiating table was the
comprehensive sanctions that the Congress led and the
Administration enforced? Would you say that, Mr. Zarate?
Mr. Zarate. Absolutely, Senator. In fact, President Rouhani
said that the sanctions were moving Iran into the economic
stone age.
Senator Menendez. Mr. Dubowitz.
Mr. Dubowitz. Absolutely, Senator, because of the secondary
sanctions' impact that actually reinforces the President's
IEEPA power.
Senator Menendez. So if, in fact, the sanctions brought us
to the point where the Iranians were willing to negotiate, it
shows that it has a force in changing attitudes and actions.
Now, I may not have agreed with the JCPOA, but putting that
aside, I am not going to relitigate it. The question is I think
it is pretty clear that, but for the sanctions, the Iranians
were on a path that they would have continued without feeling
any consequence to pursue their nuclear program far beyond what
we would want to see, far beyond any peaceful activity, and,
obviously, for the purposes of nuclear weapons.
So if that is the case, then I do not understand at a time
in which we seem to be making Iran's case for it, we seem to be
working toward helping them--I mean, if I could strike a deal
with somebody and have them, my other counterpart, implement
all the elements that I need for my deal, whether it is buying
heavy water or whether it is making sure that I get access to
the international financial markets, boy, I wish I could make a
deal like that anytime where my counterpart actually is doing
everything necessary to make the deal possible. But if I am
going to do that, I should have an expectation that other
things that we are concerned about that Iran is going to change
its behavior, and it has not. It flouts international will,
forget about U.S. will, in terms of its missile firings,
including a missile that says, ``Death to Israel''. It is out
there pursuing one of the worst humanitarian disasters we have
in Syria because of its interests in having Hezbollah be a
strong entity as its surrogate, so it does not care how many
Syrians die until it can get a regime, whether it be Assad or
anyone else, who guarantees that. And it continues to
destabilize the entire region, and it continues to export
terrorism.
So is there anything then that we should not be pursuing--
in my view, that we should be pursuing a new set of sanctions
outside of the nuclear portfolio, having nothing to do with the
JCPOA, to try to get Iran to change its positions on these
critical elements that is in the national interests and
security of the United States? Is that a fair statement, Mr.
Zarate?
Mr. Zarate. It is a fair statement, Senator, and I would
also say that it is not only a given that Iran is engaged in
these underlying activities and dangerous activities, but it
also comes at a time when we are heightening our scrutiny in
terms of financial integrity with respect to corruption, with
respect to human rights, with respect to beneficial ownership,
which the Administration just published a final rule on.
We are actually heightening international expectations in
terms of how transparency and integrity is undertaken in the
international system, and Iran is doing the exact opposite. And
so there is an inherent tension in that message as well. So not
only can we and should we use sanctions as we have in the past
against these underlying activities, but there are heightened
expectations moving forward that should be placed on Iranian
banks, Iranian companies, beneficial ownership, that should
heighten scrutiny, not lessen it, with respect to Iranian
behavior.
Senator Menendez. One last question. Mr. Dubowitz, I hear
many of my colleagues say we should keep Iran's feet to the
fire, but if there is no fire, how do you keep their feet to
it?
Mr. Dubowitz. Well, Senator Menendez, absolutely, and if
you give Iran what effectively is a nuclear snapback, which is
this ability to threaten us every time that we are going to use
non-nuclear sanctions to deter the behavior, then,
unfortunately, they have the upper hand, and their nuclear
snapback ends up being a lot more powerful than our economic
snapback, which means our ability to enforce the deal and deter
Iranian behavior is much weaker.
Senator Menendez. Thank you, Mr. Chairman.
Chairman Shelby. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman, and thank you very
much for having this hearing. This is a very, very important
discussion.
I remain strongly opposed to this deal that turns over
something on the order of $100 billion to the world's leading
State sponsor of terrorism, a very dangerous and violent regime
that is very hostile to the United States. But not only did we
release all of that money, but we lifted substantial sanctions,
allowed Iran to retain important components of its nuclear
infrastructure. And I would just like to ask a question for the
record. Mr. Zarate, has the Iranian parliament ratified this
agreement?
Mr. Zarate. To be honest, Senator, not to my knowledge.
Senator Toomey. To your knowledge, have the top political
authorities in Iran signed the agreement?
Mr. Zarate. I do not think so, Senator. I have not seen
evidence of that.
Senator Toomey. In fact, doesn't the Administration argue
that this is not a legally binding agreement with respect to
Iran but, rather, a set of political commitments?
Mr. Zarate. That is right. They argue that this is not
technically a treat.
Senator Toomey. Yeah. It seems a rather amorphous
commitment on the part of the Iranians, despite the very real
changes and concessions that the United States has made with
the financial release, with the relief of sanctions, with
permitting Iran to retain this infrastructure. But let me
follow up on a line of questioning that Senator Menendez
pursued.
Mr. Zarate, you went through a pretty powerful list in your
written testimony of the ways in which Iran has behaved, as Mr.
Dubowitz put it, ``dangerous, malign, and illicit conduct''
post-JCPOA, right? Including the repeated ballistic missile
tests, the fact that Iran remains a leading State sponsor of
terror, the deployment of troops to Syria to support the Assad
regime, Iranian continued human rights abuses, detention of two
American citizens, arresting American sailors at gunpoint,
continuing to develop and engage in malicious cyberattacks.
Now, I share the view of Senator Menendez that in response
to these really outrageous and aggressive behaviors, we have
every right--in fact, responsibility, really, to impose the
kind of sanctions that might dissuade these behaviors. But not
only does the Administration disagree, it seems, with this
approach, but would it be fair to say that the Administration
appears to believe that it should be the United States'
responsibility to facilitate the reintegration of Iran into the
world economy?
That is what it looks like to me, and that strikes me as a
bad idea, but, Mr. Zarate, I would like your thoughts on that.
Mr. Zarate. Senator, absolutely, and I warned about this
danger when I testified during the JCPOA debate before you,
that this was a potential trap, that the Iranians were going to
push the United States to help rehabilitate their image, their
economy, their reintegration, and that they would argue that
the spirit and letter of the deal required it.
Senator Toomey. Which is exactly what the Administration--
--
Mr. Zarate. Exactly what is happening.
Senator Toomey. And what is the problem with that? Why is
that a bad thing for the U.S. Government to be facilitating the
reintegration of this very hostile regime into the world
economy?
Mr. Zarate. Well, there are three fundamental problems:
One, it takes Iran off the hook of dealing with the underlying
conduct itself that is problematic--support to terrorism,
support to Assad, human rights abuses.
Senator Toomey. Arguably, could it not be seen to be
rewarding that kind of outrageous behavior?
Mr. Zarate. Potentially, and that is the second problem,
which is creating sort of dual standards. Why are we creating
exemptions for the Iranians when, as I said before, our
expectations are heightened with respect to what financial
integrity and transparency looks like in the international
system? We are fining major global banks billions of dollars,
and yet we are now promoting the integration of Iranian banks,
which we know have been used and will continue to be used for
these illicit purposes? Why? It does not make any sense. So
there is an inconsistency there.
And, third, we are giving up the strategic opportunity in
putting the onus on Iran to resolve these issues themselves, to
explain themselves to the market. That actually could promote
reforms internally. It could force very hard decisions within
Iran itself for the reformers, the moderates, to say, ``We can
no longer use our banks, our economy in this way.'' So we are
taking the hard decisions off the table and taking Iran off the
hook.
Senator Toomey. And it appears implicitly to be virtually
condoning the behavior.
But, Mr. Dubowitz, did you have any comment you would like
to make on this?
Mr. Dubowitz. Well, very quickly. I mean, the U.S.
Government did not promise Iran financial and economic
outcomes. They specifically did not negotiate outcomes.
The second is that there is this prevailing and persistent
myth that somehow we have to economically seduce the hard men
of Iran, this despite the fact that President Obama's former
DCI, Leon Panetta, said the CIA assessment is that there are no
moderates in the regime and that the U.S. negotiator, Wendy
Sherman, has specifically said since the deal, publicly, that
in this regime there are hard-liners and hard-hard-liners, and
President Rouhani is a hard-liner.
So this notion that somehow there is--that continues to
persist even today--an octogenarian--hard-line octogenarian was
just appointed to the Assembly of Experts who is going to pick
the Supreme Leader after Ali Khamenei, I do not know why this
notion continues to persist in the halls of Congress and
outside, that there are moderates who we should economically
seduce. These are hard-hard-liners or hard-liners who continue
to hold their people hostage and continue to engage in very
dangerous and destabilizing activities.
Senator Toomey. Thank you very much.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman.
I want to start out today by addressing what I see as a
very big problem as we talk about sanctions against Iran, North
Korea, Russia, or any other adversary of the United States: the
fact that Adam Szubin has now been waiting more than a year for
confirmation as Treasury's Undersecretary for Terrorism and
Financial Crimes.
Despite bipartisan support, despite being an undisputed
expert in his field, despite our repeated calls for leadership
on sanctions policy in this Administration, some of my
colleagues refuse to give him a vote on the floor of the
Senate. I hope we confront the irony of this situation head-on
in tomorrow's hearing when Mr. Szubin testifies and answers our
questions, still serving only in an acting capacity on matters
we all agree are critical to national security. We are doing
this man and our Nation a great disservice by our failure to
act.
And I would like to put this question to all the members of
our panel here today. What are your views on Mr. Szubin's
nomination and do you have any concerns about his
qualifications? Mr. Zarate.
Mr. Zarate. I know Adam Szubin personally. I worked with
him directly. I have deep respect and affection for Mr. Szubin.
I have no question about his integrity and I think he would do
a great job.
Senator Donnelly. Mr. Dubowitz.
Mr. Dubowitz. I similarly know Mr. Szubin personally and
have worked with him closely, and I think he is eminently
qualified for that position.
Senator Donnelly. Thank you. Mr. Elleman.
Mr. Elleman. I do not know him and I am not intimately
familiar with what he does, but I also----
Senator Donnelly. That is still OK.
[Laughter.]
Mr. Elleman. ----but I have heard no reservations expressed
by many of my colleagues.
Senator Donnelly. Ms. Rosenberg.
Ms. Rosenberg. I, too, have had the pleasure of working
quite closely with Mr. Szubin. He is a dedicated public
servant. He is knowledgeable. He is respected by those with
whom he works and those who disagree with him. Not confirming
him undermines his ability to do his job, which is far beyond
the scope of the Iran deal, sanctions, and encompasses a much
broader array of anti-money laundering and terrorist financing
activities that are in our broader national interest to have
him address.
Senator Donnelly. Thank you.
Mr. Elleman, in my other role as Ranking Member of the
Armed Services Subcommittee on Strategic Forces, I have
dedicated a lot of time to studying Iran's missile program and
the threat it poses to our homeland, our forward-deployed
forces, and our allies in the Middle East and Europe. I spent a
week earlier this year meeting with U.S. military leaders and
foreign officials in Israel and across the Gulf States. One of
our unifying concerns is that Iran continued to grow the size
and sophistication of its ballistic missile arsenal even under
the heaviest years of sanctions.
I am a firm believer we must invest in U.S. and allied
missile defense systems to counter the threat posed by Iran's
ballistic missiles. However, I am also interested in your views
on how we can establish more effective sanctions related to
Iran's missile program. So what are your top recommendations
for improving our sanctions policy and enforcement on Iran's
ballistic missile activities?
Mr. Elleman. Well, I think for the sanctions to actually
retard or erode Iran's capacity to grow the size of their
arsenal or the capabilities of its arsenal, the sanctions would
have to be international. You know, the U.S. applying certain
restrictions will probably not do it because we are not trading
with Iran and they are primarily relying on equipment--
manufacturing equipment and components that have been obtained
from Europe and other countries. So it has to be multilateral.
But I would also say the--you know, the primary provider of
necessary technologies has been North Korea in the past. I am
not aware of significant transfers of equipment or technology
over the past 10 years or so.
Having said that, if Iran truly wants to expand the size of
its arsenal, it is going to have to get missile engines from
someone--and North Korea would be the most likely source--and
the Proliferation Security Initiative would probably be the
best tool to approach that.
Ms. Rosenberg. Mr. Senator.
Senator Donnelly. Yes?
Ms. Rosenberg. May I speak to this issue as well?
Senator Donnelly. You may.
Ms. Rosenberg. Thank you.
I agree that internationalization and partnering with
international jurisdictions to go after Iran's dangerous and
concerning ballistic missile activities is certainly a strong
direction for the sanctions program, as well as going after the
procurement networks, a number of which the components--a
number of which you have just mentioned.
Furthermore, additional efforts outside of the sanctions
realm would certainly be beneficial, including interdiction
efforts as well, which is a matter for different areas of
Government.
Senator Donnelly. What is your opinion on--Ms. Rosenberg--
on how our counterterrorism sanctions can become more
effective? What are your best ideas on that?
Ms. Rosenberg. Thank you for the question. I have offered a
couple of ideas in my testimony, including naming the IRGC in
its entirety under Executive Order 13224, the terrorism
authority, and going after, aggressively, agents,
instrumentalities of the IRGC inside and outside of Iran, and
asking foreign counterparts in other jurisdictions,
specifically the EU, to mirror U.S. sanctions wherever possible
in that domain.
Senator Donnelly. Thank you.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Scott.
Senator Scott. Thank you, Mr. Chairman.
Mr. Dubowitz--is that right?
Mr. Dubowitz. Dubowitz, yes.
Senator Scott. Dubowitz. OK, great.
In a recent televised interview, you compared the Iran deal
to the North Korean deal in the 1990s. Obviously, that deal was
flawed and we are still dealing with the serious ramifications
of that deal. What specific similarities do you see in the two
deals? And how strongly do you feel that 10 years from now we
will be dealing with as volatile of a situation in Iran as we
now see in North Korea?
Mr. Dubowitz. Thank you, Senator. Well, I think some of the
similarities are certainly significant flaws and loopholes with
respect to the reversibility of the nuclear restrictions.
The upfront sanctions relief nature of both deals--in fact,
as I think Mr. Zarate can tell you even in more detail, one of
the biggest mistakes that the Bush administration made was
trading away extensive economic leverage that was established
through the designation of Banco Delta Asia for a continuation
of that--of that nuclear agreement and North Korean nuclear
concessions that not only ended up being reversible but that
the North Koreans violated egregiously.
And so the deal itself was fundamentally flawed in its
architecture, just like the JCPOA--reversible concessions, big
loopholes, and trading away significant economic leverage.
Senator Scott. A second question to you, sir. How important
is enforcement of the sanctions against Iran that remain in
place? And can you--can you supply any evidence that Iran
believes that we, as a country, are serious about our
enforcement mechanisms? It certainly seems to me to be--if I
were in Iran, I would not take what we have done so far very
seriously since they have already tested some ballistic
missiles, from my perspective.
Mr. Dubowitz. Well, certainly the Iranians have made it
clear that the procurement sanctions that have been imposed by
the U.S. Treasury Department are meaningless, because these
procurement networks can be reconstituted. And I would like to
just provide a bit more detail on these ballistic missile
sanctions.
For many years people said that you could not use powerful
economic sanctions to change the risk-reward calculus of the
Iranian regime with respect to its nuclear program. I think
Congress proved that wrong. I think the U.S. Treasury
Department proved that wrong.
I think with respect to ballistic missiles, as opposed to
these narrow procurement sanctions we should look at sectors of
the Iranian economy that actually support the ballistic missile
program--mining and metallurgy, energy, automotive, telecom,
electronics, construction, and the research institutions that
back it up. All of these sectors of Iran's economy provide
vital technologies, parts and components for Iran's missile
program. If we were to impose sectors-based sanctions on those
essential sectors that support the missile program, I think we
would have a chance of actually changing this calculus.
So I believe that we need to look at much more coercive
sanctions, permissible by the JCPOA, to change the mindset of
the reigning regime with respect to its missile program.
Senator Scott. Thank you.
Mr. Zarate or Mr. Dubowitz, Treasury officials stated
recently that they are not planning on issuing general license,
but this contradicts earlier statements by the Obama
administration that general license were a possibility. What
are some of the specific hazards the U.S. could encounter if it
grants a general license to Iran?
Mr. Zarate. Senator, the relief to allow Iran to deal in
dollars for international trade would give not only a stamp of
legitimacy to Iranian behavior but would facilitate their
reintegration into international trade, given the fact that the
dollar is the predominant currency, the currency that is used
in the oil trade in particular but also internationally.
And so this could take a variety of forms. It could be a
general license. It could be a specific license. But it could
be some form that allows an offshore facility that then allows
Iran to access dollars in some way that then would give the
markets confidence to be able to do business with Iran. That is
what Iran wants and it is certainly something that the
Secretary of State seems to be suggesting that we should be
offering.
And I think the Treasury officials are trying to back away
from that, in particular given the fact that, if we give this
concession in the context of the JCPOA, we are admitting that
our ability to withdraw the access to the dollar, which is a
principal and important financial tool for us, becomes embedded
in the JCPOA itself. And then we cannot use it for other
reasons.
And so the Iranians are very smart about this. They have
been gaming this throughout to get as much maximum benefit from
U.S. concessions and the spirit and letter of the deal as
possible.
Senator Scott. Thank you.
Mr. Dubowitz. Senator, if I could just add to that?
Senator Scott. Yes.
Mr. Dubowitz. Tomorrow at the hearing, when the Government
witnesses are here, please do not get distracted about these
commitments about access to the U.S. financial system. Also, do
not get distracted by the notion of general licenses.
What I think the Administration is doing is they are using
a class-of-transactions approach to sort of step by step, drip
by drip begin to dollarize Iranian transactions. You have seen
that with heavy water. You have seen that with aircraft
licenses. You have seen that with the return of restricted oil
escrow funds. You have seen that with possible humanitarian
transactions.
So it is a class-of-transactions approach where the
Administration will attempt to dollarize Iranian transactions,
not through a wholesale general license but by these classes of
transactions, so by the end of the Administration the Iranians
have effectively gotten access to the U.S. dollar and used that
legitimization as a way to get themselves out from under the
strictures that they have been imposed.
Senator Scott. Thank you very much.
Chairman Shelby. Senator Warren.
Senator Warren. I think Senator Tester is up next.
Chairman Shelby. OK.
Senator Tester. Well, you are very gracious, Senator
Warren. Thank you. And thank you, Mr. Chairman. And thank you
all for your testimony.
I want to go back to one of the questions asked of you, Mr.
Elleman, about Iran's testing of missiles. And I do not want to
put words in your mouth. Did you say they are testing them at
the same rate since the JCPOA as they were before, or did you
say something different?
Mr. Elleman. What I said was the resumed testing since
October of 2015 is a historic norm for the way they have
tested. But I did also note that they did not conduct tests in
2005, 2013, or 2014 when nuclear negotiations were making
process.
Senator Tester. OK. All right. So they are--I mean, they
are basically acting the same way they did before the JCPOA was
put into effect as far as missile capabilities?
Mr. Elleman. In terms of missile capabilities that is
correct.
Senator Tester. OK. And so from a sanctions standpoint, do
you advocate putting more sanctions on because of the missile
testing they have done? Or do you not have a position on that?
Mr. Elleman. Well, I think sanctioning the individuals and
enterprises directly involved in the program is----
Senator Tester. OK.
Mr. Elleman. ----is an appropriate measure. Whether it is
effective or not----
Senator Tester. OK.
Mr. Elleman. ----is probably another story.
Senator Tester. OK, thank you.
Elizabeth, the last Iranian election, do you know anything
about that? I mean, did the moderates win or did the hard-
liners win? What happened there?
Ms. Rosenberg. There was a relatively strong showing for
what we might characterize as somewhat more pragmatist rather
than hard-liner representatives. Nevertheless, the vetting that
occurs in order to allow candidates to stand already selects
out potential candidates who are on the more hard-line
spectrum. Nevertheless, there were a relatively good showing by
pragmatists.
Senator Tester. So let me dig into this a little more
because I think it goes back to Mr. Dubowitz's answer, and that
is that would you classify the last election as being a
different step than they had taken in previous elections, or
same old same old stuff?
Ms. Rosenberg. We could characterize it as in line, broadly
speaking, with the election of President Rouhani, which is to
say an expression of public sentiment that is veering a bit
more toward pragmatic interest in international engagement,
including economic relief.
Senator Tester. And do you attribute that to anything
specifically?
Ms. Rosenberg. Extreme economic difficulty over the last
several years and desire to see change, including getting out--
--
Senator Tester. OK.
Ms. Rosenberg. ----from under sanctions.
Senator Tester. OK.
Senator Menendez talked about sanctions, and you talked
about the fact, Michael, that the sanctions needed to be
multilateral, whatever we do. Do you think the sanctions that
we put on Iran would have been effective--would have been
effective if it would have just been the United States and EU,
and China and Russia would not have been onboard?
I am talking to Michael.
Mr. Elleman. In terms of their nuclear and missile
programs, likely not.
Senator Tester. OK. So you believe it was critically
important that the P5+1 truly had to stick together on the
sanctions?
Mr. Elleman. Yes.
Senator Tester. Do you agree with that, Elizabeth?
Ms. Rosenberg. I do.
Senator Tester. OK. Let me ask all of you, the Ranking
Member went through a list of things that Iran had done.
Elizabeth answered yes to all of them. Would any of you
disagree with Elizabeth's answers?
Mr. Dubowitz. Yeah, I would disagree. I mean, again, I made
this point before.
Senator Tester. You do not think that they have removed the
nuclear material?
Mr. Dubowitz. No, I would disagree with the conclusion that
Iran is in full compliance with the JCPOA.
Senator Tester. OK, that is not what he asked. He asked if
they had removed the material, if they had filled the reactors,
if they got rid of the heavy water. Would you agree with that?
Mr. Dubowitz. I would----
Senator Tester. Would you agree that they are still two to
3 months away from having access to a nuclear bomb that they
were when we ratified the JCPOA?
Mr. Dubowitz. No. Based on the assessment of David
Albright, they are 6 to 7 months away from having a nuclear
weapon because they have the ability to reconstitute, replace,
and reinstall the P1 centrifuges that did not get dismantled
but actually just got warehoused. So we gained about 3 or 4
months in terms of nuclear breakout.
Senator Tester. What about the heavy water?
Mr. Dubowitz. Well, in terms of the heavy water, the
Iranians continue to produce heavy water. They continue to
actually improve their capability to produce heavy water. And
when all the restrictions on heavy water and plutonium reactors
and reprocessing go away, Iran will be in a stronger position
to actually develop a plutonium bomb.
Senator Tester. OK.
In the heavy water realm, Elizabeth, would you classify it
better in our hands, or Russia and China's hands?
Ms. Rosenberg. The United States has a strong record on its
ability to handle dangerous nuclear materials. I feel more
confident in the United States' experts managing heavy water in
this jurisdiction----
Senator Tester. Yeah.
Ms. Rosenberg. ----rather than enabling States of
proliferation concern to have access to that material.
Senator Tester. All right.
Thank you, Mr. Chairman. Thank you, all of you, for your
testimony.
Chairman Shelby. Senator Cotton.
Senator Cotton. Thank you all for appearing today.
Mr. Zarate, you worked with Stuart Levey at the Treasury
Department. Is that correct?
Mr. Zarate. I did, Senator.
Senator Cotton. How long did you all work together?
Mr. Zarate. We overlapped for a year and then I went to the
White House to serve as Deputy National Security Advisor while
he served as Undersecretary of the Treasury for Terrorism and
Financial Intelligence.
Senator Cotton. And he is now the chief legal officer of
HSBC Holdings.
Mr. Zarate. That is correct.
Senator Cotton. Did you read Mr. Levey's Wall Street
Journal op-ed a couple of weeks ago in the aftermath of John
Kerry traveling Europe, acting as the Iranian Chamber of
Commerce president?
Mr. Zarate. I did read the op-ed, sir.
Senator Cotton. He said in that op-ed that, Washington is
pushing non-U.S. banks to do what it is still illegal for
American banks to do. Do you agree with that statement?
Mr. Zarate. Based on press reports and what I have read,
yes.
Senator Cotton. Could you elaborate a little bit on what
Mr. Levey might have meant? What is Washington pushing non-U.S.
banks to do that U.S. banks cannot do?
Mr. Zarate. I think the concern was, based on the meetings
that the Secretary of State was having in addition to some of
the road shows that had been deployed on behalf of the U.S.
Government, that there have been messages sent to European
banks that there are no longer major restrictions to doing
business in Iran and that they can manage the risks of doing
business with or in Iran.
Senator Cotton. And a nearby article the same day suggested
that Secretary Kerry was not successful in persuading those
European banks to do such business. And Mr. Levey concluded his
op-ed by saying, quote, ``Our decisions''--HSBC--``will be
driven by the financial-crime risks and the underlying conduct.
For these reasons, HSBC has no intention of doing any new
business involving Iran. Governments can lift sanctions but the
private sector is still responsible for managing its own risk
and no doubt will be held accountable if it falls short.''
Mr. Zarate. Right.
Senator Cotton. Do you agree that that is a--that private
actors face genuine risk of being held accountable for doing
what the current Administration is encouraging them to do?
Mr. Zarate. Absolutely, Senator. As part of my private
practice I work with banks like HSBC and others, dealing with
the regulatory and real risks in the sanctions and financial
crime environment. And they worry every day that not only are
they going to be second-guessed but they will be fined billions
of dollars, and that their access to U.S. markets will be put
at risk if they do not manage their risk.
And so there is a sense in the private sector that there
are mixed messages coming from the U.S.--strict adherence to
U.S. norms and values and laws, and then a push to deal with
what is an inherently risky jurisdiction in Iran at a time when
those expectations are actually higher than ever before; 2016
presents heightened risk for banks to do business in
financially risky environments, not less risk.
Senator Cotton. So you say mixed messages, so not just risk
that a future Administration or future Congress may view the
matter differently but actually different messages from
different parts of the United States Government at this very
moment.
Mr. Zarate. Absolutely, and not just the U.S. Government
but also State and local authorities and regulators. New York
authorities have placed some of the most stringent and heavy
sanctions and enforcement actions against U.S. and European
banks. And so banks are very worried about not just what the
U.S. Treasury says or what the State Department says, but what
New York and other regulator--other regulators have to say
about this.
In addition, there is the real risk that what banks have to
worry about, which is transparency and accountability, is
absolutely absent in the Iranian market. And so the promotion
of banking and any commercial activity in that environment is
completely anathema to the message that the U.S. Government has
been sending internationally for the last 15 years.
Senator Cotton. So these banks, and for that matter other
companies that might wish to do business with Iran, in your
professional judgment, face grave financial, legal, political,
and reputational risks?
Mr. Zarate. Enormous risks, in fact heightened risks after
implementation day, as opposed to less risk.
Senator Cotton. Would you counsel any responsible member of
a board of directors or a corporate general counsel for such
banks or companies to accept those risks when the world may
look very differently in a mere 7 months?
Mr. Zarate. I would not because the sanctions environment
is confused. The risk of Iranian cheating is high. The
realities of Iranian lack of transparency, corruption,
financial crime, and money laundering is incredibly high. And
the inability for banks to actually understand who their
customers are, who their counterparties are at a time when we
are putting out new regulations just this month with respect to
understanding beneficial ownership in shell companies,
especially in the wake of the Panama Papers, is an incredibly
risky proposition to go into Iran at this point.
Senator Cotton. OK.
And my time is nearly expired. Mr. Dubowitz, just one
question about the total value of sanctions relief that Iran
can expect to receive under the JCPOA. The President himself
has suggested it could be as high as $150 billion. Secretary
Kerry and other Administrations have suggested it may be a low
as 3 or $5 billion. Other Administration officials have accused
Members of Congress of lying by going with figures closer to
the president's own figure than with Secretary Kerry's figure.
What would you estimate, based on your calculations, is the
total amount of sanctions relief that Iran can expect to
receive under the JCPOA?
Mr. Dubowitz. Well, in terms of restricted oil escrow
assets and frozen assets that are returned, they will have
access to $100 billion, of which they will have about $55
billion in liquid assets and the remaining $45 billion to pay
off their debts.
But, Senator, as you know, if I give you $100 and you
pocket $55, and you take $45 and you pay off your credit card,
right, the net benefit to you that you have got to report to
the IRS is $100. So that is the net benefit from the frozen
assets.
In addition, Iran is going to receive hundreds of billions
of dollars of additional sanctions relief based on oil exports,
petrochemical exports, the expansion of its auto sector. And
already Iran is predicted to have GDP growth of 3 to 4 percent.
Inflation has gone down from 40 percent to about 11 percent.
So Iran has actually already received a significant
economic windfall from both the JCPOA and the interim agreement
numbering in the hundreds of billions of dollars in terms of
its macroeconomic stability and recovery.
Senator Cotton. But from the JCPOA itself somewhere in the
neighborhood of $100 billion?
Mr. Dubowitz. $100 billion in the access to frozen assets
and restricted oil funds.
Senator Cotton. Yeah. And then of course there is the
additional benefits of economic growth since the JCPOA and the
Obama administration have brought 6 percent growth to Iran
while leaving us with 2 percent growth.
Mr. Dubowitz. And the Obama administration helped Iran
avoid a balance-of-payments crisis and a severe economic crisis
in 2013 through the interim agreement and through blocking
legislation that this Committee and other committees have
forwarded.
Senator Cotton. Thank you very much.
Chairman Shelby. Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
Iranian officials are complaining about what they see as
the slow pace of sanctions relief and the lack of additional
foreign investment that they expected to see as a result of the
nuclear deal. Now, if Iran complies with its obligations under
the nuclear deal, they will get the sanctions relief that they
bargained for. But Iran has a long history of money laundering,
terrorist financing, corruption, which are among the reasons
that Iran remains a pariah State in the eyes of the
international community.
Ms. Rosenberg, instead of blaming the United States for its
failure to emerge from economic isolation, what steps should
Iran be taking if it wants to become a responsible member of
the international financial and commercial system?
Ms. Rosenberg. Thank you for the question.
To begin with, it could stop funding terrorism----
Senator Warren. Yeah, that would be a good one.
[Laughter.]
Ms. Rosenberg. ----and additionally, use this newly passed
criminalization of terrorism law to prosecute cases of this,
working with the IMF and the FATF to improve controls and risks
in its system related to money laundering and terrorist
financing.
It must address a variety of prudential risks related to
capital adequacy, corporate governance, tax and financial
disclosure, and furthermore, on a political level, to cease
engaging in the kind of provocative regional behaviors that are
a disincentive to those who would invest in the jurisdiction.
Senator Warren. All right. Well, thank you. That is very
helpful. You know, that is a long laundry list of reasons why
companies are still reluctant to invest in Iran right now that
have nothing to do with the nuclear deal. Iran is ranked 130th
on the world Transparency International's Corruption
Perceptions Index. It is ranked 118th on the World Bank's Ease
of Doing Business Index. It is ranked 108th on the
International Property Rights Index.
Ms. Rosenberg, if Iran complies with the nuclear deal, gets
the sanctions relief it bargained for under that deal but fails
to address systemic problems under these key economic metrics,
is it realistic for them to expect to be reintegrated into the
international financial system or to see serious and sustained
economic growth in the country?
Ms. Rosenberg. I think, as has been pointed out, that there
is potential for growth even under these difficult
circumstances. However, few would believe that they are in any
way living up to the potential that geological assets, a well-
educated youthful population could provide if they were
actually managing their risks.
Senator Warren. Well, that is very helpful because, you
know, it is no secret that there are some people in Congress
who are committed to seeing the Iran nuclear agreement fail at
any price, and we are hearing a lot of rumbling from them about
holding up sanctions relief even if Iran complies with the
deal.
Now, that might be good politics for some senators, but let
us be clear: Such a move will play right into the hands of
hard-liners in Iran who want to blame the West for their
economic woes.
Here is the truth: We could give Iran all of the relief
contemplated under the nuclear agreement tomorrow and Iran
would still need to implement significant structural reforms
and change its regional behavior in order to attract the
sustained investment and reintegrate itself into the
international financial and commercial system. Iran must
implement serious structural reforms, crack down on money
laundering, as you said, and stop sponsoring terrorism. Our job
here is to keep the pressure on the Iranians to make sure that
those changes are made, and not give them an excuse to avoid
making those changes. Our job is to make sure that if Iran
rejects comprehensive reforms, that it has no one to blame for
its economic troubles other than itself. Now, there is one more
thing I would like to ask you, and that is Adam Szubin is the
Acting Undersecretary for Terrorism and Financial Crimes at
Treasury. He is in charge of enforcing our sanctions against
countries like Iran and targeting the financial networks of
terrorist groups like ISIS. It has been more than a year since
Mr. Szubin was nominated to this position and the Republicans
who control the Senate have still not held a vote to confirm
him.
Ms. Rosenberg, given the critical importance of Mr.
Szubin's work to our national security, is there any credible
reason for Republican senators to continue blocking his
confirmation?
Ms. Rosenberg. I think there is no credible reason to block
his nomination--his confirmation. And in fact, it undermines
broad national security interests in a variety of areas--
proliferation, terrorist financing, the beneficial ownership
and CDD rule that was mentioned earlier on the panel--if we do
not--if he is not confirmed to this position.
Senator Warren. So a delay undermines our national
security.
Ms. Rosenberg. I agree.
Senator Warren. Thank you.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you all your appearance today. This
has been a good hearing. And the Committee will be meeting--
continue to meet on this issue. Thank you very much.
[Whereupon, at 12:03 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF JUAN C. ZARATE
Chairman and Cofounder, Financial Integrity Network
May 24, 2016
Chairman Shelby, Ranking Member Brown, and distinguished Members of
the Senate Committee on Banking, Housing, and Urban Affairs, I am
honored to be with you today to discuss the role and significance of
sanctions in the Iran nuclear deal, the Joint Comprehensive Plan of
Action (JCPOA). The JCPOA is an ongoing and unfolding agreement, with
significant implications for how the United States continues to
leverage its economic and financial influence to affect Iranian
behavior and counter its nefarious activity. This is an important
moment for the United States to examine Iranian activity around the
globe soberly and determine how best to proceed with the agreement and
against the Iranian threat.
When the JCPOA was being debated, I expressed deep concerns and
reservations about its structure, demands, and effects on U.S.
interests, especially in anticipation of increased Iranian belligerence
and adventurism. In detailed testimony before both this Committee and
the Senate on Foreign Relations Committee, I explained that the JCPOA
was fundamentally flawed, in part because it would empower and enrich
the regime and ultimately constrain our ability to use the most
effective financial and economic tools of isolation to counter
dangerous Iranian behavior.
With strategic patience, Iran can march toward a weaponized program
with greater capabilities, breakout capacity, and more economic
resources, resilience, and connectivity to the global oil markets and
commercial system. Even if Iran complies with all elements of this
deal, Tehran will end up with an unfettered opportunity to break out
and weaponize its nuclear program, overtly or covertly, along with an
ability to arm itself and its allies more openly and aggressively. The
end state of the agreement takes us far afield from the declared goal
of successive Administrations at the start of negotiations.
The structure, processes, and nature of this agreement give Iran
the benefit of the doubt that it is pursuing a peaceful program, when
the onus should remain on Iran to prove the peaceful nature of its
program, as constructed in the prior, relevant UN Security Council
Resolutions (UNSCRs).
Ultimately, what we negotiated and promised was Iran's
reintegration into the global economic system. The JCPOA sacrifices the
ability of the United States to use its financial and economic power
and influence to isolate and attack dangerous and problematic Iranian
activity--beyond the nuclear program. Beyond simple sanctions relief,
we negotiated away one of our most important tools of statecraft--the
very financial and economic coercion that helped bring the Iranian
regime to the table. Though ``non-nuclear'' sanctions were supposedly
off the table, the spirit and letter of the agreement neuters
Washington's ability to leverage one of its most powerful tools--its
ability to exclude rogue Iranian actors and activities from the global
financial and commercial system.
As I explained last year, promising Iranian reintegration into the
global system was not possible unless we were willing to defang our
sanctions regime and ignore Iranian behavior; rehabilitate the
perception of the Iranian regime ourselves; and take the most effective
tools of financial isolation off the table.
This is a critical point as Iran continues the range of dangerous
activities that have been the subject of sanctions and international
opprobrium. In the wake of the JCPOA implementation, these activities
have included the following:
1. Iran has conducted repeated ballistic missile tests in violation
of UN resolutions, including earlier this month according to
Iranian news reports, and promises further tests. The launch in
March also coincided with Vice President Biden's visit to
Israel.
2. Qassem Soleimani, the head of the Iranian Revolutionary Guard
Corps' (IRGC) Qods Force, traveled twice to Moscow in
contravention of international travel bans to coordinate
military cooperation with the Russian Government, to include
the delivery of the S-300 system to Iran and defense of the
Assad regime in Syria.
3. Iran remains the leading State sponsor of terror and has
continued its direct support to terrorist proxies throughout
the region, to include Hizballah's activities in Lebanon and
Syria, as well as Iraqi Shi'ite militias who were responsible
for the deaths of hundreds of Americans in Iraq and are now
deployed in Syria to fight for the Assad regime. Iran's support
of terrorist proxies is intended to destabilize regional
Governments allied with the United States, and the Gulf States
have uncovered and interdicted Iranian arms shipments to
militias. In recent months, international naval forces have
interdicted Iranian arms shipments likely headed to Houthi
rebels in Yemen.
4. Iran has deployed troops--regular and from the IRGC--to Syria to
fight for and defend the Assad regime, with reports of
thousands on the ground. Qassem Soleimani continues to appear
at key battlefronts throughout Syria, and the Iranians help
funnel Iraqi, Afghani, and Pakistani Shi'ite militias into the
battlefield.
5. Iran has continued to engage in human rights abuses and the
restriction of democratic norms. In the run up to recent
parliamentary elections, Iran disqualified thousands of
individuals from running \1\ and continues to hold the leaders
of the Green Movement under house arrest.
---------------------------------------------------------------------------
\1\ Sam Wilkin, ``Iran Excludes Most Candidates in Elite Assembly
Election'', January 26, 2016 (http://www.reuters.com/article/us-iran-
election-candidates-idUSKCN0V419V).
6. Iran detained two Iranian-American citizens, a father and son, in
October 2015 and February 2016, and continues to hold them. In
addition, Robert Levinson remains missing after disappearing on
---------------------------------------------------------------------------
Kish Island on March 9, 2007.
7. On January 12, 2016, Iranian naval forces arrested American
sailors at gunpoint, broadcasting the video of their detention,
and subsequently mocking the sailors through a reenactment at a
rally commemorating the anniversary of the Iranian Revolution.
The Iranians detained the American sailors days before the
implementation of the JCPOA, and hours before the President's
State of the Union address.
8. Iran continues to develop its cyber capabilities and has engaged
in malicious cyberattacks against U.S. Government sites, the
U.S. private sector, and specific individuals. In March 2016,
the Department of Justice indicted seven individuals who worked
for the IRGC and carried out attacks on forty-six (46) American
banks (including JPMorgan Chase, Bank of America, Capital One,
and PNC Bank), the New York Stock Exchange, AT&T, and the
Bowman Dam in a suburb of New York. In February 2014, Iran
launched a cyberattack against the Las Vegas Sands Corporation.
Much of this activity is not a surprise, but it cannot be dismissed
as simply the bad behavior of a recalcitrant IRGC or extremists within
the Iranian system. In the Iranian system, these actions are blessed by
the Supreme Leader, designed to promote the interests of the regime,
and calculated to test the will of the West.
Importantly, the nature of the regime, its control of the economy,
and its willingness to use the financial system to pursue all its goals
internally and externally has not changed. The Iranian system is
corrupt, lacks transparency at all levels, and is centrally controlled
by the regime. This--along with the uncertainty of how the JCPOA will
unfold--ultimately creates enormous risk for legitimate international
actors and companies considering doing business in or with Iran. This
explains why there has not been a wave of Western businesses investing
aggressively or operating directly in Iran. It further explains why the
Iranian leadership continues to complain that the United States has not
satisfied its side of the bargain.
Exposing the Risky Nature of the Iranian Regime
The risks are real for the international business and banking
communities, given the nature of the regime, the opacity of its
economy, its continued dangerous and threatening activities, and
remaining sanctions.
The constriction campaign that brought Iran to the negotiating
table was premised on the suspicion of Iran's behavior and use of its
financial and commercial system for illicit and dangerous purposes. The
U.S. Treasury targeted Iran's banks by using Iran's own conduct--its
proliferation activity, support for terrorist groups and Shi'ite
militias, and lack of anti-money laundering controls, as well as the
secretive and corrupt nature of the regime itself--as the cornerstone
of the campaign. Iran's suite of suspect activities and attempts to
avoid international scrutiny spurred the private sector to stop doing
business with Iran. No reputable bank has wanted to be caught
facilitating Iran's nuclear program or helping it make payments to
Hizballah terrorist cells around the world. If they did, they would be
caught and sanctioned, with enormous reputational and business
consequences. These concerns continue.
This produced a virtuous cycle of isolation that reduced Iranian
access to the international financial system more and more over time.
The more the Iranians tried to hide their identities or evade
sanctions, the more suspect their transactions would appear and the
riskier it would become for banks and other financial institutions to
deal with them. Over time, bank accounts, lines of credit, and
correspondent accounts were shut down. Iran's own actions to avoid
scrutiny and obfuscate transactions led to greater financial
constriction.
The Iranians deepened their greatest vulnerability. They blended
legitimate business transactions with illicit ones by funneling them
through similar conduits. The Iranian regime often tried to hide the
nature of its transactions and the identities of the Government
entities involved. They used front companies, cut-outs, and businessmen
to acquire items and goods abroad that were hard to purchase,
sanctioned, or tied to their nuclear ambitions or their weapons
programs.
At the same time, the Iranian military was taking greater control
of the Nation's economy. Importantly, the predominant economic player
was Iran's IRGC, the elite military and security unit founded in 1979.
The IRGC has gained more power and influence over time as the protector
and exporter of the revolution and reports directly to the Supreme
Leader, Ayatollah Ali Khamenei.
The IRGC is an economic juggernaut, with responsibilities related
to the development of weapons of mass destruction, missile systems, and
overseas operations. It is deeply involved in the Iranian nuclear
program, and its international arm, the Qods Force (IRGC-QF), is
responsible for providing support to terrorist proxies and exporting
the Iranian Revolution. Between them, the IRGC and its Qods Force are
responsible for all the activities--weapons proliferation, terrorist
support, and militant activity--for which Iran was sanctioned in the
past.
The IRGC--with its vast network--has embedded itself into more
industries within Iran, ultimately building what has been called a
veritable business empire. \2\ The regime and the IRGC's control of
``charitable'' foundations--known as bonyads--with access to billions
of dollars of assets in the form of mortgages and business interests
for veterans of the Iranian military--served as the baseline of its
economic power, along with its ability to construct infrastructure
through a corps of engineers. The reach of the IRGC's economic empire
now extends to majority stakes in infrastructure companies, shipping
and transport, beverage companies, and food and agriculture companies.
\3\
---------------------------------------------------------------------------
\2\ Frederic Wehrey, Jerrold D. Green, Brian Nichiporuk, Alireza
Nader, Lydia Hansell, Rasool Nafisi, and S.R. Bohandy, ``The Rise of
the Pasdaran: Assessing the Domestic Roles of Iran's Islamic
Revolutionary Guards Corps'' (Washington, DC: RAND Corporation, 2009).
\3\ Emanuele Ottolenghi, ``The Pasdaran: Inside Iran's Islamic
Revolutionary Guard Corps'' (Washington, DC: Foundation for Defense of
Democracies, 2011), pp.44-45.
---------------------------------------------------------------------------
In 2006, the IRGC acquired control of the Iranian
telecommunications sector, and it began to control more elements of the
Nation's energy sector, including the development of pipelines and the
valuable South Pars oil field. This allowed the IRGC to exclude
competition and make it more difficult for legitimate international
businesses to operate. Some estimates note that the IRGC controls
between 25 and 40 percent of Iran's gross domestic product (GDP). \4\
The IRGC is deeply involved in building Iran's infrastructure, pursuing
projects such as deep-water ports and underground facilities important
to Iran's defense and economy. These projects and industries give the
IRGC political power and access to profits and capital.
---------------------------------------------------------------------------
\4\ Ibid, p.43.
---------------------------------------------------------------------------
The IRGC intervenes in Iran's economy through three principal
channels: The IRGC Cooperative Foundation (its investment arm), the
Basij Cooperative Foundation, and Khatam al-Anbiya Construction
Headquarters. The Khatam al-Anbiya (KAA), a massive IRGC conglomerate,
was designated by the United States as a proliferator of weapons of
mass destruction. \5\ It is Iran's biggest construction firm and,
according to some estimates, ``may be its largest company outright,
with 135,000 employees and 5,000 subcontracting firms.'' \6\ The value
of its current contracts is estimated to be nearly $50 billion, or
about 12 percent of Iran's gross domestic product. \7\ KAA has hundreds
of subsidiaries in numerous sectors of Iran's economy including its
nuclear and defense programs, energy, construction, and engineering.
The company is also involved in ``road-building projects, offshore
construction, oil and gas pipelines, and water systems.'' \8\ EU
sanctions against the company will be lifted after 8 years, whether or
not the IAEA concludes that Iran's nuclear program is peaceful.
---------------------------------------------------------------------------
\5\ Department of State, Office of the Spokesman, ``Fact Sheet:
Designation of Iranian Entities and Individuals for Proliferation
Activities and Support for Terrorism'', October 25, 2007 (http://2001-
2009.state.gov/r/pa/prs/ps/2007/oct/94193.htm).
\6\ Parisa Hafezi and Louis Charbonneau, ``Iranian Nuclear Deal
Set To Make Hardline Revolutionary Guards Richer'', Reuters, July 6,
2015 (http://www.reuters.com/article/2015/07/06/us-iran-nuclear-
economy-insight-idUSKCN0PG1XV20150706); Emanuele Ottolenghi and Saeed
Ghasseminejad, ``The Nuclear Deal's Impact on Iran's Revolutionary
Guards'', Foundation for Defense of Democracies, July 17, 2015 (http://
www.defenddemocracy.org/media-hit/emanuele-ottolenghi-the-nuclear-
deals-impact-on-irans-revolutionary-guards/).
\7\ Benoit Faucon and Asa Fitch, ``Iran's Guards Cloud Western
Firms' Entry After Nuclear Deal'', The Wall Street Journal, July 21,
2015 (http://www.wsj.com/articles/irans-guards-cloud-western-firms-
entry-after-nuclear-deal-1437510830).
\8\ Ibid.
---------------------------------------------------------------------------
These three companies are direct shareholders of almost three
hundred known businesses. My colleagues at the Foundation for Defense
of Democracies have created a database of these companies and board
members and provided it to the U.S. Government. \9\ As a result of the
IRGC's control of the economy--control that has grown over time--
together with sanctions relief, the risk of regime control over the
economy will grow. In addition, the reality and risks of Iranian
sanctions evasion, money laundering, the lack of transparency, and
other financial crimes--the subject of international concern and U.S.
regulatory action against Iran under the USA PATRIOT Act Section 311--
will increase, not decrease over time.
---------------------------------------------------------------------------
\9\ Iranian Official Journal, accessed July 20, 2015 (http://
www.gazette.ir/).
---------------------------------------------------------------------------
With the IRGC in control of an increasing share of the Iranian
economy, including its infrastructure, telecommunications, and oil
sector, risks of doing business in and with Iran will increase. The
regime will continue to use its control of the economy not only to
further enrich itself but also to suppress internal opposition brutally
and ensconce its rule. The concerns over human rights abuses and regime
kleptocracy will grow.
As I have noted in the past, sanctions relief will increase risks
over time, and Iran's foreign policy will continue to challenge and
threaten U.S. interests.
From the U.S. perspective, the blend of IRGC and regime activities
created the ultimate vulnerability, particularly the blurred lines
between legitimate industry and support for Iran's nuclear program and
terrorist groups. Wire transfers to terrorist groups and front
companies flooding money into the coffers of the Revolutionary Guard
were actions seen to threaten not only international security but also
the integrity of the financial system. The nefarious nature of the
activities, tied with the IRGC's attempts to hide its hand in many of
its economic dealings and operations, made Iran's financial activity
inherently suspect. This has not changed.
As part of past efforts to exclude Iran from the financial system,
the U.S. Treasury made the argument directly to banks and companies
around the world that it was too risky to do business with Iran, since
no one really knew who was lurking behind corporate veils, pulling the
strings, and accessing bank accounts and funding in Tehran. Would banks
be willing to risk their reputations by doing business, even
inadvertently, with the IRGC or the Qods Force? Could their compliance
officers guarantee that they knew who was behind their Iranian
customers and transactions? Was trade with Iran worth the risk of
access to American markets and banks?
All of this was amplified by parallel national legislation, UNSCRs,
greater scrutiny from authorities around the world, and enforcement
actions, led by the United States. The United States created a layered
sanctions regime, with overlapping Executive Orders, designations, and
eventually legislation, focused on the key elements of the Iranian
regime and economy facilitating illicit and dangerous behavior. Each
U.S. action spurred private sector and allied responses. The effects of
this suspicion and isolation--driven by the private sector's risk
calculus and Government actions--had a real world impact.
Iranian banks, including its central bank, could no longer access
the international financial system; its shipping lines could not
traverse ports easily or obtain insurance to operate; and--thanks to
congressional and international action--its oil sales and revenues were
suspended. Iran had to create workarounds, evasion schemes, and
bartering arrangements to continue to do business.
The Central Bank of Iran (CBI) itself has been designated in part
because of broader sanctions evasion facilitation on behalf of the
Iranian banking system. Treasury issued a finding in November 2011,
under Section 311 of the USA PATRIOT Act that Iran, as well as its
entire financial sector including the CBI, is a ``jurisdiction of
primary money laundering concern.'' \10\ Treasury cited Iran's
``support for terrorism,'' ``pursuit of weapons of mass destruction,''
including its financing of nuclear and ballistic missile programs, and
the use of ``deceptive financial practices to facilitate illicit
conduct and evade sanctions.'' \11\ The country's entire financial
system posed ``illicit finance risks for the global financial system.''
\12\ Those concerns persist and are not alleviated by the JCPOA or any
Iranian nuclear commitments or actions.
---------------------------------------------------------------------------
\10\ U.S. Department of the Treasury, Press Release, ``Finding
That the Islamic Republic of Iran Is a Jurisdiction of Primary Money
Laundering Concern'', November 18, 2011 (http://www.treasury.gov/press-
center/press-releases/Documents/Iran311Finding.pdf).
\11\ Ibid.
\12\ U.S. Department of the Treasury, Press Release, ``Fact Sheet:
New Sanctions on Iran'', November 21, 2011 (http://www.treasury.gov/
press-center/press-releases/Pages/tg1367.aspx).
---------------------------------------------------------------------------
The concerns about the integrity of the Iranian financial system
are international in nature. The Financial Action Task Force (FATF),
the global standard setting and assessment body for anti-money
laundering, counterterrorist financing, and counterproliferation
financing, has labeled Iran--along with North Korea--``a high risk and
noncooperative jurisdiction.'' FATF has called on its members to
``apply effective countermeasures to protect their financial sectors
from money laundering and financing of terrorism (ML/FT) risks
emanating from Iran.'' \13\
---------------------------------------------------------------------------
\13\ The Financial Action Task Force, Public Statement, ``FATF
Public Statement 19 February 2016'', February 19, 2016 (http://
www.fatf-gafi.org/publications/high-riskandnon-
cooperativejurisdictions/documents/public-statement-february-
2016.html).
---------------------------------------------------------------------------
As recently as February 19, 2016, FATF issued a statement warning
that Iran's ``failure to address the risk of terrorist financing''
poses a ``serious threat . . . to the integrity of the international
financial system.'' \14\ The international community recognizes that
Iran--regardless of the status of its nuclear program--poses a real and
serious threat to the integrity of the global financial system.
---------------------------------------------------------------------------
\14\ Ibid.
---------------------------------------------------------------------------
This financial and economic isolation was premised on the actions
and nature of the Iranian regime itself. Since the announcement of the
JCPOA, neither has changed. On the contrary, Iran has demonstrated its
desire to continue its aggressive activities and support to causes and
groups directly antithetical to U.S. interests.
The risks from Iran are real and will increase in an environment of
sanctions unwinding under the JCPOA for a variety of reasons.
In the first instance, the unfettered return of funds to the
Iranian regime will allow Tehran the flexibility to fund its allies and
proxies and flex its muscles in the region. Regardless of amounts
available to the regime or percentage used to support terrorist
proxies, there will be an infusion of terrorist financing into the
global system. The Administration has acknowledged that some of the
unfrozen funds will go to support terrorist and militant groups, like
Hizballah, HAMAS, Iraqi Shi'ite militias, and the Houthis in Yemen.
This is certainly the expectation of Iran's allies. Iran could even use
its capital to support the Taleban and al Qaida, with which Iran has
maintained a relationship and provided support in the past.
With Iran expanding its reach and presence throughout the Middle
East, and IRGC commanders and proxies positioned from the Golan to
Yemen, there will be more concern about Iran's misuse of the economy,
the benefits of sanctions relief, and the international financial and
commercial system for dangerous and illicit activities. The infusion of
cash as a result of sanction relief will relieve budgetary constraints
for a country that had only an estimated $20 billion in fully
accessible foreign exchange reserves prior to November 2013 \15\ but
was spending at least $6 billion annually to support Assad. \16\
---------------------------------------------------------------------------
\15\ Mark Dubowitz and Rachel Ziemba, ``When Will Iran Run Out of
Money?'' Foundation for Defense of Democracies and Roubini Global
Economics, October 2, 2013.
\16\ Eli Lake, ``Iran Spends Billions To Prop Up Assad'',
Bloomberg, June 9, 2015 (http://www.bloombergview.com/articles/2015-06-
09/iran-spends-billions-to-prop-up-assad).
---------------------------------------------------------------------------
The regime itself, and its core institutions like the Ministry of
Intelligence and the IRGC, will benefit most immediately and deeply.
Iran is a theocratic regime that controls the key elements of the
economy. The mullahs have used their control of the economy--through
bonyads and the Supreme Leader's vast financial network, known as Setad
or EIKO, and which is worth tens of billions of dollars, to enrich
themselves and exert more control over the country.
Despite the notion that the JCPOA resolves all ``nuclear-related''
concerns, it does not address real concerns over continued Iranian
proliferation, to include missile and arms trade. With the allowance
for an Iranian nuclear program, infrastructure, and research, the deal
will likely increase (not decrease) the risk of proliferation--with
potential Iranian trade and exchange with rogue third countries like
North Korea.
The dangers, challenges, and risks from Iran on a regional and
global scale will only increase over time. In the wake of the JCPOA,
Secretary of State Kerry stated that we will need to ``push back''
against Iran's provocative and dangerous policies and tactics. CIA
Director John Brennan said that the United States will ``keep pressure
on Iran'' and ``make sure that it is not able to continue to
destabilize a number of the countries in the region.'' \17\
---------------------------------------------------------------------------
\17\ ``CIA Director Says U.S. Will Keep Pressure on Iran over
Nuclear Capabilities No Matter Outcome of Ongoing Talks'', Fox News,
March 23, 2015 (http://www.foxnews.com/politics/2015/03/23/cia---
director---says---us---will---keep---pressure---on---iran---over---
nuclear---capabilities/).
---------------------------------------------------------------------------
Indeed, the United States will need to push back, especially
against increasing risks and threats from Iran. This has been evident
in the wake of the JCPOA Implementation Day. To do this, the United
States will want to use its financial and economic tools and strategies
to make it harder, costlier, and riskier for Iran to threaten the U.S.
and our allies. This will mean devising and deploying aggressive
strategies to exclude key elements of the Iranian regime and the IRGC,
Qods Force, and Ministry of Intelligence from the global financial and
commercial system.
The Risks of Doing Business in Iran
On January 16, 2016, the United States, the European Union, the
United Nations, and other countries unwound a substantial number of
sanctions on the Islamic Republic of Iran as part of their obligations
under the JCPOA. Most notably, many EU and UN sanctions, as well as
many U.S. ``secondary'' sanctions, will no longer remain in force.
``Primary'' U.S. sanctions programs barring almost all U.S. persons
from doing Iran-linked business remain. \18\
---------------------------------------------------------------------------
\18\ Primary sanctions are those that apply directly to (1) the
activities of U.S. persons (including persons located in the United
States), (2) non-U.S. persons who cause U.S. persons to violate U.S.
sanctions regulations, (3) activities taking place within the United
States, and (4) transfers of U.S.-regulated goods, services, and
technologies. Secondary sanctions apply to non-U.S. persons where the
United States lacks jurisdiction to impose primary sanctions. Such
sanctions often include privileging a company's access to U.S. markets
on compliance with U.S. sanctions regulations.
---------------------------------------------------------------------------
In the wake of Implementation Day and with remaining sanctions and
financial crime concerns, important questions exist regarding what
doing business in or with Iran now means and how to evaluate and manage
such risk.
As Iran attempts to reintegrate into the world economy, many
challenges remain for companies considering doing business in the
Islamic Republic, with Iranian counterparties, or supporting customers
operating in Iran. Dealing with the spectrum of risk--financial crime,
regulatory, reputational, and policy--in the Islamic Republic will
require that U.S., European, Asian, Middle Eastern, and other firms
clearly understand the patchwork of sanctions that will remain in place
on the country, as well as many of the systemic issues, such as
corruption, impacting various Iranian business sectors. Companies must
also factor into their business decisions the risk that sanctions may
``snap back'' in the medium or long term.
The risks are amplified by Iran's long history of sanctions
evasion, illicit finance and corruption, and opaque financial and
commercial practices. In 2015, Emanuele Ottolenghi produced a report
\19\ for the Center on Sanctions and Illicit Finance at the Foundation
for Defense of Democracies detailing the various illicit and suspicious
methods used by the Iranian regime to operate in the global financial
and commercial system--including the establishment of sophisticated
procurement networks and use of gatekeepers to facilitate financing.
---------------------------------------------------------------------------
\19\ Report available upon request.
---------------------------------------------------------------------------
This complicated risk environment has dissuaded most legitimate
companies from reentering and investing in the Iranian economy. While
Iranian markets may appear attractive, companies considering
transacting with persons in Iran or doing business in Iran are
proceeding with caution. The recent parliamentary elections in Iran
have not altered this analysis or trajectory fundamentally. Companies
considering doing business in Iran or with Iranian persons must contend
with at least eight sanctions and financial crimes-related risks:
1. Primary U.S. Sanctions. Most U.S. primary sanctions, which
broadly prohibit U.S. persons from conducting transactions in Iran,
with persons resident in Iran, or with the Government of Iran, will
remain in force. These U.S. primary sanctions pose significant risks
for any multinational company considering doing business in Iran. U.S.
jurisdiction is broad and U.S. regulators can use it to target
transactions that may not initially appear to touch U.S. markets or
involve U.S. persons.
U.S. jurisdiction applies to all U.S. individuals (including U.S.
citizens and permanent resident aliens, wherever located, as well as
persons located in the United States) and entities (including any
entity located or operating in the United States, organized under the
laws of the United States, as well as foreign branches of U.S.
entities). Further, the United States may impose penalties (civil or
criminal) on any foreign person who causes a U.S. person to violate
sanctions regulations. \20\
---------------------------------------------------------------------------
\20\ See 50 U.S.C. 1705.
---------------------------------------------------------------------------
For example, if a Middle Eastern, European, or Asian financial
institution conducts transactions on behalf of an Iranian company and
the transaction involves a U.S. bank or a correspondent account located
in the United States, U.S. regulators will likely have jurisdiction
over the transaction and can impose penalties on the non-U.S. financial
institution. Similarly, if a Middle Eastern exporting company with U.S.
offices relies on those offices for back office functions for
transactions related to Iran or with an Iranian, the U.S. offices
providing back office support will be engaged in the prohibited
exportation of services to Iran (and can be subject to OFAC penalties).
Where the Middle Eastern entity caused the U.S. offices to provide the
services without knowledge of the Iranian nexus, U.S. regulators could
impose fines on that Middle Eastern entity for causing the U.S. offices
to violate the sanctions.
Even those U.S. companies taking advantage of the new General
License H--which permits foreign subsidiaries of U.S. companies to
engage in certain activities in Iran--will face significant sanctions-
related risks. While these subsidiaries may be allowed to conduct those
activities, if the U.S. parent company is involved in any Iran-related
business or transactions, it will likely be exposed to U.S. primary
sanctions. \21\ Multinational companies must build a firewall between
U.S. parents and any foreign subsidiary doing business with Iranian
persons or in Iran, which may be difficult to effectively do in
practice.
---------------------------------------------------------------------------
\21\ Note that U.S. parent companies are permitted to establish
policies and procedures that allow these foreign subsidiaries to
conduct business in Iran and with Iranian persons, though after the
initial decision to reengage in Iran-related business and the
establishment of procedures for doing so, U.S. persons cannot be
involved in the activities of their foreign subsidiaries relating to
transactions with Iranian persons or in Iran. Similarly, U.S. companies
can make their automated computing, accounting, and communications
systems available for their subsidiaries conducting permitted
activities in Iran. In effect, this permits foreign subsidiaries doing
permitted business in Iran to continue to use the same computer systems
as their parent companies. Note however that provision does not allow
U.S. parents to otherwise be involved in those activities in any way.
---------------------------------------------------------------------------
Because the breadth of U.S. jurisdiction is expansive, companies
based in Europe and Asia must be aware that any engagement with Iran
may still expose them to remaining U.S. sanctions. Companies,
particularly ones operating across borders, have to pay careful
attention to whether they may be subject to U.S. jurisdiction, which
might pose one of the most pressing regulatory risks that any company
considering entering Iranian markets will face.
2. Remaining U.S. Secondary Sanctions. Foreign businesses
considering doing business in Iran will continue to face the risk of
violating remaining ``secondary sanctions'' on Iran, which prohibit
foreign financial institutions and other non-U.S. headquartered
companies from doing certain business with Iran. While many of the
secondary sanctions imposed since 2010 have been unwound, \22\ non-U.S.
persons are still at risk for violating remaining U.S. secondary
sanctions if they engage in transactions with any one of more than 200
people and entities listed as Specially Designated Nationals (SDNs)
including the IRGC and its affiliates.
---------------------------------------------------------------------------
\22\ Following Implementation Day, non-U.S. entities can now
conduct certain transactions with:
The financial and banking industry in Iran, including maintaining
correspondent accounts for non OFAC-designated Iranian financial
institutions, the provision of financial messaging services, dealing in
the rial and in Iranian sovereign debt, and issuing credit cards for
Iranians;
Insurance-related activities consistent with the JCPOA, including
payment of claims to non-U.S. persons;
The energy industry;
Shipping, shipbuilding, and port operations;
Precious and raw/semi-finished metals dealers; and
The automotive industry, insofar as non-U.S. goods, technology,
and services are involved.
---------------------------------------------------------------------------
These restrictions pose additional and significant risks because
under U.S. law, entities owned or controlled 50 percent or more by
designated persons--so-called ``shadow SDNs''--are by law also
considered SDNs. For example, if a foreign financial institution
processes transactions on behalf of an entity that is owned or
controlled by the IRGC (whether or not that entity is listed on
national or international lists of designated parties), it could be
subject to U.S. secondary sanctions. This creates significant risk for
financial institutions and other companies wishing to do business in
Iran, given that the IRGC controls a significant portion of the
economy. \23\ This risk is further exacerbated by Iranian attempts to
create a ``gold rush'' psychology in the marketplace and to muddy the
waters regarding what restrictions may apply to specific transactions.
We should expect Iranian customers and counterparties to alter
ownership interests, names of entities, and ownership structures in an
attempt to hide links to designated parties. This would match past
practices of sanctions evasion and obfuscation of financial
transactions in the past.
---------------------------------------------------------------------------
\23\ Estimates vary on how much of the Iranian economy is
controlled by the IRGC, with many analysts suggesting the IGRC controls
as much as 35 percent.
---------------------------------------------------------------------------
Determining whether a customer, partner, or counterparty is owned
or controlled by a designated person will be a challenging task,
further complicated by the fact that the Office of Foreign Assets
Control (OFAC) at the United States Department of the Treasury has
provided limited guidance on how companies looking to do business in
Iran can determine whether they are inadvertently doing business with
the IRGC. OFAC recommends only that ``a person considering business in
Iran or with Iranian persons conduct due diligence sufficient to ensure
that it is not knowingly engaging in transactions with the IRGC or
other Iranian or Iran-related persons on the SDN List and keep records
documenting that due diligence.'' Businesses looking to enter the
Iranian market must make their own determinations about what
constitutes ``sufficient'' due diligence without more precise guidance
and while the structure of civil and criminal penalties for sanctions
violations remains in place.
Further, non-U.S. persons still need to be aware of remaining U.S.
export controls. For example, restrictions still apply regarding the
facilitation of Iranian acquisition or development of weapons of mass
destruction. In addition, transfers of certain potential dual-use
materials must be approved via the procurement channel established by
the JCPOA. U.S. origin goods, technology, and services also are subject
to the Export Administration Regulations, which retain prohibitions on
exports and reexports to Iran.
3. Remaining EU and UN Sanctions. While most EU and UN sanctions on
Iran have been unwound, a number of important restrictions remain in
place. \24\ Under EU law, trade restrictions on the sale, export,
provision, or servicing of goods deemed to be ``internal repression
equipment,'' or used for ``telecommunications surveillance and
interception,'' remain in place. Likewise, the EU will continue to
impose asset freezes and prohibitions on business and trade with
individuals and entities designated for committing human rights abuses
and restrictions on the trade of certain items related to nuclear
proliferation.
---------------------------------------------------------------------------
\24\ Under EU law, several engagements previously prohibited,
including associated services, are now allowed so long as they avoid
dealing with listed Iranian persons:
Financial, banking, and insurance measures involving Iranian
entities--including the provision of insurance to Iranian oil and gas
shipments--are now permitted by EU law and do not require prior
authorization;
The import, purchase, swap, and transport crude oil and petroleum
products, gas, and petrochemical products from Iran, and the export of
equipment to Iran for use in the energy industry are now permitted;
Engagements with the Iranian shipping, shipbuilding, and transport
sectors are no longer restricted;
Trade with Iran involving gold, other precious metals, banknotes,
and coinage is now permissible;
While the sale or transfer of certain graphite and raw/semi-
finished metals to any Iranian entity is no longer prohibited, such
activity is subject to an authorization regime; and
While the sale or transfer of Enterprise Resource Planning
software to any Iranian entity for use in activities consistent with
the JCPOA is no longer prohibited, such activity is subject to an
authorization regime.
---------------------------------------------------------------------------
Like the United States, the EU has also delisted certain entities
that are thus no longer subject to its asset freeze, prohibition to
make funds available, and visa ban. However, certain financial
institutions such as Ansar Bank, Bank Saderat Iran, Bank Saderat PLC,
and Mehr Bank remain listed by the EU.
UN Security Council Resolutions that imposed sanctions on Iran for
its nuclear program were terminated on Implementation Day. Thus, the
United Nations no longer imposes limits on providing insurance and
reinsurance products to Iranian entities, and no longer prohibits the
opening of new Iranian bank branches or subsidiaries outside Iran (nor
is there a mirrored prohibition on entities from UN member States doing
the same within Iran). However, a UN arms embargo and UN sanctions on
Iran's ballistic missile program remain in place. Further, some
individuals designated by the UN for participating in nuclear and
ballistic missile programs remain designated. \25\ The recent missile
tests and Iranian promises for more simply exacerbate the risk that
additional sanctions will be applied.
---------------------------------------------------------------------------
\25\ Pursuant to the terms of United Nations Security Council
Resolution (UNSCR) 2231 (2015) (which endorsed the JCPOA), all prior
United Nations Security Council Resolutions mandating sanctions on
Iran--namely, UNSCR 1696 (2006), 1737 (2007), 1747 (2007), 1803 (2008),
1835 (2008), 1929 (2010), and 2224 (2015)--were formally terminated
upon receipt of the IAEA's report verifying that Iran has met its
nuclear-related obligations under the JCPOA. Through UNSCR 2231, the UN
continues to impose certain restrictions on nuclear, conventional arms,
and ballistic missile-related activities involving Iran.
---------------------------------------------------------------------------
4. Likely Additional Sanctions. Businesses interested in entering
Iran should be aware that additional designations and sanctions are
likely as the United States Congress continues to focus on illicit
Iranian behavior and as Iran continues with activities such as
ballistic missile testing and the provision of support to terrorist
groups. Congress has explored additional sanctions legislation, in
particular related to more stringent sanctions tied to the IRGC and its
ownership and control interests. Though the Administration will resist
actions that appear to reimpose lifted sanctions, both the House of
Representatives and the Senate appear interested in pursuing
legislation that directly or indirectly impacts Iran, including the
recent legislation imposing additional sanctions on Hizballah.
The Administration has wanted to demonstrate its willingness to
sanction non-nuclear Iranian behavior, both to stave off additional
congressional action and address Iranian threats to U.S. interests. It
has not wanted, however, to impose sanctions or financial measures that
would allow Iran to claim that the United States had violated the terms
of the JCPOA. Since Implementation Day, the Treasury Department has
twice used ballistic missile-related designations--in January 2016,
designating 11 entities and individuals involved in procurement on
behalf of Iran's ballistic missile program, and then again in March
2016, designating additional parties tied to the missile program.
Companies are aware that additional Iranian individuals, companies, and
related networks could be designated, effectively requiring an end to
any financial or commercial relationship.
This risk increases as Iran engages in activities that spur
additional U.S. and possibly EU sanctions. In addition to its support
to terrorist groups and the Assad regime, its ballistic missile
program, and human rights abuses, there are other risks attendant to
doing business with Iran. Iran's link with North Korea, and in
particular its cooperation on proliferation and ballistic missile-
related issues, increases the likelihood that the United States and the
European Union will impose additional sanctions on the Islamic
Republic. For example, in late January, France requested the European
Union consider imposing additional sanctions on Iran for its continued
ballistic missiles activities.
5. Iran's Potential Cheating on the JCPOA. If the United States or
other members of the P5+1 conclude that Iran is cheating on its
obligations under the JCPOA, they can snap back many of the sanctions
into place. In the context of any potential snapback, OFAC has made
clear that there will be no ``grandfather'' clause for pending
transactions, meaning foreign companies doing business in Iran would
need to very quickly wind down their operations, potentially at a
significant loss. While the Obama administration will be unlikely to
push for a comprehensive snapback of sanctions unless there is a
serious, material breach of the JCPOA, Treasury Department officials
have made it clear that they have developed more limited snap back
mechanisms in the case that Iran pushes the envelope and engages in
activities that violate its obligations. Similarly, depending on the
outcome of the U.S. presidential election in November 2016, candidates
have expressed a desire to reimpose sanctions on Iran. Such action
could pose serious risks for foreign companies doing business in the
Islamic Republic.
6. Sanctions Violations Enforcement Posture. The United States
Department of the Treasury has indicated it will continue to
aggressively enforce regulations remaining in place. For example,
acting Under Secretary of the Treasury for Terrorism and Financial
Intelligence Adam Szubin noted, following Implementation Day, that
``[w]e have consistently made clear that the United States will
vigorously press sanctions against Iranian activities outside of the
Joint Comprehensive Plan of Action--including those related to Iran's
support for terrorism, regional destabilization, human rights abuses,
and ballistic missile program.'' Indeed, the day after JCPOA
Implementation Day, the U.S. Government imposed sanctions on entities
and individuals in the Middle East and Asia for supporting Iran's
ballistic missile program. These types of sanctions will be used to
help demonstrate to Iran and U.S. allies that Washington remains
prepared to use economic measures to enforce existing sanctions. In
addition, Iran's history of using a variety of financial and commercial
measures to hide its hand to evade sanctions and the scrutiny of the
international community adds additional risk that sanctions may be
applied.
7. Regulatory Risk From Multiple Enforcement Agencies. From a
regulatory and enforcement perspective, it is important to note that
the Treasury Department and OFAC are not the only arbiters of sanctions
violations and requirements. The United States Department of Justice,
the Securities and Exchange Commission, State prosecutors, and various
New York authorities, such as the Department of Financial Services,
will all play a significant role in how existing sanctions regulations
and related laws are enforced. Local authorities may elect to take a
more aggressive enforcement posture with respect to sanctions
violations, which would fall outside of the Federal Government's
control. Any company considering doing business in Iran or with Iranian
individuals or entities will need to pay close attention to the
regulatory and enforcement postures taken by these other Government
agencies.
8. Financial Crimes Risks in Iran. Though the recent business
attention on Iran has understandably focused on sanctions-related
issues, banks and businesses must remember that other financial crimes
concerns in the Islamic Republic remain pervasive. In particular, the
nature of the Iranian economy and the role of the Government within the
economy present serious risks related to bribery and corruption, money
laundering, and illicit financing. Iran ranked 130 of 175 countries in
Transparency International's Corruption Perceptions Index as of 2015.
In 2011, the U.S. identified Iran as a jurisdiction of primary
money laundering concern pursuant to Section 311 of the USA PATRIOT
Act. The FATF first raised concerns over Iran's lack of a comprehensive
anti-money laundering/countering the financing of terrorism (AML/CFT)
framework in 2007, and it still urges Iran to meaningfully address AML/
CFT deficiencies and will consider urging stronger countermeasures
later this year. OFAC also has made it clear that activity inconsistent
with a wide range of Executive Orders imposing sanctions on Iran
(including for providing support to terrorism, undermining the
stability of Yemen, and other behaviors) could still subject U.S. and
non-U.S. persons to sanctions. Now, the Iranian Government has
indicated that it will begin to target ``financial corruption,'' and
has sentenced Iranian billionaire Babak Zanjani, who helped the regime
evade oil-related sanctions, and two others to death for corruption.
Attention on the issue of corruption will now grow, as Iran attempts to
do business with the world. Any companies looking to do business in
Iran must be acutely aware of serious financial integrity risks beyond
those posed by remaining sanctions.
As some of the sanctions on Iran are unwound, many European, Asian,
and Middle Eastern companies understandably want to reengage in the
Iranian economy. The risk appetites of companies will likely vary by
sector, with large oil, aerospace, auto, infrastructure, and equipment
companies likely more willing to enter Iranian markets more quickly and
with a higher tolerance for risk. For example, Airbus has already
agreed to sell Iran 114 airplanes, and Boeing has obtained a license
from OFAC to begin commercial discussions with Iranian airlines.
In contrast, other sectors will have a more conservative risk
approach. Shipping insurers have already recommended a greater degree
of caution. For example, the London Protection and Indemnity Club, a
member of the International Group of Protection and Indemnity Clubs,
the main association of global tanker insurers, has recommended
shipping insurers not enter contracts or fixtures involving previously
sanctioned Iranian trade or entities without performing extensive due
diligence. Similarly, financial institutions will be more reluctant to
reenter Iranian markets, given recent enforcement actions targeting
their activities and the stricter financial crime compliance
environment globally.
A significant challenge will be how financial institutions wary of
the risks of doing business in Iran respond to pressure from clients
with greater risk appetites to provide financial services for
activities in Iran. Iran has already complained that European banks
have remained reluctant to engage in commercial activity with Iran, and
is now asking the IMF to help assuage such concerns with a report
slated for release in 2018. Additional pressure and statements from
Iranian leadership, including the Iranian Central Bank Governor, are
echoing the charge that the United States is not fulfilling its
obligations under the ``spirit and letter'' of the nuclear deal. The
Iranian charge is that the U.S. sanctions and narrative of Iranian risk
are still scaring away investment and financial dealings.
The desire in and from Tehran to see the fruits of the nuclear
negotiations, especially with more banking activity with the West, will
add pressure to those institutions that remain cautious. For example,
some financial institutions, including at least one major Japanese
bank, have begun processing nondollarized transactions for clients
operating in the Islamic Republic. Others have begun to flirt with the
Iranian market, with South Korean commercial bank, Woori Bank,
indicating it wants to turn its Tehran presence into a branch office,
and Austrian Raiffeisen Bank International (RBI) signing a memorandum
of understanding with Iran's Department of Environment. Importantly, it
appears that the Iranians realize that in order to do business
legitimately with the West, they must meet the standards demanded in
the Western banking world for transparency and accountability. But the
Iranians are intent to force the United States and Europe to resolve
this issue for them and to mark this as an essential part of JCPOA
implementation.
Keeping the Burden of Persuasion and Reform on Iran
In implementing the deal, the United States should not fall into
the trap of helping Iran rehabilitate itself. Throughout this deal, the
onus should remain solely on Iran to alleviate concerns about its
activities, lack of transparency, and failure to meet heightened global
standards of financial integrity in the banking and commercial worlds.
Iran should not get a free pass on the reforms, modernization, and
accountability necessary for acceptance as a legitimate actor in the
world--diplomatically and economically. This posture should force the
Iranians to turn inward to determine how they can meet international
expectations, instead of trying to compel the United States and Europe
to alter their standards or dictate to the private sector where and
with whom they should do business.
Unfortunately in the desire to appear to be complying with the
deal, some U.S. actions have created the impression that the United
States and European Governments have assumed the burden of
reintegration of the Iranian economy into the global system. There are
some examples worth noting:
1. There have been reports that the United States might offer Iran
the ability to access offshore dollar-clearing facilities, to allow for
dollar-denominated transactions and ease Iran's ability to trade
internationally. Though such a maneuver would not allow Iran direct
access to dollar clearing in the United States, it could be structured
in a manner to create the same effect. Iranian trade would then be
facilitated in a way not contemplated in the JCPOA. The United States
should not be offering special exemptions or measures to assist Iran
with access to dollars while Iran remains a leading State sponsor of
terror, subject to serious sanctions, and designated as a ``primary
money laundering concern.''
In addition, if the United States were to provide Iran with access
to U.S. dollars for offshore transactions, then the United States would
lose the ability to threaten this access in response to a range of
Iranian provocations in the future. In effect, by couching access to
the Western financial system and the U.S. dollar as part of the nuclear
deal, the United States would no longer be able to cut Iran off from
this benefit if it significantly increased its support for terrorism,
as Iran would claim that such an attempt at coercion would violate the
letter of the nuclear agreement. This would further give away coercive
financial leverage without any bargained-for concession by Iran. Iran's
underlying conduct outside of the nuclear issue was not on the table
during negotiations. The United States and the international community
should not open the door to broad benefits of relief from financial
exclusion that the Iranians neither negotiated nor deserve.
2. The U.S. Government has been sending delegations around the
globe to clarify existing sanctions and obligations and apparently to
explain how business may be undertaken with the Iranian regime. Though
regulatory clarity is important, the United States should not be
launching road shows attempting to dampen concerns about the risks of
doing business in or with Iran, especially when those risks are
increasing. The burden instead should fall on Iran to demonstrate to
Governments, the private sector, and the markets that its activities,
policies, and use of its financial and commercial system are
legitimate, transparent, and meet international standards. Iran should
be concentrating on necessary reforms, hard policy decisions, and its
own road shows to prove that it can be trusted as a responsible
international player. Until then, Iran will be seen as a risky
jurisdiction in which to invest and do business. It should not be the
responsibility of the United States or Europe to prod businesses and
banks to enter the Iranian market.
3. The United States has announced that it plans to buy heavy water
from the Iranian nuclear system, thus enabling Iran to produce more
heavy water than it needs and facilitating the economic uses of a
nuclear program built in violation of previous international sanctions.
This also legitimates Iran's nuclear program in a way that is not
obligated in the JCPOA and promotes Iran's expanded nuclear program.
Aside from not encouraging and promoting the Iranian nuclear program
beyond what is required in the JCPOA, the United States should not be
serving as Iran's market safety valve for the sale of heavy water,
displacing existing supplies to the United States from legitimate
suppliers like Canada and Argentina. As with any Iranian economic
activity, Iran should be forced to deal with the international markets
on its own, meeting relevant market and regulatory demands directly.
The United States should not usher Iran into the global economy
artificially, especially not in the nuclear markets, and allow Iran
benefits that were not negotiated in the JCPOA and for which the
international community has not received consideration.
4. It has been important that the U.S. Treasury and other U.S.
Government officials have reiterated the commitment to enforcing
existing sanctions vigorously and maintaining the ability to use the
tools of financial coercion to affect Iranian behavior. These
commitments, however, are undercut when the United States modifies its
messaging to suggest that our sanctions regime should not constrain or
affect the risk calculus of the private sector. Though intended to
demonstrate that the United States is upholding its end of the JCPOA
bargain, softened language appears to suggest that the United States is
already backing away from its willingness to use existing sanctions
against Iran. Recently, Secretary Kerry met with European banks and
noted that European businesses should not use the United States as an
excuse not to invest in Iran. European businesses should be encouraged
to listen to and account for U.S. regulatory, enforcement, and policy
concerns--not ignore longstanding and legitimate concerns.
The United States cannot alter this commitment to enforce
sanctions, weaken its call for heightened global standards for
financial integrity, or jump every time Iran complains about its
inability to access the global financial system. The United States
cannot mute itself or its willingness to use some of our most effective
financial and economic tools against dangerous Iranian activity.
Unfortunately, the United States has quieted its voice too often in the
face of Iranian aggression and violations in the hopes of a nuclear
deal--from the deafening silence as the Green Movement was crushed
brutally to current vacillation on whether recent ballistic missile
tests violate the letter and spirit of the JCPOA and the related UN
Security Council Resolution 2231.
The United States cannot be in the position of rehabilitating the
Iranian economy and image. This proves highly problematic and
undermines U.S. credibility and power internationally if this is done
without concern for the underlying issues and conduct that drove its
isolation in the first place--proliferation, support for terrorism,
human rights violations, and development of weaponry and programs of
concern controlled by the IRGC. It is the threat to the international
financial system of the illicit and suspect flows of money that is the
baseline for Iran's isolation. Iran should be forced to deal with these
risks directly.
The Strategic Use of Sanctions Moving Forward and Targeted Unwinding
The United States should treat the JCPOA and its implementation as
an ongoing process, where sanctions and sanctions unwinding form a
strategic part of U.S. and international efforts to enforce the deal,
maintain economic and financial leverage, push back on dangerous
Iranian activity, and force the Iranians to make hard decisions about
their role in the world. Sanctions and financial measures in this
regard are not just tools that were used to get Iran to the table, but
are essential levers of influence moving forward. Indeed, how sanctions
are deployed and unwound could affect the internal dynamics of Iran in
furtherance of U.S. and allied interests.
In the first instance, the United States should not shy away from
the use of sanctions against Iranian behavior and underlying conduct
that is already subject to sanctions. The U.S. Government has the
authority and ability to apply sanctions for the full suite of
nefarious Iranian behavior--to include human rights violations and
malicious cyber activity. This includes enforcement of existing
sanctions and application of new measures to constrain Iranian behavior
and discipline the international system. The United States retains the
power and credibility to do this. The effects of U.S. actions are
global and set the international norms for acceptable behavior. Absent
U.S. action, attention, and enforcement, Iranian provocations will
likely not be met with credible international push-back. If U.S.
financial and economic measures are based on facts and can be explained
credibly as furthering U.S. legal requirements and international norms,
the impact will remain global and the effect real.
In addition, the United States should not diminish its ability to
use targeted unwinding tools to force Iran to make hard choices about
its behavior in the international system. If implementation of the
JCPOA is viewed as an ongoing and long-term process, then the United
States should be thinking creatively about how to use these targeted
unwinding measures to effectuate its strategic goals.
The JCPOA attempts to unwind sanctions tied to the nuclear file,
but the unwinding is difficult and complicated given the interconnected
nature and effects of such sanctions. In some instances, the unwinding
can be managed. In many other cases, the unwinding schedule and some of
the scheduled delistings implicate actors and activities beyond the
nuclear file, complicating our ability to easily unwind sanctions and
threatening our ability to impose coercive leverage in the case of
Iranian malfeasance beyond the nuclear file. The delisting of some key
Iranian entities that have facilitated a range of Iranian illicit
activities and the cessation of sanctions prohibitions against them,
especially terrorism financing, raises serious challenges to U.S.
ability to affect Iranian behavior of concern.
There is no question trying to unwind any effective and global
sanctions regime is difficult. Unwinding intertwined, conduct-based
sanctions for a regime that uses its economy for various dangerous and
nefarious activities of international security concern is incredibly
challenging. But tearing down sanctions bluntly--particularly when
pulling down the nuclear sanctions also threatens to pull down U.S.
leverage related to issues of missile proliferation and terrorism--
without addressing that underlying and related conduct creates real
risks and does damage to the ability to use the very same tools against
Iranian individuals and entities in the future.
In light of the risks of doing business with Iran, the
reintegration of Iranian banks into the global financial system,
including via the SWIFT bank messaging system, presents perhaps the
most concerning issue. For example, Bank Sepah was designated under
U.S. authorities not simply because of its facilitation of the Iranian
nuclear program and procurement but also its role in financing arms and
missile deals, activities that should remain a concern and are subject
to UN sanctions.
The JCPOA explicitly called for the lifting of sanctions on
``[s]upply of specialized financial messaging services, including
SWIFT, for persons and entities . . . including the Central Bank of
Iran and Iranian financial institutions.'' \26\ The European Union
lifted SWIFT-related sanctions for the Central Bank of Iran and all
Iranian banks \27\ originally banned from SWIFT. \28\
---------------------------------------------------------------------------
\26\ ``Joint Comprehensive Plan of Action'', Vienna, July 14,
2015, paragraph 19(iv) (http://eeas.europa.eu/statements-eeas/docs/
iran_agreement/iran_joint-comprehensive-plan-of-action_en.pdf).
\27\ On Implementation Day, the EU lifted sanctions on the Central
Bank of Iran and Bank Mellat, Bank Melli, Bank Refah, Bank Tejarat,
Europaische-Iranische Handelsbank (EIH), Export Development Bank of
Iran, Future Bank, Onerbank ZAO, Post Bank, and Sina Bank. Separately,
the EU also lifted sanctions on Bank Sepah and Bank Sepah
International. On Transition Day, the EU will also lift sanctions on
Ansar Bank, Bank Saderat, and Mehr Bank. See Attachment 1, parts 1 and
2 and Attachment 2, parts 1 and 2 (http://eeas.europa.eu/statements-
eeas/docs/iran_agreement/annex_1_attachements_en.pdf.)
\28\ The Council of the European Union, ``Council Regulation (EU)
No. 267/2012 of 23 March 2012 Concerning Restrictive Measures Against
Iran and Repealing Regulation (EU) No. 961/2010'', Official Journal of
the European Union, March 24, 2012 (http://eur-lex.europa.eu/legal-
content/EN/TXT/?qid=1406807228342&uri=CELEX:32012R0267).
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By allowing most of the Iranian banks back into the international
financial order without dealing with their underlying conduct or
controls, the United States and the international community assumed the
good faith of the Iranian regime. This has heightened the risk that the
Iranian banking system would be used by the regime to finance and
facilitate other issues of significant national security concern.
Instead, we should consider a process of targeted unwinding that
meets our strategic goals--and could even provide Iran relief if it is
willing to abide by international rules and norms regarding
transparency and accountability of its financial system. For Iranian
banks, this would mean a stricter, monitored reentry into the financial
system, given continued concerns about their facilitation of illicit
and dangerous activities by the regime. This could be effectuated
through a program--led by the European Union--to create a monitoring
system through SWIFT (akin to the Terrorist Financing Tracking Program)
to monitor all Iranian cross-border transactions and allow for the
tracking and analysis of suspect Iranian banking activities. Instead of
the blunt unwinding measure of plugging all Iranian banks (minus a few)
back into the global banking messaging system, an aggressive monitoring
program could provide a ``halfway'' house for reintegration of Iranian
banks over time while managing the risk of more Iranian money
traversing the banking system.
This type of system might actually force the Iranian regime to make
some hard choices about not using its banks to facilitate illicit or
dangerous activities that would be subject to monitoring and exposure.
A system of targeted unwinding could advance the strategic goal that
Iran not misuse its economy and financial system to benefit terrorists,
proxies, and accelerate its nefarious international ambitions and
capabilities. If such a system could prove effective, it might spur
responsible reform within Iran as it tries to reintegrate into the
global system. This in turn would give global banks and businesses some
assurance that the Iranian banking system is maturing and under some
degree of scrutiny. Scrutiny over such financial activity and reforms
could help alleviate concerns by legitimate banks that they are being
exposed to dangerous risk, especially if legitimate and trusted
Government agencies (like financial intelligence units) are involved in
the monitoring. This, in turn, could blunt Iranian claims that the
United States was de facto continuing the imposition of sanctions by
scaring Western banks away from doing business in Iran or with
businesses interested in doing business in Iran.
The current tension with Iran over the unwinding of sanctions
underscores that the implementation of the JCPOA and ``negotiations''
with Iran will be ongoing. In this regard, we should take full
advantage of the leverage we have and devise new mechanisms to ensure
we meet our strategic goals. We should be reinforcing this power and
capability, not undermining it.
Faulty Assumptions
The current state of sanctions unwinding reveals certain
misconceptions about the state of play regarding the JCPOA and the
position of the United States to strike a better bargain. There are
many assumptions articulated at the time that need to be questioned,
and there are a few that are clearly incorrect. It is important that
this be clarified as the JCPOA unfolds and expectations and precedents
are formed.
At the time of the negotiations, the financial and economic
pressure campaign was not faltering, and the U.S. was not at risk of
losing its ability to squeeze and influence Iran in the short term.
The regime and the economy were affected by cascading isolation and
falling oil prices. During the period of the negotiations, the pressure
was increasing--belying the notion that the United States was facing a
cracking sanctions coalition and system. Quite the opposite was
occurring. The ayatollahs' concern over the strangulation of the
Iranian economy--in concert with lingering fears of the ghosts of the
Green Movement--is ultimately what brought them to the negotiating
table and launched them on the charm offensive that allowed them to
turn the tables on the West. The sanctions pressure was not sustainable
for the regime. President Rouhani admitted that these measures
threatened to drive Iran into an economic ``Stone Age.''
The regime needs access to capital, new technologies, and
connectivity to the oil markets and the global economy to maintain and
sustain itself. That is what it lost over the past decade. It is what
the Iranians negotiated to regain in the JCPOA. This is now the source
of Iran's most significant complaint.
There was also never a neat divide between ``nuclear'' and ``non-
nuclear'' sanctions when the constriction campaign launched in 2005.
This campaign was intended to use the illicit, dangerous, and
illegitimate nature of Iranian activity as the driver for unplugging
Iran from the global financial and commercial system. This is something
I tried to articulate in my testimonies before the Senate last year.
The sanctions were focused on the fact that the Iranians were
leveraging their own economy to profit the regime and allow the
construction of a suspect nuclear infrastructure and ballistic
missiles, support terrorists and militias, strengthen Assad in Syria,
engage in financial obfuscation, and perpetrate massive human rights
abuses. Other than the nuclear issues, the underlying conduct was not
on the table during the JCPOA negotiations. Without resolution of those
issues, the triggers for financial isolation remain. Thus, we are
witnessing the difficulty of unwinding sanctions that have been
triggered by underlying Iranian conduct that has yet to change.
Moreover, the JCPOA has not resulted in the diplomatic unity
promised or rewards for good behavior. Russia has quickly made its own
deals and pacts with Iran--expanding coordination and cooperation in
Syria and Iraq and signing deals for weapons systems. The United States
has been forced to assuage skeptical allies in the Gulf and Israel and
mend diplomatic wounds. European countries are engaging at different
levels and pace with Iran, sending mixed messages about what is
expected by the international community. With the varied sanctions
regimes, American companies are disadvantaged by the commercial opening
provided to European companies. Legitimate companies concerned about
real and reputational risks sit on the sidelines while less responsible
actors dive into the Iranian market. Our closest allies are worried,
and the responsible actors are losing market opportunities.
Finally, it is not clear that the JCPOA has opened a channel
through which Iran can constructively engage with the international
community and address the other serious concerns about its dangerous
policies and behavior. On the contrary, Iran appears intent and willing
to exacerbate those risks and tensions across the board. The JCPOA may
have emboldened the regime to take more aggressive steps, exacerbating
concerns among U.S. allies that Iran is being given free rein to expand
its influence and threaten their interests. Just as important, the
United States seems not to have a plan as to how to use the JCPOA
implementation to drive broader strategic goals of constraining Iranian
adventurism and sparking internal reforms.
The Iranians need to decide that they are willing and able to
address those issues of concern and change their behavior--to include
issues of financial transparency, terrorist financing, and corruption.
The Iranians must find tangible ways to demonstrate that necessary
reforms are possible before they can expect to be treated as legitimate
actors in the financial and commercial systems. This is the source of
their isolation.
Conclusion
In the short term, the aversion to the risks of doing business in
and with Iran will continue, especially if Iran continues to
demonstrate an unwillingness to stop its provocative and dangerous
activity. More importantly, Iran will not be in a position to join the
international community completely, if it does not demonstrate clearly
that it can engage as a trusted and transparent actor in the financial
system. The onus to prove this should be on Iran's shoulders. Any
complaints about lack of access to capital, markets, or investment
should be posed to the clerical regime. Iran has to decide whether it
will abide by international standards, norms, and obligations. Absent
this, it will remain a risky environment in which to do business, no
matter how attractive the opportunities.
The United States must be willing to use its financial and economic
toolkit to constrain dangerous Iranian behavior and encourage
responsible Iranian activity. This means forcing Iran to deal with the
demands of the international market place on its own and addressing the
underlying conduct that has proven problematic and risky. The United
States must continue to isolate rogue Iranian activity--and that of its
proxies--through the use of sanctions and financial measures that
exclude such actors from the global financial and commercial system.
The United States cannot abandon its use of these tools, especially as
the JCPOA unfolds and Iran continues to test the bounds of U.S. will.
The United States will need to rely on sanctions and financial measures
even more in the future, and we should be doing everything we can to
reinforce the strength and endurance of these powers--against Iran and
other rogue actors in the international system.
______
PREPARED STATEMENT OF MARK DUBOWITZ
Executive Director, Foundation for Defense of Democracies' Center on
Sanctions and Illicit Finance
May 24, 2016
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF MICHAEL ELLEMAN
Consulting Senior Fellow for Regional Security Cooperation,
International Institute for Strategic Studies--Americas
May 24, 2016
Chairman Shelby, Ranking Member Brown, distinguished Members of the
Committee, I am pleased to testify before you today about Iran's
Ballistic Missile Program and the role of sanctions under the Iran
Deal.
My statement is informed by two decades of work as a missile
scientist at Lockheed Martin's R&D laboratory, and more than 25 years
observing and writing about ballistic-missile proliferation. I have
participated in technical exchanges and visited missile production and
testing facilities in at least seven countries, and have worked
missile-related issues with technical experts from throughout the
world. Over the past decade I have interviewed, formally and
informally, Russian and Ukrainian missile experts who have worked in
Iran and witnessed first-hand the status of its missile program and its
indigenous capabilities. In 2010, I authored a dossier by the
International Institute for Strategic Studies on Iran's Ballistic
Missile Capabilities, which was a collaborative study supported by
missile specialists from Russia, Germany, France, Israel, and the U.S.
I continue to monitor missile developments around the world.
My statement today reflects my views and not necessarily those of
any organization to which I consult.
Iran's Ballistic Missile Doctrine and Capabilities
Ballistic missiles are central to Iran's deterrence posture and
will remain so for the foreseeable future. The priority assigned to
ballistic missiles is reflected by the size and scope of Iran's
arsenal, the largest and most diverse in the region. Given this
importance, Iran will not surrender its current systems, except,
possibly, under the direst of circumstances. Even if Iran acquires
advanced military aircraft in the near future, ballistic missiles will
continue to play a prominent role in its force structure.
Iran's pursuit of ballistic missiles predates the Islamic
revolution. Ironically, the shah teamed with Israel to develop a short-
range system after Washington denied his request for Lance missiles.
Known as Project Flower, Iran supplied the funds and Israel provided
the technology. The monarchy also pursued nuclear technologies,
suggesting an interest in a delivery system for nuclear weapons. Both
programs collapsed after the revolution.
Under the shah, Iran had the largest air force in the Gulf,
including more than 400 combat aircraft. But Iran's deep-strike
capability degraded rapidly after the Islamic Revolution and the break
in ties with the West limited access to spare parts, maintenance, pilot
training and advanced armaments. Consequently, Tehran turned to
missiles to deal with an immediate war-time need after Iraq's 1980
invasion, and the subsequent air and missile attacks on Iranian cities.
Iran acquired Soviet-made Scud-Bs, first from Libya, then from Syria
and North Korea. It used these 300-km missiles against Iraq from 1985
until the war ended in 1988.
In Tehran's view, ballistic missiles played a critical role in
responding to Iraqi missile attacks, and deterring future ones. The
Iranian regime also witnessed how quickly the U.S-led coalition
devastated the Iraqi army in 1991, the same army Iran battled to a
standstill during an 8-year war. The only notable response from Iraq
during Operation Desert Storm came in the form of ballistic-missile
attacks against Israel, Saudi Arabia, and other Gulf countries. The
diversion of coalition aircraft to the ``Scud-hunting'' mission, and
away from the assault on Iraqi troops and equipment, further informed
Tehran's thinking.
Throughout the 1990s and beyond, Tehran steadily expanded its
missile arsenal. It invested heavily in its own industries and
infrastructure to lessen dependence on unreliable foreign sources, and
is now able to produce its own missiles, although some key components
still need to be imported. Iran has demonstrated that it can also
significantly expand the range of acquired missiles, as it has done
with Nodong missiles acquired from North Korea. Iran's missiles can
already hit any part of the Middle East, including Israel. Tehran has
established the capacity to create new missiles to address a most of
its strategic objectives.
Iran's Arsenal
The Islamic Republic's arsenal now includes several types of short-
range and medium-range missiles. Estimates vary on specifics, and Iran
has exaggerated its capabilities in the past. There is widespread
consensus that Tehran has acquired and creatively adapted foreign
technology to continuously increase the quality and quantity of its
arsenal. It has also launched an ambitious space program that works on
some of the same technology. The arsenal includes:
Shahab missiles: Since the late 1980s, Iran has purchased
additional short- and medium-range missiles from foreign suppliers and
adapted them to its strategic needs. The Shahabs, Persian for
``meteors,'' were long the core of Iran's program. They use liquid
fuel, which involves a time-consuming launch. They include:
The Shahab-1 is based on the Scud-B. (The Scud series was
originally developed by the Soviet Union). It has a range of about 300
km or 185 miles, and carries a one-ton warhead.
The Shahab-2 is based on the Scud-C. It has a range of about 500
km, or 310 miles, but with a 720-kg warhead. In mid-2010, Iran is
widely estimated to have between 200 and 300 Shahab-1 and Shahab-2
missiles capable of reaching targets across the Gulf. Iran began
modifying its Shahab-2s in 2010 to create the Qiam missile. The Qiam
can fly roughly 600 km and has a detachable warhead, making it more
difficult to detect and track using missile-defense radars.
The Shahab-3 is based on the Nodong, which is a North Korean
missile. It has a range of about 900 km or 560 miles. It has a nominal
payload of 1,000 kg. A modified version of the Shahab-3, renamed the
Ghadr-1, began flight tests in 2004. It theoretically extends Iran's
reach to about 1,600 km or 1,000 miles, which qualifies as a medium-
range missile. It carries a smaller, 750-kg warhead.
Although the Ghadr-1 was built with key North Korean components,
Defense Minister Ali Shamkhani boasted at the time it first appeared,
``Today, by relying on our defense industry capabilities, we have been
able to increase our deterrent capacity against the military expansion
of our enemies.''
A modified version of the Ghadr-1 missile, known as Emad, was
tested in October 2015. Emad has four fins mounted at the base of the
detachable warhead. In principle, the fins can steer the warhead toward
the target as it descends through the atmosphere. In practice, however,
full development of the Emad will take a decade or more, and scores of
flight tests. The Emad's appearance indicates that Iran seeks to
improve the accuracy of its missiles, a priority that supersedes the
need to develop longer-range missiles. Iran has repeatedly said that it
does not need missiles with a range of greater than 2,000 km, or 1,200
miles.
Sajjil means ``baked clay'' in Persian. The Sajjil-2s are medium-
range missiles that use solid fuel, which offers many strategic
advantages. They are less vulnerable to preemption because the launch
requires shorter preparation--minutes rather than hours. Iran is the
only country to have developed missiles of this range without first
having developed nuclear weapons.
The Sajjil-2 is domestically produced. It has a range of about
2,000 km or 1,200 miles when carrying a 750-kg warhead. It was test
fired in 2008 under the name, Sajjil. The Sajjil-2, which is probably a
slightly modified version, began test flights in 2009. This missile
would allow Iran to ``target any place that threatens Iran,'' according
to Brig. Gen. Abdollah Araghi, a Revolutionary Guard commander.
The Sajjil-2 appears to have encountered technical issues and has
not been fully developed. No flight tests have been conducted since
2011. If Sajjil-2 flight testing resumes, the missile's performance and
reliability could be proven within a year or two. The missile, which is
unlikely to become operational before 2017, is the most probable
nuclear delivery vehicle--if Iran decides to develop an atomic bomb.
Space program: Iran's ambitious space program provides engineers
with critical experience developing powerful booster rockets and other
skills that could be used in developing longer-range missiles,
including ICBMs.
The Safir, which means ``messenger'' or ``ambassador'' in Persian,
is the name of the carrier rocket that launched Iran's first satellite
into space in 2009. It demonstrated a new sophistication in multistage
separation and propulsion systems.
The Simorgh, which is the Persian name of a benevolent, mythical
flying creature, is another carrier rocket to launch satellites. A
mock-up was unveiled in 2010. The Simorgh may have been flight tested
in April 2016, though it either failed, or only the first stage was
launched. The first stage is powered by a cluster of four-Nodong
engines.
Military and Strategic Utility of Iran's Missiles
Iran's ballistic missiles have poor accuracy. The successful
destruction of a single fixed military target, for example, would
probably require Iran to use a significant percentage of its missile
inventory. Against large military targets, such as an airfield or
seaport, Iran could conduct harassment attacks aimed at disrupting
operations or damaging fuel-storage depots. However, the missiles would
probably be unable to shut down critical military activities. Missile
defenses would further degrade the military utility of Iran's missiles.
Without a nuclear warhead, Iran's ballistic missiles are likely to
be more effective as a political tool to intimidate or terrorize an
adversary's urban areas, increasing pressure for resolution or
concessions. Such attacks might trigger fear, but the casualties would
probably be low--likely less than a few hundred, even if Iran unleashed
its entire ballistic missile arsenal and a majority succeeded in
penetrating missile defenses.
The technology adopted for use on the new Emad indicates that Iran
hopes to improve the precision of its larger missiles. Substantial
improvements in missile accuracy will take years, if not a decade, to
materialize.
Ballistic missiles no doubt would be the preferred delivery
platform should Iran ever acquire an atomic weapon. There is no formal
definition of what constitutes a ``nuclear-capable missile,'' although
the range-payload threshold established in the Missile Technology
Control Regime (MTCR) offers a broadly accepted classification measure.
The MTCR restricts the transfer of missiles capable of delivering a 500
kg payload to 300 km.
Iran's Shahab, Qiam, Ghadr, Emad, and developmental Sajjil missiles
exceed the MTCR performance threshold. Under this definition, Iran
possesses more than 300 nuclear-capable ballistic missiles.
Flight tests are an essential element of any missile program.
Flight tests are used to:
Validate the design, performance and reliability of a
missile, under a variety of operational conditions;
Verify the quality of indigenously produced missiles;
Ensure reliability as the missiles as they age;
Provide troop training and ensure readiness;
Strengthen the credibility of a Nation's deterrence
capabilities;
Threaten and coerce rivals.
Because Iran views ballistic missiles as a critical instrument of
statecraft, deterrence, and war-fighting, Tehran will very likely
continue with missile testing. Sanctions are unlikely to deter Iran
from testing its missiles.
The pace of missile testing by Iran last year and this year is
consistent with past practices. Iran did not conduct a nuclear-capable
missile launch in 2005, 2013, or 2014, when serious nuclear
negotiations were underway. From 2006 to 2012, when talks were going
nowhere, Iran averaged roughly five test launches per year. Three
flight tests were performed in 2015, and five have occurred this year.
To place this in perspective, the U.S. and Soviet Union, on
average, conducted more than 10 flight tests per year for each
operational system throughout the Cold War. Given the number of systems
deployed, each side conducted about one test a week.
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Long-Range Missiles
I have seen no evidence to suggest that Iran is actively developing
an intermediate- or intercontinental-range ballistic missile (IRBM or
ICBM, respectively). I cannot speak to a covert program. The need to
flight test missiles before they are made operational provides advanced
warning of new capabilities. Flight trials involve a dozen or more test
launches, and historically require 3 to 5 years to complete, sometimes
more.
Available evidence, including the recent debut of the Emad medium-
range missile, indicates that enhancing missile accuracy supersedes
Iran's quest for longer-range systems.
Iran could attempt to use Sajjil technologies to produce a three-
stage missile capable of flying 3,700 km or 2,200 miles. But it is
unlikely to be developed and actually fielded before the Sajjil-2
missile is fully developed.
Iran could elect to develop a ``second-generation'' intermediate-
range missile of 4,000 km to 5,000 km, or 2,500 miles to 3,100 miles,
using solid-fuel technology. This path would provide a basis for also
developing an ICBM. However, Iran's engineers would need to design,
develop and test a much larger rocket motor to support IRBM and ICBM
projects. Large motor development typically requires 2 to 3 years, and
involves many ground tests to validate design and production, as well
as performance and reliability. Ground testing would necessarily be
followed by at least 3 years of flight trials. Thus, there is little
reason to believe that the Islamic Republic could field an IRBM before
2020. Moreover, Iran would still have to rely on imported technologies,
production materials, components and technical assistance.
Iran's past missile and space-launcher efforts suggest that Tehran
would probably develop and field an IRBM before trying to develop an
intercontinental ballistic missile capable of reaching the United
States more than 9,000 km or 5,600 miles away. If development of an
intermediate- and intercontinental-missile are pursued in tandem, Iran
could conceivably field an operational ICBM in 2022, at the earliest.
If done sequentially, Iran will struggle to achieve a viable ICBM
capability before 2025.
Iran could attempt a short-cut to an IRBM or ICBM capability.
Satellite launch activity could, in principle, be used as a springboard
to developing an IRBM or ICBM. However, no country has converted a
satellite launcher into a long-range ballistic missile. There are sound
reasons why such a conversion has not materialized.
Without question, rockets designed to boost a satellite into orbit
and long-range ballistic missiles employ many of the same technologies,
key components, and operational features. There are, however, key
characteristics that differentiate satellite launchers from ballistic
missiles, apart from the payload itself. Firstly, ballistic missile
payloads must survive the rigors of reentry into the earth's
atmosphere. Protecting a long-range missile's payload from the extreme
heat and structural loads experienced during reentry requires the
development and production of special materials, as well as testing and
validation under real conditions.
Secondly, satellite-launch vehicles and long-range ballistic
missiles employ distinctly different trajectories to fulfil their
respective missions. The different trajectories call for different
propulsion systems for optimal performance. One cannot simply swap out
one engine for another and expect the missile to perform with high
dependability. Multiple flight tests of the new configuration are
needed to validate performance and reliability.
A third, less obvious difference lies with the operational
requirements. Before flight, satellite launchers, unlike their
ballistic missile counterparts, are prepared over a period of many
days, if not weeks. Components and subsystems are checked and verified
prior to launch. The mission commander has the flexibility to wait for
ideal weather before initiating the countdown. If an anomaly emerges
during the countdown, engineers can delay the launch, identify and fix
the problem, and restart the process.
In contrast, ballistic missiles, like other military systems, must
perform reliably under a variety of operational conditions with little
or no warning. These operational requirements impose a more rigorous
validation scheme, which includes an extensive flight-test program.
Normally, only after successfully completing validation testing is a
missile deemed to be combat ready. This latter requirement, and the
need to ensure prelaunch survivability, explain why the Soviets and
Americans never converted a satellite launcher into a ballistic
missile, though the reverse process occurred frequently. China
developed its early long-range missiles (DF-3, DF-4, and DF-5) and
satellite launchers (CZ-2 and CZ-3) in parallel. However, running the
developmental programs in tandem did not obviate the need to conduct a
full set of flight trials over many years for the military missiles.
Nor did the parallel programs shorten the development timeline
significantly.
Iran's Safir and Simorgh rockets are optimized to lift a satellite
into orbit. The second stages used by the Safir and Simorgh are powered
by low-thrust, long-action time engines, which accelerate the satellite
along a path that parallels the earth's surface. A ballistic missile
trajectory must climb to higher altitudes to optimize its range
capacity. An underpowered second stage would necessarily fight
gravitational forces over a longer time, robbing the payload of
velocity and thus range. Iran would likely modify the Simorgh by
replacing the second stage's propulsion system with a Scud or Nodong
engine.
Iran could opt to modify the Simorgh satellite-launch platform for
use as a ballistic missile, though the transformation would not be
simple or quick. There would still be a need to flight test the
transformed Simorgh in a ballistic missile mode. If Iran built a
ballistic missile using the Simorgh's first stage, and replaced the
second stage with a Nodong, the notional missile might achieve a
maximum range of 4,000 to 6,000 km, depending on configuration details
and the payload. To reach the continental U.S., a powerful third stage
would have to be developed and added to the first two stages of the
Simorgh. The notional missile would remain poorly suited for use as a
ballistic missile, because it would be too large and cumbersome to
deploy on a mobile launcher. It would therefore have to be placed in a
silo, making it an attractive target for adversaries possessing advance
reconnaissance and strike capabilities.
Nonetheless, Iran could elect to upgrade and modify its Simorgh.
The Soviet Union considered an analogous upgrade in 1957, when the
Yangel Design Bureau suggested combining the main boosters of the R-12
and R-14 missiles to create the R-16 ICBM. The R-16 was successfully
developed, but only after substantial redesign, including the
development of new engines using more energetic propellants. The Soviet
experience suggests that Iran would find it challenging and time
consuming to build an operational ICBM derived mainly from Simorgh
hardware. A new missile design seems more plausible.
Indigenous Capabilities
Iran possesses the technical, project-management and industrial
capacity to develop and field the ballistic missiles it desires. But
development of new systems will require sustained investment, years of
patience and a tolerance for failed projects.
The modifications of the Shahab-2 and Shahab-3, to create the Qiam
and Ghadr missiles, respectively, demonstrate Iran's technical prowess
and ingenuity. North Korea has no equivalent, suggesting that Iran is
slowly surpassing its original supplier of systems, components and
technology. Iran has also leveraged Shahab-3 technology to develop the
Safir and Simorgh satellite launchers. Finally, Iran has, over the
course of three decades, mastered many key aspects of solid-propellant
motor production.
However, Iran is not fully self-sufficient. Available evidence
indicates that Iran cannot fabricate reliably the Scud and Nodong
liquid-propellant engines that power its operation missiles. This may
change in the future, although the history of ``reverse-engineering''
complex equipment suggests otherwise. The Soviet Union, for example,
could not successfully clone the German V-2 missile after the war,
despite have access to much of the original production line, the
original blueprints and many of the key German specialists that
developed the V-2. Similarly, the Soviet attempt to reverse-engineer
the American B-29 bomber resulted in a Tu-4 which did not perform like
the original. It seems much more likely than not that if Iran wishes to
expand its arsenal of liquid-fueled missiles, it will have to import
additional engines from North Korea. North Korea's liquid-fueled
engines were very likely fabricated in the Soviet Union in the 1980s
and 1990s.
Iran's development of the Sajjil-2 missile appears to have stalled,
partly because it cannot indigenously produce some of the key
ingredients used in the manufacture of solid-propellant motors. Iran
has successfully imported key ingredients, though disruptions to the
supply chain have forced it to use multiple providers. Relying on
different suppliers, each of whom produces key ingredients to different
standards, introduces many new variables to the solid-propellant
production process, which is challenging enough under the best of
circumstances. The challenges are amplified many fold as the size of
the rocket motor to be produced grows. Iran's reliance on foreign
suppliers creates opportunities for those countries that seek to slow
the development of large missiles propelled by solid propellant.
Iran-North Korea Missile Cooperation
North Korea supplied Iran with ballistic missiles and technology
beginning in the mid-1980s and receding in the late 1990s. The
relationship was highly transactional; missiles and missile
technologies were exchanged for cash. Evidence over the past decade
indicates that North Korea-Iran cooperation is limited in both scope
and depth. Some testing data may have been exchanged in the early
2000s, as Iran began efforts to modernize the design of the Nodong/
Shahab-3 to create the Ghadr missile. North Korea is not known to have
tested an equivalent version of the Nodong, although imprecise mock-ups
of a missiles having a nosecone geometry similar to the Ghadr's were
shown during a military parade in Pyongyang in late 2010.
Sharing of blueprints and other sensitive information seems
unlikely, primarily because of security issues. Interviews with Russian
and Ukrainian missile specialists who worked in Iran during the late-
1990s, and early-2000s reveal that Tehran heavily compartmentalizes its
most valued weapons programs. This was done to prevent foreigners from
understanding the scope and status of Iran's missile endeavors, its
indigenous capabilities, and its technology import requirements. It
seems reasonable that the same security standards and practices are
applied to the North Koreans who may continue to assist Iranian
efforts. The barriers erected to preserve security would also, by
definition, impede cooperation.
Signs of minimal cooperation are also evidenced by the missiles and
satellite-launch vehicles developed by the two countries. North Korea's
Taepo-dong 1 satellite launcher, which overflew Japan in 1998, was a
three-stage system. Iran's Safir launch vehicle uses two stages. North
Korea abandoned the Taepo-dong 1, in favor of the larger Taepo-dong 2
(Unha) launcher, after only one (unsuccessful) flight. The Safir has
been used at least seven times since 2008, with just over half of the
launches resulting in success.
Iran's Simorgh launch vehicle, like the Safir, is a two-stage
rocket. North Korea's Unha is a three-stage system. And while it is
true that the first stage of the Unha and Simorgh are powered by a
cluster of four Nodong engines, the two designs are significantly
different. South Korea recovered from the ocean two Unha first stages,
the first from the December 2012 flight, the second from the February
2016 launch. After analyzing the recovered debris, the South Korean
Government concluded that in addition to the four main engines, four
small ones were also used to steer the Unha during first-stage
operation. Each of the steering engines received its fuel and oxidizer
by tapping into the plumbing that feeds an adjacent main engine. This
arrangement reduces slightly the thrust output of the main engines by
depriving it of the propellant flow diverted to the steering engines.
The small reduction in thrust is compensated, though not fully, by the
thrust generated in the steering engines. The Unha configuration is a
reasonable, low-risk design.
Photographs of the Simorgh's first stage show that it too employs
four steering engines for flight control. However, a separate pump--
scavenged from a Scud engine--is used to deliver fuel and oxidizer to
the four steering engine. The Iranian design provides the Simorgh's
first stage with an extra 13 tons of thrust when compared to the Unha's
first stage. The different designs indicate that North Korea and Iran
do not share blueprints for their respective satellite launchers. Given
the more sensitive nature of ballistic missile designs, it is
reasonably safe to conclude that the two countries do not codevelop
military missiles.
Containing Iran's Ballistic Missile Program
Multilateral sanctions, most notably UN Resolution 1929, likely
played a prominent role in retarding development of the Sajjil medium-
range missile. Technical challenges and the deaths of several key
personnel in late-2011 may also contributed to the delays. The apparent
success of the sanctions, which disrupted the supply of critical
ingredients used to produce solid fuels, was facilitated by the UN
Panel of Experts on Iran. The Panel was responsible for investigating
potential violations. The investigations, and reporting to the Panel by
Governments interdicting proscribed shipments to Iran, raised
international awareness of the sanctions. The Panel's work also
identified illicit networks and pathways, which further underscored the
international community's role in enforcing Resolution 1929.
However, the Panel does not exist under Resolution 2231. The U.S.
should work with the Security Council to reinstate the Panel, with a
focus on enforcing the trade restrictions contained in Resolution 2231.
The success of unilateral sanctions, especially those leveled
against Iranian enterprises and individuals, is historically ambiguous.
Iran creates new trading companies to replace those that have been
sanctioned. As Iran renews international trade under the relief granted
by the JCPOA, unilateral sanctions may or may not become more
effective. It is difficult to predict.
The Proliferation Security Initiative--and international effort to
disrupt the flow of WMDs and related technologies--could be an
effective tool for intercepting shipments from North Korea, Iran's
principle, if not sole source for missile engines. Without a supply of
additional engines from North Korea, Iran will find it difficult to
expand its arsenal of liquid-fueled missiles. This may drive Iran to
seek greater self-reliance, but the cost of developing and qualifying a
production line for these engines will be high.
In response to the growing threats posed by Iran's ballistic-
missile arsenal, the Pentagon has worked tirelessly with our Gulf
partners, Israel and NATO to deploy regional-missile defenses for
protection. Joint missile-defense exercises with our Gulf partners--and
Israel--offer a tangible counter narrative to Iran's missile tests, and
possibly deter Iranian use of missiles. Joint-exercises will also serve
to enhance the capabilities and effectiveness of the missile-defense
systems deployed in the region.
Iran has said it does not need missiles with a range exceeding
2,000 km. The U.S. should explore options that, at a minimum, would
legally codify that range limit. Other limitations may be ripe for
negotiation, including those that increase the transparency of Iran's
space program.
______
PREPARED STATEMENT OF ELIZABETH ROSENBERG
Senior Fellow and Director, Energy, Economics, and Security Program,
Center for a New American Security
May 24, 2016
Chairman Shelby, Ranking Member Brown, and distinguished Members of
the Committee, thank you for the opportunity to testify today on the
role of sanctions under the Iran deal.
Sanctions on Iran created the pressure necessary to compel Iran to
agree to a deal with the international community last year. In exchange
for economic relief, the Iranian Government agreed to curb its nuclear
weapons capability. The effectiveness of Iran sanctions can be traced
directly to the diligence and creativity of policymakers in Congress
and in this Administration, as well as the previous one. Specifically,
the leadership of U.S. lawmakers and executive branch implementation
and enforcement officials helped to craft a coherent international
message regarding Iran's threatening proliferation behavior, a
multilateral coalition to isolate Iran diplomatically and financially,
and the collective financial leverage so critical to delivering the
Iran nuclear deal. This deal was a major step forward in proliferation
security in the Middle East and I applaud the work of this Committee
for your important role in facilitating effective nuclear diplomacy.
The Iran sanctions regime was, and remains, the most comprehensive
program of U.S. and international sanctions, commensurate with the
grave security concerns regarding Iran's nuclear proliferation
activities, as well as its ongoing regional destabilization, ballistic
missile program, support for terrorism, and abuse of human rights. Many
U.S. and international sanctions on Iran were waived on Implementation
Day, the milestone of the nuclear deal recognizing Iran's completion of
its major initial commitments to ship out nearly all of its enriched
uranium, disassemble thousands of centrifuges, and submit to a much
more comprehensive inspections regime. However, the United States
maintains sanctions authorities relevant to Iran as part of the deal,
as well as a wide array of sanctions on Iran outside the scope of the
deal, including those that bar U.S. companies and citizens from doing
business with Iran. The existing architecture of Iran sanctions remains
very powerful and affords an enormous amount of leverage to U.S.
policymakers to pursue Iranian security provocations and
destabilization.
Unwinding Nuclear Sanctions Under the Iran Deal
On Implementation Day the removal of many EU sanctions and the
exercise of U.S. sanctions waivers and issuance of licenses permitted
Iran to expand its oil sales and access $100 billion in frozen assets.
\1\ Additionally, the United States, the EU, and the UN together
removed hundreds of designated Iranian entities from sanctions lists,
including Iranian banks that then gained access to European financial
institutions. Iranian institutions have been able to expand their
international ties since January, though this expansion is far from the
tidal wave of new economic activity that many hoped for or feared. Iran
has established new oil trading contracts in Europe \2\ and expanded
oil deliveries to Asia. \3\ Several Iranian banks are reestablishing
branch licenses and correspondent relationships in Europe and are
renewing their tics with Asian counterparts. \4\ Additionally, Iran's
charm offensive to market new deals for trade and investment, including
in areas such as automobiles and airplanes, have met some success
internationally. \5\
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\1\ ``Written Testimony of Adam J. Szubin, Acting Under Secretary
of Treasury for Terrorism and Financial Intelligence United States
Senate Committee on Banking, Housing, and Urban Affairs'', U.S.
Department of the Treasury, press release, August 5, 2015, https://
www.treasury.gov/press-center/press-releases/Pages/j10144.aspx.
\2\ ``Italy's Renzi Signs Potentially Huge Business Deals in
Iran'', Reuters, April 12, 2016, https://www.reuters.com/article/us-
iran-italy-idUSKCN0X91I2.
\3\ Chen Aizhu, ``Exclusive: Iran Renews Oil Contracts With China,
Taps New Buyers'', Reuters, December 3, 2015, http://www.reuters.com/
article/us-china-iran-oil-idUSKBNOTM0CN20151203.
\4\ Martin Arnold, ``British Regulators Help Iranian Banks Come in
From the Cold'', Financial Times, January 31, 2016, http://www.ft.com/
intl/cms/s/0/54144ec2-c692-11e5-b3b1-7b2481276e45.html#axzz45ojdIkOv.
\5\ Mehrnosh Khalaj and Michael Stothard, ``Peugeot Agrees Deal To
Revive Iran Partnership'', Financial Times, February 7, 2016, http://
www.ft.com/intl/cms/s/0/71b1acd8-cdbb-11e5-831d-
09f7778e7377.html#axzz45oJdIkOv.
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There are various reasons why Iran will expand its links to the
international financial system slowly, however. The cumbersome
unraveling of nuclear sanctions restrictions at banks and companies
around the world in order to engage in now-permitted business with Iran
is only one factor. Remaining sanctions on Iran for its terrorist and
ballistic missile activities are a deterrent to those who would
contemplate business with Iran, along with prudential concerns related
to a history of corruption, and a lack of transparency and
maneuverability for foreign firms in Iran's financial system.
Beneficial ownership information for Iranian legal entities is
notoriously unavailable and confusing, and there is a lack of
confidence in Iranian due process mechanisms for foreign entities
conducting business there. Iranian banks also lag behind many emerging
market peers in compliance with global tax, financial reporting,
capital requirements, and anti-money laundering standards, a fact
tacitly acknowledged by Iranian financial overseers. \6\ The Financial
Action Task Force has pointed out risks associated with Iran's economy
in grave terms, \7\ Transparency International ranks Iran 130 out of
168 on their corruption index, \8\ the World Bank's Ease of Doing
Business Ranking puts Iran at number 118 out of 189, \9\ and the
International Monetary Fund has recently called attention to Iran's
troubled banking system. \10\ These various factors represent
tremendous impediments to foreign investment in Iran and the creation
of new commerce for the Iranian regime and people.
---------------------------------------------------------------------------
\6\ Barbara Slavin, ``Central Bank Governor: Iran Expects Access
to U.S. Financial System'', Al-Monitor, April 15, 2016, http://www.al-
monitor.com/pulse/originals/2016/04/iran-expects-limited-access-us-
financial-system.html; Patrick Clawson, ``Iran Locks Itself Out of the
International Financial System While Blaming Washington'', The
Washington Institute, Policywatch 2600, April 5, 2016, http://
www.washingtoninstitute.org/policy-analysis/view/iran-locks-itself-out-
of-the-international-financial-system-while-blaming-w.
\7\ ``FATF Public Statement--19 February 2016'', FATF, High-risk
and noncooperative jurisdictions, February 19, 2016, http://www.fatf-
gafi.org/publicacions/high-riskandnon-cooperativejurisdictions/
documents/public-statement-february-2016.html.
\8\ ``Corruption by Country/Territory: Iran'', Transparency
International, accessed April 14, 2016, https://www.transparency.org/
country/#IRN.
\9\ ``Ease of Doing Business Index'', World Bank, Accessed April
14, 2016, http://data.worldbank.org/indicator/IC.BUS.EASE.XQ.
\10\ ``Islamic Republic of Iran--2015 Article IV Consultation--
Press Release; Staff Report; and Statement by the Executive Director
for the Islamic Republic of lran'', International Monetary Fund, IMF
Country Report No. 15/349, December 2015, http://www.imf.org/external/
pubs/ft/scr/2015/cr15349.pdf.
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Beyond Iran's self-imposed financial troubles, its escalating
regional provocations and continued aggression through proxies make the
specter of future confrontation with its neighbors or the United States
a real possibility. Iran has the largest, most lethal ballistic missile
arsenal in the Middle East and has stepped up missile tests in recent
months. \11\ It has also expanded its material support to the Houthis
in Yemen and continues to support other proxies that destabilize the
region, including Hezbollah. Iran's aggressive rhetoric and flagrant
disregard for the United Nations' restrictions on ballistic missile
activity is a red flag to potential partners, who are already wary of
the reckless behavior of Iran's revolutionary leaders.
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\11\ Kambiz Foroohar, ``U.S. Frowns on New Iran Sanctions by
Congress After Missile Test'', Bloomberg, April 13, 2016, http://
www.bloomberg.com/news/articles/2016-04-13/u-s-argues-against-more-
iranian-sanctions-after-missile-tests.
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For reasons of political and security risk, existing sanctions, and
the serious financial challenges associated with attempting business
with Iran, many global banks have made it clear that they do not plan
on doing business with Iran. In addition, as HSBC has pointed out, the
different rules for U.S. banks and foreign banks when it comes to
dealing with Iran is another road block for many foreign banks that
work to create institution-wide compliance protocols across all the
jurisdictions in which they operate. \12\ It can be too difficult,
risky, or impractical to have different compliance practices for U.S.
business units by comparison to those for business units outside the
United States, and foreign banks reasonably fear that creating
different standards may expose them to complicated and expensive
regulatory actions in the future if policy changes. The financial
institutions and companies that will attempt new Iran business are
generally moving slowly with actual contracts and deals, biding time to
discover what market pitfalls or potential future sanctions may mean
for their business. Furthermore, many of these banks are regional banks
with a relatively smaller capacity to handle trade and structured
finance, and retail services. They may also be more concentrated in
Asia, with more limited exposure to the U.S. financial system than
their European counterparts.
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\12\ Stuart Levey, ``Kerry's Peculiar Message About Iran for
European Banks'', The Wall Street Journal, May 12, 2016, http://
www.wsj.com/articles/kerrys-peculiar-message-about-iran-for-european-
banks-1463093348.
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Overseeing the Nuclear Deal and Addressing Non-Nuclear Concerns With
Iran
The core technical work of overseeing the Iran deal falls to
nuclear experts involved in compliance and verification activities. The
International Atomic Energy Agency (IAEA), the lead institution on this
effort, has so far given Iran fair marks for upholding its nuclear
commitments under the deal. In February, it issued its first monitoring
report following Implementation Day, raising no concerns about Iran's
activities. \13\
---------------------------------------------------------------------------
\13\ ``Verification and Monitoring in the Islamic Republic of Iran
in Light of United Nations Security Council Resolution 2231 (2015)'',
IAEA, February 26, 2016, https://www.iaea.org/sites/default/files/gov-
2016-8-derestricted.pdf.
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For sanctions officials, overseeing the nuclear deal involves two
primary lines of effort. The first is education and outreach to the
global community to clarify what new business activities are permitted
under the nuclear deal and what remain off limits pursuant to existing
sanctions. This educational initiative is, by necessity, ongoing, given
the dynamic nature of sanctions and evasion techniques that designated
entities may pursue. The U.S. Government has sent delegations around
the world in this effort, but much more must be done to address
confusion within the global private sector about what business is now
allowed with Iran and the appropriate controls that must be in place to
prevent sanctions violations in the future. \14\
---------------------------------------------------------------------------
\14\ Ladane Nasseri, ``Executives Are Confused by Iran
Sanctions'', Bloomberg, May 17, 2016, http://www.bloomberg.com/news/
articles/2016-05-17/iran-s-allure-tempered-by-confusion-on-sanctions-
survey-shows.
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The second primary effort for sanctions officials overseeing the
nuclear deal is ensuring that sanctions authorities are primed for use,
so that the United States and international allies are able to reimpose
sanctions in part or in whole if Iran violates its nuclear commitments.
Keeping authorities up to date means the reauthorization of the Iran
Sanctions Act before it expires at the end of the year. Additionally,
it means readying potential additional contingency measures, including
new approaches to sanctions enforcement or possible new sanctions
authorities, if Iran fails to uphold its commitments under the nuclear
deal.
Using sanctions to address non-nuclear concerns with Iran is
distinct from oversight of the nuclear deal. Unique authorities exist
for sanctioning Iran's support for terrorism and use of ballistic
missiles, its involvement in narcotics trafficking and malicious
cyberattacks, as well as its human rights abuses. The Treasury
Department has announced scores of designations under these authorities
over the years, including a number of designations during negotiations
on the nuclear deal. In recent months the Obama administration
announced sanctions on Iran for its ballistic missile procurement
activities and tests, including new sanctions on Implementation Day.
\15\ It also announced designations highlighting Iran's support for
terrorism, including through designations of entities and individuals
that support Mahan Air, in March, and Hezbollah, in January and April.
\16\ This is important work and I urge the Administration to expand its
sanctions implementation and enforcement in these areas. This is
particularly important with regard to the work of exposing and
targeting the insidious and dangerous activities of the IRGC within and
beyond the borders of Iran, including exposing the financial activity
and holdings of the IRGC, its agents and instrumentalities, and Iran's
regional terrorist proxies, whenever feasible. The U.S. Government
should, at a minimum, designate the IRGC under its terrorism
authorities.
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\15\ ``Treasury Sanctions Those Involved in Ballistic Missile
Procurement for Iran'', U.S. Department of the Treasury, press release,
January 17, 2016, https://www.treasury.gov/press-center/press-releases/
Pages/jl0322.aspx.
\16\ ``Treasury Sanctions Supporters of Iran's Ballistic Missile
Program and Terrorism-Designated Mahan Air'', U.S. Department of the
Treasury, press release, March 24, 2016; ``Treasury Sanctions Key
Hizballah Money Laundering Network'', U.S. Department of the Treasury,
press release, January 28, 2016, https://www.treasury.gov/press-center/
press-releases/Pages/jl0331.aspx; ``Publication of the Hizballah
International Financing Prevention Act of 2015 Related Sanctions
Regulations; Counter Terrorism Designations Updates; Syria Designations
Updates'', U.S. Department of the Treasury, April 15, 2016, https://
www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/
20160415.aspx.
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Beyond designating more targets, sanctions officials in the
Administration should pursue non-nuclear concerns with Iran by urging
foreign counterparts to match U.S. sanctions measures related m Iran's
support for terrorism and use of ballistic missiles, as well as its
human rights abuses. This includes outreach to European officials in
the position to enhance EU sanctions lists to include more IRGC targets
and entities involved in Iran's ballistic missile program and support
for terrorism. As a specific example, outreach to the Europeans should
include encouraging EC authorities to use sanctions restrictions to
deny access to European airports for Mahan Air, given its involvement
with Iranian support for terrorism. Expanding transatlantic unity on
sanctions targeting Iran's continued security provocations and
destabilizing regional role will send an important message to Iran: the
international community, led by the United States and Europe, broadly
condemns Iran's threatening behavior and is expanding its campaign to
expose, interdict, and counter it through security and diplomatic
means.
Alongside this additional sanctions implementation and coordination
activity, U.S. policymakers and their European counterparts should also
specifically and publicly identify Iran's self-imposed financial
problems. Doing so will make clear to Iran and the global community
that Iran bears significant responsibility for improving its economic
conditions, and that the removal of sanctions under the nuclear deal
cannot independently deliver a windfall to Iran. The strongest and most
credible strategy to highlight Iran's need to improve its financial
transparency and accountability is for technical experts inside the
U.S. Government, as well as outside at institutions such as the
International Monetary Fund, the Financial Action Task Force,
Transparency International and elsewhere, to point out the technical
problems in the anti-money laundering, counterterrorist financing, and
countercorruption domains that Iran must address. Additionally, such
experts should be encouraged and allowed, by license if they are U.S.
persons, to offer technical guidance to Iranian financial institutions
to conduct this work. This will support U.S. policy interests in
achieving greater transparency in the Iranian financial industry, and
it will clearly demonstrate that the United States is not the roadblock
to economic reform. It could help to reinvigorate private business in
Iran to better challenge the insidious control of the IRGC over
significant parts of the Iranian economy. Also, it could allow Iran to
reap the economic benefits of the nuclear deal, thereby strengthening
this important proliferation security accomplishment.
A Strategy for Powerful, Sustainable Sanctions on Iran
In pursuing Iran sanctions now and in the future, U.S. policymakers
must prioritize both the important work of isolating Iranian entities
engaged in dangerous and illicit behavior, as well as a methodological
approach to sanctions as a policy tool that supports sanctions'
continued cogency and sustainability. Given that Iran sanctions
authorities are already extraordinarily extensive and powerful, this
means focusing on aggressively using existing authorities and avoiding
the creation of new authorities that might sow confusion or undermine
existing ones.
There are three particular hazards that U.S. sanctions policy
officials must avoid. First, policymakers must refrain from the
reimposition of sanctions waived under the nuclear deal. Parties to the
Iran deal agreed to refrain from reimposing sanctions waived under the
accord. \17\ Reimposing these sanctions would be seen at best as
undermining confidence and adherence to the deal and at worst as
contravention and grounds for throwing out the deal, a significant
setback to proliferation security. Second, policymakers must avoid
creating new standards, terminology, or timelines that do not line up
with existing statutes and create significant confusion for those
working to implement and abide by sanctions. The establishment of
mismatched standards or terminology may be accidental, but can be
difficult to correct and unintentionally harmful to the private sector
or policy interests.
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\17\ Joint Comprehensive Plan of Action, July 14, 2015, 13-14.
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The third hazard that sanctions policymakers must avoid is one of
strategic and wide-ranging national security significance. Policymakers
must be careful not to put in place new sanctions that so significantly
alter international financial flows and banking activities that they
undermine the attractiveness or primacy of the U.S. financial system
and the dollar as a reserve currency. If powerful new sanctions cause
companies and banks to leave U.S. jurisdiction out of a desire to avoid
confusing, cumbersome, expensive, and threatening sanctions
restrictions, then U.S. security and intelligence leaders will have
less insight into illicit financial flows and will face a less
transparent international financial system. Additionally, the reach and
leverage of U.S. sanctions will shrink and this critical security tool
will be dulled. Treasury Secretary Lew has warned against the overuse
of sanctions multiple times in recent weeks, urging his colleagues and
successors in the sanctions arena not to use them lightly as ``they can
strain diplomatic relationships, introduce instability into the global
economy, and impose real costs on companies here and abroad. And of
course they carry a risk of retaliation.'' \18\ Policymakers could
diminish the power of the U.S. financial system with zealous overuse of
the tool.
---------------------------------------------------------------------------
\18\ ``Remarks of Secretary Lew on the Evolution of Sanctions and
Lessons for the Future at the Carnegie Endowment for International
Peace'', U.S. Department of the Treasury, press release, March 30,
2016, https://www.treasury.gov/press-center/press-releases/Pages/
jl0398.aspx; ``Treasury Secretary Jacob J. Lew Remarks at Council on
Foreign Relations: America and the Global Economy: The Case for U.S.
Leadership'', U.S. Department of the Treasury, press release, April 11,
2016, https://www.treasury.gov/press-center/press-releases/Pages/
jl0415.aspx.
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Policy proposals to create new sanctions restrictions on Iran's use
of the dollar in all financial transactions may be an instance of
flirtation with the hazards outlined above. It is not the most
effective way to draw attention to Iran's significant illicit
activities of concern, and it adds little additional bite to U.S.
sanctions on Iran while lending strength to the argument that the
United States seeks to undermine the nuclear deal by making it
difficult for Iran to reap the economic benefit of its bargain.
Furthermore, it may undermine the strength of the U.S. financial system
over the longer term. As background, in 2008 U.S. policymakers barred
so-called U-Turn transactions for Iranian entities--the transfer of
funds by a foreign bank through a U.S. financial institution to a
second foreign bank for the benefit of an Iranian bank. Since that
time, Iran has been able to use the U.S. dollar if a transaction does
not touch a U.S. bank or citizen. In practice this means that Iranian
banks or companies cannot deal in dollars for any transaction of
significant size or for any significant number of transactions, as any
transaction (or series of transactions) of scale must be cleared
through a U.S. financial institution and would therefore violate the U-
Turn rule. In simplest terms, Iran is virtually barred from use of the
U.S. financial system because of the U-Turn prohibition. In response to
recent rumors that the Administration might be considering loosening
this prohibition, President Obama made clear that the United States has
no plans to do so. \19\
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\19\ ``Press Conference by President Obama, 4/1/2016'', The White
House, press release, April 1, 2016, https://www.whitehouse.gov/the-
press-office/2016/04/01/press-conference-president-obama-412016.
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The U-Turn rule is highly consequential for global financial
institutions. Attempts to circumvent it have proven expensive and
caused tremendous reputational damage, as shown by some of the big bank
sanctions violations cases of the last decade. \20\ The aggressive
enforcement posture of U.S. financial officials in these cases has
contributed to a tendency among foreign banks to aggressively avoid
U.S. sanctions violations by refusing business with Iran, even when
permissible under sanctions rules and when it could involve very small
dollar amounts that may not need to be cleared through a U.S. financial
institution. Banks' so called derisking behavior, which has
accelerated, not abated, even as nuclear tensions with Iran have
receded somewhat, underscores the inaccessibility to Iran of the U.S.
financial system.
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\20\ Patricia Hurtado, ``BNP Paribas Pleads Guilty in U.S. to
Violating Sanctions'', Bloomberg, July 9, 2014, http://
www.bloomberg.com/news/articles/2014-07-09/bnp-paribas-pleads-guilty-
in-u-s-to-violating-sanctions.
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ln this context, anxiety about Iranian use of the U.S. dollar may
be overstated in many instances and discussion of new dollar-related
sanctions can distract from the grave and urgent need to focus more
directly on Iran's terrorism and regional destabilization activities.
Furthermore, such new sanctions would not serve U.S. nuclear security
interests if they are construed as seeking to disable Iran's ability to
use the international financial system and collapse the nuclear deal.
Also, if new sanctions remove or restrict waiver authority for the
President, it will make the sanctions less flexible, and less of a true
bargaining chip for the Administration to use with Iran to coerce
policy change from Tehran. Finally, introducing a chilling new
restriction on dollar activity in the financial system may cause some
global banks to shrink their footprint in U.S. jurisdiction to avoid
exposure to threatening penalties. Over the long term this may have
negative implications for U.S. financial system strength and the reach
of sanctions.
The Key Leadership Role for Congress on Iran Policy
Congress has a number of critical roles to play on Iran policy. A
primary one is providing current and future oversight of the deal,
ensuring that the IAEA is adequately funded to sustain its nuclear
inspection and verification activities in Iran. Congress should fully
support the office of the Coordinator for Iran Nuclear Implementation.
Additionally, lawmakers should provide sanctions investigators,
implementers, and enforcement officials at the Treasury and State
Departments and in the intelligence community sufficient resources to
carry out their activities related to the Iran deal as well as Iranian
activities beyond the scope of the deal. In addition to these resource
issues, Congress should continue to play an important role in helping
to conceive of and prepare for additional sanctions measures related to
Iran if it breaches the nuclear deal. This includes eventual
reauthorization of the Iran Sanctions Act.
Aside from sanctions measures, Congress has several other important
responsibilities in the successful execution of an effective Iran
policy. Through appropriations and authorizations processes it must
ensure that the United States has adequate ballistic missile defense
capabilities in the Middle East. It should also provide an oversight
role to ensure that the United States makes available these
capabilities to partners in the region and engages with them in robust
partner capacity building and cooperation in counterterrorism
activities and interdiction efforts to expose and halt Iran's material
support to Hezbollah, the Assad regime, and the Houthis in Yemen.
Congress should also expand its support to Israel, a key ally in the
Middle East, in intelligence-sharing and military aid arenas.
Conclusion
Iran sanctions are a powerful tool in the U.S. security arsenal and
have delivered successful nuclear diplomacy and a historic deal. Even
while many sanctions have recently been rolled back as part of this
deal, the regime is still extensive and strong. Policymakers should
continue to forcefully implement sanctions on Iran to address its
destabilizing regional role and support for terrorism. But they must
avoid undermining the availability of sanctions by diminishing the
strength and reach of the U.S. financial system. As a tool of first
resort, sanctions are an essential part of the U.S. security
infrastructure, and policymakers must prioritize a sustainable approach
to ensure the cogency and effectiveness of sanctions as a central part
of U.S. policy toward Iran in the future.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HEITKAMP
FROM ELIZABETH ROSENBERG
Q.1. What steps, if any, should Congress take to ensure the
United States maintains sufficient authority to pressure Iran
in non-nuclear areas?
A.1. The array of authorities available to U.S. implementers
and enforcers of sanctions covers a wide range of Iran's
illicit non-nuclear activity of concern, including support for
terrorism, regional destabilization, human rights abuse,
evasion of sanctions, and others. Additionally, statutory
authorities, primarily including IEEPA, are available to
enforcement officials to quickly and creatively target
potential new Iranian activities of concern in the non-nuclear
space. It is not necessary for Congress to create additional
authorities to target illicit Iranian activity of concern given
the broad scope of these combined current authorities. However,
it is important and appropriate for Congress to closely monitor
Iran's malign activity to ascertain if and when a previously
unforeseen need may arise to develop additional sanctions
authorities to pressure Iran in the non-nuclear sphere.
Q.2. What risks would the United States encounter if the Iran
Sanctions Act is not reauthorized by the end of the year?
A.2. A number of important sanctions authorities that have been
used to target Iran are encompassed in the Iran Sanctions Act,
including many that were waived pursuant to the JCPOA on
Implementation Day in January. Reauthorizing the Iran Sanctions
Act before its expiration at the end of 2016 may be useful to
keep the sanctions authorities contained in this statute close
at hand in case Iran violates its commitments under the nuclear
deal and international leaders decide to reimpose sanctions.
However, it is not necessary to reauthorize the Iran Sanctions
Act in order to have access to all the same sanctions targeting
capabilities. The IEEPA statute includes sufficient authority
for Administration policymakers to move quickly to pressure
Iran with sanctions even without the Iran Sanctions Act
remaining part of U.S. law. Furthermore, to the extent that
reauthorizing the Iran Sanctions Act may create ill will and
negative political provocation with Iran and among P5+1
partners, it may undermine the nuclear deal. This in turn can
be counterproductive to the important goal of advancing
proliferation security though the nuclear deal.