Hearing before the House Foreign Affairs Subcommittee on Terrorism, Nonproliferation, and Trade & The House Financial Services Subcommittee on Domestic and International Monetary Policy, Trade, and Technology

REP. BRAD SHERMAN (D-CAL): Thank you all for coming. Let me thank the chairman and ranking members of the two subcommittees and the chair of the two full committees, Chairman Frank and Chairman Lantos, for working together for these hearings to take place. We have an ambitious agenda this afternoon, so we'll try to limit opening statements, and I'll see if I'm able to limit my own.

I'll ask the witnesses to limit their statements to five minutes, but your full statement can be made part of the record of this hearing.

 

OPENING STATEMENT OF

BRAD SHERMAN
A Congressman from California, and
Chairman of the Subcommittee on Terrorism, Nonproliferation and Trade,
House Committee on Foreign Affairs

 

SHERMAN: The greatest challenge to America is combating terrorism and proliferation. The greatest power of America is our economic power. It is long past time that we have hearings to see how we can bring our greatest power to deal with our greatest challenge and to the greatest threats to our national security. We recently saw success in the use of this economic power where actions that seemed rather small with regard to one particular bank in Macau and a $25 million account played an important role in bringing North Korea back to the three- party talks.

In looking at the objectives we're trying to achieve, it is to turn to those proliferating and terrorist countries and limit or eliminate loans to their government, investments in their oil sector, all the other investments and their non-energy exports.

I will focus in my comments on Iran, but just about everything I have to say is equally applicable to Sudan and to others who ought to be targets of our efforts.

Our goal is to affect the behavior of U.S. companies and their subsidiaries, foreign companies, particularly oil companies and banks, and the World Bank and other international organizations.

Before the Foreign Affairs Committee, we have the Iran Counter- Proliferation Act authored by Chairman Lantos and co-sponsored by myself and others who are here today, which is designed to really apply what was originally the Iran-Libya Sanctions Act. That act was actually applied against Libya and never really applied against Iran. Both the Clinton and now the Bush administrations simply violate their responsibilities under law, and we ought to see whether our witnesses can explain why the Iran Sanctions Act is yet to be applied.

The bill would also prohibit U.S. companies from doing business with Iran through their foreign subsidiaries. And finally, it would eliminate non-energy imports from Iran, because I believe that preventing the development of nuclear weapons is more important than whether all types of caviar can be imported into the United States. I'm willing to tell my constituents that they can make do with the Russian caviar.

In the area of banking and investments, there are a number of steps we can take. The Treasury Department has prevented two Iranian banks from doing business through the Fed in New York and thus prevented those two Iranian banks from doing major dollar transactions. We'd like to find out why we're not doing that to all Iranian banks and, for that matter, all the banks of Sudan as well.

This subcommittee -- rather my distinguished co-chairman Mr. Gutierrez's subcommittee -- has jurisdiction over the World Bank. Now I know we're all concerned about how one particular woman at the World Bank got a $193,500. Very concerned about the $193,000. We need to be just as concerned about whether $1.35 billion is going to be disbursed from the World Bank to the government of Tehran as, so far, the United States has acquiesced in the process designed to lead to that result.

A particular focus of these hearings are the efforts to develop legislation designed to empower American investors to separate themselves from terror. Here the decision makers are pension plan managers, pension plan participants and private investors. We need to allow pension plan managers to divest from those companies that do business with terrorist states without worrying about either of two legal issues, both of which we can deal with in the Financial Services Committee.

One of those is the argument that they have a fiduciary duty to continue to invest in companies that invest in terror. That is wrong, and we can say so by law.

Second is the idea that if stated municipalities divest that they are somehow carrying on a foreign policy in contradiction to U.S. foreign policy. We should both authorize and encourage our states and localities to divest from those who invest in terror. We need to name and shame so that there's an official Treasury Department list of those who are doing business with terror, proliferation and genocide.

We need to allow individual employees who want to divest and who have control over their own investments to do so. If a company allows you to invest in a Fortune 500 or an S&P 500 fund, there ought to be an S&P "495 fund" -- that is to say an equivalent investment that excludes terror.

And finally, in the jurisdiction of the Ways and Means Committee, we ought to be able to turn to individual investors and say that they can sell the stocks of those companies that are doing business with terror, reinvest those funds in other stocks or similar mutual funds, and get a carryover basis because we shouldn't tax divestment; we should encourage it.

And finally, the four -- the Financial Services Committee needs to look at banning companies that invest in terror from getting any capital on Wall Street.

With that, I would like to yield to my distinguished ranking member of the (Sub)Committee on Terrorism, Nonproliferation, and Trade, Mr. Royce from California.

 

OPENING STATEMENT OF

ED ROYCE
A Congressman from California, and
Ranking Member of the Subcommittee on Terrorism, Nonproliferation and Trade,
House Committee on Foreign Affairs

 

REP. EDWARD R. ROYCE (R-CA): Well, I thank you, Mr. Chairman, for yielding, and I thank you for holding this hearing. The concept of the hearing -- changing regime behavior, changing it through use of the international financial system. And I think by way of example we can look at what has worked and what's worked relatively recently.

The United States for years wrestled with North Korea's nuclear program, unable, really, to find an effective way to deter the creation of that program. Many, many approaches were tried, but there isn't anything that has been as dramatic as the Bush administration's decision to squeeze Banco Delta Asia.

As we remember in December of 2005, the Treasury Department imposed Patriot Act Section 3.11 sanctions against this small, Macau- based bank. As Treasury stated, "This financial institution was a primary money laundering concern because senior officials in the bank are working with North Korean officials to accept large deposits of cash, including counterfeit U.S. currency and agreeing to place that currency into circulation." A top Treasury official even called it a "welling pond" for the North Korean government.

I visited the government in Macau some years ago to raise concerns about this activity and to protest this money laundering of counterfeit dollars. But I want to make the observation that the action by the administration targeting that bank did a great deal to get the attention of Pyongyang. It set off a chain of events that showed the power of the market and caused the North Koreans to come back to the nuclear negotiating table.

First there was a run on the bank, and that forced the Macau government to seize control and freeze approximately 25 million (dollars) in North Korean assets. Perhaps a greater consequence was the message that was sent to bankers throughout the region about the pitfalls of dealing with the North Koreans, leading several -- and as a consequence of that, several cut ties to the regime.

Pyongyang came back to the table, and when they did they wanted to talk about one thing. They said they wanted to talk about the money. United States willingness to discuss Banco Delta Asia led to the February 13th agreement. There's a lesson in this for us today at this hearing.

In recent testimony before the Foreign Affairs Committee, Assistant Secretary Hill testified regarding the six-party talks that we have not and will not trade progress on denuclearization by turning a blind eye to some of these illicit activities.

It appears, however, that we have done just that. And that I think is the other lesson: not to let up -- not to let up -- when you are using sanctions. And in the past few weeks the United States has gone from willing to return legitimate portions of the 25 million (dollars), to offering to return the funds to North Korea for the betterment of the North Korean people, to returning the ill-gotten proceeds carte blanch.

Kim Jong Il knows that he's getting his 25 million (dollars) back, but as of this moment, I'm still not sure what the United States is getting. And that is why once you start down this road with sanctions you've got to follow through. You have to be tough.

The "Dear Leader" has also gotten the signal from the United States that there will be no price to pay for his counterfeiting. I'm concerned, and as long as he puts forth promises on his nuclear program, the United States will bend its laws when it comes to other regimes counterfeiting our currency.

Concessions to North Korea on the financial front come as we are having some similar success against the regime in Iran and are finally considering turning up the financial heat on Sudan, which is engineering a genocide. I am disappointed that the president didn't go farther this morning during his Sudan speech and give Treasury the green light to cut off Sudan's dollar transactions with the U.S. financial system.

We have waited long enough. I've been to Darfur; I've been to camps that have been attacked, talked to survivors. Genocide is indeed occurring there. It is time for the United States to take this kind of decisive action.

The Treasury Department's campaign to explain to leading financial institutions in Europe and around the world the risk of doing business with Iran has induced many, many companies to significantly scale back or terminate their Iran-related business. As a consequence, Iran is having a harder time moving hard currency around the globe. This is harming its economy. Hopefully, it's harming it and undermining the support for its nuclear program. Certainly, high unemployment is part of the consequence. High interest rates in the country, inflation in the country is part of the consequence of private banks moving out of Iran.

The private banking sector, however, has been a lot quicker than parent governments to comprehend the threat posed by Iran, and that's perhaps best exemplified by the European stance on their export credits to Iran. We have the private companies pulling out, we have the private banks pulling out, but we have the government with their European subsidies to investments that otherwise wouldn't be made -- we have those continuing.

The latest U.N. resolution urges countries not to enter into new commitments for grants and financial assistance to Iran. But given the British experience, who found no takers when they asked their fellow Europeans to scale back on export credits during the hostage crisis, this will be an uphill climb with these governments.

Given this outlook, many in Congress prefer the approach of pressing sanctions against Europeans' energy companies that continue to invest in Iran's oil and gas sectors. The financial measures the United States has employed to face the challenges posed by Iran and North Korea have been potent, yet we'd be naive to think that there is a single silver bullet or cookie-cutter sanctions approach when it comes to facing such complex challenges. As Iran, North Korea and elsewhere, we have to take these approaches in tandem and apply them together with seriousness.

REP. SHERMAN: Thank you, Mr. Royce.

Now, the distinguished senior chairman here, Mr. Gutierrez from Illinois, who I want to thank for putting together these joint hearings, and I think these joint hearings are an excellent way for two committees to work on a very important problem.

Mr. Gutierrez.

REP. LUIS V. GUTIERREZ (D-IL): Well, thank you, Mr. Chairman. I want to especially thank you, Congressman, for approaching me with the idea of this joint hearing.

The comity we are demonstrating today is a good indicator that our two subcommittees and our full committee counterparts are working together to address the issues of proliferation and that addressing this issue is a priority for the 110th Congress.

I hope that our spirit of cooperation is mirrored by the executive department and agencies we oversee, particularly the ones we have testifying before us today, because interagency cooperation is vital to the success not just of any sanctions we impose but of stopping proliferators and state support of terrorism all together.

I will keep my remarks brief as I want to hear from our witnesses and there is a possibility we may be interrupted for votes. But there is no way to overstate the importance of this issue in terms of our foreign policy. From genocide in Darfur to nuclear weapons programs in Iran and North Korea, I believe that some form of economic sanctions or divestments have to play a pivotal role in our response.

I support U.N. sanctions, but I question the effectiveness of those sanctions, and I believe the U.S. needs to take a serious look at enhancing our unilateral measures. My subcommittee has already held the legislative hearings on Congresswoman Barbara Lee's Darfur divestment bill, and I hope the Financial Services Committee can move a version of that bill in the coming weeks.

Today I would like to hear from both our panels on the effectiveness of economic sanctions in general, specifically whether our current sanctions are working against Iran and what changes should be made going forward.

I want to thank all of the distinguished witnesses from both of our panels for appearing today to provide us with their insight.

And I yield back the remainder of my time.

REP. SHERMAN: Thank you, Chairman Gutierrez. And now the ranking member of your subcommittee, Mr. Paul.

REP. RON PAUL (R-TX): Thank you, Mr. Chairman.

I understand the concerns of my colleagues about the various nations that have been abusive with their rules and laws in their country. I share those concerns and I share the goals sought by those who support sanctions. But I do not share their same opinions. I have a different opinion regarding the success of sanctions. And my concern is very general and very philosophic. It is in no way a reflection of any sympathy for the authoritarian regimes such as we have running Iran right now.

And I say that with sincerity because, quite frankly, I think sanctions too often make things worse rather than better. I strongly oppose any move to initiate further sanctions on Iran. Sanctions are acts of war and expanding sanctions on Iran serves no purpose other than preparing the American people for an eventual attack on Iran. This is the same pattern we saw in the run-up to the war on Iraq.

Congress passes legislation calling for regime change, sanctions are imposed, and eventually we are told that only an attack will solve the problem. We should expect the same tragic results if we continue down this path. I urge my colleagues to reconsider.

I oppose economic sanctions for two very simple reasons. First, they don't work as effective foreign policy. Time after time, from Cuba to China to Iraq, we have failed to unseat despotic leaders, to change their policies by refusing to trade with the people of those nations. If anything, the anti-American sentiment aroused by sanctions often strengthens the popularity of such leaders, who use America as the convenient scapegoat to divert attention from their own tyranny.

History shows that free and open trade does far more to liberalize oppressive governments than trade wars. Economic freedom and political freedom are in inextricably linked. When people get a taste of goods and information from abroad, they are less likely to tolerate a closed society at home. So sanctions mostly harm innocent citizens and do nothing to displace the governments we claim as our enemies.

Second, sanctions simply hurt American industries, particularly agriculture. Every market we close to our nation's farmers is a market exploited by foreign farmers. China, Russia, the Middle East, North Korea and Cuba all represent huge markets for our farm products, yet many in Congress favor current or proposed trade restrictions that prevent our farmers from selling to the billions of people in these areas.

We must keep in mind that Iran has still not been found in violation of the Non-Proliferation Treaty. Furthermore, much of the information regarding Iran's nuclear program is coming to us via thoroughly discredited sources like the MEK, a fanatical cult that is on our State Department's terror list. Additionally, the same discredited neoconservatives who pushed us into the Iraq war are making similarly exaggerated claims against Iran. How often do these experts have to be proven wrong before we start to question their credibility?

It is said that we non-interventionists are somehow isolationist because we don't want to interfere in the affairs of foreign nations. The real isolationists, in my opinion, are those who demand that we isolate certain people overseas because we disagree with the policies of their leaders. The best way to avoid war, to promote American values and to spread real freedom and liberty is to engage in trade and contacts with the rest of the world as broadly as possible and to set an example here at home so others will want to emulate us.

I urge my colleagues to reconsider this counterproductive and dangerous move toward more sanctions on the various countries. And I yield back the balance of my time.

REP. SHERMAN: Thank you.

Now the chairman of the full Foreign -- correction, Financial Services Committee, Mr. Frank.

REP. BARNEY FRANK (D-MA): Thank you, Mr. Chairman. I am particularly pleased that we have taken, the two committees, the unusual step of a joint hearing. And I hope that will be an indication of the seriousness with which we address this issue.

And I think that sanctions have proven their worth if they are appropriately applied. One of my proudest moments as a public official was standing in Statuary Hall with hundreds of my colleagues and hearing Nelson Mandela thank the Congress of the United States for overriding a veto by President Reagan and passing a sanctions bill which Nelson Mandela told us was critical to the establishment of freedom for him to the end of apartheid.

Now, obviously unilateral sanctions are often counterproductive. Sanctions can be badly done. But when there is a worldwide consensus, sanctions can be useful. I believe information we are now getting from Iran shows that it is not a monolith and that in fact sanctions appropriately applied can have some impact on the decisions being made by the government of Iran.

There are combined jurisdictions here. The Financial Services Committee jurisdiction deals with a couple of things, which I would say to my good friend from Texas really reduce the influence of government in general and the federal government and are in fact aimed at enabling other entities to make decisions on their own.

Let me begin with the most, to take a phrase, libertarian of all. Namely, when people have approached investors who are fiduciaries, who invest on behalf of others, and say, "Don't enable Sudan to engage in genocide by investing in these companies; don't enable Iran to engage in its saber rattling and its adventurism and potential nuclear weapons acquisition," they are often told: "Well, you know, we sympathize, but we have a fiduciary responsibility to make every last nickel. And if we can make every last nickel by investing in Sudan or Iran or in companies that do business, we are obligated to do so."

The legislation we are contemplating in our committee would not mandate anybody do anything. But it would enable them to do it if they want to. Essentially, I regard this as the kind of (anti/Auntie ?) Geraldine legislation, for those who remember Flip Wilson. We go to companies and say, "You should not invest with these people," and they say, "Well, the devil makes me do it." And our legislation will say no, the devil doesn't make you do it anymore; the devil here being this claimed fiduciary responsibility.

So what we are talking about doing is freeing companies from the fear of being sued. And those who tell me that they think we have far too much intrusion from the legal system in the affairs of companies should be doubly supportive of this bill, because from our committee's jurisdiction, we are going to say that if a company decides for a variety of reasons, reputational risk and other things, that they will divest from a particular country which is doing these bad things in the way in which we will be listing these as part of the bill, then they may do so without fear of lawsuit. That is not an intrusion into the affairs of these companies. It is freeing them from a restriction.

Similarly, we have had states told -- my own state of Massachusetts tried to boycott the outrageous regime in Burma with state money and was enjoined from doing so in a case that was ultimately decided by the Supreme Court. But the Supreme Court appeared to say this could be done statutorily. And so what we think we should do is let the states decide what to do with their own money. We are not contemplating letting a state mandate private investment decisions. We are contemplating empowering states with their own money, by their own democratic processes to make these decisions.

So those are two aspects. I know there are other aspects of the bill, but the two particularly relevant to our committee I believe empower these entities.

If the gentleman was asking me to yield I --

REP. PAUL: Yeah, I'd like to have you yield for just a minute. You know, if what you say is true and is truly voluntary, I would not put that in the category of a sanction. And quite possibly, I will be studying that very closely, because I think voluntary sanctions are quite all right.

REP. FRANK: Well, I appreciate that. And I don't mean by this to conclude on any other part of the argument. There are different jurisdictions. But within the jurisdiction of the Financial Services Committee, that's what we contemplate doing, and what we are saying is we think this will allow the American people who, you know, have clearly shown their revulsion at the outrageous mistreatment of people in Sudan -- the genocide -- who have shown their -- how appalled they were by the outrageous claims of the Iranian government about the Holocaust, about Israel's right to exist, about nuclear weapons and about other things. We will be empowering private entities and states to make their own decisions.

And I thank my friend from Texas. I -- we get together on this, maybe we'll get the rest of them to come with us on gambling.

REP. SHERMAN: Thank you, Mr. Chairman.

Is there any other member that wants to make a brief opening statement? I'll ask you, Mr. Scott, to keep it brief and you are vice chair of our committee, so please proceed briefly.

REP. DAVID SCOTT (D-GA): Thank you. Certainly, I will be brief, because I like to get right to the meat of it. But I would like to certainly put on the table I think that any meaningful discussion today would certainly have to include a discussion on just what the Russians are up to. I mean, what good are sanctions if you've got a country like Russia who's in the process of completing a $750 billion arms deal to Iran? What -- and what must we do to bring Russia into the sphere of cooperation with sanctions?

China, the same thing: How effective are sanctions if we go this route? Because I think it begs the point that my colleague Mr. Paul was mentioning. I mean, is -- can sanctions really work? Iran is continuing to move forward.

The other point I would like to certainly hope we put on the table is the issue of the sanctions on the processed gasoline that's coming back into Iran. I mean, I -- there seems to be some hesitancy there, and that's where we can really hit them if we're going to deal with sanctions. You can hit them where they hurt. They've got all of this raw processing of petroleum, but they don't have the internal refinery capacity to refine any gasoline. They have to import that in.

So I think those are two points on the refining of the gasoline as a force of (end point ?). And then to really discuss these issues of what the Russians and the Chinese are really up to -- (inaudible).

Thank you.

REP. SHERMAN: Thank you. I hope we can now --

REP. STEPHEN LYNCH (D-MA): Mr. Chairman? Mr. Chairman?

REP. SHERMAN: Yes?

REP. LYNCH: May I?

REP. SHERMAN: Briefly.

REP. LYNCH: Very briefly. Thank you, Mr. Chairman -- Chairman Sherman, Chairman Gutierrez.

I have a special role in terms of -- I co-chair the special task force on anti-terrorist financing, along with Mr. Royce. I just came back from -- a couple of days ago from Iraq, Afghanistan, Turkey and Jordan for the specific purpose of trying to tighten up some of the anti-money laundering and anti-terrorist financing legislation in those countries.

And I want to say how happy I am that we've got a joint hearing going on this and I think it's one of the most fertile areas for us to actually make an impact on the conduct of some of these countries. And it's not -- it's not simply an issue of us asking these countries to do the right thing for reasons of democracy. But I think the sensitivity here is that many of these countries, from an anti- terrorist financing standpoint and an anti-money laundering standpoint, want the investment from the international markets, and that's where the pressure points are. And I think they will respond to that.

I do want to say there's a couple of examples of our success. One, on December 14th President Haniya from the Palestinian Authority was caught bringing $30 million in cash in a suitcase across the Rafa Gate into Egypt -- from Egypt, rather, into -- trying to get into the Gaza Strip. And that tells me that he can't wire that in. That's his problem, and that's a good thing.

Secondly, we intercepted a letter from Ayman al-Zawahiri some time ago, asking for $100,000 from his -- from his compatriots in al Qaeda, which tells me he's running short on money as well. So these are fertile areas where I think we can make an impact. And I want to join with the committee chairs and ranking members to make that happen.

With that, I'll yield back.

REP. SHERMAN: Thank you.

We'll now hear from our first witness, Ms. Patricia McNerney, the principal deputy assistant secretary for the Bureau of International Security and Nonproliferation. Her bureau leads the State Department effort to prevent the spread of nuclear, chemical and biological weapons and their delivery systems. Thank you.

 

STATEMENT OF

PATRICIA MCNERNEY
Principal Deputy Assistant Secretary,
Bureau of International Security and Nonproliferation,
U.S. Department of State

 

MS. MCNERNEY: Thank you, Mr. Chairman, and ranking members.

I'm pleased to have the opportunity today to address one of the most serious threats to international peace and security: how to keep the world's most dangerous people from acquiring and using the most destructive weapons.

The Bush administration has pioneered some innovative approaches and developed more flexible programs and initiatives to combat the proliferation of weapons of mass destruction, including by developing proliferation-related financial and economic measures, the subject of today's hearing.

I'd like to highlight the steps we are taking to impose financial costs on proliferators, the regimes that proliferate, as well as those that facilitate and support them. Proliferators rely upon support networks to facilitate their trade, which includes supporters, financiers, logistical support, fund companies, asset shippers and facilitators.

Similar to international criminal networks, proliferation networks operate for financial gain and depend on the international financial systems to carry out their transactions and business deals. We have a number of initiatives to prevent and disrupt shipments of concern, but have also increased our work in the financial area as proliferation networks are highly vulnerable to disruption of financing and support.

While the United States has the authority to take actions unilaterally with significant impact, an important element of our effort has been to broaden and deepen international cooperation to strengthen the impact of these actions. Key to this effort has been our work in the Security Council to multilateralize these efforts.

U.N. Security Council Resolution 1540, adopted in 2004, creates broad Chapter 7 legally binding requirements on all states to criminalize the proliferation of weapons of mass destruction, including the financing of proliferation. U.N. Security Council Resolution 1695 and 1718, adopted in 2006, prohibits states from supporting North Korean proliferation and provides a process for designating specific entities for an asset freeze.

U.N. Security Council Resolution 1737 and (17)47, adopted in 2006 and 2007, among other requirements prohibits states from supporting Iran's enrichment and heavy water nuclear program, as well as the ballistic missile program and specifically designates 50 entities and individuals and requires nations to freeze their assets.

As part of our diplomatic work to insure implementation of these resolutions, we're cooperating with nations to strengthen national legal authorities to carry out these mandates. For example, we are working through existing mechanisms like the Financial Action Task Force, which my Treasury colleagues will discuss in more detail, to augment legal authorities as well as through the Proliferation Security Initiative, to strengthen information sharing between the 80 partner nations.

Developing nontraditional tools to disrupt proliferators led to the issuance of Executive Order 13382. President Bush signed this order in June of 2005, authorizing the U.S. government to freeze assets and block transactions of entities and persons engaged in proliferation activities. It also denies persons designated under the order access to the U.S. financial markets and prohibits U.S. persons, wherever they are located, from transacting or dealing with such entities.

To date, the United States has designated 35 entities and two individuals under the executive order, including entities and individuals from Iran, North Korea and Syria. Most recently, the Department of State used its authority under the executive order to designate defense industries organization of Iran, one of the entities identified in the annex of the Security Council Resolution 1737.

The executive order designations in concert with strong diplomatic approaches have prompted responsible financial institutions around the world to take a closer look at their own operations and to deny financial services to entities involved in proliferation.

As a result of the loss of access to many financial institutions, proliferators and the illicit actors supporting them have been forced to wage an aggressive campaign to reconstitute their financial networks, combing the world in search of banks willing to handle their business. It is for this reason that gaining international support for our efforts is an essential element of our ability to insure proliferation networks are denied financial services worldwide.

We have seen a gradual increase in the readiness of our partners around the world to work with us to insure that proliferators do not find easy access to these global financial institutions. For example, Japan and Australia join the United States in designating each of the North Korean entities designated under our executive order. The Royal Bank of Canada restricted entities and individuals from a number of countries of concern, including North Korea, Iran, Syria and others.

The European Union adopted a strong common position to implement the asset freeze required by the Security Council Resolutions 1737 and 1747, as well as to designate some additional entities and individuals. The EU common position also takes positive steps beyond the mandate of the U.N. resolution by imposing a travel ban on named individuals, a complete embargo on arms transfers to and from Iran and prohibiting new commitments for grants, financial assistance and loans.

As part of our diplomacy, we have worked with Treasury to engage foreign governments and private firms, reminding them of the financial and reputational risks of doing business with Iran. When possible, we have shared information with governments of proliferation-related transactions to insure financial institutions have a full understanding of the activities of their customers. This has yielded results.

Additionally, the Islamic Revolutionary --

REP. SHERMAN: Excuse me; I have been tapping to indicate that you need to wrap up. You're now well over time.

MS. MCNERNEY: Okay.

REP. SHERMAN: You have a couple of concluding sentences?

MS. MCNERNEY: I just want to mention the Islamic Revolutionary Guard Corps, a key element of Iran's regime to support international terrorism and proliferation, is taking an increasing influential role. For this reason, we've worked with many of our partners in the Security Council to designate a number of the entities engaged in proliferation.

Our -- obviously our overall approach is to target -- collaborate with our international partners, and many of these efforts have been positive in that regard.

REP. SHERMAN: Thank you for your testimony.

Next I welcome Paul Simons, deputy assistant secretary of State in the department's Bureau of International Energy, Sanctions and Commodities. Mr. Simons is the principal State Department official responsible for overseeing U.S. efforts to minimize the impact of international crime and halt the entry of illegal drugs into this country.

Knowing that he can confine his statement to five minutes, Mr. Simons.

MR. SIMONS: Thank you, Mr. Chairman. Actually that was my previous assignment, but I'm happy to continue that -- the reference to that.

Thank you for the opportunity for -- to discuss this afternoon the economic dimensions of our strategy to address unacceptable behavior by regimes such as Iran, Sudan and North Korea. I would ask that my full statement be entered into the record and I'd just like to make a few brief remarks --

REP. SHERMAN: All statements -- all full statements will be entered into the record without objection.

 

STATEMENT OF

PAUL E. SIMONS
Deputy Assistant Secretary,
Bureau of Economic, Energy and Business Affairs,
U.S. Department of State

 

MR. SIMONS: Thank you, Mr. Chairman.

The main point I'd like to make, and I won't take up much time because I think Deputy Assistant Secretary McNerney has really summarized it very well, is that smart sanctions in combination with other diplomatic and financial levers really represent a quite useful tool to bring pressure to bear on regimes around the world to change course.

And the U.S. and the international community more broadly have been moving away from broader countrywide sanctions in favor of smart sanctions. We've done this rather effectively in the United Nations context, and it has largely been as a result of U.S. leadership in the U.N. that we've been able to move the rest of the international community to accept smart sanctions as an important element in the toolbox.

Targeted or calibrated sanctions make it clear that we're not taking aim, for example, at innocent civilian populations, but rather at those individuals or entities who are specifically responsible for the dangerous behavior of a particular regime. In my written statement I've provided more details on exactly how we're approaching Iran, Sudan and North Korea with respect to the use of these targeted multilateral sanctions.

But I'd just like to conclude on one point. Several of your members asked, are there any examples of success stories on sanctions? And I would like to note that this morning, the United States introduced in the United Nations Security Council a new resolution that would lift for the first time in five years the diamond embargo on the country of Liberia. The U.N. Security Council in 2003 imposed this diamond embargo, and largely as a result of putting those sanctions in place, the Liberian government came around, developed the capacity to manage its diamond industry in a responsible way and prepared the ground for a lifting of those sanctions.

And I think the Liberia diamond experience as well as our broader experience through the Kimberley Process, the multilateral process that governs trade in "conflict" diamonds, is a good success story for sanctions. It was a multilateral process. The U.N. was involved. We have 99 percent of global trade in rough diamonds now brought under a single, multilateral -- it's basically a sanctions regime, because if you're not in the group, you can't trade diamonds. So again, I think it's a good example of multilateralism and sanctions and targeted sanctions achieving their desired impact.

Thank you, Mr. Chairman.

REP. SHERMAN: Thank you for your brevity.

I welcome Adam Szubin, director of the Treasury Department's Office of Foreign Assets Control, who is responsible for administering and enforcing the United States government's economic sanctions programs.

 

STATEMENT OF

ADAM J. SZUBIN
Director, Office of Foreign Assets Control,
U.S. Department of the Treasury

 

MR. SZUBIN: Thank you, Chairman Sherman.

Chairman, Ranking Member, and distinguished members of the subcommittee, thank you for the opportunity to testify on the vitally important issues of isolating proliferators and state sponsors of terrorism.

The subject of today's hearing, "The Use of Sanctions and the International Financial System to Change Regime Behavior," speaks to the core purpose of my office, the Office of Foreign Assets Control, and the broader office of Terrorism and Financial Intelligence at the Department of Treasury. Our central mission is to use sanctions in a forceful and sophisticated way to pressure and isolate those who threaten our national security and to alter their behavior.

Impact for us is typically measured in degrees of isolation rather than in dollars frozen. If a state sponsor of terrorism begins to fear that its trade partners are withdrawing, cutting off ties, that is a success. If a proliferation firm is rejected when it applies to transfer money or to open a bank account that is a success. Our objective is not sanctions for their own sake, of course, but to alter the decision-making calculus of state sponsors of terrorism and proliferators.

We are therefore always looking to act in a concerted matter internationally, either with a coalition of like-minded states or at the United Nations. And we work closely with the State Department and with our fellow finance ministries and central banks abroad to achieve those ends.

A key if possibly counterintuitive lesson that we have learned is that less can be more. Targeted sanctions, narrow sanctions against specific individuals or entities that have violated international code, whether they be counterproliferation, counterterrorism, anti- money laundering norms, may have a bigger impact than traditional embargo-type sanctions. This is so because broad sanctions are often viewed by the private sector as obstacles to be worked around.

By contrast, when we designate specific targets on the basis of such egregious conduct as we're discussing today, private actors, private banks, export firms will often hasten to echo our steps even voluntarily, even foreign firms. It is the rare international bank that is willing to host the business of terrorist groups, and the vast majority are of course eager for more information that we can provide to protect their business against such an infiltration and abuse.

This is why we take such pains to build evidentiary packages needed to spread the word about the behavior of those that we target and why we work so closely with the intelligence community to make sure that we can declassify portions of our record to explain why we're doing what we're doing.

By moving in tandem with rather than against the natural inclinations of the private sector, our sanctions have resonated across the international financial sphere, delivering a widespread and tangible impact. Our credibility and our influence can be as decisive here as our legal authority.

With respect to North Korea and Iran, in the past year, we've taken many significant steps both alone and in concert with others to impose targeted financial measures, and we have seen the result. North Korea was already a relatively isolated state, but its nuclear weapons test and its brazen illicit conduct has led to its virtual excommunication from the world financial sector. In the banking world, North Korea is now a pariah. This is the result both of our actions but also of Kim Jong Il's regime. It is his behavior that has caused them to be excommunicated.

Iran with a developed and heavily integrated economy presents a very difficult -- different scenario. Time does not allow me to outline the array of escalating steps that we and our partners have taken over the past two years to spotlight Iran's reckless behavior, but I would like to highlight just one example.

We at Treasury designated Iran's bank Sepah in January of this year for its role in facilitating the proliferation activities of the Iranian government. Our action carried financial consequences but was as notable for what it said as for what it did. This major bank, one of the largest in Iran with branches and accounts across the world, was actively facilitating Iran's missile industry, financing and processing dozens of multimillion-dollar transactions for Iran's aerospace industries organization.

As a result of our action, banks in the United States were legally required to cut off relations, even direct, with Bank Sepah. But banks in Europe, Japan and other financial centers also responded, limiting or cutting off entirely their ties to this bank of their own accord. And thanks in part to the dedicated work of our State Department, Bank Sepah was then designated at the United Nations in March with the result that all countries worldwide are required to freeze its assets. Now one of Iran's largest banks stands to lose access to the world financial market and to the world's currencies, without which a bank simply cannot survive.

The lesson to Iran and North Korea as well as to those that would handle their proliferation activities could not be more clear. Together with my colleagues at this table and throughout the government, we will continue to direct all of our capabilities and resources against those that threaten our nation. As we do so, I look forward to working closely with your committees.

Thank you again for the opportunity to testify today.

REP. SHERMAN: Let me point out that, without objection, not only will all of the witness statements in full be made part of the record but all opening statements of a written nature from members will be made part of the record.

With that, let's make -- go through to our last witness, Daniel Glaser, deputy assistant secretary at Treasury in the Office of Terrorist Financing and Financial Crimes. Mr. Glaser is the primary Treasury Department official responsible for the development and coordination of international anti-money laundering and counterterrorist financing policy.

 

STATEMENT OF

DANIEL GLASER
Deputy Assistant Secretary,
Office of Terrorist Financing and Financial Crimes,
U.S. Department of the Treasury

 

MR. GLASER: Thank you, Chairman Sherman, Chairman Gutierrez, Ranking Members Paul and Royce, and distinguished members of the subcommittee for this opportunity to discuss these sanctions and other targeted financial measures to isolate proliferators and sponsors of terrorism.

This is an important topic that touches at the heart of our efforts to protect and safeguard the nation from threats that are truly unthinkable. The proliferation of weapon of mass destruction is chief among these threats.

Since September 11th, and even before, our focus at the Treasury Department has been to apply our authorities and financial expertise to stop the flow of money to terrorists and others who would seek to harm our citizens. In this effort, it is critical that we continue to use every tool at our disposal, including the financial pressure and leverage that sanctions and other financial measures offer. These measures are not a silver bullet, but it is becoming increasingly clear that they are an indispensable component to any comprehensive strategy to counter national security threats.

Over the last five years, we have increased substantially our understanding of the vulnerabilities in the international financial system and how terrorists and other illicit financial networks exploit those vulnerabilities. At the same time, we have steadily enhanced our skill and sophistication in applying the financial tools that we have at our disposal to close those vulnerabilities, disrupt and dismantle illicit financial networks, and apply pressure on the states that provide terrorists support and comfort.

We have learned by communicating with the international private sector that we could make the international financial system a hostile environment for terrorists, financiers and other illicit actors. We have worked with our allies and through international organizations to build a multilateral regime that leaves terrorists, financiers and supporters little room to operate in the international financial system.

Armed with this expertise gained in the fight against terrorism, we are now focusing similar efforts on WMD proliferators and their support networks. Four initiatives are worth noting right now.

First, we have worked closely with our State Department colleagues to create multilateral regime to apply targeted financial measures to proliferation. Thanks to these efforts, we now have multiple Chapter 7 U.N. Security Council resolutions that apply targeted financial sanctions to individuals and entities involved in Iran- and North Korean-related proliferation activity.

Second, we have launched an effort within the Financial Action Task Force to establish a consistent and effective global approach to the implementation of those resolutions.

Third, we have employed a range of Treasury authority, including targeted financial sanctions under Executive Order 13382, to isolate and disrupt illicit financial networks. We have also employed Section 311 of the USA Patriot Act to identify and safeguard the U.S. from money laundering vulnerabilities in the international financial system.

One well-known example, actually referenced by Mr. Royce, is Treasury's designation of Banco Delta Asia as a primary money laundering concern. Through this action, we have protected the U.S. and international financial systems from a bank that systemically failed to apply appropriate standards and due diligence, as well as facilitated a gamut of deceptive financial conduct on behalf of North Korean-related entities.

Finally, Treasury is engaged in unprecedented high-level outreach to the international private sector that is focused on sharing information about deceptive financial behavior. For example, Treasury officials have met with more than 40 banks worldwide to discuss the threat Iran poses to the international financial system and to their institutions. In fact, Undersecretary Levey is in Europe having these types of discussions even as we speak.

The result of these efforts has been remarkable. It is clear that our efforts have not had just direct impact on the targeted entities, but have also unleashed market forces that are making the international financial system an increasingly difficult environment for those who would use it for illicit purposes.

In the case of Iran, financial institutions and other companies worldwide have begun to reevaluate their business relationship with Tehran as evidence of Iran's deceptive practices mount. Many leading financial institutions have either scaled back dramatically or even terminated their Iran-related business entirely. They have done so of their own accord, many concluding that they did not wish to do -- to be the banker for a regime that deliberately concealed the nature of its dangerous and illicit conduct.

Likewise, North Korea's increasing isolation from the international financial system is driven by the individual decisions of hundreds if not thousands of international financial institutions that the anti-money laundering risks of doing business with North Korean-related entities outweighs the potential profits.

I would close by offering a thought on the potential for future use of sanctions and other financial measures. We are just discovering the full impact and the power of the authorities and financial levers we have at our disposal. Prior to September 11th, targeted financial measures were not regarded as an important component of our strategic response to national security threats. Today, they are central to our approach to virtually all national security threats. This is the case because financial measures are working. There are few actions that we have taken that have been as effective in grabbing the attention of our targets and in imposing real consequences.

Treasury remains committed to fine-tuning our application of financial and protective measures so that we can -- so that they can be used effectively against any threat at any time with a high level of success.

Thank you, Mr. Chairman.

REP. SHERMAN: Thank you.

I want to thank all the witnesses here not only for their presentation but for their hard work day to day. But let's not kid ourselves. We have not yet changed the behavior of Iran or Sudan, and we have not used but a -- the little finger on -- of our ability to impose sanctions, because every time the slightest peep of opposition comes from any -- even moderately powerful entity here in the United States, we back off.

My best example is that the epicureans don't want to survive without Iranian caviar, and if we -- if our nonproliferation policy must bow down to the power of epicureans here in Washington, you can imagine how we react when the oil companies object to policy.

Perhaps the best example of how we react to the power of oil companies here is that -- lays the basis for a question I'll ask Mr. Simons.

We passed the Iran-Libya Sanctions Act; worked against Libya because we actually applied it. Neither administration was willing to apply it with regard to investments in Iran.

As part of my written opening statement I've entered into the record a chart prepared by CRS listing hundreds of billions of dollars, or tens of billions of dollars, of investments made in the Iranian oil sector. Most of these are not secret. CRS doesn't have classified information. In fact, most of these investments were reported officially to shareholders and in the financial press.

The attitude of the State Department tends to be that if Congress passes a law and you think it's bad policy, you just ignore the law. I'm not sure that constitutional scholars agree that that ought to be the approach. Is it your position that you're simply unaware of any oil company that has made a $20 million investment in the Iranian oil sector, or is it your position that you just don't have to follow the law?

MR. SIMONS: Thank you, Mr. Chairman, for that question and I'll do my best to clarify the administration's position on this.

Let me state up front that the administration was very involved last year --

REP. SHERMAN: Sir, I'll ask you to address the question extremely briefly. We have very little time.

MR. SIMONS: Thank you.

Point number one, the administration was very actively involved with Congress last year in reauthorizing the Iran Sanctions Act for an additional five years.

REP. SHERMAN: They've ignored it the last five years; they'll continue to ignore it. Why are -- the question is not do you allow the law -- it to become law; the question is, why do you not follow the law?

MR. SIMONS: Second point, we have utilized diplomacy very actively and utilized the law in high-level demarches around the world with our major partners.

REP. SHERMAN: The law doesn't provide for high-level demarches.

The statute says you acknowledge and publicize the fact that the oil company made the investment, and then you either waive or impose sanctions. Do you have to follow the law or just kind of use it the way you want to?

MR. SIMONS: Well, with respect to how we specifically look at the administration of the law, I think it's important to --

REP. SHERMAN: Sir, I asked you a very specific question. Is it your position that no oil company has made a $20 million investment in Iran since the act became law, yes or no?

MR. SIMONS: Mr. Chairman, the pace of investment in Iranian oil sector has gone down considerably over the last three years --

REP. SHERMAN: Yes -- has there been a $20 million investment or do you just not want to answer the question?

MR. SIMONS: We believe that the pace of investment in Iran oil sector --

REP. SHERMAN: Has there been a $20 million investment or are you going to filibuster? This is not the Senate.

MR. SIMONS: Well, Mr. Chairman, I am trying to explain. I'm trying to give the best possible answer.

REP. SHERMAN: I asked yes or no. Has there been a $20 million investment? Are you going to answer the question or not?

MR. SIMONS: I am going to explain it to --

REP. SHERMAN: In other words, you're not going to answer the question.

I'll move on to our friends from Treasury. Treasury has jurisdiction over the U.S. membership in the World Bank. Which is the bigger problem: the fact that the World Bank distributed $193,500 to Mr. Wolfowitz's friend, or the fact that since Mr. Wolfowitz is there, it has disbursed over $400 million to the government in Tehran?

Mr. Szubin?

Or Mr. Glaser?

MR. SZUBIN: I am not an expert on the World Bank issues, but what I can say is to the extent I'm familiar with the assistance they have extended to Iran, its primarily for humanitarian and development purposes, which is not --

REP. SHERMAN: Okay, let me interrupt. We're all politicians here. We know something about how a government stays in power. You stay in power by bringing home the pork. Now, I know it's not (Hillel ?), it's not kosher, but it is pork. And when you allow Iranian officials to cut the ribbons on giant projects in northern cities in Iran, you help that government stay in power.

Now, with that in mind, what has Treasury done to prevent the disbursement of this over $400 million, of roughly a quarter of it are tax dollars, to help the government of Iran stay in power?

MR. SZUBIN: I really should be cautious here. My understanding is that the U.S. has opposed these votes --

REP. SHERMAN: The U.S. has opposed in the most quiet words possible and only because statute, which at least your department technically follows, requires them to vote no. But they have done nothing to the World Bank over this and they still ask us to appropriate and reauthorize as if nothing ever happened.

I see that my time has expired. I will ask State to respond for the record as to why we are still importing $170 million worth of goods from Iran every year, not oil but just the stuff that we don't need and they couldn't sell anywhere else.

I now recognize the gentleman from Texas, Mr. Paul.

REP. PAUL: Thank you, Mr. Chairman.

I have a question -- I think Mr. Szubin can be the individual to answer this, but anybody can respond -- it has to do with sanctions in general. You know, there's pretty good evidence that sanctions don't work.

I mean, when we talk about Cuba, they go on and on and on -- you know, these are my arguments that it's not a very good idea, and other countries as well that it hasn't really worked. And the other part of the argument is that it solidifies power; it actually helps the dictators rather than hurts them because they can have this scapegoat. And it also incites strong nationalistic spirit in those countries, and it unifies the country and actually diminishes any chance of dissent from those people who want to undermine the government that we're trying to undermine.

So it actually does the opposite of what we want. And too often the citizens get injured and not the dictators. That certainly happened for 10 years with Iraq, you know. It was admitted that 500,000 children may have died from those sanctions, and yet Saddam Hussein, until he was taken out, the sanctions really didn't hurt him.

And also, the argument that there's injury to our exporters too -- obviously, you know, we cut off exports, our people suffer. Our -- I have farmers in my district; there are countries that they used to export to. They could export to Cuba. So we injure ourselves too if we don't achieve our goals. These are all the arguments from us who object on principle against sanctions.

But what I'd like to know is, do you deny all these things that we argue? Or do you sort of say well, yeah, you know, that's partially true, but those are the acceptable costs? What would you answer to that question?

MR. SZUBIN: Thank you for the question. I think it goes right to the core of what we -- what we are considering constantly when we think about how to apply sanctions in a smart and effective way.

And the concerns about unintended consequences that you raise, the concerns about hurting the people of a country when it's really the regime's behavior that we're trying to change, are things that we look at very carefully in how we craft -- working with the State Department how we craft the dimensions of our sanctions.

I can give you some examples of that.

With respect to Iran, I think we can document some real successes in terms of applying pressure against the Iranian regime.

The example of Bank Sepah, which I gave you, is really remarkable, and I don't know if it's fully understood outside of the U.S. government, where you have one of the largest banks in Iran all of a sudden facing a worldwide -- basically a worldwide ban. If you think that's something that the Iranian government shrugs off, I can tell you they don't. They take that very seriously.

And the fact that all around the world countries are reducing export credits, saying we're not so comfortable with trade with this country; the fact that countries around the world are beginning to say we're going to cut off all dealings with you, and banks are beginning to say we're not going to handle your business, it's made an enormous difference in North Korea and in Iran. It's shaking them. And if it's not shaking the Ahmadinejads of the world, it's certainly making the elites of that country make a direct --

REP. PAUL: May I interrupt? Because I think we're not getting to the point of my question, and that is, do you think some of my concerns are real? Or do you just say well, that's not true, or that's just part of the problem and part of the costs and we have to accept that? Or are you saying -- you're arguing the case for sanctions being effectively applied and working okay. Does that mean that you deny that my concerns are ever something that we should be talking about?

MR. SZUBIN: No, no, not at all. I think -- to the contrary, I think it's your concerns exactly that have informed our approach to sanctions.

In other words, how can we apply sanctions in a way that take into account the concerns you're raising, that try to avoid unintended consequences, that try to avoid having the people of a country, as you say, feel like they resist the application of sanctions more than their own oppressive government. And so that's why we've been so careful to be targeted.

REP. PAUL: So -- excuse me -- but so you're in a way arguing that if you apply them more wisely, you're going to avoid these consequences, which I guess if that is the case, I think that it might be a dream. (Laughs.) But that is what you think your goal is is to --

MR. SZUBIN: That is our goal. And I don't want to overstate our successes or underplay the costs that come with sanctions. They do come with costs. What we try to do is minimize them. So we can't avoid them all together, but if they're going to be effective, they're going to deliver costs and some unintended consequences. We try to minimize them and be smart about them.

REP. PAUL: Okay. And I yield back.

REP. SHERMAN: Thank you.

I'll now yield to Mr. Scott, the vice chairman of our committee.

REP. SCOTT: Thank you very much, Mr. Chairman.

I'd like to start my question with, how much of an obstacle, in each of your opinion, is Russia to this process of sanctions working in Iran?

MS. MCNERNEY: Well, this last resolution we worked actually quite closely with Russia in terms of crafting Security Council Resolution 1747. We do have concerns, and I think we've expressed them publicly as well as to the Russians privately at many levels with their arms relationship that remains with Iran. We've expressed concerns about the Bushehr reactor, although Russia has delayed finalizing that, delayed the shipment of fuel as a result of concerns they have as well.

I think Russia is a key player, as is China, in a sanctions program that works from a multilateral standpoint, and to the degree that Russia steps up and increases its pressure, I think that's a very important element for an overall effective sanctions regime.

REP. SCOTT: Mr. Simons?

MR. SIMONS: Perhaps if I could just add one point that Undersecretary Burns raised when he was up here on the Hill several times in the last few weeks, which is that we're really at a different starting point from the rest of the world with respect to sanctions on Iran.

We've had unilateral sanctions in place for 29 years. The rest of the world has generally had open trade and investment regime with Iran, including arms sales in certain cases. And to bring the rest of the world around to our way of thinking has been a huge challenge, but we think we've had a fair amount of success since we started down this path two years ago.

We now have two consecutive Chapter 7 resolutions. We have language in the most recent resolution calling for a review of export credits. We're moving along on designations of individuals and entities involved in nonproliferation. This was really quite unthinkable a couple of years ago, so you really have to I think keep in mind that we're operating from different starting points and we're brining the entire rest of the world along. And this requires a certain amount of patient diplomacy.

REP. SCOTT: Thank you.

Mr. Glaser?

MR. GLASER: Well, certainly our interaction with our Russian counterparts has been more limited than in the State Department contacts. In our interaction with Russia on anti-money laundering counterterrorist financing issues, I think we enjoy a very close relationship with Russia both in the Financial Action Task Force and our bilateral -- and in our bilateral cooperation.

Russia has a very, very large financial system. They have over 1,000 banks in Russia, and certainly, we have discussed with our Russian counterparts concerns relating to the ability of illicit actors -- Iran, North Korea -- to access some of those banks. That's something we're going to continue to work on with Russia.

But overall, from a Treasury Department perspective, in our cooperation with Russia on anti-money laundering and counterterrorist financing issues, I think that we have enjoyed close cooperation.

REP. SCOTT: Well, let me ask you, how do you account for if Iran says they're not going ahead with their nuclear program for a nuclear weapon, that they're going for it for nuclear energy -- the one fact that looms out to us that says that might not be so is the quantity of what is called fissile material, which is the most critical component that goes the other way, and intelligence as we've learned that Russia has been the source of this?

So how do you -- how do we -- how do you -- you all seem to, from your comments, seem to treat Russia as being a rather benevolent friend here. But on that point alone, it says that we've got some serious back-channeling we need to do with Russia. And I am concerned that we're not doing enough of that, that we're not having the kinds of talks with these folks. I mean, you're saying one thing but that evidence.

Then the second point was at the basic -- the same time that the administration made the move to send two carrier units into the Gulf was at the point where the decision was made for the $750 million anti-aircraft defense mechanism that Russia has sold to Iran? And it seems to me that I don't believe that this country is putting enough emphasis on Russia in terms of what they've got to do.

So my -- and I see my time is moving on, but my point is that given all of that, what more do you think we could do in terms of incentives to get Russia to really play ball with the rest of the world, and particularly with us, to effectively deal and negate this threat in Iran? Because it's clear from what I have just said and information we're making (sic) that they're the main culprit of getting them in the position of being the threat that they are.

MS. MCNERNEY: Take that?

Well, I think there's a distinction there with the Bushehr reactor, which we've been concerned that Russia obviously has cooperated. But what's of particular concern and the focus of the IAEA as well as the U.N. Security Council is the uranium enrichment program. There we don't have information that Russia has been engaged in support for that program, which has the most nuclear weapons application.

At the same time, you are correct that it's essential that Russia be a party to any multilateral action to put pressure on Iran. I do think we have made progress in that regard. Russia looks at these problems differently. We obviously have a lot of work to convince them to look at the way we do.

There are larger regional contexts that are part of any dialogue we have with Russia. But certainly, at the highest level, there's regular contact. There's regular dialogue. And I think the fact that all of these Security Council resolutions have been adopted unanimously is an indication of Russia's role in putting the pressure on Iran in a way that they view as sufficient, but obviously, we'd like to increase that pressure.

REP. SHERMAN: Thank you. I believe the gentleman's time has expired.

I notice an extraordinary interest of Japanese media in these hearings and glad for it. I will point out that as in my written opening statement made part of this record the Inpex company of Japan has made a $200 million investment in the Iranian oil fields. They entered into that transaction in February 2004.

And in response to Mr. Scott's comments, I should point out that I have talked to everyone in the administration from the president to Secretary Rice urging that we recalibrate all of our policy toward Russia as necessary to secure their definitive support on proliferation and issues, particularly Iran. Unfortunately, they're not interested in changing any part of our policy toward Russia on, say, issues in Russia's back yard in order to get Russia to change its policy toward Iran.

Now I'd like to recognize our ranking member, Mr. Royce.

REP. ROYCE: Thank you, Mr. Chairman.

North Korea has been counterfeiting U.S. currency, and it's been reported that in recent discussions with the North Koreans and in addition to seeking an end to action against Banco Delta Asia, they wanted a shipment of counterfeit currency detectors supposedly to keep notes from entering their system. And this struck me as rather amazing, because I wonder if it's plausible. I wonder if it's more likely that they wanted this technology to help them better defeat countermeasures we're taking to protect our currency.

So I -- based upon what they used, equipment that they purchased abroad for in the past, I just thought I'd ask that question since their entertaining that -- requesting that from us.

MR. GLASER: Well, thank you Mr. Royce. And you are correct. That was a discussion that was had in the context of the bilateral working group that I'm involved with with North Korea. And you're exactly right. We do continue to remain concerned about ongoing counterfeiting by the government of North Korea --

REP. ROYCE: Yeah.

MR. GLASER: -- and this is something that we take quite seriously. In my last working group with North Korea, I brought two senior U.S. Secret Service agents, investigative agents, with me to discuss those concerns and to raise those concerns. And it is something that we are going to continue to go back to until the --

REP. ROYCE: But my question was just the ludicrous nature of a request from the other type -- other side of the table for this technology of us, which would allow them then to avoid countermeasures. (Laughs.)

Let me ask you another question here. The Treasury Department's designation of Bank Sepah in Iran revealed a financial relationship -- when you designated that you revealed a financial relationship between Iran and North Korea, as Bank Sepah was facilitating business between Iran's aerospace industries organization and North Korea's chief ballistic missile related exporter at the time. North Korea has a long-standing missile relationship with Iran. So I was going to ask, how comprehensive is the North Korean-Iran relationship?

And I was also going to ask you: The Treasury Department has implemented targeted measures against two Iranian state-owned banks, Bank Saderat for financing Hezbollah in 2006, and the bank I just mentioned in January for its ties to Iran's proliferation activity.

What degree of the financial sector in Iran -- the banking sector is state-owned? Because we have moved here on two of their state- owned banks, but the four largest state-owned banks I assume are also critical in Iran's drive to acquire WMD, and that I would assume actions should be taken against them too given the attitude of the regime and the use that they put to state-owned parastatals like this.

MR. GLASER: Well, sir, to address your second question first, I don't have any numbers off the top of my head. A substantial portion, if not all, of the Iranian banking sector is state-owned and controlled. We have taken very important action against two Iranian banks, Bank Saderat and Bank Sepah. In the case of Bank Saderat, as you note, for terrorist financing concerns --

REP. ROYCE: Listen, I concur with that. I'm asking you about the four largest banks, moving on them on the basis of what we've found state-owned banks doing where we proved these other two cases.

MR. GLASER: We're -- what we're trying to do is have a strategic and growing momentum with respect to how we approach Iran and Iran's access to the international financial system.

REP. ROYCE: Okay.

MR. GLASER: It combines a lot of effort; it combines all of our tools.

In the case of Bank Sepah, we used an executive order. In the case of Bank Saderat, it was a revocation of the "U-turn" license. In -- and we're combining that all with the strategic dialogue with the international private sector. We're also combining that with multilateral work with the U.N. I think as we --

REP. ROYCE: Okay --

MR. GLASER: I think as we move forward, you'll see that we are going to continue to focus on the Iranian financial system. We're going to continue to try to squeeze it and try to make sure that these --

REP. ROYCE: All right, but while you're sending that message, let me just close with this: In releasing $25 million to North Koreans, money they had in Banco Delta Asia, did we return to them ill-gotten gains, funds produced through counterfeiting, drug running and other illegal activity. Isn't it true that we returned those funds to them?

MR. GLASER: Well, we didn't return anything to North Korea. It wasn't North Korea's money and it wasn't our money. It was money frozen by the Macanese authorities and it belongs to account holders who were certainly North Korean-related. Several of these account holders we certainly do have concerns about.

I think the broader question is you yourself pointed out, Mr. Royce, is how effective was our action with respect to Banco Delta Asia in closing a vulnerability in the international financial center -- system and communicating to North Korea that we will not tolerate this type of activity, and, frankly, communicating to Iran and communicating to all bad actors. And I think we've done that with the way we've gone final on our rule and with the way we continue to monitor the international financial system.

REP. ROYCE: Yes, we were influential. But my question was, was ill-gotten dollars returned? Was ill-gotten gains returned to North Korea?

MR. GLASER: I understand what you're saying, and I think it's a more complicated question than that. These were not our funds, and they're not North Korea's funds.

We -- I spent two weeks in Beijing working with all interested parties, working with the Macanese, working with the Chinese, working with the North Koreans and working with the South Koreans to try to find the best way to dispose of these funds. In the end, it's not a question of whether I'm happy about the resolution, whether I'm comfortable with the resolution. The question is, what was the most workable resolution? What was a workable resolution? It was never our intention that these money -- that these funds be frozen indefinitely, and in the end, the workable resolution was that the funds be returned to the account holders.

REP. SHERMAN: Thank you.

I'd like to recognize Mr. Lynch. I'll ask him to try to limit himself to three minutes so that Mr. Tancredo will get in a question or two.

REP. LYNCH: Okay, I'll do my best.

Mr. Chairman, to begin with, I have a list of companies investing in Iran's energy sector since 1996. So I'd just ask to have this list --

REP. SHERMAN: Without objection, so ordered.

REP. LYNCH: Terrific. That gets that out of the way.

I just want to go back. Mr. Scott raised a good issue. I'm going to go from the specific to the general.

Mr. Simons acknowledged that our ability to enforce these sanctions depends greatly on the cooperation of our international neighbors -- now -- especially in the medium and in the long-term.

The framework for doing that really is dependent on the anti-money laundering legislation adopted by these individual countries and whether or not, as Mr. Glaser is responsible for or deals with, setting up certain FIUs.

I've been traveling around the Middle East trying to get some companies -- excuse me -- some countries who have not established FIUs to do so -- namely Jordan, and there are a whole host of others. We need that transparency, I think, because if the oil-for-food program was any indication of our ability to have effective sanctions, then it's going to rely extremely highly on the cooperation of our international neighbors.

Mr. Glaser, how are we doing? I know we had great cooperation initially. Everybody signed the convention on anti-terrorism financing. We got some FIUs stood up. A lot weren't stood up and we're still in the process of doing that, but you know, I sense there's some falling off in terms of enforceability and things like that. We have to have that framework in place if these sanctions are going to work, even if we get them passed through the U.N.

Could you comment on that, sir?

MR. GLASER: Yeah, I'd be happy to, Congressman. And I think the points you make are exactly right. A strong anti-money laundering regulatory regime on the transparency that that creates is fundamental to the effectiveness of implementing any type of sanctions program, any -- certainly any type of targeted financial sanctions program.

So it's so important that countries throughout the world implement international standards on anti-money laundering and counterterrorist financing. And that really is -- a large part of my job is to work with the international community on those types of issues. I think you pointed out some of the countries that still need work. Jordan is certainly one of the countries that still needs to enact a comprehensive anti-money laundering law, and there are other countries as well. So we do have work ahead.

One thing I can say is that I think the whole -- I think the whole context of the debate has shifted. When I first started working in this area 10 years ago, there was a legitimate question in the international community as to whether countries even had to do this at all. I think we've moved past that. Over 175 countries have made political commitments to implement the FATF standards, the international standards on anti-money laundering.

So now the question comes -- goes to implementation. Frankly, that's the harder issue. We work with FATF, we work with FATF-style regional bodies, we work in the G-7, we work bilaterally to try to emphasize the importance of this. And I agree with you: We need to -- we need to keep the pressure up and we need to keep our focus up.

I'm not sure that international compliance with these standards has dropped. I think in fact its probably improving, but maybe the publicity it receives has dropped a little bit and maybe we haven't been focusing as much as we can on certain jurisdictions. But I do think it's a very important issue.

REP. SHERMAN: Thank you, Mr. Glaser.

Now let's recognize the gentleman from Colorado.

REP. THOMAS TANCREDO (R-CO): Thank you, Mr. Chairman.

Just quickly; I know we're running out of time: When we're talking about the importance of having multilateral sanctions and how unilateral sanctions potentially don't work unless you can get this kind of cooperation from the rest of the world, how do you do that if you're not willing to have unilateral sanctions yourself? I mean, can the United States act in that capacity? Did we have to have 29 years of unilateral sanctions against Iran in order to get to the point of actually having the rest of the world community come along with us? Or do we not impose sanctions first while we're waiting to gather this international support?

MR. GLASER: Well, I think it's certainly true that any financial measure, be it a sanction or otherwise, is more effective if it's applied in a multilateral --

REP. TANCREDO: Undeniably.

MR. GLASER: -- but certainly, that is possible. That said, I do think there are things that we can do and have done not in a multilateral context that can be very effective.

As was pointed out, I think our use of Section 311 of the Patriot Act has been very effective. I think that our dialogue with the international financial community to try to educate them on the risks of doing business with jurisdictions like Iran has been very effective. And I think that some of the designations that Mr. Szubin implements with respect to banks like Bank Sepah have been very effective. The key is then taking those actions and "multilateralizing" them to make them even more effective.

And I think that we've been working really hard on that and we're seeing the success. Part of the problem, frankly, is that, you know, we're very grateful to Congress for giving us the tools that we need to be very agile in our approach to these issues. Most of the countries we cooperate with -- frankly, most of the very sophisticated countries we cooperate -- don't have nearly the set of tools that we have at our disposal. And part of these things that we -- part of what we try to do as we engage with them is to say look, we have these executive orders; we have Section 311; we have OFAC. You need to develop these things too to enhance our bilateral, multilateral cooperation.

REP. TANCREDO: Okay, I understand that the flexibility given to you in those situations can be helpful. But I have to agree with the chairman in terms of the fact that I think you have taken -- you know, taken some actions that are beyond the provisions of the laws that were enacted by Congress and specifically what he mentioned in terms of allowing financial support to flow.

So again, I want to congratulate you on your successes. I want to tell you, however, that I am certainly concerned about the fact that our inability -- it seems like we have an inability here to actually define which part of those sanctions will actually hurt the people of the country, which part of the sanctions actually work to change regimes. That's something we'll have to continue at a later date, but it's a very tough line to draw here.

REP. SHERMAN: I want to thank the first panel.

Mr. Simons, please respond to my question for the record at length, and there may be other questions for the record submitted by members. We'll stand adjourned until 4:45 or until after the last vote, whichever shall occur later.

Thank you to the first panel; look forward to the second panel.

That's 4:45 or when the votes are over.

(Recess.)

REP. SHERMAN: Folks, welcome back. I want to thank a very patient second panel for waiting for the last hour and a half and want to introduce our first witness, who I know had to delay her flight; she's not on the 6:00 p.m. flight back to Missouri. I want to welcome Sarah Steelman, treasurer of the state of Missouri.

She oversaw the first successful divestment of the U.S. State Employees Pension Fund from investing in companies that support regimes which sponsor terrorism. She was formally a member of the Missouri Senate, deputy director of the Missouri Department of Natural Resources, and an adjunct professor of economics at Lincoln University. I want to thank you for your trailblazing efforts. I look forward to someday seeing CalPERS and CalSTRS follow your lead, and look forward to hearing your testimony.

 

STATEMENT OF

SARAH STEELMAN
Treasurer, State of Missouri

 

MS. STEELMAN: Thank you, Mr. Chairman. I look forward to that day too. I very much appreciated your remarks here today; it has restored my faith in Congress as well. (Laughs.)

I appreciate the opportunity to be here today and I am really grateful to you all for examining this important issue, and very appreciative to be asked to provide a little perspective from the "show me" state, where what you do is more important than what you say. And I believe, as you do, that this is one of the truly critical issues facing our nation.

And these are unparalleled times, and your leadership on this issue is so important and it is so needed.

And I fear too often what is really at stake is forgotten in this national debate and that this is really about our families and it's about our husbands and our wives and our brothers and our sisters and our sons and daughters, because it's about keeping them safe and secure. And in the effort to do so it seems strange that we send young men and women to defend us, some of whom have paid the ultimate sacrifice; however, we have not yet used one of our most powerful weapons -- America's financial market.

We face serious threats around this world from terrorists and terror-sponsoring nations. It was shocking to us in Missouri to find out that we in America are funding the very enemies we are fighting through our investments -- billions and billions of dollars worth. And I believe Missourians are in line with the rest of this nation on this issue.

A recent poll showed that more than 80 percent of those surveyed say that if they learned that a company in which they have invested was found to be doing business in a state sponsor of terrorism like Iran or Sudan or North Korea or Syria, they would either sell that investment or they would demand the company cease doing business with the terror-supporting nation.

The attack that took the lives of thousands on September 11th cost money. The roadside bombs that kill our soldiers in Iraq and Afghanistan cost money. The nuclear weapons Iran hopes to use on this country cost money. These threats we face can be defeated but will take a resolute and comprehensive response.

Someone who knew quite a lot about big problems facing our nation had this to say back in 1852: "The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew. We must disenthrall ourselves, and then we shall save our country."

In Missouri we heeded that wise admonition and the people have responded by telling us that we're doing the right thing. It is our belief the missing element in the debate thus far has been the use of the economic weapons at our disposal. The war on terror should be fought on this new battlefield and every American can play a major part by using America's financial weapon, the weapons at every American's disposal. We can rise to this occasion together.

So by cutting off these billions of dollars going to known sponsors of terror we can make a decisive difference in this fight.

In Missouri we believe it is wrong to use public money -- taxpayers' money -- to fund our enemies and to subject shareholders to the inherent risk associated with these investments. And so some of the actions that we've taken in Missouri include the following:

We've implemented tough anti-terror policies in the treasurer's office, including complete prohibitions on doing business with terror- sponsoring nations and companies. And this approach is working -- UBS, Credit Suisse and other companies have stopped doing business in Iran at least in part from this kind of pressure.

We implemented the nation's first terror-free public fund, which screens out terror-tied stocks from the portfolio. It's managed by State Street Global Advisors, the world's largest institutional investment company, and since inception, our terror-free fund has significantly out performed the international fund benchmark, which contains the terror-tied stock. Again, one reason for this, I believe, is that there is a significant risk to share value associated with these stocks, a risk that investors should know about and be protected from. And to date, we are looking at a rate of return of 19.15 percent versus the benchmark which is at 15.25 percent.

We've set up the nation's first terrorism screening policy and divestment procedure for a public pension fund. And our public pension fund contains about $6 billion in investments -- total -- about which about ($)20 million we initially identified as being invested in stocks that are tied to terrorism.

And let me remind the committee, and I know you all know this, that economic sanctions imposed on these state sponsors of terrorism -- like Iran, Syria, North Korea and Sudan -- means an American cannot do business in those countries. Yet billions of taxpayer dollars are invested in those companies, which is absolutely wrong -- first of all, because it's funding our enemies, and secondly by investing in those companies, we are undercutting the economic effect of those sanctions. Thirdly, those investments in multinational companies are at the expense of the American worker. And lastly, we owe it to the taxpayers and pensioners to protect their pensions from shareholder risks involved in investing in these countries.

We are also in Missouri in the process of offering the first terror-free mutual fund in our 529 plan as well as an international terror-free fund for our 529 college savings plan so that every Missourian has the choice to save tax free -- it is tax free and terror-free.

We've written and encouraged state treasurers across the country to take similar actions. We hosted a police and firefighter terror- free investment summit to educate our law enforcement personnel about how their pension funds may be funding the very enemies they may have to save.

And we are currently in Missouri pressing hard on our legislature to pass a resolution calling on all of our state pension funds to divest from terror and go terror-free.

And you may hear from the so-called expert staff from your pension systems or others, like we did, various arguments made against the policies. And there's room for debate on some issues, but our experience in Missouri has shown that the arguments we heard and that you may hear in the coming weeks were either undocumented, illogical, inconsistent or simply untrue. And I think I have provided some of those arguments in the written testimony that I have provided to the committee.

But whatever arguments you may hear there can be no argument against this: that we are engaged in a monumental struggle with the most serious of consequences. As Lincoln said, "It is truly a question of saving our country."

Every effort and every means to win this fight and every person in this country should be a part of the victory. And let me just say again -- and I am speaking on behalf of the heartland of America and we decided in Missouri that we can't wait for somebody else to do this. And with all due respect to Congress and the president and the administration, in Missouri we decided to act. (Laughs.) And frankly, that is what is missing in the war on terror, which is giving every American a way to help engage and protect their families and their nation.

So I would ask that we try to cut off the billions of dollars going to these regimes and that we can make a critical difference in this fight. But to get there, Congress must act, state legislators must act, pension systems must act, private investors must act and Wall Street must act. And I will say it once again, what we need most of all, what will ensure a victory -- just as it always has -- is that the people of this country must act. And when we do we will find ourselves in a much better, much safer world for our children and children's children.

Thank you, Mr. Chairman.

REP. SHERMAN: Thank you, Madame Treasurer.

Next, Roger Robinson; he is the president and chief executive officer of Conflict Securities Advisory Group, a private company that has been instrumental in helping investors determine which companies are actively engaged in business with particular regimes.

He was formally senior director of international economic affairs at the National Security Council and executive secretary of the Cabinet-level Senior Inter-Governmental Group for International Economic Policy.

 

STATEMENT OF

Roger Robinson
President and Chief Investment Officer,
Conflict Securities Advisory Group

 

MR. ROBINSON: Thank you, Mr. Chairman. Indeed, it's a privilege to appear before you and committee members today. I thank you for that.

My company, Conflict Securities Advisory Group, is an independent, impartial research provider, as you pointed out, specializing in the field in what has become known as global security risk management and the implementation of terror-free investing strategies.

Just a word on global security risk because it's central, I think, to this particular dimension of your enquiry. It is defined by the SEC and others as the risk to share value and corporate reputations stemming from company ties to U.S.-sanctioned states, principal among them the terrorist-sponsoring nations. Our company, CSAG, as we call it, was established in the fall of 2001, and maintains the worlds most comprehensive data base on every publicly traded company globally with business ties to Iran, Sudan, Syria and North Korea, as well as public firms that have been associated with weapons of mass destruction and ballistic missile proliferation.

In this connection, our Global Security Risk Monitor online service identifies some 450 mostly foreign companies with business ties to these countries, some 340 of which have ties to Iran alone.

We provide our data to scores of asset managers, pension funds, state and federal entities, including the Securities and Exchange Commission's Office of Global Security Risk, and have had the good fortune to coordinate closely with private sector as well as public fund managers, including the great state of Missouri, on structuring and implementing terror-free investing portfolios.

I'd like to say that as such, as an independent research provider, we're not commenting on -- or we don't take a position on legislation or U.S. policy initiatives, but I -- to the extent that I do so today, it would be my personal views and not necessarily those of the company.

Now, trying to get quickly to some of the issues you care about most. Not surprisingly, about 60 percent of the companies in our database are engaged in some dimensions of the energy sector, particularly with respect to the oil-producing states like Iran, Sudan and Syria.

It is no exaggeration to say something you've no doubt learned in today's hearing from a number of sources that were these public companies to withdraw from terror-sponsoring states, export earnings would for the most part plummet and economic and financial crises would likely ensue.

Indeed, it's fair to say the publicly traded companies provide, wittingly or unwittingly, vital life support to these regimes in a number of sectors beyond energy, including telecommunications, electric power generation and manufacturing.

Now, there was some talk about the official sanctions and how they've performed, and, Mr. Chairman, in my view you have correctly characterized the ineffectual implementation of the Iran-Libya Sanctions Act and its successor legislation the Iran Sanctions Act.

In the course of my submitted testimony, I discuss other elements of global security risk, the mechanics of terror-free investing, examples of municipal, state and private sector shareholder activism, and the implementation, cost and performance with respect to terror- free investing. So I'll put that aside for the written testimony and just give you a sense of where we are from the point of view of terror-free investing today.

It is a fact that the American people overwhelmingly care about where their retirement dollars are going and how they are being used. There was a recent poll by Luntz and Maslansky firm that put in striking detail the fact that some 80 percent of the American people that were polled were prepared to take lower returns on investments in order to avoid companies partnering with terror-sponsoring regimes. And the other numbers are equally dramatic, if not more so.

There is no question, therefore, that given a choice, American investors would prefer to avoid doing business with companies that have those types of material business arrangements with these regimes.

It's been a matter of opportunity to make that choice and I think that where Treasurer Steelman is owed a great debt of gratitude is the fact that she was the first to step forward with a public fund and take it terror-free and in so doing, particularly with her state's 529 college savings plan, open up this chance for every American.

The first mutual fund has now gone terror-free -- some two years ago the Roosevelt Anti-Terror Multi-Cap Fund -- that again makes this opportunity available. And certain states in the way that they're pursuing legislative remedies have likewise started to open up a market to convince Wall Street to provide something that heretofore has been utterly neglected, which is terror-free or Iran-free products and services.

This is a matter of not only the American people learning about where their money is really going and how it's being used, but also the opportunity to move that money out of those companies if they should choose to do so into a place where they can readily continue their investing patterns without necessarily taking even a loss. In fact, not only do you not have to sacrifice returns, but in the case of Missouri and other precedents, those returns have actually been better.

I would just take you to the fact that several states, as you know, have introduced legislation. There are different types, and this is an important distinction because, for example, some states are just concentrating on companies that are in the Iranian energy sector and are indeed even violators of the Iran Sanctions Act at the ($)20 million or more level. How many companies do you suspect are involved? Maybe 20? How many of those are state-owned with very little of their shares traded in the open markets? And the bigger question is, what about the other 320 companies that are providing vital life support to the regime in Tehran? So you have very limited what's called now targeted divestment, but the question the target divestment --

REP. SHERMAN: Mr. Robinson, can you just sum up in a couple of minutes?

MR. ROBINSON: Yeah -- is how much is it really doing, versus the blanket variety which tends to put an electrified fence around companies that wish to do business with those countries.

So I am happy to talk to a bit more of that in the questions and answers, but thank you for your time.

REP. SHERMAN: Thank you.

Now, the first panel, of course, was entirely from the Bush administration. This panel is entirely not part of the administration. I got to pick four of you. I am going to call upon the witness chosen by Mr. Royce, but before I do, I have to comment on Mr. Royce's incredible ecumenical spirit.

MR. BLUM: (Off mike.)

REP. SHERMAN: Mr. Blum, I thought you were chosen by Mr. Royce; you said you were the minority witness.

MR. BLUM: (Off mike.)

REP. SHERMAN: Oh, Ron Paul chose -- oh, so we have two minority witnesses. Ah.

I will cleanse Mr. Royce of association with you and indicate it is Mr. Paul who selected you and point out that it is Mr. Paul who is remarkably ecumenical in that he has chosen not only a very qualified witness but one who is, I believe -- did you say general counsel of Americans for Democratic Action?

During your 14-year tenure as counsel to various Senate committees, Mr. Blum, you've played a key role in conducting several high-profile investigations including the BCCI scandal, General Noriega's drug trafficking, and foreign bribery by the Lockheed Corporation. Mr. Blum is also a former chair of the United Nation's Experts Group on Asset Recovery. Let us hear from the witness selected by Mr. Paul.

 

STATEMENT OF

JACK BLUM
Cousel, Baker Hostetler

 

MR. BLUM: Thank you, Mr. Chairman.

I am a skeptic when it comes to sanctions and how they work. And my skepticism is drawn from a long history of sanction failure which I outlined in a prepared statement which I hope you will make part of the record.

But let me give you the personal anecdote that really brought it home. I was working with Senator Kerry in hearings by the Senate Foreign Relations Committee on drug trafficking by General Noriega. The administration, becoming aware of the Noriega connections with arms trafficking and drug smuggling, imposed severe sanctions on Panama.

A year after they were imposed, we asked the GAO to take a look at how effective they were. The report back was absolutely shocking. It was having virtually no impact. The use of offshore corporations, free trade zones and a variety of other tools enabled the Panamanians to get around the sanctions with impunity.

We learned in the course of it, by the way, that most of the sea food in Miami at the time was coming from Cuba, and it was coming through the free trade zones from Panama so that we had Panamanian sanctions and we had Cuban sanctions, and neither of them were working.

Now, in part, this is because sanctions are enforced by the Office of Foreign Asset Control -- approximately 125 employees; probably half of them work on tracing people that want to go to Cuba on vacation and the other half in charge of all the sanctions everywhere else in the world. And they cannot possibly do that job.

You've heard the arguments about other failures of sanctions and why; I won't go into that territory. I believe you've seen Iran build nuclear weapons despite sanctions -- or head toward building it. You've seen Korea build a bomb successfully despite sanctions, while the population was busy eating grass, and where if the sanctions had been fully applied we would have had a million North Koreans heading across the Yellow River into China.

I submit that is not the solution. The solution is much more targeted, focused efforts on the ways and means that nations use to get around the regimes that have been set up to control missile systems and the movement of nuclear material. And those regimes include prohibitions on shipping certain categories of goods, shipping certain sorts of nuclear materials. Now, the big holes in the system at the moment are free trade zones and the fact that the biggest tool of international trade, which is to say commercial letters of credit, are really outside the current network of reporting as suspicious activity.

Most of that, banks consider to be low-risk business and they simply don't provide the information or report in suspicious activity reports customers who are dealing with offshore entities and free trade zones where suspicious activity occurs. And I submit that if you really want to do something effective and stay focused on weapon systems, delivery of weapons of mass destruction, there are ways to do it.

I was utterly amazed to discover the lack of coordination in the intelligence community on this subject. The intelligence community is getting a river of information, but the people who are working on weapons of mass destruction aren't plugged into the people who are getting the financial information in a proper way. The people who know about what it is you should be looking for and who under 314 of the Patriot Act can tell the financial institutions what to look for and what to report about aren't doing it. There's very little communication about that with the financial institutions. And I would argue that that coupled with much more forthcoming cooperation and discussion with FATF and the European Union would make an enormous difference in our ability to control proliferation. Instead, we talk about things which perhaps make us feel a lot better but aren't necessarily controlling that which we want to stop.

I think that a lot of what people have said about not wanting to invest and not wanting to do business with terrorist states is absolutely correct. And indeed, I share that sentiment. I don't argue with people who say I don't want my money invested in a public company. I wouldn't invest in a public company that wants to support a regime I don't like. On the other hand, what happens in the real world is another matter. And what's been happening in the real world, I'm afraid, is that we tend to bend.

So I will just leave you with this thought: The only major bank in the United States that maintains an account for an Iranian bank --- the Federal Reserve Bank. And I note with some amusement that in all the discussion of the sanctions nobody has called the Fed in to say, what are you guys doing with that account?

REP. SHERMAN: You can be sure that we will be asking that question. Long ago I gave an opening statement to these hearings in which I called for us to stop doing "U-turn" transactions for all Iranian banks, which I realize is just an inch away from your comment.

I also want to point out that when it comes to nonproliferation, which is the core of what our subcommittee focuses on, there are really two ways to deal with regimes that are proliferating. One is through invasion, another is through sanctions. When it comes to invasion, we're "o" for whatever, including Iraq. And when it comes to sanctions the only success really that we've had in getting a country to give up nuclear weapons is South Africa, and that is attributable, I think, to worldwide sanction programs.

But I want to go on to welcome David Asher, senior associate at the Heritage Foundation. I'm going to guess that you are Mr. Royce's witness.

From 2001 to 2005 you served as senior adviser to the assistant secretary of State for East Asian and Pacific Affairs, and he also served on the U.S. delegation as an adviser to that delegation to the six-party talks with North Korea.

Mr. Asher.

 

STATEMENT OF

DAVID L. ASHER, Ph.D.
Senior Associate Fellow,
The Heritage Foundation

 

MR. ASHER: Thank you, Chairman Sherman, Ranking Member Royce, Congressman Manzullo. I appreciate the opportunity to be here today.

In addition to working on the diplomatic track as Jim Kelly's adviser in the six-party talks, I reported to Deputy Secretary Armitage and Secretary Powell and coordinated the North Korea Working Group. It was called the NORKAG, North Korea Activities Group, which is an interagency effort involving 14 different U. S. government agencies and departments and over 200 policymakers, intelligence analysts and law enforcement officers, with one goal: to try to impede North Korea's global weapons proliferation networks, their illicit trading networks -- some which are linked together -- and their finances.

The Illicit Activities Initiative probably involved the use of several -- the development, conceptualization of the use of several of the tools you are discussing today, including the USA Patriot Act Section 311, which we worked hand in glove with Treasury Department to apply, and plan to apply, against North Korea. And after a time of deep research, we came to conclude that one of the best spots was in Macau against Banco Delta Asia.

Whatever one's perspective on Banco Delta Asia, I believe the use of Section 311 was very effective in containing North Korea's weapons proliferation and with the trading networks. And it demonstrates to the regime that such activities are not a sustainable or acceptable way of supporting their existence in the world. And in that context, I feel they did contribute to the six-party talks.

But we designed this initiative with the goal of countering these activities themselves and the people that are involved with them, not necessarily just supporting the six-party talks. We did not design the initiative to give it away. And for that reason I am concerned about the illicit funds that were frozen at Banco Delta Asia, upon our request of Macau authorities, being handed back to North Korea.

Even as an act of diplomatic expediency -- and as a former diplomat who is concerned with negotiations with North Korea, I'm for expediency in the right circumstances -- this strains one's litmus test of what is reasonable and it certainly contradicts the spirit and the letter of the laws that we have invoked in the international agreement we have actually co-sponsored regarding North Korea's proliferation, such as U.N. (Resolution) 1718.

North Korea is a nation whose profits in illicit trade may in many years exceed what it earns in legal exports. It is a nation that has to learn that if it wants a normalized relationship with the United States, something it says is its top priority, in the context of denuclearization, it has to abandon government-directed criminal activities, including the counterfeiting of the dollar and weapons proliferation to state sponsors of terror like Iran. These are not peripheral objects; they are very much at the heart of what we are doing.

In my view, we could have offered North Korea $250 million in development assistance to help improve some aspect of its bankrupt economy in order to get the talks going, but never should allow $25 million in clearly illegal money or money linked to illicit perpetrators to be handed back. This action plays to North Korea's few remaining strengths as a nuclear-armed dictatorship, not the many we enjoy as a nation of freedom and laws.

Some have asked me -- many have asked me -- how freezing $25 million in a little bank in Macau can cause such a disruption. There are two reasons, both of which we clearly conceptualize in planning the action.

The first is that the 311 imposition drove a wedge between North Korea and Macau. Until September 15th, 2005, when the action was taken, DPRK had for decades enjoyed a protected relationship with Macau's government and many of its business leaders and political leaders that reached far beyond Banco Delta Asia.

Not only was Macau a global center for North Korean proliferation and for illicit activities, it also was a center known for managing the finances of the kleptocratic finances of Kim Jong Il. This sounds a little bit exaggerated, but the fact is the South Korean government alone poured something on the order of $500 million in bribes in order to obtain the 2000 summit, and they investigated -- this has been prosecuted in their courts -- into banks in Macau in bank accounts which one would assume were controlled by Kim Jong Il. That is certainly what they assessed. So losing ready access to Macau imposed a huge cost on North Korea.

The other reason is that it was more than $25 million that -- the BDA that was frozen on September 2005. Essentially North Korea was frozen out of the international financial system. It was sort of a "shot heard 'round the world" for national bankers who cut off relations with North Korea, fearing that something like what happened to BDA could happen to them.

In addition, banks under "know your customer" rules took it unto themselves to start to freeze or to impede access to accounts globally. I've talked to many bankers about that. They told North Koreans, we are going to cut our business relations with you; we're not going to wire the money out of the country; if you want access to it you got to present yourself. The same thing's happening at Banco Delta now. North Koreans who are involved in illicit activity are a leery to present themselves to withdraw funds. So this has really crimped their style and it has had a very important impact on impeding their proliferation potential.

In closing, the BDA issue is said to be settled. My former colleague Chris Hill has said that the issue is settled by the recent reversal in policy. However, the reality is, from North Korea's perspective and from ours, is that until North Korea starts to act as a normal, transparent, law-abiding member of the international financial system and, indeed, the international community, it's going to continue to be punished by the legacy and the continuity of its own illicit actions.

It's really in their court. They're the ones that are the masters of their own situation. And, you know, of course we hope that this action by being made permanent against Banco Delta -- they're not going to undo that; they may have unfrozen the money -- will serve as a inspiring legacy to get North Korea to behave better, both diplomatically and as a player in the international system.

Thank you.

REP. SHERMAN: Thank you.

Lastly, a very patient Victor Comras, who led the U.S. State Department's foreign policy trade control and sanctions programs for nearly a decade, in addition to serving as a member of United Nations al Qaeda monitoring group. He is a noted authority on al Qaeda and terrorism financing. His articles have appeared in a number of publications, including The Washington Post and The Financial Times.

MR. COMRAS: Thank you very much, Mr. Chairman. Thank you for inviting me here -- (off mike) -- tools to persuade --

REP. SHERMAN: You may want to turn on your microphone.

MR. COMRAS: Sorry. I'm all set now? Good.

 

STATEMENT OF

VICTOR COMRAS, ESQ.
The Eren Law Firm

 

Thank you, Mr. Chairman, for inviting me here today to talk about how sanctions can be used to dissuade Iran and North Korea from their current nuclear proliferation policies.

I have long been an advocate of using well-considered targeted, economic and political sanctions to dissuade Iran and North Korean from pursuing their irresponsible nuclear development programs.

Sanctions are coercive measures. They are supposed to have an impact. They are meant to pressure a regime to conform to specific norms. Sanctions fail when the costs that they impose are simply not persuasive.

Iran will only change course if and when its leadership is convinced that the international community will in fact take the steps necessary to seriously impact Iran, its very vulnerable economy and its leaders personally. Iran's leaders know that serious economic sanctions would have serious consequences for the stability and the durability of their regime.

Unfortunately, the sanctions placed on Iran to date by the Security Council do not amount to much. They convey the message that the key countries simply continue to lack the political will necessary to face up to Iran's challenges. Beyond freezing the assets of some 30 or so individuals and entities and banning the purchases of Iranian arms, the sanctions do very little to impact Iran's economy or to cut the flow of sensitive arms equipment and technology to Iran.

Each country under these sanctions continues to remain free to decide for itself what sensitive military equipment and technology they should no longer provide. The resolution only calls on them to exercise restraint and vigilance when it comes to providing Iran with sensitive dual-use items or stopping key Iranian military and industrial officials from visiting their countries. These measures are not obligatory and the resolution continues to allow countries to provide Iran with developmental assistance and with commercial-term loans and investments.

This leaves Russia a free hand to pursue its ambitious multibillion dollar trade program with Iran. It leaves on the table several major oil and gas development projects, including a potential $10 billion investment by Royal Dutch Shell and the Spanish oil company Repsol to develop Iran's South Par Field.

It also leaves on the table the multi-billion dollar construction of an LPG export plant by Total and a $20 billion investment by SKS Ventures of Malaysia. It does nothing to deal with the multibillions -- up to -- maybe up to $100 billion over the next 25 years worth of deals being negotiated between China and Iran.

Against this background Mr. Chairman, how can any of the U.N. sanctions measures really be taken seriously? I believe that we should now adopt a much more aggressive strategy in favor of effective sanctions on Iran -- sanctions that are directed specifically at Iran's economic and political vulnerabilities.

We should proceed concurrently on two tracks. One, we must continue to press for stringent Security Council sanctions -- sanctions that include accelerating measures that will isolate Iran and cut off Iran's access to capital equipment and -- (audio break).

MR. ASHER: (In progress following audio break) -- Chinese banks doing business with North Korea. And we're not talking about tens of millions; we're talking about hundreds of millions of dollars. Okay, so that's important to understand. And I think we did scare them, and it got them to start to cooperate much more importantly in law enforcement.

The problem is we're sending back to North Korea exactly what they demanded. They want to be accepted as a country which can do these sorts of things and not pay the price. I'm all for transformational diplomacy of North Korea, but we should be -- again, I said let's offer $250 million in developmental assistance. We can build the American University in Pyongyang if we have to and educated the North Koreans about, you know, civil society.

I'm not against engagement, but this -- this caters to the worst elements inside North Korea and it contradicts our policy.

And I believe we have to -- you know, protecting the power and prestige of the United States of America I know is a critical concern for all of you. And this committee does a great job, you know, making sure that the administration and other past administrations have done this.

But we give up a lot after we've made a big deal about these illegal activities and then we hand back criminal money. Even if it wasn't technically us handing it back and even if they didn't technically hand it back to North Korea's government, that money was associated with illegal income I'm very confident. And it is controlled by the North Korean government. They're just -- through proxies.

REP. ROYCE: Okay, thank you.

MR. ASHER: I think it's just not a constructive effort.

REP. ROYCE: One of the things Mr. Blum said was in regard to these free trade zones, he said it's almost as if these zones were invented to make a mockery of the global regimes to control the weapons trade and to limit proliferation. I'm interested in knowing what we can do about that in terms of the free trade zones and also, as we go through the testimony, the arguments made by Mr. Comras -- I mean, I think we all concur that yes, Europe should be recognizing that even the market -- the international market is reacting to the dangers of doing business in Iran and is pulling back -- but not Italy or France or Germany that are continuing with these export credits and are insistent, even when Britain makes the request that they're going to continue to have their tax payers subsidize the risk of pushing business with Iran, which otherwise would not occur in the market.

And so my question goes to, all right, what do we do about these failings? How do we galvanize Europe? Do we do it through NGOs? Do we launch some kind of a PR campaign? I mean, something has to be done here.

Mr. Blum.

MR. BLUM: The problem here has been that Iran has something that everybody needs, including us, and that's oil. And that oil becomes a very potent bargaining tool no matter what a bunch of bums they happen to be. So somebody will jump in to do business with them and this has been going on in the politics of oil for at least 50 years, where regimes that you wouldn't otherwise look at for two minutes get away with all kinds of things -- Obiang in Equatorial Guinea, running an absolute monarchy, police state, kleptocracy. We could go on and on.

The truth is the world has no way to deal with what is essentially a criminal government that makes it as a sovereign state under the Treaty of Westphalia norms. So we have in North Korea a criminal enterprise masquerading as a state. And now it wants the same privileges as a state, wants to negotiate its status as a criminal enterprise.

Genocide isn't negotiable. Criminal enterprise shouldn't be negotiable. And what do we do? And the only tools left are invasion or what? And if the state involved has something we need, it's a terrible, terrible problem.

Now, I look at it as use targeted tools, use a targeted embargo. And I think, for example, the free trade zone business you have to insist that free trade zones document stuff that goes in and stuff that goes out -- not just simply let it go in and out.

REP. ROYCE: And as I understand you -- as I understand you, if we put the same -- in your view, if we put the same resources that we do on all of these other fronts, into Treasury and so forth, in order to target the money laundering and everything else, you think we'd more effective on it.

MR. BLUM: I think you'd be much more effective because that targeted stuff would get at the very things we really don't want shipped and it would create certain financial strains in places and ways that work.

REP. ROYCE: I thought your presentation -- your arguments were very interesting. I'm not sure that you've convinced me in your written report here on -- on South Africa, because I do think that's a case where sanctions actually did bring a regime -- I don't dismiss what was done to get around it --

MR. BLUM: They actually were on their way to nuclear weapons in the middle of the sanctions. And the sanctions only worked when the rest of the world finally got on board. That was the turning point. And I'd just say that you really do need that kind of worldwide revulsion to make things happen.

REP. ROYCE: Do we organize the NGO communities around that? Do you guys help make that effort?

MR. BLUM: That's part of what you have to do. The thing that works -- I advise banks and brokerage houses on money laundering issues, and the thing that is most convincing to the people I talk to is to point out reputational risk. What would it be like if the general public in the United States found out that wires that were supporting, let's say, nuclear proliferation in Iran were going through your bank? And the answer is, "Oh my God, that could be a bet-the-business proposition; we better make sure our system prevents it." So it really is the public revulsion, not only here but abroad, that makes it work.

MR. COMRAS: I'd like to make two points if I can. One is oil is a two-edged sword when it comes to Iran. Iran -- it accounts for 80 percent of Iran's export earnings, over 50 percent of the government's budget. So Iran is itself a prisoner of its own oil exports and cannot afford to any great degree to curtail those exports without having major consequences for the Iranian regime and for the public at large.

And second of all, I think one of the problems with Europe is that we've set the bar so low that we've called success when we haven't success. And why go beyond what the United States is satisfied with? We've been satisfied to date with too little and it's time to raise the bar.

Thank you, Mr. Chairman.

REP. SHERMAN: I think historians will marvel at the enormous cost the United States was willing to pay to deal with the puny nuclear program or not even dream of a program that Iraq had and our unwillingness to incur any significant cost in order to impose serious sanctions on Iran.

I'd like to turn first to Mr. Asher and North Korea.

The $25 million is, as you pointed out, not just $25 million. But then the question is, is giving them, quote, "back" the $25 million giving them back the rest? We gave them back the chicken. Are the monkeys still scared? Put another way, where is North Korea now with regard to its access to banking facilities, particularly in China, compared to where they were before we did the action on the one Macau bank?

MR. ASHER: That's an excellent question. I think that the monkeys are most definitely still scared, and the private sector has on its own now commenced a series of investigations working with law enforcement authorities around the world, one of the most important of which is having Lloyd's of London -- it's extraordinary -- hundreds of millions of dollars of North Korean insurance fraud that they have manufactured essentially, just like they've manufactured counterfeit currency. It's a much bigger income earner -- essentially pure profit.

The Korean National Insurance Company, which used to be called the Korea Foreign Insurance Company, has taken out reinsurance from -- somehow, I don't know why Lloyd's people have bought it, but they've underwritten the reinsurance. They come up with a disaster -- I mean, there are disasters in North Korea, like the Ryongchon explosion or floods but they've -- people don't have insurance essentially. They make it up. They provide and then they claim reinsurance on insurance people didn't have. It's a huge racket.

REP. SHERMAN: And Lloyd's was -- this serves Lloyd's right.

MR. ASHER: The thing is that it's a major -- there are over $100 million in question in British courts right now. I think they're going to lose and I certainly -- and that's the private sector --

REP. SHERMAN: When you say they're going to lose, you mean North Korea will not recover the $150 million --

MR. ASHER: Exactly. And this -- they've been doing this for years apparently. They've had hundreds of millions of dollars in crop insurance. They did the same thing in 1997, in 1999. They even scuttled, apparently, one of their ships.

They collided deliberately with a Hyundai merchant ship in the middle of the Indian Ocean. It carried $70 million insurance. The ship -- their ship collided with the Hyundai ship. It's right in the middle of the -- you know the run up to the 2000 summit. And the ship, even though it had basically a dent on the bow, it just merely sank, which implies it was exploded. They blew it up and they sank it.

REP. SHERMAN: Mm-hmm.

MR. ASHER: Great way to collect insurance. You know, but the point is the game is up. And I feel -- looking back at my time in the government, I'm glad that we -- you know, we spent a lot of time working with law enforcement to uncover these.

The thing that's ongoing that really does deserve some attention is the investigations by a whole variety of U.S. law enforcement agencies. I was very involved in instigating them. I did not tell them how to investigate it. They've done great work.

The problem is, what do you do with it? You know, are we going to indict the North Koreans for what they're doing or not? It was our decision -- and I worked for Colin Powell and Rich Armitage. We're not against engagement. We created the six-party talks and participated. But we felt that the North Koreans know they're doing this stuff. And they know there's got -- they should know that there's a price associated with it. And our goal is, you know, to get them to stop. One way to do that is to actually bring forward the evidence that has been collected in U.S. law enforcement investigations so the whole world knows that we're not making this counterfeiting stuff up.

REP. SHERMAN: We certainly have a long way to go if just a few years ago Lloyd was selling -- Lloyd's was selling them reinsurance, and I hope we don't have to go to the point of counterfeiting their currency.

MR. ASHER: Well, we wouldn't do that. But some people seem to think that we're making this stuff up. And the problem is if they start to believe it and they see us turning back money that was clearly linked to illicit activity in Macau, they may start letting down their guard, because you know, especially -- as I hope they will -- the six-party talks start to take off a bit. I don't think the North Koreans are going to give us anything more than a freeze for compensation, but -- personally. That's another topic.

REP. SHERMAN: I think I need to go on to another witness.

Treasurer Steelman, we've talked to other pension plan trustees private and public sector and they say, "God, Brad, you're right; we ought to divest, but we're going to get sued because we're not maximizing our return." Now, you have one possible answer, which is, hey, you're earning a great return. But, you know, there's no guarantee that your portfolio is going to outperform others in the next quarter.

Has anybody ever tried to say they're going to sue you for breach of fiduciary duty because you're not earning every last cent that somebody thinks they might be able to earn by investing in terrorism?

MS. STEELMAN: No one has brought it up except the investment managers, the same people who are bringing it up to you.

REP. SHERMAN: So you have tens of thousands of beneficiaries of your plan, virtually every state worker in a relatively large state. And not a single one of them has said --

MS. STEELMAN: Not a single one.

REP. SHERMAN: Not a single one.

MS. STEELMAN: In fact, when they find out that their taxpayer- funded pension plus their own contribution from their hard-earned job with the state -- when they find out about this, they're outraged. They don't want their money --

REP. SHERMAN: They're outraged that this hadn't been done earlier and they're happy that you're doing it now.

The other argument I'm getting from CalPERS is that somehow a huge percentage of their portfolio would have to be sold. What percentage of -- I assume you had a diversified portfolio of chiefly U.S. but also international investments. What percentage did you have to sell to get away from investing in terror?

MS. STEELMAN: Well, we -- as I said, we estimated about $20 million out of a $6 billion pension fund.

REP. SHERMAN: Twenty million -- and you divested both from U.S. companies and foreign companies that do business with -- I believe you identified four terrorist states?

MS. STEELMAN: That's right. That -- of course, the domestic companies are prohibited from doing business there so --

REP. SHERMAN: A few do through their subsidiaries.

MS. STEELMAN: That's true, but theoretically it is just international companies.

But the other argument, and I as a fiduciary have the responsibility of making sure that we do get a good rate of return, but that we're also assessing risk. And there is no question that there is risk associated with investing in companies who do business with governments that our State Department and Treasury have deemed economic sanctions and that have been designated as state sponsors of terrorism.

And I'm not the only person who thinks this in the world. I mean, the SEC has looked at and has inquired of companies if they are disclosing to their shareholders the fact that they're investing in these kind of companies who are doing business in those countries.

REP. SHERMAN: I would point out that these companies face several types of risk. They face a general representational risk. They face a risk of divestiture by investors. And it's always best to sell your stock a day before everybody else sells theirs. So by acting first, Missouri has protected its employees, its beneficiaries. And then, finally, there's a consumer risk, because not everybody in this country owns stock or has control over stock. A lot of people may have a pension that they have no control over, but we're all consumers.

And if this or that oil company can't -- you know, loses even 1 percent of the U.S. market, that could adversely affect them, which adversely affects their stock price, which gives investors another reason to sell off, et cetera.

So if -- I wish I could transfer my federal pension investment into the Missouri fund. Unfortunately, I haven't figured out a way to do that. But I think you're protecting your beneficiaries, your reputational risk and in a lost of investment risk and a loss of consumer confidence risk.

And I kind of cut you off there. I don't know if you have any further comment.

MS. STEELMAN: Well, I would comment to what you just said. Its one thing that I think Congress could act on is to make sure that the federal pension funds are not being invested in this way. And the only way, maybe, to do it -- you know, we did it in Missouri by making that choice. It's a different legislation; it's not mandated. We made an investment decision which, again, I think from a fiduciary responsibility and the question you originally asked -- investors make decisions every day about that. Institutional investors make decisions about what to invest in and why.

And so, it just seems to me that there, you know that -- to begin with, that the federal pension plan should be -- not be investing in our enemies when we -- we are funding military personnel who get retirement from that very same pension plan.

REP. SHERMAN: I couldn't agree with you more. And it's not even a circumstance where -- not only do we invest in such entities, but we force our employees to do that. In other words, we don't give them the choice. We give our employees a choice of four or five different investments, but your stock investment fund has just a little bit of terror in it; your international stock investment fund, a little bit of terror; your bond investment fund, just a little bit of terror. You don't have a choice.

As it happens, federal employees can invest exclusively in U.S. Treasuries, but that -- that certainly isn't the investment strategy that is advised, especially for younger employees. But that is the only choice even available, let alone mandated. I would think that people who draw their paycheck from the federal government should be told that they should not have their money invested in terror, or at least their federal pension should not be. And we ought to be following Missouri.

I'm going to yield to Mr. Royce for a second round. Or I'll ask another question or two.

REP. ROYCE: (Off mike.)

REP. SHERMAN: Okay, well I'll try to keep you entertained.

Mr. Robinson, you're the holder of the information. You study this. Is this available online or is this proprietary, "you've got to pay a fee to find out"? If I want to buy tennis shoes only from companies that aren't -- you know, part -- you know, isn't part of a group of corporations one of which is investing in the Iranian oil fields, can I go to your website? Or do I got to pay you a fee?

MR. ROBINSON: Well, it is a -- it is a proprietary database in the sense that a lot goes into not only identifying these companies, profiling them, but updating that information quarterly. But it is a modestly priced event that would be lost in the noise, frankly, for any institutional investor.

And in the case of retail, or average Americans that want to take advantage of terror-free investing, fortunately, that's now an option that's in effect free of charge on Missouri's 529 plan, for example. And we're going to be seeing a number of other terror-free and Iran- free products and services hopefully come to market, in part because of events like this hearing today.

REP. SHERMAN: But if I'm a consumer rather than an investor and I want to know which oil companies I should buy my gasoline from or which banks I should do business with, are you going to help me?

MR. ROBINSON: Well, we're going to try to equip product providers to be able to help you because we'll work with them to, in effect -- we just can't put the data out on the Internet so to speak. We'd be out of business for starts, but it would also not be a dynamic picture.

Companies are going in and out of these countries all the time, so a photo or a snapshot -- if you were to get a hard copy of that list right now, it could obviously be quite different three months from now. So it is a dynamic process, and there is, I think, a legitimate market involved.

REP. SHERMAN: I would hope that some retailer with some fortitude -- I think is the term I had in mind -- would have the guts to subscribe to your service, identify which of their competitors is investing in Iran, for example, and then do an ad campaign that says: "We never invested in Iran. We never will. And here are three of our competitors that do. Wouldn't you prefer our product?"

MR. ROBINSON: It is a differentiator, Mr. Chairman.

REP. SHERMAN: And we could get -- and certainly they wouldn't have to just be saying it themselves. They could get the Conflict Securities Advisory Group to provide that information. I realize that a lot of folks in the business world don't want to get that hand -- you know, get their knuckles bruised throwing that kind of punch, but the fact is we as consumers want to know --

MR. ROBINSON: I think that's right.

REP. SHERMAN: -- and the best way we're going to find out is through advertising.

MR. ROBINSON: That's right.

And Mr. Chairman, if I could go to just something else you pointed out and that Treasurer Steelman, I think, answered properly and eloquently, is the issue of the fiduciary responsibility and risk here.

For example, in Ohio there is a very important debate and even battle looming right now with its Iran divestment legislation, which is blanket versus targeted. It basically is saying that any company with active ties to Iran is out of that state's portfolio. It leaves it to the external fund managers to make that happen. And that is what creates new products and services for average Americans to take advantage of.

And then you have folks like the National Foreign Trade Council and other detractors coming in with, frankly, somewhat scare-mongering tactics that this is going to involve draconian costs, that it's unconstitutional, which is a good one, because if you think about it, what state doesn't have certain restrictions in their investment policies? Tobacco, human rights, labor rights in the case of California.

Lots of states do this, and the fact is that when you have the SEC talking about the fact that there's an inordinate risk to share value here, how does that -- how does this kind of decision, which as Treasurer Steelman says, takes place every day, become a constitutional matter? I just don't buy it, and I think that that's why we need to focus greater attention on battlegrounds like Ohio and how this goes there, because, frankly, so goes the nation.

REP. SHERMAN: Did you say Ohio or Illinois?

MR. ROBINSON: I'm sorry?

REP. SHERMAN: You said Illinois earlier, now you're saying Ohio.

MR. ROBINSON: I'm sorry. Illinois did a very powerful model on Sudan. Ohio is the one right now focusing on Iran. And I would merely command to the committee's attention to take a look at that because it is going to be a pivotal debate where these various detractors and proponents come together and have this out and, in the balance, gets to Mr. Royce's issue of what a potent instrument this can be.

When you empower individual Americans to make this kind of choice -- you talk about reputational risk, as Mr. Blum did; this is putting these companies in a stark position where they have to make a choice between their rather limited business interests, in some cases with Iran, versus their standing in the U.S. capital markets and places like the New York Stock Exchange. Trust me, it's an easy decision for them.

REP. SHERMAN: Just to comment on the constitutional argument and that is, whatever the fiduciary duty to protect their investors -- and we've just identified three reasons why it's a bad idea to invest in companies that invest in terror -- they can do for that reason, I think, without a constitutional argument.

If they're doing it for the purpose of affecting foreign relations, somebody could argue that unlike tobacco policy that's an exclusive issue with the federal government. But that's why I look forward to working with perhaps Mr. Royce and others on legislation that makes it clear that your fiduciary duty argument goes away by federal statute and that the federal government encourages and authorizes all of its states and cities and other governmental entities to divest.

And therefore, anything that they do along those lines is not adverse to or in conflict with federal control or foreign policy but in furtherance of it. And that should apply not only to investments but also to those that wish to alter their procurement rules to do business only with companies that don't invest in terror.

At this point, let me yield to the gentleman from Southern California, Mr. Royce.

REP. ROYCE: Thank you, Mr. Chairman.

I was going to go back to Mr. Blum for a question because in my office Tom Sheehy and I have gone around and around on this question of the effectiveness of sanctions. And I know where you are on this and your skepticism of it. But I would -- I would just throw out Libya as a question to you. That is commonly held up as an example of the effective use of sanctions that end up stymieing the effort of WMD on all fronts. And I was just going to ask whether or not you concur or if you see that differently.

MR. BLUM: I don't think it was sanctions alone. Remember how many years we had sanctions and how many years indeed where we had even military action against them and they kept going doing things -- bombing airplanes, sponsoring terrorists, having training camps.

I think what happens is they reach a point where the society as a whole wants to join the international community and they begin to put enough pressure on the leader or the leader begins to discover, as I think Qadhafi did, that he -- he doesn't like to be the outlier anymore.

REP. ROYCE: But that does go back to the question of whether sanctions is what put them there. I've wondered -- I know that the prime minister of Italy said he had gotten that information, that it was the toppling of the statue of Saddam Hussein that convinced him.

But sanctions -- if we go to the -- back to your argument, that it was a change of perspective on the top part of the population in Libya -- and I know a lot of Libyans -- that's credible to me. But what drove them to that? Was it the sanctions?

MR. BLUM: I can't -- you know, I can't answer that and I can't say they always don't work. It's just that I've seen so many cases where they're honored in the breach, where the regime builds a weapon even though we've tried to block everything, where the population starves but the guys who are running the country don't. And I look at that and I say, "Wait a minute, this is not necessarily the best approach." It doesn't mean that it isn't a tool and it can at times be a useful -- very useful diplomatic tool. But no one should think that it's the be all and end all.

Now I think that if you're going to go in that direction, what we really have to focus on are the enabling countries that help people beat the system. You know, if you want to have a sanctions regime, put Liechtenstein out of business.

REP. ROYCE: Yeah, I -- that's -- that's an area where I think you're absolutely right, because access to the international financial system is what every one of these regimes really covets and probably couldn't function long without.

And the question I would just close with, Mr. Chairman, is if we could find an effective way to bring that concerted effort on the Cayman Islands and Liechtenstein and so forth and your free port argument that you made in your testimony --

MR. BLUM: The Iranians have a free port in the Persian Gulf and the Iranians use that as a center for getting dollars from Russian gangsters. It's a center for smuggling; it's a center for arms transshipment. They have great commerce with Dubai, and Dubai has become the financial center for all of this stuff that's going on with Iran.

Dubai has no controls. It has a free port that's absolutely wide open and it's where Halliburton moved when we began talking about putting pressure on the oil supply business. There are some thing's here that we have to do in conjunction with the discussion of sanctions. And I think that those things are pretty high priority.

REP. ROYCE: Well, Mr. Chairman, thank you.

Panel, thank you.

REP. SHERMAN: I'll just point out one thing about which sanctions work and which don't. Libya, South Africa had one thing in common and that is it wasn't just the United States. And the sanctions that haven't worked have tended to involve only the U.S., which turns our attention to how do we get Europe on board or, better yet, the U.N. on board?

Now, if we get the U.N. sanction -- that's probably the best way to convince Europe to join us -- and as we then get at least some hope that Russia and China would actually adhere to a well-drafted U.N. resolution -- it's just up until now they haven't allowed one to be adopted, given that they have a veto, et cetera.

So the question for Mr. Comras is, how do we get Russia and China -- assuming this is our number one priority, assuming that we are willing to use every lever we have with Beijing and Moscow -- how do we get Russia and China to allow us to pass meaningful sanctions at the U.N., rather than the "no Disneyland for Revolutionary Guards" sanction that we have now?

MR. COMRAS: I think the road starts with Europe again. First, we need to get the Europeans to take a much stronger position vis-a- vis Iran. And once they buy into a common position with the United States on stringent, targeted sanctions that have an impact and that make sense, I think that they alone can carry the day without Russia and China but that they by doing so will bring Russia and China into that same approach.

One doesn't --

REP. SHERMAN: Why do you think Russia and China would change their behavior vis-a-vis Iran just because Europe was kind of cajoled, kicking and screaming but finally agreeing to sanctions? Just because Germany won't invest in Iranian oil fields, why wouldn't China?

MR. COMRAS: Well, I start with the proposition that even without China and Russia, if the Europeans take the appropriate measures, they will put pressure on segments within the -- Iranian society to begin to force a rethink on the policies within Iran. And once you've begun that process, then Russia and China have everything to gain by joining in and continuing that pressure.

The most important factor in sanctions against Iran will be that China and Russia not step in to take the place of Europe. But that will be a time-consuming event in any event. Russia and China are not in a position to take over the balance of trade, which involves almost 40 percent of all of the non-oil -- 40 percent even including the oil trade, but -- 40 percent of the commerce of Iran is with the European countries, not with Russia and China.

In that trade, Europe enjoys a trade balance -- that is, it sells more to Iran than it imports from Iran, even counting the oil. There would be such a dislocation within the commercial class, particularly in Tehran, if the Europeans began to tighten up on that trade and began to restrict it that that would have major implications now is the next step for putting pressure on Iran to comply.

REP. SHERMAN: Thank you for your comment. I sense Mr. Blum wants to make a very, very short statement.

MR. BLUM: I have one very brief thing I'd like to tell you about, which is last fall I was asked by a subcontractor for the State Department to prepare a module on controlling the monetary aspects of weapons of mass destruction that they were going to use in a worldwide education and awareness program in connection with the U.N.

This had come through a prime contractor, a subcontractor, and suddenly, for reasons I can't even comprehend and which in conversation I learned senior people at the State Department were unaware, the module was pulled and the program was cancelled. I have to tell you that when I look at the way this stuff is contracted out, subcontracted out and then mismanaged, I think there's a little bit of oversight work to be done.

REP. SHERMAN: Well, we look forward to that responsibility as well.

Finally, I would say that sanctions on Iran -- and that has been a focus for us -- it's not a matter of the effect they have on the Iranian economy. I mean, I wish prosperity for all of Iran's people. It's the effect they have on the politics of Iran. For that to happen, we have to be able to broadcast in Iran a single message and that is: Your country is going to do much worse if you continue your nuclear program and it is going to do much better if you abandon it and join the world nations.

I'd like to start those broadcasts now. Unfortunately, I don't lie that effectively in Farsi. First we have to make it true and then we have to broadcast it. And unless we do both -- unless we have the political effect, we're not going to change any government's policies.

I want to thank Mr. Royce for being so patient. I want to thank the witnesses for being here and being patient as well. And thank you very much.