Panelists

John Barker
William Lowell
Sharon Squassoni

Moderated by the Wisconsin Project on Nuclear Arms Control

Introduction

Tehran's decision to keep its centrifuges spinning precludes the resumption of multilateral negotiations on Iran's nuclear program and allows Iran to pursue a nuclear weapon capability. Its defiant position has been at the forefront of discussions this fall, with Congress tightening U.S. laws targeting Iran and its foreign suppliers, and the U.N. Security Council debating how to sanction Iran for its violation of Security Council resolution 1696.

Most commentary on sanctions holds that because the United States has severed diplomatic and almost all economic ties with Iran, it has no ability to punish Iran unilaterally. U.S. President George W. Bush gave credence to this assessment when, in December 2005, he said that the United States was "relying upon others, because we've sanctioned ourselves out of influence with Iran." However, the United States has never fully enforced its existing arsenal of domestic sanctions vis-à-vis Iran. So, while pursuing Security Council action, could the United States be doing more on its own to slow Iran's nuclear and military progress?

In an effort to shed light on this question, the Wisconsin Project on Nuclear Arms Control hosted a roundtable discussion in Washington D.C. on September 19, 2006. The three panelists who participated in this discussion were chosen on the basis of their experience with export control law and sanctions. They are John Barker, former Deputy Assistant Secretary of State for Nonproliferation Controls and for Export Controls, who now focuses on national security matters as a Partner at the Washington D.C. law office of Arnold and Porter LLP, William Lowell, former director of the U.S. State Department's Office of Defense Trade Controls, who currently works on nonproliferation and export controls for the House International Relations Committee and Sharon Squassoni, a specialist in national defense at the Congressional Research Service, who served previously as an expert in nuclear proliferation at the Arms Control and Disarmament Agency. The panelists took up the following questions:

• What are the U.S. laws for sanctioning Iran and its suppliers? Could they be improved?
• How have these laws been applied in the past? How should they be applied?
• What is the U.S. objective in seeking to sanction Iran and how should it be pursued?

The panelists found that despite maintaining a near total prohibition on trade and investment with Iran, the United States still has room to take action that would directly impact Iranian entities, primarily through the banking sector. While penalties on U.S. persons who violate the embargo are at an adequate level to deter all but determined criminal behavior, the penalties against foreign persons who proliferate to Iran, while quite strong, are rarely imposed. The authority exists to block the assets of and prohibit U.S. persons from dealing with foreign companies that supply Iran's weapon programs. These companies can also be barred from selling their goods in the United States. In the context of a well-defined strategy, which has for its objective limiting Iran's conventional and unconventional weapon development, the United States should begin imposing such penalties. It should also convince key allies to implement similar measures.

The following findings are the moderators' summary of the discussion. The findings are a composite of the panelists' individual views; no finding should be attributed to any single panelist, or be seen as an official statement of policy of any government.

The first step in a revitalized U.S. sanctions strategy vis-a-vis Iran should include penalties that target Iran directly, such as additional restrictions on Iranian financial institutions.

While the United States pursues a policy of punishing Iran in the U.N. Security Council, it has sought to tighten restrictions on Iranian banks that continue to conduct dollar transactions through U.S. financial institutions. The panelists endorsed this policy, since it targets Iranian institutions directly, and agreed that it should be broadened. The United States could, for example, do to all Iranian government or government-controlled banks what was done recently to Bank Saderat: The Department of the Treasury amended the Iranian Transactions Regulations (ITR) to block Bank Saderat, one of Iran's largest government-owned banks, from the U.S. financial system. The amendments immediately block all "U-turn" payments, in which U.S. dollar transactions involving Bank Saderat are cleared through a U.S. bank, and allow for a grace period after which all other payment and financing transactions previously exempt or allowed after obtaining a license must be stopped.

There would be a number of benefits to pursuing such a policy, according to the panelists. First, the effect of these sanctions would be felt quickly. The ability of Iranian banks to conduct business in U.S. dollars would be immediately affected. This would raise the cost of doing business for Iran and would damage overall business confidence in the country.

Second, sanctions on Iranian banks could be put in place without U.N. Security Council support. In fact, these measures could be implemented while the Security Council is still deliberating on sanctions, because it targets Iran directly, rather than third parties whose support the United States might still need for a U.N. resolution.

The panelists assessed that for banking sanctions to have a lasting effect, the United States would need support from Europe and Japan. Without such support, the only impact would be to encourage entities to shift from dollar clearing transactions to euro or yen clearing transactions. The panelists found it likely that Europeans would be willing to stop doing business with Iran's government-controlled banks as a preferable alternative to military action. The Bush administration's reputation for unpredictability might actually play in its favor here, as U.S. allies are concerned about the prospect of and fall-out from American air strikes. However, countries with deeper economic ties to Iran, such as Switzerland or Germany, may be reluctant to sign on to this policy, because it would mean a loss of business. A method of compensating companies for the eventual loss of business with Iran might need to be found.

The panelists suggested that the G7 could be used as a forum for the coordination and implementation of restrictions on Iranian banks. Treasury secretaries meet regularly under G7 auspices and have a close working relationship. In addition, this forum does not include China or Russia, which would both be likely to oppose any such measures.

A problem could arise, however, in the settlement of energy transactions, given that countries that would apply these measures buy oil and natural gas from Iran. The panelists suggested that an exception could be made for such transactions, at least in cases of extreme dependence such as Japan. Such an exception would benefit both Iran and the energy buyer. While this would be a large exception, it would prevent the measures from being a de facto economic embargo and would thereby increase the likelihood of broader international support.

The U.S. sanctions strategy must also include imposing penalties on Iran's suppliers. The most powerful such penalties are to be found in two executive orders that allow the President to block the assets of and to ban imports from entities involved in proliferation.

The panelists found that contrary to popular assumption, the United States already has full legal authority to sanction Iran's foreign suppliers. Executive Order 13382, dated June 28, 2005, allows the President to block the assets of persons engaged in proliferation activities. And Executive Order 12938 (as amended by Executive Orders 13094, dated July 28, 1998 and 13382) allows the President to impose an import ban, among other penalties, on foreign persons involved in the proliferation of mass destruction weapons or missiles. Such measures, which would deny the sanctioned entity access to the U.S. market, target the pocketbook, and are therefore the most effective means of altering the behavior of a business enterprise.

However, these authorities are rarely invoked. And when invoked, they are often used to sanction entities that are immune to the penalties. About 30 entities have been designated under E.O. 13382 since it was issued in June 2005. This executive order provides the authority to block the assets of "persons engaged in proliferation activities and their support networks," and forbids U.S. persons from dealing with these "blocked" companies. Most are North Korean, Iranian or Chinese entities with whom the United States does little to no business. Some seven entities, all Russian and Chinese, are currently designated under E.O. 12938 and are subject to an import ban, which prohibits them from directly or indirectly selling their goods or services in the United States. An import ban on proliferators is also included in the missile and the chemical and biological weapons sanctions laws, under the Arms Export Control Act. But, here too, many of the entities subject to an import ban never did much business in the United States.

Still, these executive orders are broad authorities with broad triggering mechanisms. In both cases, the entity must only have attempted to engage in activities that might "materially" contribute to proliferation in order to trigger sanctions. The panelists found it difficult to imagine more strenuous penalties than those in existing executive orders, even if Congress were to design new legislation. The issue, therefore, is not a lack of tools, but a lack of enforcement-and perhaps the political will to enforce.

Actions such as blocking the assets of Iran's trading partners and banning their products from the U.S. market are more sensitive than sanctions on Iranian banks, because they target third parties-most likely Russian and Chinese entities that are directly or indirectly controlled by their respective governments. For this reason, the panelists cautioned against imposing wide import bans and blocking assets precipitously. Rather, the U.S. sanctions strategy should be a deliberate one, in which pressure is ratcheted up slowly, as sanctions are most inhibitive just before they are imposed. The panelists recommended first targeting a few well-known and serial proliferators, like the China North Industries Corporation (Norinco), which has been sanctioned by the U.S. government some six times since 2003 for its proliferation activities, usually with Iran. A two-year import ban was imposed on Norinco in 2003 for its missile proliferation activities with Iran. The ban allegedly did some damage before it expired in 2005. Making an example of a few repeat offenders could serve as leverage to get others entities to stop bad behavior. In fact, the panelists believe that the mere threat of an import ban on key entities in Russia and China might reduce transfers to Iran, and might even give Russia and China reason to reassess their opposition to a strong sanctions resolution in the United Nations-opposition which up to now has been cost-free.

The United States should also make every effort to encourage a coalition of concerned allies-in Europe, Japan, Australia and Canada, for instance-to impose similar penalties on the same entities. Doing so would increase their impact exponentially, and could force these entities-and more importantly their governments-to choose between trading with the West and dealing with Iran. The panelists predicted that it would be easier for these entities to find an alternative source of supply than an alternative market.

The panelists warn that the United States should not resort to import bans and blocking assets on Russian and Chinese entities more broadly until it becomes clear that the U.N. Security Council process has been exhausted, and that Russian and Chinese government support for strong U.N.-endorsed sanctions is unattainable. Otherwise, imposing these penalties would be counterproductive to U.S. efforts in the Security Council.

The panelists found it important to note that executive orders are not a perfect substitute for legislative action. There is less accountability under executive orders; an administration, if it decides not to apply penalties against a particular proliferator, is not required to inform Congress or to explain the decision. This gives the executive a great deal of discretionary flexibility and freedom of action without congressional oversight. While this arrangement may be preferable to the executive branch, and may cut down on the weighty reporting requirements often embedded in sanctions legislation, it also allows an administration to change policy, without consulting Congress or explaining its decision. The panelists concluded that there would be important benefits, in terms of oversight, to codifying the authorities that exist only in executive orders.

U.S. statutes that impose penalties on foreign persons for proliferation to Iran are weak and poorly enforced.

The panelists found that the two key statutes available to sanction foreign persons for proliferation to Iran have been ineffective: the Iran-Iraq Nonproliferation Act and the Iran Nonproliferation Act (as amended). Both include relatively weak sanctions, are applied for a short duration, allow the President broad waiver authority and have a high evidentiary threshold.

The Iran Nonproliferation Act (INA) has been the most common means of sanctioning Iran's suppliers since it became law in 2000. It was amended in November 2005 in order to, among other things, broaden its application to include foreign governments. However, the trigger for sanctions is high: they are imposed only if the entity "knowingly" transferred goods, services or technology that could "materially contribute" to Iran's nuclear, biological or chemical weapon, or missile development efforts. And while the President must identify and report on foreign entities that appear to have transferred proliferation related goods and technology to Iran, there is no requirement to impose sanctions on these entities.

Even if sanctions are imposed under this Act, the panelists judged them to be too weak to influence the behavior of foreign companies. The penalties include, for a period of two years: a ban on U.S. government procurement, contracts and assistance, a prohibition on the sale by the U.S. government of any item on the U.S. Munitions List, the denial of any export to the entity requiring a license under the U.S. Export Administration Act or the U.S. Export Administration Regulations, and the suspension of any existing such licenses. However, the Act does not include a parallel prohibition on the commercial sale of U.S. Munitions List items.

These penalties are unlikely to influence behavior. The most commonly targeted entities do no business with the United States government and are rarely inconvenienced by the sanctions. Those that trade with the United States are only restricted, not prevented from continuing to trade. The panelists believe that, in many cases, sanctioning entities in this way may be worse than no sanction at all; it offers the impression of action when no meaningful objective is attained and makes the cost of proliferation very affordable indeed.

The INA and the executive orders mentioned above do not encompass conventional arms proliferation. Transfers to Iran of "destabilizing numbers and types" of conventional weapons are covered by the Iran-Iraq Nonproliferation Act of 1992 (IINPA). However, this Act does not contain an elaborated list of the military equipment that, if sold to Iran, would trigger sanctions. Though the President is authorized under the law to add to the list at any time, no administration has done so since the law was passed. As a result, most Russian and Chinese military transfers to Iran are not penalized, as they fall below the vague threshold of the Act. For instance, Russia's contract to sell Iran up to 30 Tor-M1 short-range surface-to-air missiles for some $700 million is not subject to U.S. sanctions. The panelists found that this loophole can and should be closed. The United States, perhaps with Europe, Russia and China, should publish an up-to-date list of the weapons and other military equipment that, if transferred to Iran, would be met with sanctions. Allowing the present situation, in which arms flow into Iran in an unqualified way, merely creates growing risks for the future and contributes to a regional arms race, as other countries seek additional weapons systems to deter threats from Iran's ongoing build-up.

In addition, the IINPA has many of the same shortcomings as the INA: The trigger for sanctions requires an entity to have "knowingly and materially" contributed to Iran's conventional or unconventional weapon programs. And while the sanctions are "mandatory," they may be waived for U.S. national interests. No entity has been sanctioned under this Act since 2003.

Efforts in Congress to strengthen U.S. sanctions law that target third parties are not likely to improve significantly the current arsenal of sanctions.

While recognizing that there exists no single law that adequately covers sanctions on Iran, the panelists were not optimistic about the prospect of legislative efforts to pass such a comprehensive law. And initiatives that seek to make tactical improvements to existing law may be too specific for the current climate; the Iran issue is now being seen at a higher level than third party sanctions enforcement. The bi-partisan initiative to amend the INA, for instance, which has been underway in the Senate, includes some important improvements to the existing Act. It would broaden the subject of sanctions to include parents, so that sanctions would capture foreign companies sending a forbidden export to Iran through a subsidiary. However, there is no equivalent effort underway in the House, so this initiative is not likely to advance for now.

Efforts to renew and improve the Iran-Libya Sanctions Act (ILSA) have fared slightly better. At the time of our discussion, ILSA was set to expire. It was subsequently renewed within the Iran Freedom Support Act (H.R.6198), which was signed into law on October 1. Among other things, ILSA allows the United States to impose sanctions on companies investing more than $20 million a year in Iran's energy sector. This powerful sanction was intended to deny Iran the financial means to sustain its mass destruction weapon and missile programs. Yet it has never been imposed. While agreeing that such a penalty would have an impact, the panelists concluded that its application would continue to be waived. The diplomatic costs of enforcing this section of ILSA would be high, as a number of European and Japanese energy companies are investing in or planning to invest in Iran's oil and natural gas sector. The panelists felt that, absent a major new threat by Iran to stability in the Persian Gulf, it is difficult to imagine a scenario in which the benefits of enforcing ILSA's provision for energy sanctions would outweigh the costs of penalizing close allies whose cooperation in containing Iran is essential.

When renewed, ILSA was amended to include a new set of mandatory sanctions against persons who have knowingly "exported, transferred, or otherwise provided to Iran" technology that would "contribute materially" to its conventional or unconventional weapon programs. If this high threshold is met, the President must impose at least two of the following penalties on the sanctioned entity: the denial of any exports from the United States that require U.S. government review or an export license, a ban on U.S. government procurement, limits on loan assistance from U.S. financial institutions, prohibitions on serving as a dealer of U.S. government debt or as a repository of government funds, a ban on U.S. government procurement and restrictions on imports to the United States. But as with the INA and the IINPA, the President may waive these sanctions if "it is important to the national interest of the United States." Therefore, the creation of a new authority under which to sanction those who proliferate to Iran is unlikely to change the current landscape, as it contains many of the same weaknesses as existing law.

The Iran Freedom and Support Act (IFSA), was not only a vehicle through which to renew ILSA. It also codified the series of executive orders that establish the near total embargo on U.S. trade and investment with Iran, and it approved assistance for human rights and democracy organizations in Iran. The former will make it more difficult for the executive branch to relax economic sanctions on Iran. However, the modified version of IFSA is more modest than the original bill (H.R.282), which, though it passed overwhelmingly in the House, had little support in the Senate and was opposed by the Bush administration.

The United States has historically led by example on export control; to do so with regard to Iran, the United States must accept the economic burden and the political fall-out that would result from a thorough application of sanctions if it expects other countries to accept the same.

The United States has less to lose, economically, from sanctioning Iran than the countries whose support for such measures the Bush administration is trying to win. The panelists found that if the United States wants to set an example for other countries, it must be willing to accept its share of the burden, wherever possible.

To date, however, the Bush administration has been unwilling to impose the strongest penalties at its disposal, for fear of jeopardizing trade with companies that do business in the United States. Such sanctions might lead to increased prices for American consumers and to job loss. Instead the United States regularly sanctions foreign companies that do little, if any, business in the United States. And it has done so under the Iran Nonproliferation Act, which does not include the authority to impose an import ban or to block assets. If the United States is not willing to deny its market to companies that proliferate to Iran, the panelists concluded that the United States is not doing as much as it could under its present laws.

This, the panelist found, creates a credibility problem for the United States. The administration appears to be exploiting the differences between various sanction authorities, and seeking to appear active in punishing Iran's suppliers, without actually imposing penalties that have a chance of altering the behavior of these suppliers. In July, the United States sanctioned Rosoboronexport, a state-run arms exporter, and Sukhoi, a manufacturer of fighter jets, both from Russia, under the Iran Nonproliferation Act. (Sanctions against Sukhoi were terminated in mid-November.) Under this Act, both companies can continue to access the U.S. market; they are simply barred, for a period of two years, from U.S. government procurement and assistance, from buying any item on the U.S. Munitions List from the U.S. government, or any item that requires an export license. One panelist noted that the sanctions allow Rosoboronexport to continue supplying Boeing with titanium. Rosoboronexport recently bought a 41 percent stake in titanium giant VSMPO-Avisma. According to published reports, VSMPO-Avisma supplies 40 percent of the titanium used by Boeing, and will supply up to 70 percent of the titanium used by Airbus in contracts through 2012. If the United States is unwilling to relinquish such trade for the sake of punishing a company that may be helping Iran improve its fighter aircraft, then it will have a difficult time convincing others not to sell arms or dual-use items to Iran.

The current U.S. efforts to sanction Iran and its suppliers must be undertaken as part of a comprehensive strategy with a clear goal in order to be effective. Because the Bush administration has yet to clarify what it wants to achieve vis-à-vis Iran through sanctions, U.S. allies are hesitant to support such measures.

The sanctions the United States seeks to impose on Iran must be tailored to their intended purpose, which the panelists found has been too narrowly focused on the suspension of uranium enrichment. In addition to enrichment, the United States should impose sanctions aimed at limiting Iran's support for terrorism, its conventional arms build-up, and its ability to threaten stability in the Persian Gulf. Whether aimed specifically at stopping enrichment or more broadly, the United States would be more likely to gain support for sanctions-both within and beyond the U.N. Security Council-if it developed a road map for what they are expected to achieve.

This road map would also help identify the sanctions that are best suited to achieving U.S. aims. If the goal of sanctions remains focused on stopping enrichment, the panelists agreed that the best chance of forcing Iran to reconsider would be through sanctions on Iranian financial institutions that have a quick impact and that raise significantly the cost to Iran of doing business with other countries. Iran, unlike North Korea, is an active participant in the global economy and has something to lose by being cut off from it.

If the goal of sanctions is broader, a strategy the panelists endorsed, then the United States should close loopholes in its existing set of sanctions laws and consider imposing the stronger penalties on Iran's suppliers outlined above. While blocking the assets of Iran's trading partners and barring them from selling in the United States may not have an immediate impact on Iran's nuclear program, such measures would be important as part of a long-term containment strategy.

In order to achieve either goal, it would be important to convince key U.S. allies to participate in these measures. To date, most countries are reluctant to endorse the Bush administration's push to sanction Iran because they believe that the United States sees sanctions as purely punitive and ultimately aimed at regime change. The panelists noted that historically, sanctions have been used to influence conduct and to get proliferants to mend their ways, not to effect regime change. Most allies do not support the goal of regime change. And they see no reason to join the long-standing U.S. policy of unilateral sanctions on Iran, which they consider to be a failure. However, most allies do see the benefit of preventing a conventional arms build-up in the Middle East, and might be willing to close their markets to entities that sell Iran military equipment and dual-use technology. And many countries could be willing to limit Iran's ability to support terrorism by penalizing banks believed to be serving as facilitators and conduits for the activities of terrorist groups. The United States must also define what behavior would lead to sanctions being lifted, in order to make clear to Iran-and to the world-that there is a way out. This will reduce the impression that sanctions are aimed at regime change.

The panelists concluded that the Bush administration would be more likely to win support among allies for sanctions if it specified the objectives of its sanctions strategy, the tools it is prepared to use, and the requirements for sanctions to be lifted.