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Iran

Turning to the subject of Iran, the Washington Institute has continued its excellent, incisive work on the Iranian regime, including during this symposium. The title of your event is precisely correct - the prospect of an Iranian bomb is unacceptable, not just to the United States but to the entire world community, as evidenced by two unanimously adopted UN Security Council resolutions requiring the Iranian government to cease uranium enrichment. Iran's unrelenting pursuit of a nuclear weapons capability, combined with its continued provision of financial and material support to terrorist groups, makes the possibility of a nuclear-armed Iran a direct and dangerous threat to the international community.

To address the Iranian threat through deterrence and prevention, the United States has employed a two-fold sanctions strategy: utilizing domestic authorities and engaging in international outreach.

First, under the International Emergency Economic Powers Act, which provides broad statutory authority to respond to threats, the President issued Executive Order 13382 in 2005. This Executive Order authorizes the Treasury and State Departments to target key nodes of WMD and missile proliferation networks, including their suppliers and financiers, in the same way we target terrorists and their supporters. A designation under Executive Order 13382 denies the targeted entities access to the U.S. financial and commercial systems and puts the international community on notice about the threat posed to global security. These prohibitions have a powerful effect, as the suppliers, financiers, transporters, and other facilitators of WMD networks tend to have commercial presences and accounts around the world that make them vulnerable to exactly this kind of financial action.

The United States designated the Iranian state-owned Bank Sepah under E.O. 13382 for providing financial services to Iran's missile program, and this action has had a significant impact. Like other Iranian banks, Bank Sepah engages in a range of deceptive practices in an effort to avoid detection, including requesting other financial institutions to conceal the Sepah name when processing its transactions in the international financial system. Additionally, Bank Sepah has facilitated business between North Korea's chief ballistic missile-related exporter, KOMID, and Iran's Aerospace Industries Organization. KOMID, which has also been designated by the Treasury Department under E.O. 13382, is known to have provided Iran with missile technology. By cutting off Sepah from the U.S. financial system, we have commercially isolated the institution and have made it more difficult for Iran to finance its proliferation-related activities.

Second, we have also worked through the international community to build upon our domestic actions. We are most effective when we proceed multilaterally, either with a coalition or with the consensus of the United Nations. Our multilateral efforts have yielded critical success in the fight against proliferation financing, and a key example is the unanimous adoption last month of UN Security Council Resolution 1747, which reaffirms and expands UN Security Council Resolution 1737 of December 2006. These resolutions target Iran's nuclear and missile programs, and among other requirements, obligate states to freeze the assets of named entities and individuals associated with those programs. Significantly, among these entities was Bank Sepah. The United States has worked with governments and financial institutions around the world to implement the common obligation to freeze the assets and economic resources of all listed entities and individuals, including Bank Sepah and Bank Sepah International.

We have worked closely with our fellow finance ministries and central banks abroad to build consensus on these financial measures, and the effect has been striking: international partners who originally resisted the idea of applying sanctions on Iran have reversed this position and now support pressuring the Iranian regime to renounce its support for WMD proliferation and to comply with its international obligations.

This is especially significant because we believe that segments of Iranian society beyond President Ahmadinejad and the Islamic Revolutionary Guard Corps - including the mullahs, their merchant class backers, and liberalizing forces - understand the high costs of the country's increasing isolation and the need to change its behavior.

Engaging the Financial Community

Our multilateral action to change Iran's behavior is not confined to governments, however. We have engaged in unprecedented outreach to the international private sector, meeting with more than 40 banks around the world to share information and discuss the risks of doing business with Iran. We exchange common interests and objectives with the financial community when it comes to dealing with threats. Financial institutions want to identify and avoid dangerous or risky customers who could harm their reputations and business, and governments want to isolate those same actors and prevent them from abusing the financial system.

We are seeing concrete benefits through this partnership. We have learned that the Swiss bank UBS cut off all dealings with Iran, and Credit Suisse and HSBC have also significantly limited their exposure to Iranian business. A number of other foreign banks are refusing to issue new letters of credit to Iranian businesses. According to the banks, these were business decisions, pure and simple - handling Iran's accounts was no longer good business. Multinational corporations have also held back from investing in Iran, including limiting investment in Iran's oil field development.

Further, in a move that demonstrates that Iran is feeling the effects of financial isolation, the Iranian government also filed a complaint with the IMF - subsequently denied - that U.S. action against Bank Saderat, an Iranian state-owned institution, constituted a foreign exchange restriction.

And last year the OECD raised the risk rating of Iran, reflecting this shift in perceptions and indicating its sense of the inherent risk in doing business with Iran. Governments should not subsidize via export credit programs the country risk created by Iran's illicit behavior. The good news is we have seen a sharp decrease in export credits from countries such as Germany, France and Japan. We expect that the OECD's higher risk rating will contribute to a continued downward trend in export credits to Iran.

Additionally, Iran recently announced that it has reallocated its foreign reserves out of dollars. This raises the important point that while a growing number of banks have cut off Iranian business in dollars, they have not yet done so in other currencies. Regardless of the currency, the core risk with Iranian business remains the same: when dealing with Iran it is almost impossible to "know your customer." Since banks cannot be certain that parties are not involved in illicit activity -- and such conduct is not limited to one currency -- scaling back dollar-business reduces the problem, but does not eliminate it.

In spite of these successes, some have asked if further measures should be considered to increase pressure against Iran. Members of Congress are considering a number of legislative options, including application of U.S. sanctions to the business activities of foreign subsidiaries of American companies; mandatory divestment from companies doing business with Iran; and having the government "name and shame" firms - both domestic and foreign -- that do business with Iran. While these proposals are certainly well intended, they could have significant counter-productive policy implications. Our shared goal is to pressure the Iranian regime to change its behavior, and the best way to achieve this objective is to keep the focus on illicit conduct and maintain as broad an international coalition as possible. Yet many of these proposed measures may be seen by our allies as extraterritorial U.S. Government action and could affect our ability to obtain their cooperation on mutual action with respect to Iran.

You might recall the history of this debate. In the 1990s, for example, we were concerned about the commitment of our allies to put pressure on Iran through the imposition of sanctions. The European Union, in turn, argued that some measures under consideration were an inappropriate extension of U.S. law. In recent years, as discussed earlier, our economic sanctions strategy has evolved into a more targeted and conduct-based approach. Along with our international outreach, this has helped to build a coalition of partners with a shared goal of putting as much pressure as possible on the Iranian regime to change its behavior. As Mike Jacobson pointed out in a recent Washington Institute policy paper, our economic sanctions against Iran are intended to engage, not confront, our allies. We must be careful not turn this successful effort into a debate that would engender transatlantic friction and turn the focus away from Iran's illicit conduct. Sanctions have the most comprehensive impact when applied cooperatively and collectively.

In closing, let me make clear that the Treasury Department's objective is to employ the most effective methods to dissuade the financing of dangerous activities, and especially Iran's nuclear ambitions.

After 30 years of experience in national security policy, I have come to the conclusion that the most effective sanctions meet the following criteria: they are carefully targeted at illicit conduct; they are multilateral in scope; and they engage financial and business institutions as well as foreign governments. Any additional sanctions proposals should be judged against these criteria to ensure maximum effectiveness in deterring Iran's dangerous behavior.

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