US Treasury: Remarks of Under Secretary for Terrorism at NYU Law School - 9-12-12

Remarks of Under Secretary for Terrorism and Financial Intelligence David Cohen before the New York University School of Law on "The Law and Policy of Iran Sanctions"


September 12, 2012

As prepared for delivery

NEW YORK - It is a great pleasure to be here at The Center on Law and Security at NYU School of Law. Having spent 20 years practicing law before I entered the Obama Administration, it is a real treat to speak to an audience of law professors, lawyers and, especially, aspiring lawyers.

Before I turn to my main topic for this evening, I want to pause for a moment to recognize and remember what transpired 11 years ago yesterday, just two miles from here. The horrific attacks of 9/11 had a profound impact - on our nation and our world, on our sense of security, and on how we go about protecting our country.

Sadly, as we pause to reflect tonight on the tragic deaths of those killed on September 11, we are also mourning the loss of four Americans, including Ambassador Chris Stevens, who were killed in Benghazi, Libya, yesterday. Ambassador Stevens and the other Americans who lost their lives in Libya were dedicated public servants, and as the President said today, they exemplified America's commitment to freedom, justice and partnership with nations and people around the globe. Their deaths are enormous loss for the United States, and a reminder of the sacrifices Americans make every day around the world in the service of our country.

With this tragedy in mind, I hope my remarks tonight, and the discussion that follows, will shed some light on the work the Department of the Treasury is doing as part of these broader U.S. government efforts to keep our country safe.

The office I lead in the Treasury Department - the Office of Terrorism and Financial Intelligence - was created to better organize and align our government's efforts to combat terrorism and other national security threats.

In essence, my job is to combat illicit finance - such as fundraising by terrorist organizations and their supporters; money laundering by drug cartels and transnational criminal organizations; and illicit financial transactions that facilitate nuclear and ballistic missile programs.

Along with an extraordinarily talented and dedicated group of intelligence analysts, policy advisors, sanctions investigators, and regulators, we work to disrupt these illicit networks, protect the integrity of the U.S. and international financial systems, and advance core national security and foreign policy interests of the United States.

And I am so proud that one of our alumni, Zach Goldman - who contributed in so many spectacular ways to our mission - is now the Executive Director of this Center. You are all very lucky to have him.

One of my key responsibilities is developing and overseeing the implementation of economic and financial sanctions programs.

And although we have been using sanctions for many years against terrorist financiers and WMD proliferators, the last several years have seen a burst of intensity and creativity, as we have developed and deployed sanctions programs on such diverse targets as Assad's regime in Syria, transnational criminal groups like the Brothers' Circle and the Yakuza, and, of course, Iran.

This evening, I'd like to focus my remarks on our use of financial pressure in an effort to persuade Iran's leadership to change its calculus about its nuclear program.

Speaking about this topic in a law school is particularly appropriate, because we have used a variety of legal tools - some that are quite innovative - to generate this financial pressure.

The Threat from Iran

No one questions that Iran is one of the most pressing national security issues of our day.

It remains the world's leading state sponsor of terrorism, sending money and weapons to extremists across the globe.

The Iranian regime routinely abuses the human rights of its citizens, while it exports repression through its Qods Force, by supporting HAMAS and Hizballah, and, most recently, by providing critical assistance to the Assad regime in its brutal attacks on the Syrian people.

And its nuclear program threatens the peace and security of the entire Middle East and beyond.

Since coming into office in 2009, this Administration has pursued a dual-track strategy in an effort to resolve the Iranian nuclear issue.

From the first days of the Administration, we extended a sincere offer of diplomatic engagement to Iran - providing Iran with a path to reclaim its place among the community of nations.

At the same time, we made clear that if Iran refused the offer of engagement we, along with our partners in the international community, would steadily yet rapidly apply increasingly powerful and sophisticated sanctions on Iran.

We are working to make the choice for the Iranian leadership as stark as possible: between genuine engagement, on the one hand, and ever-increasing financial and economic pressure on the other, so that the Iranian government recognizes that there is only one real option - to address, in a meaningful and concrete fashion, the international community's very serious concerns about its nuclear program.

As I am sure you know, thus far the Iranian leadership has not taken the opportunity offered to it.

And as a result, over the last few years, we have crafted and implemented a series of sanctions - some in conjunction with our international partners, and some that are complementary to steps taken by others - that have very substantially ratcheted up the pressure on Iran.

The Impact of Sanctions

Let me give you a sense of the impact that these sanctions are having on Iran today.

Put simply, Iran's economy is struggling. In part, this is due to the Iranian government's continued gross mismanagement of its domestic economy. And in part, it is due to the effect of sanctions pressure.

Sanctions have hit Iran's oil sector - by far its most important industry - hard over the past year.

Historically, oil exports comprised 80 percent of the Iranian government's foreign exchange earnings and provided about two-thirds of its budget revenue.

Last year, Iran exported approximately 2.4 million barrels of oil per day to about 20 countries, making it the third largest oil exporter in the world, and earning it about $100 billion from oil sales.

As a result of actions taken since the beginning of this year, Iran's crude exports have plummeted to approximately one million barrels per day, a dramatic 55 percent decrease.

This decrease in exports is costing Iran up to $5 billion a month, forcing the Iranian government to cut its budget because of a lack of revenue.

Compounding this severe loss of revenue, Iran is also facing the loss of access to the modern international banking system. Sanctions have effectively terminated international access for most Iranian banks. This has had a number of important effects.

With its banks increasingly unable to finance trade or process international payments, it has become ever more difficult for Iran to conduct business beyond its borders.

It has also made it much more difficult for the Iranian government to access the revenue it is still able to earn from its oil sales, multiplying the revenue loss from reduced sales volumes.

Today, the Iranian government is relegated to the backwaters of the international financial system - and they know it.

Earlier this year, Iranian President Mahmoud Ahmadinejad lamented that "Iranian banks cannot make international transactions anymore," and just last week he said the sanctions are "blocking off conduits. . . like the conduits of selling oil and [accessing] foreign exchange."

Perhaps the most dramatic reflection of the impact of financial sanctions can be seen in the plummeting value of Iran's currency, the rial.

Over the past 12 months, the rial has lost more than half of its value against the dollar. At this time last year, it took about 12,000 rials to buy a dollar; last Sunday, it took 26,000.

As its wealth has evaporated, the Iranian government has tried in vain to stem the decline of the rial, including attempts to shut down the currency exchange market in Tehran in an effort to prevent Iranian citizens trading rials for dollars.

Macroeconomic indicators tell a similar story of economic distress.

According to the CBI's own calculations, Iran's official inflation rate is 27 percent - and with the rial plummeting, inflation is likely to rise much higher.

The unemployment rate is officially estimated to be 17 percent - although, again, it is likely higher.

And according to the IMF, Iran's GDP growth this year was projected to be only 0.4 percent. The decline in Iran's oil receipts - which occurred after the IMF's estimate - may well yield negative GDP growth. In any event, it will be down substantially from about 10% growth just five years ago, and far below the performance of neighboring oil-exporting countries.

The financial and commercial effects of the sanctions, combined with the Iranian government's economic mismanagement, are beginning to affect Iran's domestic politics. Most notably, in July the Supreme Leader - who had previously brushed off sanctions - acknowledged "pressures" and urged Iranians to adopt an "economy of resistance," including such policies as "correcting consumption methods" to limit demand while also "reducing Iran's dependence on oil" for revenue.

The Arc of the Financial Sanctions Effort

Clearly, the Iranian government now faces a complex and daunting set of economic challenges, unquestionably due in part to the impact of sanctions.

To understand how we have arrived at this point, I want to trace for you the arc of these efforts, and point out some of the notable changes in how we have gone about applying pressure on Iran - all in service of this Administration's overarching objective of preventing Iran from acquiring a nuclear weapon.

When the Obama administration came into office in 2009, we inherited the fruits of several years of strong U.S. efforts to apply pressure to Iran on three fronts.

First, there was the near-total U.S. embargo on financial and commercial relationships with Iran.

For close to two decades, American banks have been forbidden from transacting directly with all Iranian banks, including the Central Bank of Iran; American businesses have been forbidden from buying just about anything from, or selling just about anything to, Iran; and American oil companies have been forbidden from importing oil from Iran.

Second, we inherited a UN sanctions framework that imposed multilateral sanctions on Iran.

A series of Security Council Resolutions, beginning in 2006, not only highlighted serious concerns with Iran's nuclear program and demanded that Iran halt its uranium enrichment activities, but they also imposed sanctions against dozens of individuals, firms and Iranian government agencies involved in its nuclear and ballistic missile programs - including one major Iranian state-owned bank.

And third, employing a targeted, conduct-based sanctions strategy - in which we took action against particular actors involved in illicit activity - Treasury had imposed sanctions by 2009 on more than a dozen Iranian banks.

These targeted actions barred U.S. persons from transacting with these designated banks and froze any of their assets that were within U.S. jurisdiction. But just as importantly, they exposed the illicit activities of those banks subject to sanctions.

Through a vigorous outreach and education effort, my predecessors at Treasury made certain that the international business community - in particular, global banks - were made aware of these illicit financial activities.

And although foreign banks are not generally obligated to abide by these sanctions - they reach only U.S. persons and those operating in the U.S. - many foreign banks, acting out of enlightened self-interest to protect their reputations, chose to terminate relationships with sanctioned Iranian banks.

A Strategic Shift: Expanding the Conduct-Based Approach In the Dual-Track Strategy

By 2009, these efforts clearly had begun to have an impact on Iran. Not only did they disrupt the activities of those sanctioned, but we saw a growing economic impact on Iran, particularly as many of its banks found it increasingly difficult to transact internationally.

When President Obama took office, these efforts continued unabated - and, indeed, have been expanded significantly. At the same time, President Obama put a newfound emphasis on the engagement track of the dual-track strategy.

From his very first months in office, the President put forward a very clear choice to the Iranian regime: a path that would allow them to rejoin the community of nations if they meet their international obligations, or a path that leads to an escalating series of consequences if they don't.

By late 2009, it was clear that Iran was not - at that point, at least - prepared to engage meaningfully with the international community.

This was demonstrated most plainly by the disclosure, in September 2009, that Iran had begun work in secret on a new uranium enrichment facility in Fordow. And it was confirmed later that fall when Iran at first accepted, and then rejected, a deal to exchange its stockpile of enriched uranium for the nuclear fuel it needed to manufacture medical isotopes at the Tehran Research Reactor.

It was time to sharpen further the choice for Iran's leadership by developing and implementing truly "biting" sanctions against Iran.

We did this in two principal ways, both of which broke new ground.

First, remaining faithful to our conduct-based sanctions approach, we took aim directly at Iran's Central Bank (the "CBI"). We did so both because the CBI was complicit in the illicit activity of Iran's designated banks - and thus fair game under a conduct-based approach - and also because it was a key node in Iran's receipt of oil revenue - and thus a particularly attractive target for sanctions.

Second, we amplified our efforts to isolate Iran's designated banks. Moving beyond our appeal to foreign banks' enlightened self-interest, we took a series of actions that conditioned foreign banks' direct access to the U.S. financial market on their agreement not to deal with Iran's designated banks.

The Multilateral Foundation: UNSCR 1929

The first indication of this new approach can be seen in UN Security Council Resolution 1929, adopted in June 2010.

Like prior Iran-related Resolutions adopted by the Security Council, Resolution 1929 called on Iran to demonstrate the exclusively peaceful nature of its nuclear program and to suspend uranium enrichment. It also imposed sanctions on individuals and entities involved in Iran's nuclear and ballistic missile programs.

But most importantly, Resolution 1929 laid the groundwork for the enhanced sanctions measures that the U.S. and others have put in place over the past two years.

In its preamble, Resolution 1929 spoke of the need for member states to "exercise vigilance over transactions involving Iranian banks, including the Central Bank of Iran, so as to prevent such transactions contributing to proliferation-sensitive nuclear activities, or to the development of nuclear weapon delivery systems." It also "not[ed] the potential connection between Iran's revenues derived from its energy sector and the funding of Iran's proliferation sensitive nuclear activities."

In doing so, the Security Council highlighted for the first time the importance of Iran's energy sector revenues and its central bank to its proliferation activities.

Second, the Resolution contained several "hooks" that set the stage for direct action to restrict Iran's international banking access.

It did so by calling on member states to prevent their banks from providing financial services to Iran - including allowing correspondent accounts between their banks and Iranian banks, or allowing Iranian banks to open new branches in their jurisdictions - if there are "reasonable grounds to believe" that these financial services "could contribute" to Iran's nuclear or missile programs.

Now you are all lawyers, or someday soon will be. Take a moment to ponder that evidentiary standard - "reasonable grounds to believe" that financial services "could contribute" to Iran's proliferation activities. As an abstract matter, that is not a terribly difficult standard to meet.

And, as a practical matter, we had a wealth of information that demonstrated how Iranian banks abused their financial access to facilitate Iran's proliferation activities - often using deceptive practices to try to mask the involvement of designated proliferators and other illicit actors.

With the financial provisions of Resolution 1929 as a foundation, we shared our information about Iran's illicit and deceptive financial practices with our partners around the world.

And in the summer and fall of 2010, the EU, the UK, Japan, South Korea, Canada, Australia, Norway, and Switzerland took robust action to restrict Iran's banking activities. Other nations took less formal or public - but still very strong - steps against Iranian financial activity in the wake of Resolution 1929.

The New Domestic Framework


As Resolution 1929 was being drafted and adopted at the United Nations, here at home we worked closely with Congress to craft the Comprehensive Iran Sanctions Accountability and Divestment Act ("CISADA"), which the President signed into law on July 1, 2010.

CISADA set a new precedent. It gave the Secretary of the Treasury the authority for the first time to require U.S. banks to terminate correspondent banking relationships with foreign banks that knowingly engaged in significant transactions with designated Iranian banks.

This is a particularly powerful provision. Access to U.S.-based banks is critically important for many foreign banks because their ability to offer dollar-denominated services to their clients depends on their ability to clear dollar transactions through banks in the U.S. Without access to the U.S. financial system, a foreign bank's ability to service its customers is significantly limited.

CISADA required foreign banks to consider much more than the reputational risk involved in dealing with designated Iranian banks. It required them to contemplate the very significant business consequences that would result from being cut off from the United States if they chose to work with those two dozen Iranian banks that we had sanctioned.

After CISADA's enactment, my colleagues and I fanned out around the globe to explain the new law, visiting or talking to government counterparts in over 50 countries and representatives from more than 150 foreign financial institutions.

As we explained in these conversations, CISADA offered foreign banks a choice: they could do business with banks in the U.S., or they could do business with designated Iranian banks. But they could not do both.

The impact was dramatic. Nearly everyone we spoke with readily recognized that there really was only one choice - to terminate relationships with designated Iranian banks. And those that did not appear to recognize this - like Kunlun Bank in China and Elaf Islamic Bank in Iraq, both of which have now been cut off from the United States banking system - have learned that we are quite serious about the choice to be made under CISADA.

As I said, CISADA was novel and innovative, but it was not, as some have claimed, extraterritorial. It does not purport to regulate foreign banks. To the contrary, it provides authority to the Secretary of the Treasury to regulate U.S. financial institutions, limiting our banks' ability to transact with certain foreign banks.

The Central Bank of Iran

Now, once CISADA was in place, we turned our attention to the Central Bank of Iran - the key to Iran's oil revenues because, under Iranian law, it is the only bank authorized to receive payments for Iran's oil sales.

In the spring of 2011, we began discussing with our closest allies the possibility of imposing international sanctions on the CBI. We made the case that isolating the CBI was warranted because of the role it played in Iran's illicit activity, and that imposing specific sanctions on the CBI - the recipient of Iran's oil revenues - would be a particularly effective way to ramp up the pressure on Iran.

Following through, in November 2011 we issued a formal finding under Section 311 of the USA PATRIOT Act that the entire jurisdiction of Iran, including the CBI, was a "primary money laundering concern."

In that finding, we focused on much more than Iran's abundant anti-money laundering deficiencies. In a key passage, we described the CBI's role in funneling billions of dollars to designated Iranian banks and in engaging in deceptive practices to conceal those payments.

The same day we acted, the UK and Canada took action to forbid almost all financial transactions between their banks and all Iranian banks, including the CBI. The campaign to isolate the CBI was well underway.

Then, a little more than one month later, the President signed the National Defense Authorization Act for Fiscal Year 2012 (the "NDAA"), which set the stage for additional pressure against the CBI and Iran's oil revenues.

The relevant provision in the NDAA, Section 1245, is complex. It builds on the CISADA model by limiting direct access to the U.S. financial system for foreign banks involved in paying the CBI for oil or other goods, unless the foreign bank's home country significantly reduces its oil imports from Iran.

As I said, it's a complicated piece of legislation, so let me say that again. Under Section 1245, foreign banks involved in significant transactions with the CBI - including making payments for Iranian oil - can be cut off from the United States banking system unless their home jurisdiction has significantly reduced its oil imports from Iran.

The purpose of this legislation is clear enough. It leverages foreign banks' desire to have access to the U.S. financial system to drive down Iran's oil revenues. Section 1245 thus provides a powerful incentive for countries that import oil from Iran to reduce their imports - namely, if they significantly reduce their Iranian oil imports, their banks will be protected, for a period of time, against the possibility of sanctions for transactions with the CBI.

As we did after the enactment of CISADA, we have spent a great deal of time over the past nine months meeting with foreign counterparts in both the public and private sectors to explain Section 1245 and - along with colleagues from the State and Energy Departments - to encourage importers of Iranian oil to protect their banks from sanctions by significantly reducing their imports.

And as in the aftermath of CISADA, the response has been quite positive. Every country that imported oil from Iran as of the beginning of this year has taken steps to significantly reduce the volume of their Iranian oil imports - driving down Iran's oil revenues.

The Path Ahead

So that brings me back to where I began, with the impact of these measures on Iran.

The combined impact of the sanctions adopted over the last several years by the U.S. and our partners around the world clearly got the attention of Iran's leadership. Taking aim at Iran's oil revenues, combined with squeezing Iran's access to the international financial system ever more tightly, created a dynamic that encouraged Iran to come to the negotiating table earlier this year.

So along with the Germany and other permanent members of the UN Security Council - the P5+1 - we have met with the Iranians four times since April.

We came to these meetings ready to explore a path to a negotiated resolution, but Iran's response to date has been a non-starter. We believe that, while not limitless, there remains time and space for a diplomatic solution if Iran's leadership takes the strategic decision to make meaningful concessions. But let's be clear: The onus is on Iran.

And as we have clearly signaled all along, if Iran is not prepared to negotiate meaningfully about its nuclear program, we will increase the cost of Iran's intransigence.

And that is precisely what we have done.

At the end of July, the President issued an executive order imposing new sanctions on Iran.

This order tightens the rules related to payment for Iranian oil to make doubly sure that Iran is only able to sell its oil to countries that are significantly reducing their imports of Iranian oil.

It also tightens the rules regarding the sale of Iranian oil. Under the new order, any party that acquires oil from Iran - including brokers, traders and other middlemen - is subject to sanctions, again if that party is not located in a jurisdiction that is significantly reducing its oil imports from Iran.

Moving beyond Iran's oil exports, the new executive order authorizes sanctions against anyone involved in the import of petrochemicals from Iran - a multi-billion dollar industry for Iran, second only to its oil industry.

And it also authorizes sanctions against anyone assisting Iran in acquiring precious metals, such as gold, as well as physical U.S. currency.

Less than two weeks later, in early August, the President signed another piece of legislation, the Iran Threat Reduction and Syria Human Rights Act, that builds on our robust sanctions regime.

There are dozens of powerful provisions in this new law, but let me highlight just one - section 504. This provision seeks to limit what Iran can do with the revenue it earns from its oil sales.

In essence, Section 504 is designed to require Iran to deposit its oil revenue within the country where it is earned, and to prevent Iran from moving that revenue around the global financial system or repatriating it to Iran.

Because almost all of the countries that purchase oil from Iran run a significant trade deficit - that is, they import more from Iran than they sell to Iran - this provision should "lock up" a significant portion of Iran's earnings in each of these countries.


In short, as long as Iran continues to reject the path to a negotiated resolution, we will continue vigorously to pursue the pressure track.

As I have tried to sketch out, we have in place now an enormously powerful set of sanctions, at home and around the world. It retains its essential conduct-based foundation, as it broadens out to target an ever more comprehensive set of Iranian financial and economic activities.

We will continue to devise new and enhanced sanctions - so long as Iran refuses to address in a meaningful and productive way the very serious concerns with its nuclear program.

And the impact from sanctions will only increase over time - as the financial sanctions continue to bite, the oil-related sanctions continue to drive down Iran's oil sales, potential workarounds are stymied, and our partners continue to take complementary action.

We believe it is still possible to prevent Iran from achieving its goal through a combination of diplomatic and economic efforts. But while the diplomatic window is still open, there should be no doubt that it will not be open indefinitely, and that all options remain on the table to prevent Iran from obtaining a nuclear weapon.

Thank you.