Senate Committee on Banking, Housing and Urban Affairs: Minimizing Potential Threats from Iran: Administration Perspectives on Economic Sanctions and Other U.S. Policy Options

October 6, 2009

Weapon Program: 

  • Nuclear

Related Library Documents: 

Related Country: 

  • Iran

SEN. DODD: The committee will come to order.

Let me welcome all of our guests who are here, in the hearing room this morning, and to welcome our witnesses to this hearing, as well as my colleagues who are here today. Our hearing is minimizing the potential threats from Iran. I'm going to make some brief opening comments. I'll turn to my colleague from Alabama.

Normally, we move right into our witnesses, but this is a subject matter I know in which many members have interest. And so I'll ask if anyone has any very brief opening comments they'd like to make, and then we'll turn to our two colleagues who are here, Senator Brownback, Senator Casey. I should let you know, I extended the invitation to others as well. There's been an interest -- (audio break) -- in the subject matter.

My colleague from Connecticut, Senator Lieberman, and my wife this morning are attending a funeral. We lost a wonderful young captain who was killed in Afghanistan, and the funeral services are for him this morning. And Joe, properly, and my wife are there at the funeral services in New Haven this morning. So I apologize for his absence. He has a strong interest in the subject matter, as many of you know, along with Senator Kyl and Senator Bayh, who have also offered a proposal dealing with sanctions.

So we'll move along here. We're going to get to our witnesses from the administration as quickly as we can. But I thank everyone for their tremendous interest -- appropriate interest -- in this subject matter.

Today, we confront, of course, a serious threat to our nation's security and global stability: the prospect of a nuclear-armed Iran. If Iran were to acquire nuclear weapons capability, it would pose, I think all of us agree, a serious threat to peace and security in the Middle East, especially to our closest friend in the region, Israel; not only to mention ourselves and others as well.

At our last Iran hearing in July, Senator Shelby and I agreed to hear from the Obama administration before moving forward on any sanctions legislation. Much, of course, has happened in that time. Last week in Geneva, after revealing another covert uranium enrichment facility in Iran, the administration held its first diplomatic meetings with Iran and other permanent members of the U.N. Security Council and Germany. Undersecretary of State William Burns met one- on-one with Iran's chief nuclear negotiator. This dialogue demonstrated the United States' commitment, in my view, to pursuing every avenue to push Iran to come clean on its nuclear program and abide by international nonproliferation commitments.

President Obama described the talks, and I quote, as "a constructive beginning," end of quote. Participants agreed to follow- up talks later this month. The International Atomic Energy Agency is to be granted access to Iran's uranium enrichment site at Qom, and Iran has indicated a willingness, in principle, to export low-enriched uranium to Russia and France for processing for medical uses.

Whether Tehran will keep these commitments, or if they'll prove yet to be another stall tactic to avoid tougher sanctions, obviously remains to be seen. And the situation is increasingly urgent, I think as many would agree. Over the weekend, The New York Times reported that the IAEA scientists believe Iran has enough sensitive data to assemble a nuclear weapon.

Ultimately, we will only succeed if Iran's leaders are persuaded to cooperate or face sustained, progressively intensifying, multilateral economic and diplomatic pressure on their government, including tougher sanctions.

They must make a clear choice, come clean on their nuclear program, suspend enrichment and stop supporting terrorists around the world, or continue to deepen their international isolation.

Increased international pressure and the specter of biting sanctions are clearly what have brought Iran to the table for substantive talks, in my view. Worldwide condemnation of Tehran's secret enrichment activities, its human rights abuses, and post- election crackdown have unified the international community to intensify the pressure on Iran's leaders. We must now not let up.

I intend to move forward in this committee this month on comprehensive-sanctions legislation. I'm committed, as I think (the ?) colleagues are as well, to ensuring that this Congress equips this president with all of the tools that he needs to confront the threats posed by Iran.

Just as last year, we will incorporate the best of our Senate colleagues' contributions into one original committee bill, including penalties on companies that support Iran's import of refined petroleum products, of bolstering its domestic capacity, advanced by Senators Bayh, Lieberman and Kyl; the authorization for state and local governments to divest in companies involved in critical businesses with Iran, sponsored by our colleagues who are here today, Senators Brownback and Casey.

In addition, our legislation will further tighten our trade embargo on Iran, enhance Treasury's mandate to freeze assets tied to Iran's terrorists and proliferation activities, and help to cut off Iran's access to the most sensitive and advanced technology available, through tougher export controls on these products into Iran to its black-market trading partners. I would hope our legislation will complement, as I believe it will, and reinforce ongoing diplomatic efforts, and send a very, very clear signal to Iran's leaders of what's in store if they continue to defy the will of the international community.

We are very fortunate to be joined today by some of the administration's chief architects of Iran policy.

Deputy Secretary of State James Steinberg will elaborate on ongoing diplomatic efforts to curb Iran's nuclear ambitions, assess our chances for success, and survey the policy options.

Undersecretary of Treasury Stuart Levey joins us once again. A welcome holdover from the Bush administration, he will discuss the tough, targeted financial measures employed against Iran and explore with us other pressure points in the global financial system that could be employed against Iran's government.

And finally, we'll hear from the acting undersecretary of Commerce, Dan Hill. It has been over two years since the Bush administration proposed restricting export licensees to countries where sensitive technology flows to rogue nations, such as Iran, via third nations, and combatting black-market proliferation networks, which flourish throughout Asia and the Middle East.

But first we're going to hear from two of our colleagues -- after we hear from Senator Shelby and others this morning who may be here -- Senator Casey and Senator Brownback, who will describe their legislation currently under review by our committee on the role of divestment from firms doing business in Iran's energy sector.

We welcome to the hearing those members who are here and the guests who are in the audience. But let me turn first to Senator Shelby.

SEN. RICHARD SHELBY (R-AZ): Thank you, Mr. Chairman.

Recent developments in Iran underscore the importance of this morning's hearing. Last month we learned that Iran has a secret uranium enrichment facility. Last week the Iranians announced that they had reached a last-minute deal to send their supplies of low- enriched uranium to France and Russia for further enrichment.

Just yesterday, news reports revealed that senior staff at the International Atomic Energy Agency have concluded that Iran has acquired, quote, sufficient information to be able to design and produce a workable nuclear weapon. Although Iran denies that it is trying to develop nuclear weapons, it has taken no credible steps to prove otherwise. Iran's troubling conduct is not limited to its pursuit of nuclear weapons. Iran has the dubious distinction of being the most active state sponsor of terrorism for 10 years running, according to our State Department.

Because of Iran's extensive financing of terrorism around the globe, the Treasury Department has referred to Iran as, quote, the central banker of international terrorism. There should be no doubt that Iran remains a serious and growing threat to the entire Middle East region, to our European allies and to the interests of the United States.

The issue is not whether we must take action to check Iran's hostile ambitions, but rather, I believe, how to maximize the effectiveness of the actions that we take. There's a long history of failed policies designed to rein in Iran. As Secretary of Defense Gates noted last October, and I quote: Every administration since 1979 has reached out to the Iranians in one way or another, and all have failed.

Thank you, Mr. Chairman.

SEN. DODD: Thank you very much.

Senator, any opening comments? I know Senator Corker -- this is a modified Corker rule we're applying here this morning, but several members --

SEN. SHELBY: Corker (II/too ?).

SEN. DODD: That's right.

Any comments, Jack, or --

SEN. JACK REED (D-RI): (Okay ?).

SEN. DODD: No?

SEN. SHELBY: Here.

SEN. DODD: Jim? Yeah, Jim.

SEN. JIM BUNNING (R-KY): Thank you, Mr. Chairman. I believe this is probably the most important hearing that I have been with you -- since I've been on the Banking Committee. The danger of a nuclear Iran poses one of -- if not the greatest -- threat to our national security. Now more than ever, we need to use every economic and diplomatic tool at the disposal of the United States and the rest of the free world to prevent this from happening.

We have had sanctions against Iran since -- on our books since 1987, the first year I was in Congress. They, along with other multilateral efforts, have served to put a financial choke on Iran's rogue behavior. Now is the time to expand these sanctions even further and close several loopholes in existing laws.

In the past I have authored legislation to enforce a mandatory ruling of investigation of potential violations of existing Iran sanctions under the Iran Sanctions Act of 1996. I was pleased last year to see this committee incorporate my amendment into the chairman's mark of S. 3445, the Comprehensive Iran Sanctions Accountability and Divestiture (sic; Divestment) Act. I'm looking forward to working with the chairman and Senator Shelby to ensure that this language and its stated purpose are incorporated in any new Iran sanction legislation that this committee will take up.

As it stands, the State Department is encouraged but not required to provide a determination on whether or not a company is in violation of our sanctions, thus giving these sanctions little or no enforceability. Time and time again I have asked the State Department for transparency on this issue, as well as guidance on how to develop workable guidelines on enforcement that will give our sanctions real teeth.

Now is the time to enforce these sanctions and deny Iran the financial capital needed, to fully fund their nuclear proliferation and support for international terrorism.

Thank you, Mr. Chairman.

SEN. DODD: Thank you very much, Senator.

Anyone else wish to be heard?

Bob, do you want to be heard on this at all quickly?

SENATOR ROBERT MENENDEZ (D-NJ): Yeah.

SEN. DODD: Senator Menendez.

SEN. MENENDEZ: Thank you, Mr. Chairman. Appreciate the opportunity.

Mr. Chairman, I just want to say that I appreciate you holding this hearing -- incredibly important, incredibly timely -- in the midst of all the other committee's work -- and to state my strong support for strong actions on Iran's financial and energy sector, should efforts to engage with the regime fail to produce desired results.

You know, although the administration's meetings with Iran officials, in Geneva last week, have been called a constructive beginning, and I look forward to hearing how that definition was defined to our witnesses, what we need now is meaningful action by the Iranian government, to live up to its obligations under multiple U.N. Security Council resolutions.

Current engagement efforts must not be an open-ended process. We cannot weather endless rounds of fruitless negotiations, while the Iranian regime surreptitiously advances its nuclear ambitions.

The Iranians have a history of using talks to stall for time in developing their nuclear program. This fact and the troubling disclosure of a covert enrichment facility at Qom underscore the urgency with which we must be prepared to resort to severe sanctions, to arrest Iran's nuclear ambitions.

I continue to ask, how long are we to pursue what up to now have been fruitless negotiations, while the Iranian government continues to pursue a clandestine nuclear program, with the clock running out?

And so I hope that the negotiations can provide a resolution. But I also believe that there are many areas of Iran's financial and energy sector where sanctions could have a profound effect.

Sanctioning Iran's central bank or, for that matter, banks that continue to do business with Iranian banks, could cause the Iranian banking system to collapse.

Sanctioning suppliers of refined petroleum products to Iran and thereby curtailing Iran's ability to import such products could be devastating to Iran's economy.

Those are but two examples. I firmly believe however that using economic pressure is far superior to the other alternatives, which we might have to consider in the future if we do not act now.

And so I believe that the opportunity for those sanctions, if the talks soon don't really produce meaningful results, is a far better alternative than the options that would be left to us on the table.

Thank you, Mr. Chairman, and I'd ask that my full statement be included in the record.

SEN. DODD: That'll be the case. Thank you, Senator. And, by the way, I'll -- for the record purposes, any statements that members want to put into the record will be included, along with any supporting documentation. That'll be true of all of our witnesses as well. I'll make that point.

Senator Brownback, Senator Casey, we welcome both of you to our committee, and glad you are able to be here this morning to present your thoughts and ideas. Senator Brownback, we'll begin with you.

SEN. SAM BROWNBACK (R-KS): Thank you very much, Mr. Chairman. Appreciate that. Ranking Member Shelby, members of the committee, thank you very much for attending and for letting us speak here today.

I've worked for a number of years on Iranian policy issues. It has been a difficult task, and one I can't say we've got a whole lot to show for over a number of years. In spite of all the efforts and the diplomatic efforts, the Iranian regime has continued to show -- choose a collision course with the free world.

The Iranian government is the leading state sponsor of terrorism worldwide, as Senator Shelby noted; the foremost exporter of extremist ideology; the primary source of instability in the Middle East. The regime's leaders have brutally oppressed their own citizens. They have threatened to commit genocide against the state of Israel, the region's only full-fledged democracy.

And the regime's radicalism and brutality not only harms our interest and threatens our national security but also challenges our moral obligations. It simply, in my estimation, would be unconscionable to allow the mullahs to acquire nuclear weapons. Were they to achieve this goal, they would possess a trump card to ensure the continuation and augmentation of all these dangerous and destabilizing actions.

Mr. Chairman, you've been willing to hear us on our simple piece of legislation. It's a piece of the puzzle, I believe. It certainly isn't the whole thing. It's an effort, like Senator Menendez is saying, that you try to get out in front with some things to try to head off a much bigger collision, and that's what we're after with this.

This is a very simple divestiture piece. It's modeled after something that was done two years ago on the Sudan divestiture effort, which was modeled after the South African divestiture effort. This allows state and local units of government to divest from investments associated with Iranian companies or companies doing business in Iran in such a way to bring an economic pressure on them.

A number of states have already done this, and yet they're in this legal limbo whether or not they can actually legally do it. This makes it clear that they can do it, the Iran Sanctions Enabling Act, S. 1065, currently S. 33 -- bipartisan cosponsors of it. The administration, I believe, would support it. Then-Senator Obama in the last Congress was the cosponsor, along with me, of this same bill, so I think the president -- I know he's well aware of it, and is supportive of it.

I would say, though, that this is only one piece of it. We've got to deal, I think -- and this committee is a key one of doing this -- a broad set of sanctions proposal. I've pushed in the past that we should look at human rights as being our first concern and the last of our concessions, not the other way around. I think we need to showcase that in this overall piece, because that gets the people of Iran, which are our natural allies, on our side, if we emphasize the Iranian people and their need for human rights. Along this line, I think appointment of a special envoy for human rights in Iran, to elevate and lift up the issues, would be good.

Another issue that's working its way through the foreign operations budget now is the Global Internet Freedom Consortium. It's a small amount of money, $30 million, to allow people to be able to communicate over blogs, Facebook and Twitter from the Iranian revolution. We saw this during the election being very effective, as the regime tries to block people getting onto the Internet, and yet some of these fairly simple mechanisms can allow them to communicate over the Internet. I think that would be a key thing as well for this committee to support and add its voice to.

And finally, Radio Farda I think has been a good key piece of the overall communications effort with the Iranian people, and I would urge its continuation and support.

That's a -- that's hitting a round of issues but, Chairman, I think we've got to go at this strong, because the collision course is what has been set by the Iranian regime. And anything we can do to stop that prior to them developing nuclear weapons are things I think we have to engage, and we have to engage them now. We've got to push this forward at this point in time, and not wait and not dither, saying, well, we're waiting on something else or we're waiting diplomatically for things to move. Because I think diplomatically the Iranians are just using that to stall for time, while the collision course gathers steam.

Thank you, Chairman.

SEN. DODD: Thank you very much, Senator.

Senator Casey.

SEN. CASEY: Mr. Chairman, thank you very much. And I'm honored to be back before this committee as a former --

SEN. DODD: Good to have you back. Any time you want to come back -- (inaudible) -- member.

SEN. CASEY: -- as a former member.

We meet here at a time of grave challenge with regard to what Iran has been up to. And I want to commend the work of this committee, Mr. Chairman and Ranking Member Shelby and the entire committee, for focusing, appropriately so, on this grave challenge.

I do want to commend the work of Senator Brownback over -- not just on his work on our particular piece of legislation, but generally over many years on these issues.

We have, as I said, a challenge before us. And I know that many saw some hope in some of the discussions last week in Geneva, but I don't think we should be under any illusions with regard to what this regime has been doing. This is a regime which has refused to recognize the will of the Iranian people and last June's election. This is a regime that has repeatedly disregarded U.N. resolutions on its nuclear program. And this is a regime that previously agreed to send uranium abroad for enrichment only to later renege on the deal. And finally, this is a regime which continues to threaten our ally Israel, and, of course, is a direct threat to our national security interests.

Iran -- the regime in Iran has repeatedly claimed that its nuclear program is only for peaceful purposes, but the facts, especially in recent weeks, don't add up. The United Nations says Iran violated international law by not notifying the IAEA when construction on the Fordu site started more than three years ago. Why are international inspectors invited only after -- after -- the regime is caught misleading the world again?

So I believe we have several strategies here that have to be employed, and they're on concurrent or parallel tracks. First, the negotiations conducted by the administration are important and should continue. At a minimum, this international effort will help restore America's long-held reputation of being an honest broker, of a country that values diplomacy, of a country that values relationships with allies and welcomes new ones.

Internationally, the U.S. is on better footing on this ground than it has been in years. Ties with traditional allies in Europe have been strengthened, and those on the fence, like Russia and China, are showing signs of cooperation on issues that are critical to our national interests.

But second, I believe the Senate must act. And in summary, what we're trying to do is to give not only the federal government all the tools it needs -- the administration as well -- but in particular to give other levels of government, in this case pension funds, give them the tools they need to participate in this strategy.

I believe the Senate should do its part by providing the administration all the tools it needs to put pressure on the Iranian regime. Iran's leaders need to know that if they decide to renege on their commitments, as has been done in the past, the United States is prepared to impose a series of tough sanctions, tough sanctions including measures that will allow state pension funds to divest from Iran and restrict petroleum imports.

The Iran Sanctions Enabling Act, which Senator Brownback and I introduced last May, would allow state and local government pension funds to divest from companies that do more than $20 million in business with the Iranian energy sector.

As Senator Brownback noted, this measure is similar to legislation used with regard to Sudan in the past. Eighteen state legislatures have passed individual Iran sanction members -- measures, I should say. And we need to do the same thing at the federal level to give these pension funds the authority that they need to help us out on this grave challenge.

Finally, in terms of a third strategy, we need to be (prepared ?) -- and I would add to the second part of that the Kyl-Bayh-Lieberman legislation as well, that I and many others are co-sponsor of.

Thirdly, I would think we need to be prepared to support democratic voices and human-rights activists in Iran. This is not about regime change, but a genuine commitment to democratic values.

In a speech before the U.N. General Assembly, President Obama said -- and I quote -- "There are basic principles that are universal. There are certain truths that are self-evident. And the United States will never waver in our efforts to stand up for the right of people everywhere to determine their own destiny."

Our long-held commitment to human rights should not fall off the table during these important deliberations on Iran's nuclear program. In fact, there should be -- these should be, I should say, fully addressed, and our diplomats should raise specific concerns with regard to human rights in Iran.

Ultimately, the political fate of Iran is up to its people to decide, and we should take the lead from them.

We should remain open to their calls for assistance.

In closing, Mr. Chairman, if history is any indication, Congress should be prepared to hand the president the leverage he needs to send a message to the Iranian regime that America cannot and will not accept an Iran with nuclear weapons. The administration needs all the tools at its disposal to increase pressure on the regime diplomatically, politically and through more stringent economic sanctions. I call on my colleagues in the Senate to listen to legislatures in so many states across the country who have passed divestment legislation. The American people do not want to do anything with investing in Iran's energy sector. We need to send a strong message to the regime (and/in ?) the international community that a nuclear-armed Iran is unacceptable.

Mr. Chairman, thank you very much.

SEN. DODD: Thank you very much, Senator, and I appreciate that very much.

We've been joined by a couple of our colleagues here, and I'm going to turn to Senator Schumer. I see Senator Bayh, who's also one of the authors of the -- one of the proposals that we hope to incorporate in this bill.

And just to notify my colleagues, I want to thank people like Senator Casey, Senator Brownback, Senator Lieberman and others. We had planned on this hearing actually prior to the announcement of these talks that opened up on October 1, but I think it's very timely that we do so. I think the point's providing the tools necessary to go forward, are essential.

So let me turn to Senator Schumer briefly. If I could ask my colleagues to be relatively brief. I'll open up statements -- we're going to have full statements in the record.

SEN. CHARLES SCHUMER (D-NY): Great. I'd ask unanimous consent my entire statement --

SEN. DODD: They're excused -- by the way, any -- we want to sit for a minute -- we'll have these opening statements, and any questions we'll ask you to hold up for a minute.

SEN. SCHUMER: I ask unanimous consent the entire statement be read in the record.

SEN. DODD: Yes, sir.

SEN. SCHUMER: And thank you, Mr. Chairman, first for holding these hearings -- they couldn't come at a better and more important time -- and I want to thank all of my colleagues -- Senator Brownback, Senator Casey, Senator Bayh, Senator Lieberman, Senator Kyl -- who worked so hard on this.

And look, we have to do something. This has been an issue important to me for about 10 years. I believe when it comes to Iran, we should never take the military option off the table, but I have long argued that economic sanctions are the preferred and probably the most effective way to choke Iran's nuclear ambitions.

The Obama administration has recently begun direct diplomatic negotiations with Iran, and the first round of these talks did yield some important concessions from the Iranians last week. These negotiations should certainly continue.

But they don't supplant the need for action by this Congress now.

Iran when it's caught red-handed has a habit of promising just enough to avoid a strong response from the international community. Not this time. We should continue talks with the Iranians but we should not trust them.

The threat of new sanctions will only serve to strengthen the president's hand, as we pursue a diplomatic solution. And as I mentioned, economic sanctions are the right way to go. I'm going to try to summarize here in the interest of time.

The bill sponsored -- by Senator Bayh, Kyl and Lieberman -- I think is exactly the right way to go. Gasoline is one of the few pressure points where if we act unilaterally, we will have real effect on the Iranian economy.

Most of the other things we have to do multilaterally. But that is one thing that we can do. And I'm glad it's in the legislation. Two other things, we can do, that we can do unilaterally.

First, Senator Graham and I introduced something called RICA, the Reduce Iranian Cybersuppression Act. And what it would do, would bar companies that export sensitive communication technology equipment, to Iran, from applying or renewing procurement contracts with the U.S. government.

Many of the large ones particularly in Europe do this. It allows the Iranian secret police and others to spy and do other things against their citizens. We should stop them from selling it by using tough sanctions.

And another point in the bill: 27 of us last year called for the Iranian central bank -- we blocked off the bank -- the correspondent actions of banks with one another, and that really hurt Iran.

So what they did is, they had their central bank move in. And now it does what commercial banks do. We should block, and I hope we'll put it in this legislation, the Iranian central bank, called the Bank Markazi, from being -- playing a role in helping other banks circumvent U.S. financial sanctions. We should treat them as a commercial bank and block them off.

Finally one other point, Mr. Chairman, and that is that we need to enforce as well as put new tools to use sanctions. Our existing sanctions are riddled with leaks, in the form of trading partners who funnel our export through a back door to Iran.

We send them exports, and then they send them to Iran. We can plug these leaks by increasing the amount of inspectors we have stationed in the United Arab Emirates and other countries where black markets are serving to circumvent our sanctions. A GAO report, for instance, found that enforcement is lacking particularly in the UAE. And so today -- at least I'M asking the administration to deploy more inspectors to the UAE and other areas of vulnerability of sanctions.

It's a very good bill, Mr. Chairman. I hope we move it quickly. I ask my entire statement be read into the record and thank my colleagues.

SEN. DODD: Thank you, Senator. It will be included.

Senator Bayh, any opening comments?

SEN. EVAN BAYH (D-IN): Just very briefly, Mr. Chairman.

First I'd like to thank you for your leadership. With all the other issues you have on your plate, this is a clear signal of how seriously you take this matter, and so I want to thank you for that; also for your willingness to incorporate the legislation I've worked on with Senators Lieberman and Kyl. We have 76 cosponsors of that legislation, spanning both sides of the political aisle and running, frankly, the length of the ideological spectrum from left to right.

So there's real consensus about the need to bring urgency to this issue, because time is not our friend. Iran is moving aggressively down a nuclear path. If we don't take aggressive steps, one day we will wake up to the unpleasant surprise of them having become a nuclear power. And at that point it will be a much more difficult problem to deal with.

Also, on the issue that I focused on, their vulnerability to restricting imports of refined petroleum products, they recognize that vulnerability. They're moving aggressively to deal with it by increasing their refining capacity. So we have a window of opportunity here in the next year to two to act to really raise the price that they have to pay for their nuclear ambitions and hopefully get them to change their minds.

The last thing I would say, Mr. Chairman, is this legislation offers our best chance to avoid the very painful dilemma of having to choose between either a nuclear Iran, which is unacceptable, or military action to avoid that eventuality, which would be very difficult in and of itself.

So I thank you for your leadership, for including our approach. I want to thank our colleagues for focusing on this as well. Frankly, we need to use the entire spectrum of sanctions to try and deter the nation of Iran from pursuing these weapons.

Thank you, Mr. Chairman.

SEN. DODD: Thank you, Senator, very much.

Any of our colleagues have questions for our two friends Senator Brownback and Senator Casey?

If not, you're both -- I'm sorry, Bob. Did you have something?

SEN. BOB CORKER (R-TN): I -- well, just in -- first of all, I don't -- I couldn't agree more with the opening statements and things that have been said about the -- I absolutely believe that Iran obviously is pursuing a nuclear weapon, and that's absolutely unacceptable.

I guess the question I would have for all of the sponsors, which it sounds like we have many of in the Senate, is, are we looking at something that's enabling, that gives the administration tools that they can use should they decide it's appropriate to use them, or are we prescribing? I mean, to me, that is something that is of concern, especially with what has just occurred. I mean, we do have an opportunity, hopefully, to actually have sanctions in place that mean something for the first time in decades. And I wonder whether the Senate and the House acting in a prescriptive way is actually helpful or harmful. And I guess the question is, are we talking about enabling legislation or are we talking about directing, prescriptive type of legislation?

SEN. DODD: Well, either one of you want to respond to that very quickly?

SEN. BROWNBACK: Just briefly on ours, it's clearly enabling, because what we're doing is allowing state and local pension funds to divest, and right now they have a questionable legal authority whether they can do that. So this is then their choice, but it's something a number of them will take advantage of.

SEN. DODD: Senator Casey, any quick comments?

SEN. CASEY: No, I'd agree with that assessment in terms of our legislation. But at the same time, if the other major piece, the Kyl -- or Bayh-Kyl-Lieberman, were to pass, it does give the president authority. It's not -- it's not -- my understanding, it's not prescriptive, but I think it sends a very powerful message to the Iranian regime and to the world that the United States Congress is united on this. So I think it could be a combination of both empowerment in terms of the pension funds, but also giving the president authority that's unilateral.

SEN. DODD: Thank you very much. Well, thank both of you very much for your participation this morning. We look forward to working with you.

That was a very good question, Bob, and it's an important one, obviously. And I think the enabling point is one -- because we do need to modify some laws that would allow the administration to act, and thereby giving them those tools ahead of time. And I suspect that there are other ideas they have which probably will not be included, necessarily, in our legislation as well. So it's an excellent question and one that we're sensitive to here as well. I appreciate it very much.

Let me turn to our witnesses, if I can, and thank them for being with us. Jim Steinberg is well known to many of us here, the deputy secretary of State, second-highest official, works closely with Secretary of State Clinton, our former colleague. And Undersecretary William Burns. By the way, I want to thank Secretary Burns. I talked to him over the weekend. He called and gave me a good briefing on the events as they unfolded on October 1, and (it ?) was constructive and somewhat optimistic, although cautious, obviously, about progress.

But I appreciate very much his doing so.

During the Clinton administration, Jim Steinberg served as deputy national security adviser and director of policy planning at the State Department. And while I don't mention it here, he formally sat behind these daises up here as a Senate staffer, so he knows our job as well as the job of the executive branch.

And Jim, welcome back to the Senate.

Stuart Levey is the undersecretary for Terrorism and Financial Intelligence at the Department of Treasury, the first ever to hold this position. Appointed by President Bush, Mr. Levey has earned renown for honing U.S. sanctions policies, employing targeted financial pressures -- measures against financiers of terrorism and weapons proliferation.

You have a wonderful reputation; done a great job. And we're delighted you're saying on to continue this effort. So thank you for being with us this morning.

And I've already introduced Dan Hill, but let me just briefly give you a little background. Dan Hill is the acting undersecretary for Industry and Security at the Department of Commerce. In this capacity, he oversees policies for licensing exports of dual-use products; that is, goods and services that have both military and commercial applications. A senior career commercial official, Mr. Hill is playing a key role in the administration's review of U.S. export control systems.

And we thank you very much, Mr. Hill, for being with us.

I'm going to ask you to try and keep your comments relatively brief, if you could. And again, your full statements and supporting documents will be a part of the record. And we'll begin with you, Jim.

MR. STEINBERG: Well, thank you, Mr. Chairman. Thank you, Member Shelby, and all the members of the committee. It's always good to be back in the Senate.

I want to express appreciation on behalf of the whole administration for the interest that you, this committee and the entire Congress has expressed in this subject. It's an important issue for all of us. And I'm confident that we will have a very useful discussion this morning about how we can best achieve our common objective, which is how to address the challenge posed by Iran's nuclear programs. Strong congressional interest in this issue is extremely valuable to us in our efforts, and I'm appreciative of all the work that you've already done on this.

I ask, obviously, that my full statement be put in the record, but I'll just make a few points in summary. I want to begin by being clear about our objective. Our goal is to prevent Iran from achieving a nuclear weapons capability. And we will work with our allies and partners towards that goal, as well as to counter Iranian actions that threaten to destabilize the Greater Middle East and the rest of the world.

To that end, as you've observed, we've pursued a dual-track strategy of economic sanctions engagement.

We think that only by using them together and coordinating them closely can we achieve this important objective.

Let me just take a minute to explain how we're implementing this strategy, including last week's meeting in Geneva. And I would be happy to take your questions when I'm finished.

But we understand Congress's concerns and sense of urgency that you've all expressed this morning and look forward to working with you and consulting with you on any legislative effort with the aim of maximizing our ability to pursue this two-track strategy to convince Iran to meet its obligations while preserving the president's flexibility to carry out the strategy successfully. This committee and others have already provided crucial leadership and important work, and we appreciate the importance of working with you in a shared objective.

I want to emphasize that we're pursuing engagement not because we believe in talking for talking's sake, but because we believe it will advance our goals. In the past, as we've attempted isolation without engagement, Iran has developed a growing mastery of the nuclear fuel cycle while flagrantly flouting its international obligations. Its leaders have neglected the rights of its citizens; its government has continued to pursue a wide range of destabling (sic) activities abroad.

Now, we are realistic about the prospects of engagement. We are and we have forcefully presented our concerns to Iran's leaders and made clear the choices they had before them. But engagement not only increases the chances of achieving our goals through negotiations. As so many of you observed, it also forges a strong consensus with others if negotiations do not produce the results that we seek.

Our objective is a positive outcome that successfully addresses the security concerns posed by Iran's nuclear program to the United States, to Iran's neighbors and to the international community. We are making clear the steps that Iran can take to help resolve our concerns and those of the international community and the benefits that that would bring in turn.

Iran must demonstrate through its actions the exclusively peaceful intentions of its nuclear program. That means allowing unfettered access to international inspectors, cooperating fully with the IAEA's investigation and taking up the long-standing proposals of the P-5 plus one, including a halt to uranium enrichment.

In response to the clear and unified message of the P-5 plus one in Geneva last week, Iran pledged to take several concrete steps along these lines, including IAEA inspections of the previously undisclosed facility at Qom, now scheduled for October 25th, and an agreement in principle regarding a supply of low-enriched uranium for the Tehran research reactor.

If implemented, and I stress if implemented, this agreement would limit Iran's potential to achieve a short-term breakout, in developing weapons-grade highly enriched uranium, and in so doing would help demonstrate whether Iran is serious about proving its peaceful, exclusively peaceful, intentions.

But as Chairman Dodd noted in quoting President Obama earlier last week, he said, this is a constructive beginning but it must be followed by constructive action by the Iranian government.

We will look for and judge by the constructive actions ahead of another meeting of the P-5 plus one with Iran, which we anticipate to take place later this month.

While we're beginning this diplomatic process, our patience is not limitless. We are sensitive to the security concerns of many countries in the region. And these concerns have heightened our sense of urgency.

In the event that Iran passes up this opportunity, our engagement will make it possible to mobilize international action more effectively. By our openness to a negotiated resolution, we can clearly increase our ability to persuade others to stand by with us, if more forceful action is needed.

Our efforts to convince Iran to change course will be more effective if we act in concert with others. Our efforts have already shown some signs of paying off.

Three years ago, the United States was virtually alone in applying pressure on Iran. Now a growing number of countries share our concern about Iran's negative policies and have signaled willingness to join our dual-track strategy.

We have pursued a progressive tightening of U.N. sanctions on Iran with Resolution 1737, 1747 and 1803. We have worked with our colleagues at Treasury and with the international financial community through the Financial Action Task Force.

The European Union has adopted measures to limit the granting of export credits. And as a result of sanctions and international efforts, the cost of doing business with Iran is going up.

I also want to note, as so many of you have done, that our concerns with Iran go beyond the nuclear issue. The Iran government's terrible repression of peaceful protesters, opposition politicians and journalists following the elections revealed to the world much about the character of that government and has increased its isolation.

We are also deeply concerned about the American citizens held in Iran and urge the Iranian government to promptly return them to their families. We have expressed those concerns directly to the Iranian government.

Tehran's aggressive foreign policy presents another threat. In recent years, Iran has benefited from and exploited instability in Iraq, Afghanistan, Lebanon and the Palestinian territories. Our strategy in the greater Middle East is aimed at bolstering security for our partners while reducing Iran's ability to exploit these challenges for its own gain.

We've been working with our regional partners, including Egypt, Jordan, Iraq, Israel, Lebanon and the Gulf states to develop cooperation that will enable us to manage the political, diplomatic and security challenges that Iran poses. These efforts are beginning to show signs of success, including the GCC-plus-three forum, inter- Arab cooperation to help address the political crisis in Lebanon, security and military talks with the Gulf states and Arab government's increasing support for Iraq.

We are also working actively on a comprehensive Middle East peace process, and some regional governments have chosen to conclude model nuclear-cooperation agreements in partnership with the United States, thus disproving Iran's claims that the West seeks to block the pursuit of peaceful nuclear energy by countries.

Well aware of the regional and global consequences of a nuclear Iran, we will continue with our dual-track strategy. We in the international community very much hope that Iran will make the correct choices for itself, the region and the world. Yet we will be prepared to move ahead swiftly and effectively with additional measures with the confidence that our engagement today will make such measures unified and effective.

So in conclusion, again, Mr. Chairman, thank you for you, for your interest in this, for all the members of the committee. And we look forward to working with you in the days and weeks ahead.

SEN. DODD: Thank you very much, Mr. Secretary. We appreciate very much your approach. We'll have some questions for you in a minute.

Secretary Levey, thank you again for joining us, and thank you again for your service.

MR. LEVEY: (Off mike.) Sorry about that.

Thank you, Mr. Chairman, members of the committee. It's good to be back here again to discuss this critical issue. We appreciate your focus on this issue and the support you've given us at Treasury over the years.

Deputy Secretary Steinberg has already given an overview of our two-track strategy toward Iran, focused both on engagement and on being ready to impose clear consequences on Iran if that engagement does not yield the outcomes we seek.

For that reason, we've been working with our colleagues across the U.S. government to develop a strategy for imposing substantial costs on the government of Iran if the president determines that that's what is needed.

The plan we are developing is necessarily comprehensive. As many of you noted in your statements, no single sanction alone is a silver bullet; we will need to impose measures simultaneously in many different forms in order to be effective.

The plan we're developing also takes into account Iran's potential vulnerabilities and those activities that are likely to have the greatest influence on Iran's decision makers. We should be realistic about the ability of sanctions to achieve our political and security objectives with Iran. If, however, we accurately target the key vulnerabilities and fissures within Iran and then act together with a broad coalition of governments and key private-sector actors, we can at the very least demonstrate to the Iranian government that there are serious costs to any continued refusal to cooperate with the international community.

Although we cannot describe the particulars of our planning in an opening hearing, I -- in open hearing, I would like to explain some of our thinking.

First, we will build to some extent on what we have done before and the efforts that you mention, Mr. Chairman. As this committee knows well, beginning in 2006, we developed and implemented a strategy to target Iran's illicit activities. We used our authorities to designate more than a hundred entities and individuals supporting Iran's nuclear missile enterprises, including the key organizations within Iran, scores of their front companies, Iran's major banks that finance their conduct, and Iran's major shipping line that handles illicit shipments for these dangerous enterprises.

We also acted against the IRGC and several of its companies, as well as the Qods Force for its role in supporting terrorist organizations.

Many of our actions have been implemented internationally by the U.N. Security Council and still others by the European Union and Australia. We combined those government actions with outreach to scores of banks and other private-sector leaders around the world. We discussed the risks of doing business with Iran and shared information with them about Iran's illicit and deceptive practices. As a result, the international private sector amplified the effect of our government actions, as banks and companies around the world came to understand that if they're dealing with Iran, it's nearly impossible to protect themselves from being entangled in that country's illicit conduct.

At this point, most of the world's major banks have cut off or significantly scaled back their business with Iran, and Iran is increasingly dependent on an ever-shrinking number of trade and finance facilitators.

Second point I'd make is that if we must increase sanctions, we'll need to adjust our strategy to the current situation in Iran.

Due to economic mismanagement, some experts estimate Iran's unemployment rate to be well over 20 percent. With the lack of jobs disproportionately affecting the young, three out of four unemployed Iranians are under 30.

Foreign investment in Iran has declined substantially. The Iranian government's reliance on corruption and nepotism, in business, limits opportunities for all Iranians.

The government increasingly awards no-bid contracts to companies associated with the IRGC. These companies operate under names that obscure their IRGC affiliation, so that many unwitting non-Iranians are in fact doing business with the IRGC.

In the name of privatization, the IRGC has taken over broad swaths of the Iranian economy. The IRGC seeks to monopolize black- market trade of popular items, funneling the proceeds from these transactions through a patronage system and then using them to help subsidize the government's support for terrorist groups.

There is now a broad acknowledgement that the Iranian government engages in deceptive financial and commercial conduct, in order to obscure its development of nuclear missile programs and to facilitate its support for terrorism.

International understanding of those practices have been underscored by the U.N. Security Council resolutions on Iran and by six warnings issued by the Financial Action Task Force, about the risk Iran poses to the financial system.

Secretary Geithner reinforced all of these concerns this week, meeting with his counterparts at the IMF in Istanbul. Across the board, transactions with Iran are already handled differently than transactions with any other country, except perhaps for North Korea, engendering either heightened suspicion or outright refusal to engage in them.

The vulnerabilities in Iran could be compounded by the internal fractures resulting from the elections. As Secretary Gates recently stated, it's clear in the aftermath of the election that there are some fairly deep fissures in Iranian society and politics and probably even in the leadership.

Finally and I think most important, as the deputy secretary pointed out, we will need a united coalition. We are intensifying work with our allies and other partners, to ensure that if we must strengthen sanctions, we will do so with as much international support as possible. We think that will be critical to our success.

Thank you and I would be happy to answer your questions.

SEN. DODD: Thank you very much, Mr. Secretary.

Mr. Hill, we appreciate you being here, Mr. Secretary, as well.

MR. HILL: Thank you, Mr. Chairman.

Mr. Chairman, Senator Shelby, members of the committee, I welcome the opportunity to appear before the committee today, to discuss the Department of Commerce's role in administering and enforcing U.S. dual-use export control policies towards Iran.

We work closely with our colleagues at the Department of State and the Department of the Treasury, as well as other agencies, to implement the long-standing U.S. embargo on Iran.

All exports to Iran are subject to both the Export Administration regulations and the Department of Treasury's Iranian transaction regulations. Treasury is the lead agency for administering the embargo, including licensing activities, which features not only a prohibition on exports and re-exports of items under our jurisdiction at the Department of Commerce, but also comprehensive restrictions on financial transactions and investments.

Commerce, however, is responsible for several aspects of the embargo of Iran. First, we provide critical technical assistance to Treasury on the proper classification of items proposed for export or re-export to Iran under a license. Second, we play a vital role in enforcing the embargo, by investigating transactions that may constitute violations of our regulations. An export or re-export of an item subject to our regulations without Treasury authorization would generally constitute a violation of law.

The Bureau of Industry Security at the U.S. Department of Commerce has approximately 100 federal law enforcement agents in 10 field offices around the United States. We have agents stationed at main Commerce, as well. We've had a number of significant cases involving Iran which in turn led to successful enforcement actions. Currently we have 235 open investigations involving Iran, which constitutes a little less than one-third of all the investigations we have of possible violations of our regulations.

I have attached to my written testimony a list of recent enforcement cases for Iran that shows light on our activities.

We also have export control offices -- officers in five foreign locations: Abu Dhabi in the United Arab Emirates, one in Beijing, one in Hong Kong, New Delhi, and Moscow. We hope to add more to Singapore and a second one in Beijing in the coming year. These export control officers conduct pre-license checks and post-shipment verification visits to verify that items will be and are being lawfully used and have not been diverted to prohibited users or uses within the country or illegally transshipped to another country, such as Iran.

We coordinate closely with the Department of State and other agencies as we work with other countries, including states that we have concerns that may be involved in transshipments to Iran to establish and strengthen these states' export and transshipment control systems.

This enables those countries to cooperate with us, build their export control system based on our best practices and to cooperate with us on specific transactions as well as take actually -- actions against parties in their own countries who are illegally exporting items.

We have a set of unique tools at the Department of Commerce to enforce the export controls. The first tool that I'd like to talk about is our temporary denial orders. A temporary denial order is a legal order that can be issued quickly for 180 days at a time to prevent an imminent violation of the commerce regulations.

For example, in 2008, we issued a temporary denial order denying the export privileges of Balli Group PLC and related countries and individuals known as the Balli Group, Blue Airways and Mahan airways for 180 days. Evidence obtained by our agents showed that the parties knowingly reexported three U.S.-origin aircraft to Iran in violation of our regulations, and they were preparing to reexport three additional aircraft to Iran in further violation of our regulations. Our temporary denial order effectively precluded the U.S. or foreign parties from engaging in that activity, and ultimately the temporary denial order prevented the illegal reexport of the three commercial aircraft to Iran.

A second tool we have is what we call the entity list. This is a list that can be used to prohibit the export or reexport of any item subject to our regulation to any listed entity. In 2008, for example, we added 75 foreign parties to the entity list because of their involvement in a global procurement network that sought to illegally acquire U.S.-origin electronic components and devices capable of being used to construct improvised explosive devices. These commodities have been used in IEDs and other explosive devices against our coalition forces in Iraq and Afghanistan. This network acquired the U.S.-origin commodities and illegally exported them to Iran.

As a consequence of the addition of these entities to our entity list, new -- no U.S. or foreign party may export or reexport any items subject to our regulations to these entities without a license. Exporting and reexporting any items to the entities without the required license is a violation of the law.

We maintain a robust outreach program to educate the private sector on our embargo on Iran, and we have detailed guidance on our website.

We focus on key companies, such as freight forwarders, integrators or cargo carriers and shipping lines, with regard to the embargo of Iran. Our efforts are targeted towards educating exporters on vigilance and partnering with firms based in major trans-shipment hubs, not only in the Persian Gulf region, but also in Southeast Asia.

In conclusion, I've detailed the role the Department of Commerce plays in the administration enforcement of the embargo on Iran. And I'd be happy to answer any questions at this time.

Thank you.

SEN. DODD: Thank you very much, Mr. Secretary. And I appreciate very much your testimony. We'll have some questions about that.

Let me just say to my colleagues, I'll try and keep around that five to six, seven minutes, if we can. There are 10 of us, roughly 10 of us here, and so we don't want to keep our witnesses any longer than necessary.

Let me begin, if I can, Secretary Steinberg. And critics of the administration deride the government's current approach as rewarding Iran's misbehavior with just talks, in a sense. You get a flavor of that with some of the comments that are made. However, as you have outlined, our strategy is more nuanced than that, and it is a dual- track approach, as you pointed out: engagement backed by the threat of severe sanctions.

And how has that open-hand diplomacy disarmed our international critics and provided the United States with the cooperation that I think all of you one way or another have mentioned here? Obviously, you can go it alone, and we've seen in the past -- I recall the South African sanctions. We were almost alone in that process, and had the positive impact; even though it would have been better had we had more cooperation. But certainly, I think ultimately we had an effect on what was occurring. But ideally, you get cooperation. If you're going to be seeking success here, you need to achieve that. So I'm curious as to whether or not -- how this approach has helped, to what extent of building that additional support that is necessary.

And then I would secondly like to know whether Iran is using the talks to make sincere commitments on nonproliferation, or to stall severe multilateral sanctions. Again, we've got a history here that raises concerns. You've raised them yourselves. We don't know the answer to that yet. Obviously, there's a history here which would cause one to have deep concerns about how serious Iran is about complying here, or just buying the time as many of my colleagues have indicated in their statements.

So I'd like to know what benchmarks that you are using to correctly judge Iran's commitments down the road. What are you looking at here specifically that will give you a stronger sense of whether or not we're on the right track with all of this? And why don't you begin with that, if you can.

MR. STEINBERG: Well, thank you, Mr. Chairman. As you said, I think one of the keys and one of the important elements of our decision to deepen our engagement here is because it does strengthen our ability to get the international community to support our dual- track approach.

When there's a recognition that we're going the last mile to seek a diplomatic resolution, there's greater understanding if we have to take other measures.

And I think you saw this coming out of the meetings that both the president and the secretary had in New York and Pittsburgh over the last several weeks. The comments by President Medvedev, for example, a clear indication that the Russians understand, in light of Iran's behavior and the fact that we have made a good effort to try to solve this, that the Russians seem to be more open to additional sanctions. You're seeing a coming together of countries around the world to recognize that this is Iran's last opportunity. And if they fail to take it, there is a greater openness to this.

I don't want to underestimate the difficulty. It's very critical that we get the support of the Security Council if we can, because that really strengthens the effectiveness. I myself was in Beijing last week to discuss this with very senior Chinese leadership to make clear that we view this as critical and a core interest of ours that's important to our relationship with China, that they work with us as we engage, that they be supportive of our efforts if we need to take stronger measures. So I think that there is a strong sense that these efforts will pay off.

And frankly, the spotlight now is on Iran. We've come to the table. Everyone's looking for their response. And I think, being able to focus that international spotlight now on these discussions, people will judge Iran by its actions -- which leads nicely into your second question, which is, I think we now actually do have some very concrete benchmarks that we can judge whether Iran is now beginning to get serious in light of this additional pressure and the global attention or whether this is a stalling tactic.

In particular, we have two very specific commitments that we are going to be following up on in just the coming weeks: the commitment to ship out the low-enriched uranium for fabrication into fuel for their research reactor and the commitment to provide the IAEA access to this previously undisclosed facility.

We had meetings with the Iranians scheduled on October 19th to review the details of how to carry out this shipment out of the LEU. And the inspections of the Qom site, the Fordu site, are scheduled for October 25th. So by the end of the month, we will have some very clear indications about what their intentions are.

Going beyond that, we have on the table, as you know well, Mr. Chairman, a proposal for a "freeze for freeze" that would begin us down the path of stopping their enrichment program. And so we'll expect a quick response by them as well. So I think we do have a number of concrete benchmarks.

I think it's very important that by giving the Iranians a sense that the patience is not limitless, that we have had success. At the July G-8 meetings in Italy, the G-8 leaders made clear that they anticipated review where we were in September. And I think that giving them that sense of a time horizon had an impact on getting the Iranians to come forward. The president has also made clear that his patience is not limitless on this. He sent a very strong message, both publicly and privately, that we expect a firm and clear response from Iran in the near future.

SEN. DODD: Let me ask both of you quickly a question that's been raised and certainly on the minds of many -- I saw a small piece the other day -- those who are objecting to this stronger set of sanctions, particularly when it comes to the gasoline and petroleum issues, that this may have the counter-effect within the population of Iran. It's been pointed out that obviously the protests have been devastating, what's happened to people there, and yet highlighted to the world the repressive actions of the Iranian government.

But it's been a critical element, I think, in all of us in talking about additional pressures, that we not lose the support of the average Iranian in this process here, who will obviously be affected by these policies we're talking about.

How do you address that question? It seems to me I recall other examples, having been here on the sanctions issues in South Africa and elsewhere, that those same criticisms were raised at the time, that this was going to have the reversal effect. It didn't, of course, and we've now learned since how important those sanctions were to emboldening and encouraging the population that were living under a regime that was so repressive.

What is the answer here, in effect? Do you believe those criticisms are legitimate? And if so, how do we address them? Or do you believe the Iranian population themselves, those who are putting so much on the line, would welcome this approach that we're engaging in today?

MR. STEINBERG: Mr. Chairman, how to impose sanctions and have them be effective is a matter of judgment and not science. We've had a lot of experience, as you said, over the years with sanctions. We know that sometimes they have an impact on the population and the government is able to insulate itself from those sanctions . Other times, they can provide leverage by putting additional pressure on the government.

So I think that's something that we're going to have to fine-tune as we go forward.

I think it's important that we have a broad range of tools available to us, but I think we do need to have a more refined judgment about precisely how to exploit the kind of vulnerabilities that Undersecretary Levey talked about, to see which are the smart sanctions that have the biggest impact. So, for example, Undersecretary Levey talked about the role of the IRGC. That may be a place where we could be particularly effective. I think we'll want to work with you, working with the experts in this area, as we develop this tool kit, to think about how the targeting is most effective in both supporting those we want to support in Iran and putting the pressure on those who need to make the decisions to desist from the program that they're currently involved in.

SEN. DODD: Secretary Levey, you want to quickly comment on that as well?

MR. LEVEY: Well, I agree with the deputy secretary just said. We have learned over the last few years how to do this better, and some of the letters -- lessons that we've learned are that to the extent we can focus on illicit conduct of the government in Iran, we'll have a better chance of not only getting better support within Iran but getting a better multilateral coalition to impose the measures with us, which is my second point: that, you know, if we can do this with other countries, we're much, much better off than if we do it unilaterally. So as we go forward, as the deputy secretary said, we need to be very careful and craft this plan in as careful a way as possible, to make sure we have the desired effect.

SEN. DODD: Yeah. Are you concerned at all about the population -- not that that should be the sole determining factor, but it's a critical element, it seems to me. You've had great courage being shown by huge populations that have responded to the elections particularly in Iran. We've heard over and over again the continued support among large populations for what we're trying to do here and how we maneuver and handle that situation so it doesn't become a liability but a continuing asset for us in this effort.

Do you have any concerns about that?

MR. STEINBERG: Mr. Chairman, as I said, I do think we always have to worry about the humanitarian impact and the political impact, because we want to take advantage of the dynamic there and not to undercut the opposition, not to hurt those who are being courageous, as you said. And I think it -- part of it will be a judgment call, as Undersecretary Levey has said, about whether there's a broad international consensus, whether this is seen as the international community taking an action, so that it's not the United States alone singling them out, that I think will have an impact on the political dynamic within Iran. It may also depend on what other measures are taken and how obvious it is that Iran is refusing to take any kind of positive action.

So I think it is a delicate entrenchment. There may be other steps that we want to take first. We need to look at the full suite of tools that are available to us, both in terms of the sequence and how it applies in the circumstances.

SEN. DODD: I went way over the time and I apologize.

Senator Shelby.

SEN. SHELBY: Thank you, Mr. Chairman.

Secretary Steinberg, why have we allowed the Iranians a month from the time the secret nuclear site was discovered to the time that the International Atomic Energy Agency inspectors will visit the site?

There's a lag time there. It seems like a pretty good size one.

MR. STEINBERG: Thank you, Mr. Shelby.

As you'll recall, these meetings took place on October 1st. And the inspections are now scheduled on October 25th. We obviously need to do -- we want the IAEA to do the kind of work it needs to do, to make sure that these inspections are effective.

It's the kind of thing where it's not just a question of walking into the site but actually doing the preparatory work, assembling the right equipment, materials, the background.

They need to get briefings, from those who may have some insight, to make their inspections worthwhile. There's a little bit of a danger that an unprepared inspection will not be a very effective inspection.

We had asked for two weeks. It's going to take place in three weeks. Obviously we would have preferred two weeks. But I think it is a short notice. We're not -- this is not an indefinite delay.

It's within a matter of weeks of the disclosure. And I think the IAEA will be in a good position to determine what's going on there. It's our judgment that this is within the period of time that we will still get a good insight into what's going on.

SEN. SHELBY: Mr. Secretary, did Iran enter into and then abandon a similar pledge to have Russia enhance its low-enrichment uranium in 2007?

MR. STEINBERG: To my knowledge, Mr. Shelby --

SEN. SHELBY: I know you weren't doing that then.

MR. STEINBERG: I don't believe that the discussions were similar to this particular understanding, which is to have the fuel fabricated for this research reactor. I'd have to check and I'll give you an answer for the record.

But I think the specifics of this arrangement are somewhat different than the past discussions. And I think this is a more concrete set of proposals, as to how this would be handled, including with the involvement of the French as fabricators of the fuel.

SEN. SHELBY: The State Department -- you're the deputy secretary there -- continues to identify Iran as, quote, "the most active state sponsor of terrorism."

Do you think that this raises the possibility that any nuclear weapon that Iran builds could find its way into the hands of terrorists?

MR. STEINBERG: Mr. Shelby, I --

SEN. SHELBY: (Plus bombs ?)?

MR. STEINBERG: I think these are all grave concerns. I think that there are so many different reasons why the potential possession of a nuclear weapon from Iran would pose a danger to us and to the region. We have -- the danger that it would be either deliberately or inadvertently transferred to a terrorist or non-state actor is a very serious concern; that it would be used to threaten its neighbors would be a concern; that it would be used as a cover for it to engage in more aggressive behavior in the region. We can think of so many reasons why this is such a grave danger that that's why we put such a high priority on preventing them getting it.

SEN. SHELBY: Mr. Steinberg -- Secretary Steinberg, in the past 10 days, we've learned of both the secret enrichment facility and the International Atomic Energy Agency report that concludes that Iran has acquired, quote, "sufficient information to be able to design and produce a workable nuclear weapon." Should these two revelations lead to a reevaluation of the 2007 U.S. national intelligence estimate on Iran, which stated then that Iran had a weapons program prior to 2003 but stopped it in that year -- in other words, update the estimate?

MR. STEINBERG: Mr. Shelby, as you know well from your past service here in the Senate, there are aspects of this that I could only go into in closed session. And we're obviously prepared to do that. We are -- this is something we constantly take a look at. It's constantly under review because of the urgency that it takes.

SEN. SHELBY: In other words, you're saying you wouldn't ignore this -- the new revelations.

MR. STEINBERG: Right. And the only thing I would say on that is that we have seen the reports, obviously. We have not seen the formal IAEA conclusions. So we look forward to that. But we take this all very seriously. This is something that's not -- you don't just kind of do the assessment once and then look again. This is something that we put a high priority to keep under permanent review.

SEN. SHELBY: Secretary Levey, you've been involved in this a long time -- that is, dealing with terrorist financing. The United Nations blacklists three of the five Iranian banks explicitly sanctioned by the United States and the European Unions; only sanctions two of them that you're aware of. What would the effect be if the United Nations and the European Unions worked with the U.S. in sanctioning all the Iranian banks? And because of the existing U.S. sanctions, banking within Iran is quickly, I understand, moving from the government-run banks to private banks and unofficial banks. And what are the difficulties there -- first with the U.N. and with the European Union?

MR. LEVEY: Well, Senator Shelby, as you indicate, even the unilateral designation of a -- the Iranian banks by the United States has had a broad effect -- not only because other governments take it seriously, but, most importantly, because banks around the world take it seriously.

That effect is -- no doubt about it, it is multiplied and it is made much more effective to the extent it's done multilaterally. So to the extent we've had designations at the EU of Bank Melli, that has been greatly enhancing of the effect of our designation of Bank Melli. To the extent that the U.N. designated Bank Sepah, that was devastating to Bank Sepah. So there's no doubt that the premise of your question is correct, that a U.N. designation of these financial institutions that we have already designated would be extremely powerful.

SEN. SHELBY: Secretary Hill, last week, Secretary Locke proposed to eliminate license requirements for dual-use exports for a large number of countries which are our allies and partner nations, so to speak. If original export-license requirements are removed for items exported, for example, to the European Union, how will the U.S. be able to enforce its re-export license requirements? In other words, once it goes into the Union, what tentacles do we have there?

MR. HILL: Thank you, Senator. As Secretary Locke clearly said in his address last week, any export-control reform must be -- must be accompanied by robust enforcement and compliance effort and ramping up our efforts there. I have met with the secretary since his announcement, and he is very committed to that, and has asked us to carefully consider the very question that you just raised as we craft our regulations to move that process forward.

We currently have for Iran a total embargo on exports and re- exports that would stay in effect, would not have any -- there would be no impact from our export-control reform. For other items that might be included in the export-control reform, we're looking at ways to control those, including requiring re-export requirements out of those allied nations, including monitoring notification. We're looking at a broad range of issues. We think it's a very important issue that you've raised, and we intend to get it right.

SEN. SHELBY: How is the administration ensuring that any -- any -- proposal to decrease controls which comes under the State Department -- I mean under the Commerce Department -- on sensitive U.S. equipment won't find its hands -- ultimately the equipment won't find its -- be in the hands of Iranians?

MR. HILL: Thank you, Senator. And again, the answer remains the same. We need to be very diligent as we craft that regulation, because we don't want that to happen, and a very robust enforcement and compliance effort to guarantee that going forward.

We work today with allies. For example, we've had a team with the State Department that has visited the UAE once to twice a year over the past few years, where we've helped them develop an export- control system. And we're starting to see progress there. So we have that going on as well.

But again, we're going to be very careful as we move forward on export-control reform to ensure the bad guys don't get the stuff.

And frankly, sir, some of the stuff they get's not all that sensitive stuff. Electronics that go into IEDs and end up on the battlefield hurting our young men and women are not the highest-tech items.

But we're very conscious of that. Our enforcements efforts have been on that. We were able to disrupt the international Mayrow ring and put 75 entities on our entity list.

SEN. SHELBY: Mr. Secretary, I have one quick question, if I could, of Secretary Levey.

In our July hearing, Mr. Secretary, reference was made to the notion that if one is doing business in Iran today, then they are probably doing business with the Islamic Revolutionary Guard Corps.

In October of '07, the Office of Foreign Assets Control, that you are very familiar with, listed the leading Iranian financial institutions, the IRGC and other entities as Specially Designated Global Terrorist organizations. At that time, or anytime thereafter, was there ever a list with a complete financial footprint of who is trading with Iran? And if there was -- is no such list, then why do you suppose one was never created?

MR. LEVEY: Well, as you indicate, Senator Shelby, we did do the -- a very broad set of designations in 2007.

SEN. SHELBY: But not specific, was it?

MR. LEVEY: Well, it was a little bit more specific than you've laid out, because we also subsequently have designated a number of companies that are owned or controlled by the IRGC. As you indicate, that has an effect in the United States, of course. It freezes their assets; it makes it a crime for anyone to do business with them.

But it's a good signal to the rest of the world who really don't want to necessarily do business with the IRGC. If we can identify the companies for them that are IRGC-owned and controlled, then they can take steps themselves to avoid doing business with them. So we have made an effort to continue to provide that guidance to the international business community and continue to take action ourselves to make sure that we're applying the appropriate sanctions.

SEN. SHELBY: This is important, is it not?

MR. LEVEY: I think this is a very, very important matter, yes.

SEN. DODD: Thank you very much.

Let me -- I know we've got -- again these are open hearings. We invite people to come. The signs are blocking the view of some other people in the room from watching the witnesses. So I'd ask them to lower them a bit if they would. Thank you very much.

Senator Reed.

SEN. REED: Thank you, Mr. Chairman.

And thank you, gentlemen.

Secretary Steinberg, you just returned from China. We heard that the Russians were ready to stand with President Obama, on the stage in Pittsburgh, along with President Sarkozy and Prime Minister Brown. But the Chinese were reluctant.

So it seems to be that they're the most critical element of pulling all the major powers together. Can you comment on their position or what we are doing, to get them to pull together with the rest of the major countries?

MR. STEINBERG: Well, thank you, Senator Reed.

It obviously is critical because of the value that we get, from having the Security Council act in these cases. It gives a much more powerful international message, as well as legal tools. I think it's important to recognize that China did not stand in the way of the earlier Security Council resolutions.

So they have accepted in the past that these measures are necessary. And as you know, we've had some considerable success with China in connection with North Korea recently. And I think that's a very important step, because the measures that we took most recently on 1837, with North Korea, are very powerful tools that are available to us and could be replicated in this context with Iran.

I think it's very clear to me, from my discussions with them, that the fact of our engagement strengthens our hands with them. They obviously see this as the preferable course. And to the extent that they see us seriously working an attempt to solve this diplomatically, it increases the chance that they're going to do it.

They obviously have a number of economic interests there. That makes it more challenging to get their support. But the president has raised this at the very highest levels. And in his meeting just a few weeks ago, with President Hu, he made clear that this is at the very top of our agenda, in terms of our concerns.

And I believe that that strong connection that the president has made will help us, should it become necessary to seek additional measures through the Security Council.

SEN. REED: One of the issues that concerned the Chinese is, their -- about 20 percent of their oil, I believe, comes from Iran.

But do they understand that if this situation gets out of hand, one of the likely consequences is oil prices boom up and that they would suffer probably more than anyone else or as much as anyone else?

MR. STEINBERG: Well, Senator, I certainly made that point to them when I met with them. And I also made clear that more broadly, that as they become increasingly dependent on imported oil, imported energy, that they have a huge stake in stability in the Middle East. And an Iran with nuclear weapons or a nuclear capability would create deep instabilities in that region. So I think in some ways, although their energy needs creates ties with Iran and others, it also creates a recognition that they have a stake in this in ways that they may not have seen before.

And I think this is one of the great challenges in our broader engagement with China, is to make clear that they now have a global stake in dealing with questions like this; they can't simply stay on the side and say this is not our problem. Whether that's successfully made it into their thinking, we'll only see in the event. But we've certainly been making that explicit with them.

SEN. REED: Let me switch gears to the domestic situation in Iran. The unprecedented turmoil after their election seems to be continually below the surface, has been occasionally breaking through. What effect does this have on their deliberations, their negotiations, their view of how they should proceed with their nuclear program?

MR. STEINBERG: Senator, it's in some ways the $64,000 question. And I think it really is ultimately somewhat a matter of speculation. There's no question that this is a major factor, but whether this is leading the government of Iran to be more open to a solution because it faces internal pressures, or whether it's making it more defensive, I think is really hard to judge at this point.

I think the only way we're going to be able to tell is by testing the proposition by making clear, including very clearly to the Iranian public, where the opportunities are and how either the government can deepen its isolation further, which is one of the arguments that the opposition made during the campaigns, is pointing to the behavior of the government, which deepened its isolation and the cost it imposed on the Iranian people. So I think we have to keep focused on that aspect.

SEN. REED: Secretary Levey, you mentioned that -- in response to Senator Shelby -- that the IRGC has a significant economic role. I've heard that they've just bought a major position in the telecom company in Iran. Is that correct?

MR. LEVEY: Senator Reed, I've seen that report, and at this point we're trying to confirm it. But there are certainly indications to that effect, yes.

SEN. REED: And I would presume it's not just that they have a good idea for a situation comedy, but they are -- they're looking to control, actually, access to the Internet, to Tweeter (sic/Twitter), to everything else.

MR. LEVEY: That's certainly a possibility, and one is seeing the IRGC injecting itself into so many different areas, as I laid out in my testimony and as you pointed out. And as Deputy Secretary Steinberg said, this may be -- this may well be an area where we can focus some attention and have the ability to bring others along with us and make it more effective.

SEN. REED: Is the IRGC becoming so powerful that they are a force unto themselves, that Ahmadinejad and the mullahs have less and less control of them? Or have they allied with Ahmadinejad as a front so that they can maintain their presence, their growing presence?

MR. LEVEY: I think there -- the -- there are different indications that we have in both directions on that. But at this point it looks like the IRGC is certainly well connected to the supreme leader, and that's the assumption that we're going forward on.

SEN. REED: Just a final question: How does the nuclear program get their money? Is it -- do they go -- big bank loans? Or, I mean, how directly can we affect the funding of these specific programs through sanctions?

MR. LEVEY: Well, Senator Reed, the issue here is, this is a government-funded enterprise, obviously, so this is a regime -- this is a -- you know, a country that has a lot of income from its natural resources. So we have to deal with that situation as we find it.

Just because they have the money, though, doesn't necessarily mean that they can easily engage in international business transactions. And so by trying to raise the costs and make it more difficult and identify illicit transactions and get partners around the world to scrutinize it and be suspicious, we can slow them down and make it more difficult for them in that way, even if it's a situation where we can't stop Iran from having money that it gets from selling its oil.

SEN. REED: Thank you very much. Thank you, Mr. Chairman.

SEN. DODD: Thank you very much, Senator.

Senator Corker.

SEN. CORKER: Mr. Chairman, thank you. And thank of each -- each of you for your service and testimony, and we appreciate what you've said today.

Secretary Steinberg, is there any question in anybody's mind that, during this period of time between now and October 25th, that much of the facility that we're getting ready to inspect is being dismantled?

MR. STEINBERG: Senator, as you can probably guess, what I could tell you about that, I can't tell you in open session.

SEN. CORKER: Well, just --

MR. STEINBERG: So -- but I think that what I -- my broader point is that we are pretty confident that the period of time, the delay, is not going to have an impact on our -- a significant impact on our ability to understand what was going on there.

So I guess it -- to get what is underlying your question, which is, is this -- they have acknowledged that this is an enrichment facility. This is not a case where we are accusing them of having a facility, they've denied it, and they're going to go then hide all the stuff to prove it wasn't it. They have acknowledged that it's enrichment facility. And so I think we believe that the period of time here is not likely to have an impact on our understanding. More important, what -- in addition to inspecting what's there, what we will achieve from this is making sure that this is put under safeguard, so that if they want to continue to go forward with this facility, they -- it will be fully safeguarded, with monitors and all the equipment that the IAEA has.

So given the state of this -- and it is in a very preliminary state -- I think we feel confident that this delay is not one in which significant deception or activities will take place that would significantly impede our understanding of what was taking place.

SEN. CORKER: And I have seen much of the classified -- probably not as much as you have on a daily basis, and I don't think there's any question about that. I guess we -- sometimes one might wonder, you know, would it make sense to have somebody on the ground immediately there and then let the inspectors come in, once they're prepared? But I guess that's too rational of a thing to occur and just doesn't make sense in international diplomacy.

MR. STEINBERG: Again, Senator, I mean, we obviously would have liked to have had a somewhat earlier engagement, but given what -- our understanding of the state of play is there, the slight delay beyond the two weeks that we had suggested, in our judgment, is not going to make a significant impact on that.

SEN. CORKER: And I appreciate the answer.

Senator Dodd asked a good question about what might happen with the sanctions on refined product as far as the people go. As a -- just a tool itself, I mean, do you think the keeping of refined product from actually coming in from other places to Iran is an effective sanction, period? I mean, is it an effective sanction?

And the reason I ask -- there have been a lot of people that say that they can easily get around it, and you know, there's all -- they have subsidies in place that they could remove, and that would contain, you know, the amount that would actually be utilized.

There's, you know, a lot of smuggling that goes on to other countries which they could stop. I mean, is it or is it not an effective sanction?

MR. STEINBERG: Senator, I think that we still have not reached a firm judgment on whether that would be the best way to go; in part, because it would have to -- we need a better understanding of what the efficacy would be, in part because it would depend on the degree to which others participated in this. Obviously, this is a hard thing to do unilaterally.

SEN. CORKER: Sure. But if everybody participated -- I know right now China is the major assistor, if you will; but if everybody participated, and the companies that have just recently stopped continued to stop, would it be an effective sanction or not?

MR. STEINBERG: Again, I think -- I think we have not reached a firm conclusion about whether the net benefits and the net cost would have the effect. Because the challenge is always to try to translate the economic impact into what the political impact would be. And our goal, as we think about what we might want to do going forward, is to think, as Undersecretary Levey said, about how does the government make its calculation. What would have the biggest impact on them; whether it's transmitting it through its impact on the people, or whether it's directly affecting their own activities?

We found in many cases -- for example, the reason I think a lot of us are focused on the IRGC is if you can focus on kind of the cost- benefit calculation of the individuals who are making these decisions, sometimes that has a more targeted impact -- sometimes called smart sanctions -- than things that have to work as a transmission belt through the pain they impose on the public. But I don't think we want to take it off the table. I think it's one of the things that we need to look at.

SEN. CORKER: Let me ask you this. Have you asked for Congress to act? And the reason I ask that, my guess is, with all the testosterone, if you will, that shows itself as it relates to Iran and other kinds of things, if you asked for sanctions, they'd be passed out of here in about 24 hours, maybe more quickly. So -- so the question is, have you asked for us to take any actions in Congress as it relates to sanctions?

MR. STEINBERG: I -- I think, Senator, the key for us will in part be timing, which is --

SEN. CORKER: Well, no, no, no, but have you asked yet? Just "Yes/No."

MR. STEINBERG: We have not asked for additional measures.

SEN. CORKER: Would you like for Congress to prescribe what needs to be done, or would you like for Congress to enable you, if you make decisions as it relates to sanctions?

MR. STEINBERG: Certainly, Senator, we -- the president would like to have the maximum flexibility, in part because of his ability to get --

SEN. CORKER: He'd like to be enabled?

MR. STEINBERG: He would like to be enabled.

SEN. CORKER: Then in essence, just to get to the legislation we have before us, you would oppose then the Lieberman-Kyl bill that says you "shall" -- you "shall" keep refined product from coming into Iran?

MR. STEINBERG: Again, Senator, I think what we'd like to do is work with the committee to give the president the appropriate flexibility. And I know the chairman and others have indicated some willingness to look at actually how --

SEN. CORKER: Well, the answer -- I'm just going to say for you, since you're being diplomatic, as a -- as a diplomat -- is that you oppose this legislation. And I guess, you know, it does worry me that we might get in the middle of your work right now.

But the counter to that, and this is my last question, some of my colleagues up here on the dais, you know, we whispered back and forth a little bit about, okay, what's different now? I mean, there's been talks that have been going on for some time. And by the way, I'm on the side of feeling that you guys do need some flexibility, okay, that we don't need to be telling you guys what to do yet, okay? I mean, I think there's an opportunity for actions to take.

I think, though, the world community's watching. I know many of us are watching. There's been a lot of talk going on by many, many administrations, and nothing has happened.

My final question is, you know, what's different, in your opinion, this time that would enable you -- if you had the freedom and you weren't prescribed by others -- what is different this time that will allow you to be effective as it relates to Iran?

MR. STEINBERG: I think the most important thing is I think we have a better chance of getting broad-based sanctions, broad-based economic and political pressure, because we demonstrated that there's -- that we have made every effort to solve this through diplomacy, and that the burden is clearly on Iran, that they have clearly rejected any attempt to solve this peacefully.

And I think that's an enormous tool for us to get others to act, and at the end of the day -- not only -- because not only are sanctions more effective when they're broad-based, but it also takes away the political argument that the Iranian government may try to make, which is that this is American hostility. This is clearly an international rejection of their unwillingness to be straightforward and open about their program, their unwillingness to prove that it is peaceful.

And so I think that affects not only our ability to get others to join us, but the dynamic that we've all been discussing today about how this plays within Iran itself becomes harder for them to try to use that line with their own people about why these painful measures are now being employed.

SEN. CORKER: I thank you for your service and for your answers, and, Mr. Chairman, for the hearing.

SEN. DODD: Thank you very much, Senator.

Let me just point out, as I understand the legislation, by the way, that there's waiver authority in the legislation for the administration, and so it's not quite as prescriptive as my friend from Tennessee has suggested.

And secondly and I say this respectfully over the years that as a co-equal branch of government, and obviously we delegate to the administration, the executive branch, to conduct foreign policy, and you can't have 535 members of Congress conducting foreign policy, I understand that point.

But also I think it's important on issues like this that the world understand, particularly the Iranian government understand, that our patience has run out, that this has gone on too long and that we are running a great risk, if they accumulate and acquire those weapons and pose the great threat to us and to our allies.

And so while we don't relish this choice, they're giving us no other choice at this point, except the one that we'd all like to avoid. And that is the one that we're trying to avoid, by what we're suggesting here.

And so while it is painful and it may impose some difficulties, in the absence of doing so, there is the fear here collectively that the Iranian people, the Iranian government rather, is taking us to the cleaners on this issue. And the end result would put us at great risk.

So I just think it's important to note that. This is not something we enjoy doing. And obviously working with you, and I appreciate your response, Mr. Secretary, is exactly the mood that we intend to engage with you on.

Let me turn to Senator Bayh.

SEN. BAYH: Thank you, Mr. Chairman.

Just following up on that, to my friend from Tennessee and the chairman and out guests here today, as the legislation does use the word shall. But it also includes waiver authority that the president, on a finding that it's not in the national interest to impose the sanctions, can waive the sanctions.

So we're trying to strike the balance, between creating a sense of urgency, clearly getting Congress on record as saying this is something that we're interested in doing.

I personally think it's the right thing to do but maintaining the appropriate balance of powers, between the legislative and the executive branch, we ultimately give discretion to the executive branch, to exercise its judgment as it sees fit. So that was the balance we were attempting to strike, between being advisory and prescriptive, maybe a little of both.

So that's just for the record. Thank you all for being here today. And my first question, I guess, Mr. Steinberg, it's good to see you again, would be for you.

We're now engaged in this accelerated diplomacy. But the clock is also running. And so my question for you would be, what should the deadlines for the diplomacy be? And what should the consequences for failing to meet them be, if the Iranians just are dragging this process out, in an attempt to achieve a nuclear capability before the world can do anything about it?

MR. STEINBERG: Well, thank you, Senator. I think there are some real opportunities here to test Iran's intentions and to get a sense of the accelerated timeline. One of the reasons why we put such emphasis on this arrangement for shipping out most of the low-enriched uranium for the -- to be reprocessed into fuel for the Tehran research reactor is that it has a real immediate impact, which is, it takes away from Iran LEU which could be fabricated into high-enriched uranium -- highly enriched uranium and, potentially, into material for a nuclear weapon.

So a prompt action by Iran on that would be a very significant step. That's why we've put a lot of emphasis on it, and we'll have an opportunity in a matter of days --

SEN. BAYH: How would you define "prompt"?

MR. STEINBERG: We have a meeting on October 19th to discuss the details of this, and, as I indicated earlier, we anticipate a meeting of the P-5 plus one with Iran by the end of the month. So we're really talking about a matter of days and weeks for the first two commitments that Iran made in the Geneva talks -- that is, the inspection of the Qom facility and trying to reach an agreement on the shipping out of the LEU.

SEN. BAYH: Is there any way for us to verify whether they've actually shipped out all the enriched uranium that they have?

MR. STEINBERG: Well, I think we have a fairly good idea -- not to the -- you know, to the gram -- but a fairly good idea, because the facility is under IAEA inspection; that, you know, within a reasonable tolerance we have a pretty good idea of what their current LEU stockpile is. And so --

SEN. BAYH: So you're -- prompt deadlines.

MR. STEINBERG: Yes.

SEN. BAYH: You're talking in terms of by the end of the month, or around there.

MR. STEINBERG: By the end of the month, I think we will have a clear indication of whether, on the first two specific things that they apparently agreed to in Geneva, whether they're taking action to show they're serious.

SEN. BAYH: I'm -- it was, I guess, typical that they apparently agreed to things and then pretty quickly denied having agreed to those very things. They don't seem to be face -- speaking with a unified voice. So the second part of my question is, if they appear to be dissembling or delaying, what should the consequences for that be?

MR. STEINBERG: I think the president and the secretary and others have made clear that if we see that they are unwilling to take action on the things that they've said they're going to do, that we are prepared to move with stronger actions -- ideally through the Security Council and multilaterally, but we reserve the right to take actions by ourselves. And I think we've given them a good time horizon within which they have to do it, which is not years but has to be quite promptly.

SEN. BAYH: I think you're quite right in judging them not by what they say but by what they do. And my observation is that the Iranians tend to respect the strength and that seriousness of purpose. Our credibility is important here, and willingness to actually take steps forward, actually -- interestingly, it maximizes the chance that you don't have to take those steps.

MR. STEINBERG: I firmly -- I strongly agree with that, Senator.

SEN. BAYH: My second question -- and my clock must be on fast- forward; I'm only getting time for two here -- and I'd be interested in all three of you. It seems to me, at the bottom of all this is an assessment of the character of the Iranian regime. And it may be -- and it's obviously opaque, and it may be somewhat internally divided. I think two of you have indicated that. But ultimately, will they act as a nation-state, assessing their interests and acting pursuant thereof? Or will they be motivated by religious furor, fervor, or hatred toward Israel or the United States or the West, making decisions that we would consider to be irrational?

If it's the former, we can ratchet up economic, financial, diplomatic, cultural, all sorts of pressure, hopefully -- ultimately attaining a level that it's just -- they determine it's just not in their interests to pursue nuclear weapons any more. If in fact the ultimate arbiters are motivated by other factors, then perhaps not, and that takes you down another line of analysis.

So my question to all of you gentlemen is, ultimately, if they were to -- if this regime, as currently constituted, were to obtain a nuclear weapon, what are the changes that they would misuse that weapon in a way that we would consider to be irrational?

MR. STEINBERG: Senator, it's -- obviously, it's hard to know the answer to that question, but I think that's why we are -- the dangers that it potentially poses is why we place such an urgency on preventing them from developing that capability in the first place.

We have a variety of tools available to us. Nothing is off the table. We believe that there's a chance through diplomacy, but we recognize that that may not succeed and we may have to turn to other options. But we've made clear that we have a very clear goal, to prevent them to develop the capability to do that, so that we can avoid the risk that you have identified.

SEN. BAYH: Mr. Levey? By the way, thank you for our previous meetings over the years. You've done great work in this area, and one of the few things that actually has ratcheted up the cost to the Iranian regime for their misbehavior, so I'm grateful to you for continuing on.

MR. LEVEY: Well, thank you, Senator. And I appreciate your interest in this and all the discussions that we've had about it over the years.

I think the answer to your question about what is the nature of this leadership in Iran is that, while we don't know for sure, what we're trying to do now is probe that. The process that Deputy Secretary Steinberg laid out will give us -- will put before the leadership in Iran a rational choice, either to engage and take the steps that they're being asked of, or face the consequences of not doing so.

And so we'll put before them the rational choice, and we'll be able to learn by what happens rather than by a prediction.

SEN. BAYH: Mr. Hill, do you have an opinion about this?

MR. HILL: Sure, but I think I'll defer to my distinguished colleagues. I would just say at Commerce we're focused on preventing bad guys from sending things to Iran that will hurt us in the battlefield.

SEN. BAYH: Right. Well, if I could just make two final points, Mr. Chairman -- my time has expired -- it is possible that the -- you know, they're operating as if they were in a bazaar and are ultimately rational decision makers at the end of the day. But we may not be able to raise the cost so high as to ultimately affect their decision about this, because even the reformers, as I understand it, are in agreement that -- about the nuclear aspirations of the country. At least they have been until recently. So there seems to be a broad consensus within Iran about this. That's number one.

Number two, even if there's a -- even if you think there's a 95 percent chance that they are rational decision makers and will behave like a normal nation-state, if there's only a 5 percent chance that they will not, is that a risk that you're willing to run? And that's a very hard question to answer.

So I encourage you in these efforts. We should ratchet up the cost, as high as we can, Mr. Levey, as you say, perhaps we will then find out how they behave. Of course then you always have the question of will they comply with that. But that's perhaps the subject for another hearing on another day.

Thank you, gentlemen. Thank you.

SEN. REED: Thank you, Senator Bayh.

Senator Merkley.

SEN. JEFF MERKLEY (D-OR): Thank you very much, Mr. Chair, and I appreciate your testimony today.

The question I want to ask you all to help us have insights on, and to the degree you can do so in an unclassified fashion, is -- certainly there is no long-term benefit to China and Russia to having a nuclear-armed Iran, and yet they have been somewhat reluctant to come to the table and join in an international effort, multilateral sanctions. Can you give us a little insight into how Russia and China have thought about this issue, weighing their short-term trade deals against the long-term risk, and how their perspectives are changing and how we're working to continue to help them see the importance of this effort?

MR. STEINBERG: Thank you, Senator. It's always a little bit perilous to try to peer into internal decision-making of other countries and particularly in these cases where it's not so transparent perhaps as in our own, where you can read about it in the newspapers.

The -- it seems to me that the biggest challenge that we have is that both Russia and especially China have a firm conviction that the best results are achieved through diplomacy. And they are frankly more skeptical than we tend to be, about the efficacy of economic sanctions and the like.

They aren't opposed to them. As I said earlier, we've had the support of Russia and China on three Security Council resolutions that affect Iran. So they have recognized that at the end of the day, you may have to take these measures. And again most recently with North Korea, we got them to take some very strong measures.

So I think they are slower to come to the conclusion. They are more likely to conclude that the threat is counterproductive than -- we often feel the threat actually is incentivizing to a country, to negotiate.

But as I said, I think that it is not because there is a fundamental disagreement about the objective. Nor I think increasingly is there as much of a difference about how dangerous a nuclear Iran would be. I think there's a growing acceptance among all of the five that this is something that is of paramount importance.

So that's why the engagement strategy has been so important, because it helps us convince countries like Russia and China, which are more inclined to put stock in diplomacy and negotiation, that we have seriously pursued that. And we're not just kind of rushing over it, to get to other kinds of actions.

They obviously have economic interest there. Europeans have economic interest there. And those must have an impact in their overall calculation. But I think at the end of the day on these issues, they understand of what paramount importance this is.

Again you can never know for sure. But in my earlier service, during the Clinton administration, we worked with China to end their support, direct support, for Iran's nuclear program in the mid-1990s. And again they had an involvement with the zero-power reactor in Iran and the like. And they were reluctant to do it. But over time, they did end that involvement.

So I think there are -- the record would suggest that if you work this hard enough, there's no guarantee. But there's at least some prospect that they will come around, to the view that we share.

SEN. MERKLEY: Let me ask this question.

When Iran's government looks around the world, they see Pakistan now as a nuclear power, despite sanctions that were applied at one point. They see certainly North Korea as a nuclear power. And they see how reluctant foreign nations are to mess with nations that are nuclear powers.

Is there a certain logic to their pursuit, especially if you throw in national prestige? Are these things so deeply rooted -- their vision of kind of the protection that a nuclear weapon provides them, and their national prestige -- that it is -- can sanctions -- can sanctions be reasonably expected, even in a multilateral, serious format, be expected to counteract those two powerful forces?

MR. STEINBERG: Senator, I think we have to disrupt that logic. If we take each of the elements -- I think you've raised some good questions there. With respect to prestige, I think it is possible, and I think this gathering of international consensus is how we do it, is to actually reverse the calculation; that it isolates it, that it makes it more of a pariah state; that rather than gaining prestige and influence, it becomes less welcome in the international community, less able to achieve its objectives. So I think we have the ability to break that logic.

In terms of security, I think we can also show that they're less secure, that they are uniting all of the countries in the region to be concerned about them, to strengthen their military ties with each other and cooperation with us.

So each of these potential logics are what we have to work on and to demonstrate to them that if they think that's what they're achieving, they're actually not going to achieve it, they're going to achieve the opposite; they will be less secure, less prestigious, less able to achieve their objectives by going down this road. And here the strong international consensus, I think, is a critical part of that effort.

SEN. MERKLEY: And to change that international environment, we really have to have full cooperation of major powers around the world. And I understand that that is the foundation of your efforts, and we all hope that those are successful.

MR. STEINBERG: Thank you, Senator.

SEN. MERKLEY: Thank you.

SEN. : Senator Bunning.

SEN. BUNNING: Thank you, Mr. Chairman.

Mr. Steinberg, since the enactment of the Iran Sanctions Act of 1996, approximately how much have foreign countries invested in Iran's energy sector?

MR. STEINBERG: I'd have to provide that for the record, Senator. I don't have --

SEN. BUNNING: I would appreciate that very much.

Since you do not know that answer, I happen to be aware that the figure that you would give us does not include $70 billion in pending transactions that are known about, most of which are long-term contracts to purchase Iranian gas and oil.

Is that correct? You know about those?

MR. STEINBERG: Senator, there -- obviously, there are some long- term contracts. And there are -- I mean, there are legal issues with respect to investment and the coverage of the Iran Sanctions Act as opposed to purchases and long-term contracts.

But let me just say, because I know of your interest in the Iran Sanctions Act, that you have to look at this not only from transactions that have taken place but transactions that have not taken place. And one of the powerful tools, and one of the ways that we work with the Iran Sanctions Act, is to use this as leverage to discourage people from investing in Iran. And I -- again, from my previous service, I know how powerful that can be, and I know that the previous administration also used it as a way to discourage actors -- particularly Europeans, but others as well -- from making these investments. And I think there's no question that --

SEN. BUNNING: Well, in that regard, then, under the Iran Sanctions Act, how many of these countries that are in violation of our sanctions -- how many more countries -- in other words, does the State Department actually consider these countries in violations of our sanctions?

MR. STEINBERG: There are -- we obviously look at each transaction that comes to our attention, Senator, and if we find a violation we would obviously impose measures on --

SEN. BUNNING: Do you rule on it? Does the State Department then impose the ruling that is in the Iran Sanctions Act?

MR. STEINBERG: We would impose sanctions if we found there was a violation of the sanctions act.

SEN. BUNNING: You would. Okay, recent -- this is the same -- for the same gentleman. Recent excerpts of the International Atomic Energy Agency annex confirms foreign intelligence reports that Iran has restarted work on a nuclear warhead design. Does it remain the position of the administration that Iran has not restarted this design?

MR. STEINBERG: Senator, the -- you're citing press reports. To my knowledge, that IAEA report has not been completed or sent to us, so I can't comment on the specifics of the IAEA report.

With respect to Iran's nuclear program, that's something that we continue to keep under advisement and review, and the details obviously we'd be happy to review in the classified session.

SEN. BUNNING: Thank you.

Mr. Levey, are you aware of foreign banks that continue to conduct business with sanctioned Iranian entities? If so, why have these banks not been sanctioned?

MR. LEVEY: Well, Senator Bunning, the question is, whose sanctions are they violating?

SEN. BUNNING: Yes.

MR. LEVEY: If they are -- if they're violating --

SEN. BUNNING: I'm speaking about ours.

MR. LEVEY: Right. So we have acted against the Iranian banks that -- that are violating -

SEN. BUNNING: What about the other foreign banks?

MR. LEVEY: They're not permitted to use our financial system to --

SEN. BUNNING: That's correct.

MR. LEVEY: -- to do the business with any Iranian bank.

SEN. BUNNING: So if you find them in violation of that, then you do sanction?

MR. LEVEY: There would be consequences for any foreign bank that was using our financial system to do business with an Iranian bank.

SEN. BUNNING: Thank you. What role do large financial clearinghouses, such as Euroclear, EBA and the Asian Clearing Union, play in allowing Iran to circumvent sanctions?

MR. LEVEY: Well, Senator, as you know, those are all major institutions that have to abide by not only U.N. Security Council resolutions that apply to Iran, but also the kind of the financial rules of the road, in terms of legitimate financial activity.

That said, there is -- and we've engaged with the institutions that you've mentioned to make sure that they're aware of the risks of doing business with Iran, as I laid out in my testimony. Some of the institutions that you mentioned we -- we do engage with very closely to make sure that they're not being used as a way for Iran to obscure the underlying parties to a transaction. And that is a concern that we continue to have and engage on actively.

SEN. BUNNING: Mr. Steinberg, outside of the Qom facility, how confident is the administration that there are no other secret Iranian facilities?

MR. STEINBERG: Senator, this is obviously something that -- the very fact of the Qom facility has to raise questions about whether there are things that we don't know about. This is something we obviously put as among our highest priorities, in terms of the intelligence community. And you know, I think this is something that, while we have no specific evidence of other facilities, it's not something that we take for granted that -- the fact that they don't.

SEN. BUNNING: In other words, there could possibly be?

MR. STEINBERG: By definition, there could be, and I think we have to take very seriously the possibility that there might be.

SEN. BUNNING: Okay. This'll be my last question, since my time is running out.

For Mr. Steinberg, the P-5 plus one talks have been described as slow and a constructive beginning. Will Russia and China agree to the next steps if the negotiations fail to show progress?

MR. STEINBERG: Senator, I obviously will have to see in the event, but I think that the -- certainly with respect to Russia, the comments of President Medvedev were encouraging in terms of his recognition of explicitly recognizing that -- of the role of sanctions in this case. And I'm hopeful that, with the Chinese as well, given their past practice, which is ultimately coming along with supporting Security Council resolutions, that we can persuade them as well. But I can't obviously guarantee it at this point.

SEN. BUNNING: Do you know if Russia will commit to stopping anti-aircraft-system sales to Iran?

MR. STEINBERG: It's certainly something we have raised repeatedly with them. They have indicated that they understand the concerns that we have, but we're not resting on our laurels on this one.

SEN. BUNNING: Thank you very much, gentlemen, for being here.

SEN. : Thank you, Senator Bunning. Senator Menendez?

SEN. MENENDEZ: Thank you, Mr. Chairman. Secretary Steinberg, in your opening statement you basically said the Iranians can either negotiate in good faith or they can face increasing international isolation and pressure. And my question is, up to now, do you think the Iranians have negotiated in good faith?

MR. STEINBERG: Senator, I think this is frankly the first concrete evidence that we have had during this administration of serious negotiation. I'm an outsider with respect to the earlier negotiations and whether those who were involved felt that there was any progress made at that point. But I certainly think that during the first months we were in office we were not seeing the signs of responsiveness at all from them, and I think it has been the -- both the growing focus of the two tracks of our strategy that has brought the intense scrutiny on them and the possibility of additional pressure. So --

SEN. MENENDEZ: Let me ask you this. The first day of talks seemed to produce a potentially positive first step, that -- Iran's agreement supposedly to ship most of its low-enriched uranium out of the country.

Now, I've read press report that they're denying they made that commitment. Which one is it?

MR. STEINBERG: Senator, as I mentioned before, we have a meeting with them on October 19th, and I think we'll see. I think that the --

SEN. MENENDEZ: But did they or did they not make that commitment in the first --

MR. STEINBERG: They made a commitment to proceed with this program.

SEN. MENENDEZ: All right. So they made a commitment. Now they say they don't, which is an example to me of, you know, what they have traditionally done as they have moved along in these negotiations; you know, give you one sense (sic) forward and then two steps backward.

Let me ask you this. We can only sustain a process with measurable, practical results is your testimony. Well, my question is, then, what is that? That's rather amorphous to me.

The president has said by the end of the year we should be able to access (sic) whether the talks hold real promise. What's the timeline you all have in mind? How will we know if the Iranians are serious? How will we be able to palpably have a sense of benchmarks in which we measure real progress versus illusory progress?

MR. STEINBERG: Well, I think the issue that we've just been talking about is an important first step. The agreement -- if they implement it -- and I agree, we'd have to make sure they implement it, although I don't think we should draw a lot of conclusions from the press statements they make about it. I think we'll put a lot more emphasis on what they actually agree to when we come back together again.

But if they in fact move forward, not just agreeing but actually move forward, actually shipping out the LEU, that would be a tangible sign of progress. Doesn't end the (problem ?), it's just the beginning of a process. But it would be a very tangible step, because it would reduce dramatically in the near term their ability to move forward with enriching the LEU to a high-enriched uranium. That's significant. It's a tangible, substantive step.

Similarly, putting the Qom facility under full IAEA safeguards is important. They have a number of steps they need to take. They need to implement the additional protocol to the NPT. That's an important step that would give us significantly greater confidence about what's going on in the rest of the country.

They need to suspend enrichment. That's been the requirement of the Security Council, and it remains the -- requirement of the Security Council. So we have a number of steps beyond these preliminary steps that they have to take, and we have a very, I think, (forced march ?) through this process to make sure that they're doing it.

SEN. MENENDEZ: You've listed about four significant items that need to be pursued. What's the time frame that we need to see that happen in?

MR. STEINBERG: Again, I think the president has made clear that we need to continue to see tangible steps as we move forward through the fall.

SEN. MENENDEZ: If, in fact, we come to December and those four items have not been achieved, is that satisfactory?

MR. STEINBERG: I think we have to look at the state of play at that point to see what has been accomplished, what has not, and what the prospects are for moving it forward.

SEN. MENENDEZ: How long do we continue with these talks before we see a verifiable suspension of Iran's enrichment program?

MR. STEINBERG: That's the requirement of the Security Council, and it's the priority in our negotiations.

SEN. MENENDEZ: I know, but -- I understand it's a priority, but it's been our priority for how long now?

MR. STEINBERG: Again, Senator, what we're --

SEN. MENENDEZ: Quantify for me how long has it been the priority for?

MR. STEINBERG: It has been a priority since the Security Council imposed these provisions. And I --

SEN. MENENDEZ: And how long has that been?

MR. STEINBERG: Again, I think we need to make sure --

SEN. MENENDEZ: (Respectfully ?), how long has that been? Roughly.

MR. STEINBERG: When was the -- 2006.

SEN. MENENDEZ: 2006. We are at the near end of 2009 and the clock is ticking.

And so I'm trying to get from this administration what is the sense of time -- is this open-ended -- in our pursuit. I mean, I hope you are successful, believe me. I think we all hope you are successful. But, you know, we have to have some quantifiable time frame. You don't want the Congress to pursue the legislation, but at the same time, you don't give us a time frame. That makes many of us very uneasy.

MR. STEINBERG: Senator, I share your concern about this not being either a cover for continuing the program or an unlimited process. And the president has been very clear publicly about the fact that he will not tolerate that. We set a time frame of September for a comprehensive review at the G-8, and what we got was the agreement to the October 1st meeting and some in-principle commitments to some steps. So it shows that at least in theory, we may be making some progress.

We don't want to interrupt that progress, because we don't know for a fact that sanctions will necessarily be effective, if we can make progress through negotiations. But we also don't want to drag this out indefinitely. We'll have some very clear indications that -- either the decision to send out the LEU or to not do it is a very powerful indication of what their intentions are. It's an important step because it has an impact on the ticking clock. That is to say, if they don't have these stores of LEU, then their ability to move quickly to break out to a nuclear capability is delayed.

So we understand very strongly, and I think the countries in the region, as you know, understand as strongly as we do about the danger of the ticking clock. The clock needs to stop ticking. We've made clear to the Iranians that that's what we're looking for right now, is we recognize that it might take some time to get a comprehensive settlement, but they need to stop the clock ticking so that the danger doesn't grow. And that's what we're focused on in the near term.

SEN. MENENDEZ: Well, I certainly hope that you succeed, but I want you to know that I -- I'm sure others -- feel very passionately that this is not like a chess game, where you each get to -- after you make your move, you stop the clock.

The clock is continuously ticking. And regardless of what is said, what we need is real action.

Thank you, Mr. Chairman.

SEN. REED (?): Thank you, Senator Menendez.

Senator Schumer.

SEN. SCHUMER: Thank you, Mr. Chairman. Thank you to the witnesses.

My first question's for Mr. Hill. Mr. Hill, as I mentioned in my opening statement, black markets around the world have been serving to circumvent our sanctions against Iran, and until we address the illegal funnelling of goods, any new sanctions could be easily skirted as well, at least some of them.

The UAE in particular has been a major hub for illegal transshipments of goods to and from Iran. We've seen reports that Dubai has now been working to prevent these transshipments from going through, but those activities have merely shifted to other countries. Malaysia and Oman continue to be key intermediaries for Iran to illegally acquire U.S. technology.

A 2007 GAO report found fault with our enforcement of illegal transshipments of goods to and from Iran. It cited that only one inspector from each Treasury and Commerce were stationed in the UAE. Would more inspectors on the ground in this region make a difference in our ability to enforce existing sanctions?

MR. HILL: Thank you for the question, Senator. And of course more resources are always welcome. As we work with the Congress and with the administration --

SEN. SCHUMER: That wasn't quite my question. They're always welcome, but would more inspectors make a difference here?

MR. HILL: I'd have to say yes, probably.

SEN. SCHUMER: Thank you.

MR. HILL: We have a focus on the Iran, and around the world we're trying to enhance our blueprint, our footprint for enforcement, and the secretary's very focused -- Secretary Locke's very focused on that.

SEN. SCHUMER: Okay. How many U.S. officials are currently working on the ground in these countries to investigate the diversion of U.S. goods?

MR. HILL: We have five agents stationed -- we have five posts overseas. In my testimony I reference those.

SEN. SCHUMER: How many agents, yeah.

MR. HILL: We have a hundred agents here in the United States focused on this issue.

SEN. SCHUMER: How many overseas?

MR. HILL: There are five --

SEN. SCHUMER: Just five? One in each place?

MR. HILL: One in each.

SEN. SCHUMER: Okay. Well, I certainly think you need more and certainly, I guess, you agree we need more, and we should try to get you those. Okay?

I hope we will.

Could you describe the cooperation between Commerce, Customs, FBI, OFAC, the State Department, in stopping and prosecuting illegal export schemes?

MR. HILL: It -- it -- thank you, Senator. It truly is -- is a good story to tell. It's been a remarkable collaborative effort. On the -- in the case that I described in my oral comments, where we added 75 names to the entity list, which interrupted an international smuggling chain that was eventually ending up in components being shipped to Iran to put into IEDs that ended up in Afghanistan -- was an effort led by Commerce, but we were strongly supported and worked closely with Justice, Customs, ICE and all those.

And I think -- you know, I remember back in the '80s -- I've been around for a while -- where relations weren't so good. The relations are good today, and we work well with the -- with our sister agencies.

SEN. SCHUMER: Okay. Next, I think I'll ask this to Mr. Levey, Mr. Steinberg, but any of you could answer it. I'm always looking for places where the United States -- we can act unilaterally and have some real economic effect on Iran. And it seems to me that the legislation that have been introduced by Senators Bayh and Kyl and Lieberman would do that, because gasoline is a weak pressure point. What's your view as to the effectiveness of that legislation, without commenting specifically? I don't know if in your testimony you support it or not. Does the administration support the legislation?

MR. STEINBERG: Senator, as I said to the chairman, I think we want to work with the committee in terms of how we would craft an overall package coming out of the Congress.

SEN. SCHUMER: But the concept -- I'm not ask you for language. I'm asking, would the administration support the concept of putting pressure on oil companies, gas -- that sell gasoline to Iran, and making it virtually untenable for them to do that, by not selling here?

MR. STEINBERG: Again, Senator, I think we have to -- in terms of which of the potential measures or sanctions, whether they're more targeted on individual entities in Iran as opposed to a broad-based thing that would affect the Iranian economy like that, I think we have not reached a judgment as to which of those might be the most effective; in part because not only do we want to have the impact on the economy, we want to make sure that that's going to affect the decision-making in Iran and not target the wrong people in Iran and, similarly, to make sure that we maximize the chance of getting international support for these things. Because there is obviously a risk in these things that if we do not have international support, that there'll be diversions, there'll be work-arounds, and the efficacy of the sanctions will not nearly be as effective.

SEN. SCHUMER: But it seems to me, with gasoline, where there are not that many large refiners and sellers and most of the large ones need a U.S. market as well, that that's a place that has real possibilities.

Let me ask you about central bank. I was very active in preventing Iranian banks from being correspondents -- this is to Mr. Levey -- and now their central bank has taken over some of those roles.

I do believe the one effective thing we've done economically unilaterally was when we put pressure on their banking industry. Would the administration support a move, which I would urge the chair -- which I've already urged the chair to put in this legislation, to extend that in whatever way we could to the central bank of Iran, who's now, as I said, assuming the same functions that the commercial banks did?

MR. LEVEY: Senator, without commenting on what action we might take in the future, let me just tell you what we have done already with respect to the central bank. We have publicly expressed some concerns about just what you've mentioned, which is that they have engaged in certain deceptive conduct and have assisted banks that are under unilateral sanctions by the United States. But what we did do is we cut off all Iranian financial institutions -- their commercial banks, their state-owned banks, their private banks, and the central bank of Iran -- from all access to the United States financial system. And at this point, that's the state of affairs with respect to the central bank of Iran, as well as with all other Iranian financial institutions.

The question now is, you know, getting -- trying to broaden that to what other countries can do and having the desired impact within Iran.

SEN. SCHUMER: Right. I guess I share the frustration expressed by my colleague Senator Menendez. I don't trust the Iranians one bit. If you look at past history, whenever they're squeezed a little bit, they feint and then they back off. I'm not saying we shouldn't pursue these negotiations, but I find it troubling that the administration is not looking, at the same time, to be supportive of the toughest sanctions possible.

It's great that the Russians have finally said something, but again, seeing will be believing there, as you know, Mr. Steinberg. I worked really hard to try and persuade the previous administration to look at the Russians and the interconnection of the missiles in Eastern Europe and sanctions in Iran, got nowhere. And I'm glad that this administration -- I know the two are not related officially, but I'm glad you're pursuing both separately.

Tell us if you think there's a real chance that the Russians will -- I mean, to me, Putin sees Iran as leverage over us, and he doesn't want to give up that card very easily. Tell me, is there any reason that you have some optimism that this time it will be different?

MR. STEINBERG: Senator, I think, as you said, I mean, I think we'll see in the event. I mean, I think whether we're optimistic or not, we'll see in the event.

We're encouraged by the words, both the public and the private words but especially the public words, because I think President Medvedev has put himself out there in ways that I think create some credibility issues there.

But I also think that, I mean, for reasons that you'll understand, the specifics of some of the things we're looking at we don't particularly want to -- (inaudible) -- but there's a very intensive internal effort to examine precisely the questions you are asking here.

Would refined products be the right thing to do? Are there other measures? We are working very hard on this because we recognize, as Senator Menendez and you have said, that we may have to move very promptly if we don't get a response in the next couple of weeks, on these things, to take measures.

We will be ready and we will be coming back to you, to tell you what we want to do. But I think at this stage, for us to sort of kind of go through in public precisely what we're doing.

So you're raising the right questions. We are very, very focused. And we welcome your thoughts about which of this whole suite, because we have a lot of tools and a lot of things that we might take as the next step, as to what's going to be most effective, because there is no science in this.

It is a judgment call as to which of these various tools. What's the sequence? Do you do them all at once? Do you do them in a series? How do you sequence this with the international action, unilateral, Security Council, otherwise?

But we recognize, we need to be ready quickly. And the president has asked us to be in a position to take measures, strong measures, quickly if we don't see a very prompt response to the kinds of things that the Iranians have said that they're prepared to do.

SEN. SCHUMER: Well, I would recommend just in conclusion, I thank the chair, as tough a measure -- toughest measures as possible that are efficacious.

You don't want to do what the Bush administration did. This is my judgment, not yours. Sounded tough and did very little. You want to really be tough. But I wouldn't back off any longer.

Thank you, Mr. Chairman.

MR. : Do any of my colleagues have additional questions?

Senator Merkley.

SEN. MERKLEY: Thank you, Mr. Chair. And I want to address this to Mr. Hill.

In your testimony, you lay out the export controls on U.S.-origin devices and the efforts you go to enforce that. Have you done any sort of evaluation of the impact that this has, in terms of the Iranian economy?

MR. HILL: I'm not aware of anything internally, evaluation we've done. Again our focus is to prevent the bad guys from getting stuff to Iran. And we haven't evaluated what that means to the Iranian economy that I'm aware of.

SEN. MERKLEY: Okay, that strikes me as very strange that you wouldn't have such an evaluation. Could you get back to us on whether you think this has had any -- had any impact?

MR. HILL: I certainly would be happy to do that, sir.

SEN. MERKLEY: One of the things that has limited its impact is U.S. corporations have been allowed to set up foreign subsidiaries to do business with Iran. Doesn't that just drive a -- create huge loophole that almost makes the export controls irrelevant?

MR. HILL: Under our -- thank you, Senator. Under our regulations, any U.S. item that's exported or re-exported by any entity in the world is under our regulations, and has no effect if it's a foreign sub or not.

SEN. MERKLEY: No, but it does mean a U.S. company can set up foreign subsidiary to engage in trade with Iran, and while the items can't be U.S. origin, isn't that basically the only limitation?

MR. HILL: Our regulations go to U.S.-origin items that are -- contain U.S. parts, made with U.S. technology, or they're in their entirety U.S. origin.

SEN. MERKLEY: Well, so in getting back to us in terms of evaluating the effect of the sanctions, if you could address this issue of whether the ability of U.S. corporations to set up foreign subsidiaries to do business with Iran has undermined the effectiveness of those -- of trade factors, it would be helpful.

I notice in your testimony, for example, you talk about three planes that -- and you don't list what type of plane, or if you did, I missed it -- but three planes that were not reshipped to Iran due to the efforts, and I think this was involving the Bali group -- three U.S.-origin aircraft to Iran in violation of the EAR. And I wondered -- well, so Iran turns around can buy them from a U.S. company that has a foreign subsidiary, not U.S.-origin planes, but planes produced in some other nation.

MR. HILL: Well, again, just to be clear, they cannot export, re- export. any U.S.-manufactured planes; they cannot export, re-export any foreign-made planes that incorporate U.S. parts and components. And most of the major airlines and aircraft today incorporate significant U.S. parts, and so they would be prohibited from export or re-export to Iran under our current regulations.

SEN. MERKLEY: With anything with U.S. parts in it. Okay.

I wanted to turn to the effort to address the actions of foreign companies, and particularly under the Iran Sanctions Act. How many companies have been assessed penalties under the Iran Sanctions Act?

MR. STEINBERG: Senator, there's only been one finding under the Iran Sanctions Act, and that was in 1998, but the sanctions were waived at that time.

SEN. MERKLEY: The answer -- zero.

MR. STEINBERG: That's correct.

SEN. MERKLEY: Okay. The -- I believe that that act -- if you think of the three components, investment, trade and sales of equipment, that of those three, the act only avests (sic) -- only addressed investments; it doesn't address trade, purchases, if you will, or sales equipment to Iran.

And then indeed, the investment portion, we've had reason to not implement sanctions when we found them. And so the kind of -- or penalties. So has -- is essentially the ISA toothless and perceived as such around the world?

MR. STEINBERG: Sir, I think they're -- as I mentioned earlier talking to Senator Bunning, I think one of the things that is hard to judge, although I think we can give some impressions about it, is the amount of investment that has been deterred as a result of the Iran sanctions. There have been a number of companies which have indicated an intention -- a number of European countries and East-Asian countries that have made very explicit initial plans to make investments. And those investments did not go forward because of the result of our investigations.

I recall some explicitly, when I was last in office, where we had conversations with the foreign governments, made clear that we were prepared to impose what was then the Iran/Libya sanctions act, and they desisted from those investments. So it's one of those things that -- it's not always the case that you can judge the efficacy of the legislation by the number of times the sanctions have been imposed.

It has been a deterrent. It's been a substantial deterrent. And I'll try to get the committee more details about what we think may have been the impact in terms of other investments, which at least were mooted about and didn't take place.

But I'm aware of several, and so I think that just the fact that it hasn't been imposed doesn't mean that it was toothless in terms of its impact. And as the sponsor said at the time, the goal was not to impose the sanctions; the goal was to get other countries to join with us in doing this. And what we tried to do was to try to develop an international consensus around trying to discourage investment.

And in fact, one of the biggest problems Iran has had is the difficulty that its had of attracting investment. It is way behind in its technologies. Its output is much less. Its technology is much more -- less forward-leaning and effective because of our concerted diplomacy backed by the ICA to stop those investments. So I think -- I just don't want to be drawing the conclusion -- the fact that sanctions were not imposed doesn't mean that the act in its deterrentive value didn't have an effect.

SEN. MERKLEY: Can I follow up here for a moment, Mr. Chair? The -- am I correct in thinking that Total Esse (ph), the French company that was found in violation, proceeded with investments and is still proceeding with investments today?

MR. STEINBERG: I'd have to get back with you on the specifics on that, Senator. But clearly, we keep these all under review. And so, in our judgment, there are no investments that we're aware of that are in violation of the act.

SEN. MERKLEY: I'll conclude with just this notion, and that is that the loopholes limited the impact of U.S. sanctions, but the biggest hole is the lack of multilateral action. And I know the administration is pursuing that aggressively because no matter what the U.S. does on their own, if the rest of the world isn't with us, as my colleague -- my assistant said earlier today, it's like building a dam halfway across the river; you don't stop the water from flowing. And so we have to build that dam all the way across the river. And thank you for your efforts in that regard.

MR. STEINBERG: Thank you, Senator.

SEN. REED: If there are no further questions, thank you very much, gentlemen, for your testimony and your service. And the hearing is adjourned. (Sounds gavel.)