SEN. RICHARD C. SHELBY (R-AL): The committee will come to order.

One of this country's most pressing and potentially dangerous foreign policy challenges involves Iran's development of nuclear weapons and their means of delivery.

A nuclear-capable Iran would fundamentally alter the situation in the Middle East.

Furthermore, Iran's support for some of the most dangerous terrorist organizations in the world and it's exploitation of those organizations to undermine efforts at peace and stability in the Middle East make it imperative that we continue to examine the role of economic sanctions in limiting the scope of its conduct.

Confronting the scourge of terrorism remains the central tenant of U.S. national security policy.

Terrorist organizations from the Middle East to Southeast Asia, to say nothing of terrorist tactics employed by insurgents in our own hemisphere, continue to present serious challenges to us.

It is in this context that the committee today will hear from the administration on its views on reauthorization of the Iran-Libya Sanctions Act, or ILSA.

That statute passed in 1996 and renewed in 2001, targets foreign entities that seek to invest in the development of Iran's oil and natural gas industries, industries vital to Iran's economic well being and by extension presumably vital to its ability to develop a nuclear weapons complex.

Since the revolution of 1979, the Iranian regime has remained an implacable foe of the U.S. interests in the Middle East.

This blossoming of democracy we thought and hoped we saw with the 1997 election proved short lived as the ruling theocracy subverted genuine democratic reform at every turn.

In fact, those early gains now appear to have been lost following last year's elections.

There's open hostility toward the United States and toward the existence of the state of Israel, combined with their government's commitment to carrying out activities consistent with the development of nuclear weapons.

That's placed a premium on the effectiveness of sanction programs targeting Iran, especially those sanctions intended to minimize the financial assets available to develop weapons of mass destruction and the ballistic missile technology to effect their delivery.

There seems little question that ILSA has been effective in impeding Iran's ability to modernize its energy sector even though the test case for its application, the French company Total SA's $2 billion agreement with Iran for development of the South Pars gas field, resulted in a presidential waiver rather than the imposition of sanctions.

The $11 billion in new contracts signed since then, remain in limbo by virtue of foreign concerns regarding ILSA's potential application, concerns more recently supplemented by fear of additional sanctions or military action.

That Iran has nonetheless moved forward with activities consistent with the development of nuclear weapons is not a testament to ILSA's lack of effectiveness, but rather to the vast increase in revenue resulting from the increase in oil prices over the past two years.

In addition to the questions of whether and how to reauthorize the ILSA, the committee is interested in hearing from today's witnesses on the importance of other economic sanctions regimes that target Iran.

In this regard, the committee looks forward to hearing from the Treasury Department on implementation of Executive Order 13382 and the president's WMD Proliferation Initiative that imposes financial sanctions on foreign entities determined to be assisting in the development of nuclear, chemical or biological arms and their means of delivery.

Development of an indigenous nuclear weapons capability is beyond the means of all but a few countries. Iran has received assistance in developing its nuclear complex.

This raises the question about how the issuance of Executive Order 13382 affected this situation.

The committee is pleased to have with us today the Honorable Nicholas Burns, undersecretary of state for political affairs; the Honorable Patrick O'Brien, assistant secretary of the treasury for terrorist financing and financial crimes.

The Department of State is the lead agency for the implementation of ILSA.

The Department of Treasury, particularly its Office of Foreign Assets Control, is vested with the authority for administration and enforcement of U.S. economic sanctions.

Their appearance here today will help the committee to better understand the role ILSA and other economic sanction regimes have and continue to play in containing or impeding Iran's ability to conduct activities threatening to U.S. interests.

Senator Sarbanes?

 

OPENING STATEMENT OF

PAUL S. SARBANES
A Senator from Maryland, and
Ranking Member, U.S. Senate Committee on Banking, Housing, and Urban Affairs

 

SEN. PAUL S. SARBANES (D-MD): Thank you very much, Mr. Chairman.

I'll be brief because I think there may be a vote coming in.

SHELBY: That's right.

SARBANES: I know you're anxious to move the hearing along.

I do want to join you in welcoming Undersecretary Burns, Assistance Secretary O'Brien to the committee to discuss the reauthorization of the Iran-Libya Sanctions Act, known as ILSA.

We reported out a version of the original legislation, 1996, from this committee and reauthorized the act in 2001.

And now we deal with the question of a further reauthorization since that one expires later in the year.

Of course, sanctions against Libya have been lifted in view of the dramatic change in Libyan policy.

Trade with and investment in Iran have been banned by executive order since 1995.

Iran is one of a group of a small group of countries listed by the Department of State as state sponsors of terrorism.

And as such, it is also ineligible for trade preferences, U.S. foreign assistance and U.S. support through the World Bank or the IMF or multilateral financial institutions.

ILSA added to these measures. It required the president to impose at least two out of a menu of six sanctions on foreign companies that invest more $20 million a year in Iran's energy sector.

I won't go through those sanctions. They're known to all of us. And they're contained in the current statute.

The application of ILSA may be waived by the president.

And the statute would cease to apply if Iran ends its efforts to acquire weapons of mass destruction, and if it is removed from the U.S. list of state sponsors of terrorism under the legislation.

So there's a clear path for the nonapplication of this legislation.

It seems to me a clear, reasonable path for any country wishing to play a responsible role in the international esteem to follow.

Regrettably, Iran's pursuit of a nuclear weapons program and its material support for terrorists present very serious threats to an international peaceful order.

ILSA is an important tool for bringing pressure to bear on the Iranian regime.

And it's my sense of it that there is broad agreement in the Congress that the act should not be permitted to expire.

And we look forward to testimony this afternoon from these witnesses.

And, Mr. Chairman, I've abbreviated this statement for the sake of efficiency here.

But I do want to welcome the witnesses again.

Thank you.

SHELBY: Thank you, Senator Sarbanes. We'll make your full statement a part of the record.

Senator Allard?

ALLARD: Thank you, Mr. Chairman.

And thank you for holding this hearing.

I'd like to associate my remarks with both, you, Mr. Chairman, and the ranking member.

And you know, I supported the extension of the Iran-Libya Sanctions Act, ILSA. And I'm pleased to have this opportunity to get an update on how the act is working.

Iran's actions have a direct affect on U.S. security. And the ILSA is one piece of our policy on Iran.

Our national security vis-a-vis Iran is more important now than ever.

Congress enacted ILSA in response to their support for terrorism and pursuit of weapons of mass destruction.

Yet, Iran's support for terror is still incredibly active.

Likewise, Iran continues to aggressively pursue weapons of mass destruction, including nuclear weapons.

This hearing will be an important opportunity to examine not only the act but also its implementation.

Even strong potentially effective measures can be rendered ineffective if they are weakly implemented and monitored or enforced.

I'd like to hear about the effectiveness of ILSA as well as the manner in which it is being carried out.

I'd like to thank the witnesses for being here today. And I look forward to their testimony.

SHELBY: Thank you.

Senator Reed?

REED: Well, thank you very much, Mr. Chairman.

I would request that my statement be part of the record.

SHELBY: Without objection, it'll be made part of the record.

REED: And welcome both Secretary Brien, Secretary Burns.

It's good to see Secretary Burns again.

SHELBY: Senator Hagel?

HAGEL: No statement.

Look forward to our witnesses' testimony.

Thank you.

SHELBY: Senator Menendez?

MENENDEZ: Thank you, Mr. Chairman.

And I will take a minute or two here.

It's a very important issue. And I appreciate the chair's indulgence.

Before I address the issue of Iran, I want to briefly discuss Libya.

I know the applications on the ILSAs, against Libya, was terminated in September 2004 when Libya agreed or announced that it would dismantle its weapons program.

But this action, in no way in my mind, absolves Libya's responsibility for the attack on Pan Am flight 103, an attack that shocked the world, claimed the lives of 189 Americans, 38 that were from my home state of New Jersey.

The Libyan government still owes $2 million to these families, which it promised to pay as soon as it was removed from the state sponsor of terror list, an action the State Department announced on May 15.

And even though this money can't start to replace the lives of those Americans who were murdered, I firmly believe that a promise made must be a promise kept.

And we simply cannot let Libya off the hook until it lives up to its promises.

And I hope the administration will understand that there are many of us on both the Senate and the House who hold this firm belief and expect the administration to act accordingly.

Now, let me briefly turn to Iran.

We should be here to examine the flaws in the current sanctions frame work and to make sure that, as this committee moves forward to craft new legislation, that we close the gaps and tighten the current sanctions.

It's not enough to simply renew our current sanctions against Iran in my mind.

In my mind, it's not enough to simply renew our current sanctions, which let foreign subsidiaries of U.S. companies violate the spirit of U.S. law by investing in Iran's energy sector.

In my mind, it's not enough to simply renew our current sanctions against Iran and continue to allow U.S. pension funds to invest in foreign energy companies investing, which invest in Iran without informing their investors.

It's not enough to simply renew our current sanctions against Iran and continue to allow a presidential waiver that is so broad and doesn't include any real congressional oversight.

And it's not enough to simply renew our current sanctions that would allow the administration to continue to ignore certain investments in the Iranian energy industry so as to avoid either applying sanctions or waiving them.

And finally, it's not enough to let the sanction status quo continue at a time when Iran continues to taunt the international community and flout international standards.

There are some who say that the U.S. Congress should not act while we're in the midst of difficult negotiations with Iran in an attempt to stop the development of their nuclear weapons.

I disagree.

I say this is exactly the time for the United States to act, and particularly for the Senate to act.

With every day that passes, Iran continues its march towards nuclear weapons.

So, Mr. Chairman, in the interest of time, I'd ask the rest of my statement be entered into the record.

But I look forward to working with the chair...

SHELBY: Without objection, it'll be entered in the record.

MENDENDEZ: ... and the ranking democrat to having a vigorous reauthorization.

SHELBY: Thank you.

Senator Schumer?

 

OPENING STATEMENT OF

CHARLES E. SCHUMER
A Senator from New York, and
Member, U.S. Senate Committee on Banking, Housing, and Urban Affairs

 

SEN. CHARLES E. SCHUMER (D-NY): Thank you, Mr. Chairman.

I'd ask unanimous consent my entire statement be put in the record.

SHELBY: Without objections, as told.

SCHUMER: I know there's a time problem.

And I want to thank you and Senator Sarbanes for holding this hearing on ILSA. It's a law in which I believe very strongly.

In the 107th Congress, I introduced the initial legislation to reauthorize ILSA because I believed it was an important tool in keeping up the pressure on Iran and Libya, countries who harbored and supported terrorists.

It was an important law for us to extend then. It's an important law now.

Now, I'm going to just skip over my testimony on Libya.

They've improved their behavior. But I still have some concerns about compensation for family members of Pan Am flight 103.

And those are in my statement. I'm going to skip over that.

But let's put it like this. The Libyan government has not lived up to all its commitments. And we have to do some things about that.

Now, as for Iran, I am very concerned about China's growing involvement in Iran's energy sector.

The administration accused Norinco of proliferating weapons technology and missile components to Iran.

And according to the CIA, the Chinese are working on a Zirconium production facility that'll help Iran produce cladding for reactor fuel.

This is an end run about what we intended to do when we enacted ILSA.

While we've targeted sanctions at Norinco and other Chinese companies, we've got to be clear with China itself that we're not looking favorably upon its dealings with Iran.

We have much to gain from our relationship with China but, as with their actions to manipulate the currency, we have to be watchful and apply constant pressure.

Similarly, there are reports that Russia's been providing Iran with nuclear and military assistance.

The administration is supposedly considering negotiating a nuclear cooperation agreement with Russia, something we have steadfastly refused to do unless Russia ends its nuclear cooperation with Iran.

I hope the administration continues to demand that Russia end its cooperation with Iran before we enter such an agreement.

And as we reauthorize ILSA, we have to consider whether a few additional measures are necessary. And I'm glad we're having this hearing.

Under current law, the administration has the ability to sign national interest waivers whenever it finds, quote, "it's important to the national interest of the United States."

You could drive a Mack truck through that loophole.

I believe a stricter approach, examining whether a country's preventing the acquisition and development of weapons of mass destruction by Iran and other national security issues should be part of the waiver process.

We should no longer limit our view to economic considerations in the post-9/11 world.

National security must be at the forefront of our decision making.

And finally, another issue we should consider is whether we should set a timeline for determining whether an investment violates ILSA.

I'm concerned that for some investments, no determination is ever made. The department simply avoids the issue all together.

The implications of these investments are too important to let them quietly languish in the review process.

And finally, Mr. Chairman, I'd note that given Iran's most recent behavior, we need a strong law that'll clearly establish our view that investment in Iran's energy sector directly or indirectly aids Iran's larger objects and is contrary to what our country is trying to achieve in the Middle East, a peaceful region that no longer supports terrorism.

ILSA is an important tool in our fight against terrorism.

And I look forward to working with you, Mr. Chairman, and my colleagues on the committee on the appropriate way to extend this law.

SHELBY: Thank you, Senator Schumer.

We've reached a point in the Senate, we have a vote on. We have two more votes.

Secretary Burns, Secretary O'Brien, I believe that I'd like to hear your testimony.

We've reviewed your testimony. And others here in the room probably would.

So we will take about a 30 minute -- we hope we'll be back in 30 minutes. We'll recess the Senate until then.

Is that OK with you two?

BURNS: That's fine.

O'BRIEN: Certainly.

Thank you a lot.

The Senate will be in -- the committee will be in recess until we get back from the three votes, approximately, 30 minutes maybe.

BURNS: OK.

SHELBY: Thank you.

(RECESS)

SHELBY: The committee will come back to order.

That was a typical 30-minute...

(LAUGHTER)

... recess in the United States Senate. It runs more than 30 -- that's the way we keep up with it -- 30 minutes equals an hour, maybe an hour and a half, maybe two hours. Who knows?

We do apologize to both of you.

BURNS: No problem.

SHELBY: But that's the order of business.

Your written testimony will be made part of the record in its entirety.

And you can proceed.

We'll start with you, Secretary Burns. Proceed as you wish.

We think this is a very important issue.

BURNS: Mr. Chairman, thank you.

Mr. Chairman, I hope you can hear me. You can?

SHELBY: Thank you.

 

STATEMENT OF

R. NICOLAS BURNS
Undersecretary of State for Political Affairs

 

BURNS: Thank you very, very much.

Don't worry about the delay. We understand the legislative process.

I'm glad to be here with Assistant Secretary O'Brien. And we're happy to answer your questions.

My testimony is submitted for the record. I will not read it to you.

But let me just make a few preliminary points, if I could, to establish the administration position.

First of all, I'd like to say, in response to what you said, Mr. Chairman, and some of the other members, there's no question that the challenge posed by Iran to American national interests is profound. It is a very important one.

And I can tell you that both President Bush and Secretary of State Rice treat it as one of our top national security concerns.

Iran is seeking a nuclear weapons capability, which is unacceptable to the United States.

And our policy, as Secretary Rice said on May 31, is to deny them that ability to create a nuclear weapon's capability.

Iran is the leading state sponsor of terrorism in the Middle East and the central banker of terrorism.

And Iran is pursuing policies in its own country that deny people basic rights.

SHELBY: Plus, they've got more money now with the price of oil increasing. It is sad. (ph)

BURNS: They have a little bit of money to pursue the policies.

So Iran presents, in three different areas, direct challenges to our most vital interests in the Middle East region. And therefore, we are happy to be here to talk to you about this issue.

On the question of ILSA, the Iran-Libyan Sanctions Act, we think the Congress acted wisely in 1996 to write this law, and wisely in 2001 to reauthorize it for five years.

And it's the position of our administration that we would very much support the further reauthorization of ILSA now in 2006.

Mr. Chairman, you called ILSA a useful tool. That's exactly what Secretary Rice has said as well.

Because what it's done, it's shown a very bright spotlight on Iran. And it's made Iran the object of negative attention by the international community. And that's positive in our efforts to deny them what they want to have.

SHELBY: It's showing the truth of what they've been doing, isn't it?

BURNS: It has done that as well. It has very much done that as well.

I would just say this. In 1996, when Congress first developed this law, I think Congress was concerned, and I think the prior administration was concerned about our allies' commitment to put pressure on Iran through the implementation of sanctions, bilateral sanctions and multilateral sanctions.

This year, in 2006, we're dealing with a very different international environment. Because those allies in Europe are now our partners in this international negotiating effort, which is designed to deny the Iranians what we had talked about, deny them nuclear weapons.

And as you know, since February 2005, the president had determined that we should support those European negotiations.

Now, unfortunately, the Iranians walked out on the Europeans last August and September.

And since then, the president has tried very hard to create a large international coalition of countries, including Russia and China, India, Brazil, Egypt, to rebuke Iran for its trying to do, to vote against them in the IAEA, to take the issue to the U.N. Security Council.

And more recently, you saw Secretary Rice go to Vienna on June 1. And we established a agreement among the permanent five countries of the Security Council that we're going to offer Iran two paths.

The first path is the prospect of negotiations.

And Secretary Rice said that the United States might even be at the table of those negotiations for the first time in a quarter of a century should Iran agree to suspend its enrichment activities that it's planned at the time.

The second path, if Iran refuses negotiations, would be a path of sanctions through the U.N. Security Council.

And I think this is the most dramatic way that the international landscape has changed since ILSA was crated in 1996.

We want to keep the European allies with us in this effort to isolate and pressure the Iranian government.

And so while we very strongly support the reauthorization of ILSA and we certainly see the value of ILSA, we have not chosen to support some of the pieces of legislation in the House and in the Senate that would so significantly change ILSA and change its requirements that it would, in the first place, limit the president's ability to conduct foreign policy under our Constitution.

But I think more pertinently, it would focus the attention -- some of those bills -- it would focus the legislation on sanctions against our allies at a time when we're trying very hard to focus the spotlight on the Iranians and when we provide it for a sanctions path through the U.N. Security Council that I think will have great promise should Iran turn away from negotiations.

So I wanted to make that point to you because I think that it responds to some of the preliminary points that the members made.

I also wanted to say, Mr. Chairman, that Libya, of course, is a special concern of our government.

And back in 1996, Libya was pursuing unacceptable policies in the realm of WMD proliferation, but also in the realm of terrorism. And so it was quite appropriate for the Congress to include Libya in that act.

Libya, of course, had been implicated most pertinently -- I know that Senator Schumer and Senator Menendez spoke to this -- to the Lockerbie -- the Pan Am 103 bombing in December 1988.

Three State Department employees were among the 178 Americans killed in that. So we have enormous sympathy for the families of the deceased. And we have tried to support them.

And in fact, I'll be meeting with some of these families tomorrow morning. I had a conversation with them this morning to get a sense of some of their concerns.

As you know, we've come a long way with Libya.

And on May 15, just last month, Secretary Rice announced our intention to resume diplomatic relations and to remove Libya from the state sponsors of terrorism list.

And this is the latest decision in a very careful process that I know you were very much a part of.

And it began in 1999, when Libya began to address our terrorism concerns. And then in 2003, when Libya confirmed its renunciation of terrorism.

And then, of course, in December 2003, Libya announced its decision to dismantle its WMD program.

So given that, we think that ILSA served a constructive purpose.

But as the president had already determined in 2004 that Libya had met the requirements that we had laid down, we would hope that the Congress would now remove Libya from the ILSA legislation and just proceed with the reauthorization focused on Iran, which of course is our major concern on WMD, on nuclear weapons, and our major concern on terrorism.

So I don't want to read the rest of my testimony. But I just wanted to just get those points out to give you a sense of our strong support for reauthorization.

Our concern about some of the House and Senate bills that we think would restrict our ability to be effective in limiting Iranian nuclear ambitions...

SHELBY: We saw that on the floor last week, didn't we?

BURNS: Yes. And I think you know from our written testimony, I'll be very happy to go into any aspect of the negotiations that are underway or the policy that we're pursuing.

Thank you very much.

SHELBY: You might remember Senator Sarbanes and I, a couple of months ago, were in Libya. And we had good meetings and worked with the State Department. We want to continue to work with you.

BURNS: We do as well, Mr. Chairman.

SHELBY: Secretary O'Brien?

 

STATEMENT OF

PATRICK O'BRIEN
Assistant Secretary of the Treasury for Terrorist Finance and Financial Crimes

 

O'BRIEN: Thank you, Mr. Chairman.

Also in the interest of time here, given the hour, I'll also try to be brief.

As an opening remark, I will just say that the Treasury Department is lending its full support to the diplomatic efforts that are underway. And we're very committed to that process and lending whatever support that we can.

You mentioned in your opening statements, in particular, the WMD authorities that are relatively new to the Treasury Department. So I thought maybe what I would focus on my comments would be on the new WMD authority.

In June 2005, the president issued Executive Order 13382 aimed at undercutting the firms involved in proliferation of WMD and their financial and logistical support networks.

Since that time, six Iranian entities have been designated for their support of the proliferation of WMD and their missile delivery systems, including Iran's pursuit of nuclear weapons under the guise of a peaceful nuclear energy program.

A couple of the key designations that I would note: the Atomic Energy Organization of Iran, which reports directly to the Iranian president, and is the main Iranian institute for the research and development activities in the field of nuclear technology; and the Aerospace Industries Organization, which is a subsidiary of the Iranian Ministry of Defense and Armed Forces Logistics, which is the overall manager and coordinator of Iran's missile program.

AIO oversees all of Iran's missile industries.

In addition, just last week, OFAC designated four Chinese companies and one representative office in the United States that supplied Iran's military and Iranian proliferators with missile- related and dual-use components.

No reputable company or institution should be doing business with these entities.

I also wanted to mention the broad country sanctions that are in place and that are administered by OFAC.

They have been enforcing this far-reaching set of sanctions against Iran since 1995.

Pursuant to the Iranian Transactions Regulations, OFAC administers commercial and financial sanctions against Iran that prohibit U.S. persons from engaging in a wide variety of trade and financial transactions with Iran or the government of Iran.

These regulations prohibit most trade in goods and services, including financial services between the U.S. and Iran.

The ITR even prohibit foreign persons in third countries from re- exporting high-tech U.S. origin goods to Iran.

The regulations prohibit any post-May 7, 1995 investments by U.S. persons in Iran. And U.S. persons are prohibited from facilitating transactions involving Iran by third country persons.

The effect of these sanctions has been the severe restriction on the ability of U.S. persons to engage in trade or financial services with Iran.

Perhaps as important as this governmental action is, the response that we're seeing from the international private sector, which you also mentioned in your statement, has been very important.

As it witnesses first hand the disturbing direction in which the Iranian regime seems to be headed, the financial sector has begun to reassess whether it's appropriate or prudent to do business with Iran.

The words and signals coming out of Iran have led observers to worry about Iran as an investment arena. And it prompted reputable members of the international financial community to curtail or cut ties with Iran altogether.

For example, in the international banking community, UBS, Credit Suisse and others have announced that they're ceasing or curtailing their business with Iran.

Press reports have indicated that in the energy sector, firms like Baker Hughes and ConocoPhillips and others have suspended dealings with Iran.

In May, the Organisation for Economic Co-Operation and Development, the OECD, downgraded Iran's credit rating for official credits, and now assesses Iran at the same level of risk as countries with active insurgencies, such as Columbia and Sri Lanka.

These are just the decisions that are being publicly reported.

Reputable institutions around the world are also making quiet decisions to cut back or severe dealings with Iran, having decided that they don't want to do business with a state of sponsor of terror and proliferator.

We in the government can help inform this process by identifying specific threats that private firms might otherwise be unable to detect and protect against.

We're in a critical moment with Iran now.

The Treasury Department and all members of the U.S. government is lending its full support to the State Department's work to bring about a successful outcome to the recent round of multilateral efforts.

In the meantime, in cooperation with our interagency partners, we will continue to use our tools to dismantle networks that support terrorism and weapons proliferation wherever they may be.

We will continue to do everything in our power to deny these networks access to the financial system.

Thank you.

I'd be happy to answer any questions that you have.

SHELBY: Thank you, Mr. Secretary.

I'll start with you, Secretary Burns.

The one instance in which ILSA sanctions were to be imposed, as I understand it, the case of French energy company Total as a agreement to develop a major Iranian gas field, the provisions were waived.

I understand that the waiver was issued by the previous administration.

But I would like to hear from you, if we could, from the Bush administration's position on actually imposing sanctions under ILSA.

Is ILSA, Mr. Secretary, a largely symbolic threat that won't actually be used? It wasn't used then.

And there are reports out there that China and Iran are negotiating or were negotiating a $100 billion deal that would involve Chinese development of an Iranian oil field. And of course, that makes this question, I think, very relevant.

BURNS: Thank you, Mr. Chairman.

I would say this. We support the reauthorization of ILSA because we think it is an effective part of the diplomatic arsenal and economic...

SHELBY: But it's got to have teeth, hasn't it?

BURNS: Pardon?

SHELBY: It's got to have teeth -- teeth.

BURNS: Well, certainly any legislation worth its salt has to have teeth. I agree with you on that.

And we support reauthorization because ILSA has been part of the diplomatic arsenal, economic arsenal that we've got to focus the attention of the world on Iran.

And I think the primary benefit of ILSA over the last decade has been just that. It's created an environment where Iran has been put under a spotlight and made to answer questions.

And it has had a deterrent effect in some respects. Let me give you one specific example.

If you look at a map of the Middle East, you see over the last decade this extraordinary construction of gas and oil pipelines from the Caspian and Black Seas to the major markets in Western Europe.

And you'll notice that the great majority of those pipelines are not traveling through Iran.

Bakujahan, which is the most prominent, which received very strong support from President Clinton and President Bush, does not travel through Iran.

And ILSA has played a part in creating that kind of climate where countries and companies have to fear the potential consequences should they get the attention of our government.

SHELBY: In preparing a conference on doing business with Iran, the Law Society in London included in its announcement the following, "Do you have trade relations with Iran? Have you maximized them to their potential?"

The list of corporations attending the event included dozens of prominent financial and energy companies that we're familiar with, including HSBC Bank, BP Oil, Royal Bank of Canada, Standard Bank PLC, the Deutsche Bank, and United Insurance Brokers.

Also listed among the attendees, the Embassy of Iran.

Now, I don't think we should be under any illusion regarding the respect for U.S. sanctions policy with regard to Iran outside the immediate context of that country's nuclear weapons program.

I'm also aware of recent press reports indicating increased reservations on the part of some banks and energy companies that do business with Iran, and which you alluded to.

Mr. Secretary, is there a point out there though where the old adage that the business of business is business may take a back seat to larger considerations involving a regime like Iran poses, like, a clear danger to U.S. interests and allies in the Middle East?

Do you understand what I asked?

BURNS: Yes, I do, Mr. Chairman.

I would just answer very briefly and say that our administration believes it continues to be in our interest to maintain United States sanctions on Iran that have largely been in place since the late 1970s. This is the right policy for the United States.

Now, the newest element of our policy is to construct this choice that Iran now has to make.

If they want to have peaceful relations, a negotiated settlement and someday far into the future a normal economic relationship with most of the rest of the world, they're going to have to go down the path of negotiations.

Should they refuse that, then we have agreed -- and this was Secretary Rice's agreement with Russia, China, Germany, France and Britain -- all those countries have agreed that, if Iran refuses to negotiate, we will go to New York to the Security Council. And we will entertain the possibility of sanctions against Iran.

So we believe that sanctions can be an effective instrument in international politics, but most effective when you have a wide variety of countries practicing them.

SHELBY: Sure.

BURNS: Not just the United States in isolation, but the great trading nations of the world.

SHELBY: But the bottom line, they've got to mean something, haven't they?

BURNS: They do.

Well, they have to mean something. They have to be universally applied.

SHELBY: Well, first of all, in an abstract sense, they have to mean something. Otherwise, it's mainly symbolic.

I'm not saying this is. I'm asking you the question. They do have to mean something, sanctions do, as a rule, do they not? Otherwise, they'll be ignored.

BURNS: Yes. I think the credibility of the current diplomatic effort that we have underway hinges on our ability to go down that second path, should we must.

SHELBY: We have to.

BURNS: And we are ready to do that if Iran rejects the negotiating path.

SHELBY: Secretary Burns, the issue of pipeline construction has been interpreted by some as a gray area when considering whether ILSA provisions should be applied -- whether they should be applied.

The Iran-Turkey Natural Gas Pipeline has already proven problematic.

And India and Pakistan are both involved in pipeline discussions with Iran.

Could you describe just for the banking committee here today the State Department's approach to pipeline construction projects within the context of ILSA enforcement?

BURNS: I'd be happy to do that, Mr. Chairman.

We've had numerous conversations with the governments of India and Pakistan just in recent months. And our advice to both governments has been you should resist and refuse to enter into any such long term agreement with the government of Iran.

Because we say Iran is not a reliable supplier of energy. Iran could possibly fall under international sanctions in the very near future if it refuses to stop its nuclear projects and nuclear activities.

And it's interesting that these well-advertised plans for a pipeline have not materialized.

And it's our impression that India and Pakistan are hesitating on whether or not they should go forward.

What we've advised is that they look towards Kazakhstan and Turkmenistan for long-term oil and gas contracts, not to Iran itself.

So it's an active part of our diplomacy to dissuade these countries from doing this.

SHELBY: Secretary O'Brien, I'll direct this first part of this question to you.

The Department of the Treasury recently sanctioned four Chinese companies for aiding Iran's ballistic missile programs.

One of the Chinese companies in particular, China Great Wall Industry Corporation, has been a repeat offender. And in fact, appears with disturbing regularity when the issue of militarily sensitive technology transfers are discussed.

Would you provide the committee your view on whether U.S. sanction regimes need to be strengthened in order to provide a better deterrent?

Is the Chinese drive to secure energy supplies too powerful to be stopped through sanctions such as already exist in the U.S. law?

And is there a potential for U.S. dual-use technology to be diverted to Iran, which we're all concerned about, in violation of Iranian Transactions Regulations in the course of Chinese transactions, such as those involving the recent sanctions announcement?

I recognize that the commerce has jurisdiction of dual-use technologies. But does State have any insight here?

Does the Chinese export of fiber optic technology to Iran involve any U.S. technologies?

Secretary O'Brien, I'll ask you first. And then, call on Secretary Burns.

O'BRIEN: Thank you. And I'll focus on the aspect...

SHELBY: Thank you.

O'BRIEN: ... of the financial and logistical support networks for this kind of proliferation.

And I think actually your exchange just previously about the need for multilateral action is reinforced by your question.

Under the U.N. Security Council Resolution 1540, all nations agreed that it's important to address the financial aspects of proliferation.

The G-8 has also discussed this and committed to track, identify and freeze the assets of weapons proliferators.

The United States has played a leading role in actually developing a tool to do that. And that's the EO that I mentioned in my statement, EO 13382, which really applies the same kind of financial sanctions to weapons proliferators as we have in the terrorism context, which are internationally known.

So can the United States by itself end the activities of proliferators that are determined? You know, no. We can do our part.

I think part of what we're doing in conjunction with the State Department is encouraging other nations to look at the commitments that they've made in various international arena on the proliferation front, and begin to appreciate and address the financial component of proliferation.

So I think multilateralizing this kind of tool will be a very important step to increasing our effectiveness.

SHELBY: Secretary Burns, do you agree with that?

BURNS: I certainly do agree with what the Secretary has said, Mr. Chairman.

As to the latter part of your question, I'd like to take that question and get back to you it I could on...

(CROSSTALK)

SHELBY: For the record, that'll be good.

BURNS: ... for the record.

SHELBY: I think it's very important. Pipelines are central to all of this energy.

Secretary Burns, the House bill's provisions on sanctions, if I may.

In your opening statement, Mr. Secretary, you addressed problems the Department of State finds in the legislation passed by the House.

In addition to those issues specified in your statement, were there other provisions to which the department objects?

Does a provision targeting the foreign subsidiaries of U.S. corporations present any problems?

Would such a provision continue to be problematic, if implemented prospectively and not retroactively?

And do the parameters for imposition of sanctions reflected in that legislation fit within your comfort zone?

Can you discuss that openly here?

BURNS: I'd be happy to.

First of all, Mr. Chairman, I want to say we share with the sponsors of the House and Senate bills -- with which we disagree -- we share with them a concern strategically of what we ought to do, which is isolate and pressure Iran and stop it from developing nuclear weapons. So there's no argument there.

We have a tactical difference in two respects.

In general, we're at a point in our diplomacy now where we want to turn the attention of the United States and the instruments at our disposal towards the Iranians and not towards our allies.

Because we don't want to weaken that international coalition that we've created. We don't want to make...

SHELBY: And how do you that? That's kind of tightrope, isn't it?

BURNS: Well, it is difficult. And you certainly want the Europeans to be focusing their attention on Iran, not their attention on the United States and a piece of legislation here in Congress.

So in general, that is the major objection that the administration has had for many months to the two bills that are under question, H.R. 282 and S. 333.

Specifically, there are a couple of provisions that I think I put into my testimony that we believe would restrict the president's ability to pursue a policy that would be effective and it would give him the flexibility he might require in this very fluid environment where we're on the verge possibly -- possibly -- of a negotiation with Iran on the future of its nuclear weapons program.

And I think I've detailed those in my testimony.

SHELBY: You have.

Secretary O'Brien, Iranian support for terrorism, you know a lot about this.

You said, and we know, Iran is the world's leading state sponsor of terrorism.

Secretary Burns touched on this in his opening statement.

But could you provide the committee for the record here the Treasury Department's current assessment of Iranian financial support for terrorist organizations?

Recent press reports indicate, and your statement confirms, that foreign banks, including some that were assessed large fines for their failure to comply with U.S. anti-money laundering laws or lowering their profiles in Iran -- are European countries whose banks -- and a lot of them do business with Iran -- reassessing those relationships beyond the crisis atmosphere that surrounds the nuclear weapons issue.

In other words, is there any sense of reputational risk for banks doing business with Iran and extends beyond the current crisis?

You know, we've worked with you a lot on the financing of terrorism out of this committee. Senator Sarbanes and I believe that's one of the important, you know, ways to fight. We're working (ph). You know that.

You got some comments?

O'BRIEN: Absolutely. And we appreciate your support in that regard very much.

As a general matter -- and I touched on this in my written statement as well -- we do have grave concerns. And would say that Iran is a leading...

SHELBY: They're the banker for a lot of the terrorism in the world, are they not?

O'BRIEN: Yes. And I think they pose a particularly difficult target to combat in that as a state sponsor, as a sovereign, they have vehicles and apparatus available to them that others don't.

There are state-owned banks. There are para-statal companies that can help mask their activities in the financial sector in addition to the informal methods, like hawala or cash couriers to move money.

So they're a particularly difficult target.

I think we've focused very heavily on some of the organizations that they support. There's Bala (ph) and Hamas and the Palestinian Islamic Jihad.

We've taken substantial actions against the front companies and organizations, charities or individuals that are working on behalf of those operational groups.

So I think they clearly are at the foremost of our mind and our concern with respect to terrorist financing.

And your comment about European banks, as I touched on in my remarks, we are seeing an increased sensitivity to reputational risk.

And I won't limit that only to the proliferation context. I think it's broader than that.

And in effect, you know, Iran is isolating itself by its conduct, by its support for terror, by its support for proliferation, by the statements that its leadership is making.

So I think we do see an increased sensitivity to reputational risk. And we think that's a very positive development.

SHELBY: Thank you.

Senator Carper?

CARPER: Thanks, Mr. Chairman.

SHELBY: Excuse me. Senator Menendez comes -- he was here first.

MENENDEZ: No, no. Please, go ahead. No, go ahead.

SHELBY: No, he was here earlier first.

I didn't see you over there. Sorry.

CARPER: I'll be happy yield.

SHELBY: OK.

MENENDEZ: Well, thank you, Mr. Chairman, very much.

I appreciate -- in the beginning of your testimony, I understand you made some reference to my concerns about Libya. And I appreciate that.

We're going to be vigorously engaged in hoping to see that a promise made is a promise kept, and that our administration and our government helps these families achieve that even though it will never fill the void in their lives and in their heart. But I believe it's critical.

So we will be working with others hopefully collaboratively with you and to get the results that we'd like to see.

I'd do have a few questions about our reauthorization.

Secretary Burns, is it not true that under current U.S. law, if a U.S. company invests, let's say $20 million over the course of one year in Iran's energy sector, that the president must impose sanctions?

BURNS: Senator, thank you for the question.

That is my reading of the legislation that was reauthorized in 2001.

Now, the president retains the ability to ascertain whether or not to impose the sanctions. And of course, the president has waiver authority.

And one of the reasons that we support reauthorization is we think -- I won't give you my whole testimony. But you were out of the room.

We think this has been a very useful tool in the ability of our administration to focus a spotlight on the Iranians and to put some pressure on them.

But the president does. And both President Clinton and President Bush have had this authority.

MENENDEZ: All right. Well, let me ask you this.

Isn't it true that under the current law, if a foreign subsidiary of that U.S. company, that very same U.S. company invests the same $20 million over the course of one year in Iran's energy sector that there'd be no consequences for that company?

BURNS: Senator, I'm not a legal expert on the bill. I don't want to pass myself off as one. So I'd be happy to take your question for the record and give you a written response.

MENENDEZ: Well, we'd love to get an answer. But I think the answer...

SHELBY: Would you do that for the complete record for the committee, plus the Senator?

BURNS: Yes. Yes, sir.

SHELBY: Thank you.

MENENDEZ: Thank you, Mr. Chairman.

I'd love to get an answer through the chair. Let me just offer that the answer is yes. And that's the problem.

It seems to me that the very essence of our sanctions regime in this regard doesn't have the teeth that it needs because it allows U.S. companies to do business in Iraq (sic) through their foreign subsidiaries.

And particularly, if one thinks that -- as one's focus is that the essence of our sanctions program is to make sure that we achieve a goal that Iran cannot use money from its petroleum sector to fund its development of nuclear weapons program, than we are undermining it by having this very large loophole available.

And so it seems to me that we need to close that loophole in a reauthorization.

The other concern I have is that under existing law, American companies are by and large not allowed to do business in Iran and non- U.S. companies face possible sanction if they invest over $20 million in Iran's energy sector.

And the rationale is again rather simple. Petroleum production gives Iran the cash to pursue production of weapons of mass destruction. And they need massive foreign investment to keep oil producing.

Those non-U.S. companies that have invested in Iran's energy sector are liable to American sanctions under ILSA.

Yet, many American pension plans and mutual funds continue to invest large amounts in these very same companies.

Several state and municipal pension plans have actually begun to take steps to end their investments in such companies so that, in essence, they're not fueling Iran's ability.

Do you believe that a cessation of this type of investment would have a major impact on Iran's political leadership and in doing so pursuit of nuclear weapons, given the fragility of their economy?

BURNS: Senator, we share with you a very deep desire to stop Iran's nuclear weapons program.

Now, we have to calculate the best way to do that.

And our sense is that you have on one hand American sanctions in place for the last 26 and a half years on the Iranian government that have not had a decisive impact on Iran's ability to proceed to develop its economy and its nuclear industry.

We think it is far preferable to try to get a great number of countries involved in sanctions.

And so we have offered the Iranians a choice.

Negotiations to deconstruct their nuclear program. And if they don't accept that, then of course, an alternative path that would lead to the U.N. Security Council and what we hope would be a sanctions regime.

We think that's far more effective.

And one of the reasons why we support the reauthorization of ILSA is because we think ILSA is an instrument in that policy.

We do not support some of the other bills that have been put forward in the House and Senate because we think they would tie the president's hands so much that we couldn't carry out this policy of trying to offer these two choices to Iran, and would perhaps make it even impossible for him to lead a coalition down that second path toward sanctions.

MENDENDEZ: Mr. Secretary, if I may.

Just as a final comment, Mr. Chairman.

You know, I do agree with you.

The problem is in the beginning of your answer here. The problem is that we have not used ILSA as forcefully.

I've seen the testimony of both Secretary Rice -- I read yours. And the reality is that we have not used ILSA under its existing wherewithal. And as a matter of fact, in a way that I think has been helpful.

We have not had the will -- that's why I think you have an accurate statement that it hasn't been as powerful as it could be.

If you look at a CRS report, they say, and I quote, "that while some believe ILSA did slow Iran's energy development initially, its deterrent affect weakened as foreign companies began to perceive that ILSA sanctions would not likely be imposed."

And that same report includes a list of 11 foreign companies which have apparently invested over $20 million in Iran's energy section.

So, yes. I mean, if you have a tool and you leave it in the shed, it's never going to produce any fruit.

If you have the wherewithal to use the law and you don't enforce it, it is never going to be of value.

And that is the very essence of what I think is happening here.

And that's why I, for one, believe that we need to make sure that there is a strengthened ILSA renewal so that we can actually guarantee -- you know, we have stopped Iran's march yet.

I find it interesting that we have a set of circumstances where what the administration pursues today -- the administration originally criticized the 1994 frame work agreement that the Clinton administration conducted with North Korea, very critical of it. But the very essence of that same frame work is what they're pursuing in Iran.

I have real concerns here.

We still have a chance to make a difference as it relates to Iran's achievement of any nuclear weaponry.

We're already pass that with North Korea.

But we do have an opportunity here.

And I believe that this is a tool, Mr. Chairman, that can be vigorously used.

And I appreciate the chair's beginning to hold hearings and hopefully a markup in the not too distant future.

SHELBY: Thank you, Senator Menendez.

Senator Carper had to go. But he asked that we keep the record open. He has a number of questions to both secretaries.

And we will get those to you.

BURNS: Thank you.

SHELBY: Appreciate your patience today. Appreciate your contribution. And more than that, we appreciate your waiting on us.

BURNS: Mr. Chairman?

SHELBY: Yes. Secretary Burns?

BURNS: Will you indulge me just for a moment?

SHELBY: Absolutely.

BURNS: And very briefly. I just wanted to respond to the Senator.

I think he's given us a very thoughtful presentation of his views.

And I just wanted to say, I think we all agree on the strategy. Everybody agrees we've got to stop the Iranians from developing a nuclear weapons program.

The major problem we have with a so-called strengthening of ILSA as opposed to a straight reauthorization, of S. 333 or H.R. 282, is that it would allow Iran to divide us from our European allies.

Right now, you've got a situation where Iran is trying to escape pressure by the Security Council. It fears the unity of the Security Council.

And what President Bush and Secretary Rice have achieved is the unity of the Security Council.

Some of the provisions in both of those bills would actually point ILSA directly at the allies. It would make them the issue rather than Iran.

I told the chairman before that we feel that one of the great benefits of ILSA over the decade, it's made Iran the issue.

But some of the provisions here, as to which we object -- it's in my testimony -- would actually make France the issue or Britain the issue or Germany the issue.

And we think we'll be far more effective in stopping Iran if we maintain that unity, and if the president and future presidents have the flexibility that they ought to have to pursue a rational policy.

So I just wanted to give you the benefit of that thought.

I thought you gave a very thoughtful presentation.

MENENDEZ: Mr. Chairman, very briefly?

SHELBY: Go ahead, Senator Menendez.

MENENDEZ: I appreciate the chair's indulgence.

I appreciate what you have to say, Mr. Secretary.

But even when we focus on U.S. companies, on U.S. foreign subsidiaries and on U.S. pension plans, it doesn't hurt any foreign country.

SHELBY: We appreciate your appearance here today.

The committee's adjourned.

END