Sanctioning Iran: A View from Washington

Good afternoon, it's a pleasure to welcome you all here at the Transatlantic Institute. I am the Director and it is a great honor as well to introduce our speaker today, Dr. Michael Jacobson, who is spending some time in Europe talking to counterparts about issues of shared interests between Europe and United States and he is here today to do pretty much the same and give us a view from Washington on the question of sanctions against Iran. He is a Fellow of the a Senior Fellow at the Washington Institute and he has been doing quite a bit of research and work on issues of sanctions, terror financing and related matters and he comes with a strong background in the area having worked previously in government including the FBI if I remember correctly. Dealing with such issues he has both the practitioner and scholarly tools to address the question. It is at the top of the Transatlantic agenda today, so we very much look forward to your comments. Just as a remainder you are being filmed and not for any sinister purpose, except that we post our on the record events on our website. So if any of you want to go back there later on you can find in few days posted and therefore this means that our conversation today is on the record. Mike, the floor is yours, thank you. Thank you for having me here Emanuele, thank you for the Transatlantic Institute. It's a real pleasure to be here speaking about this important topic. Well, I am going to talk today about the US government's Iran sanctions and I'll be focusing really primarily on what has occurred in the last year and a half. I am going to focus my remarks on really mostly on the Treasury department, but I will touch on what the state department is doing as well. And I am focusing on Treasury really for two reasons. The first is that that is where I worked before I came into the Washington Institute for the last two years. So I actually know more about it than I do about about the other agencies and secondly and this is more important reason, is that I think what Treasury is doing right against Iran may be the most important thing in the US government's tool kit against Iran of what's going on right now. I am going to discuss what is behind the that the current strategy that they are employing, what the motivation is, what type of success they have had, what obstacles they have encountered and what future is what next steps can and should be taken. The US government has had this is the little background has had comprehensive trade sanctions against Iran since 1995. And what does this mean? This basically means that US persons, US companies can't do business with Iran with certain exceptions, some of them have been tempered over time, for example, the US companies can do business in carpets, pistachios, humanitarian aid and there are a few other exceptions. But basically by and large they are comprehensive trade sanctions. But a year and a half ago the US government realized that a new strategy was needed. Treasury working with the state apartment realized we were the ones that worked on the strategy and came up with a strategy. It was designed a change Iran's behavior by raising the cost for them of their behavior. And it was designed to show them that their behavior was not cost free. Now let me talk a little bit about first about why a new strategy was needed. As I mentioned the US government has had pretty comprehensive sanctions in place for quite a while. The first reason is that foreign governments were not receptive particularly receptive to these comprehensive trade sanctions to which they viewed as political. Telling them that they should be doing no business with Iran across the board didn't go over very well. It was viewed as a political act and they didn't want to join in that. Now one reason why countries were reluctant to join in sanction it was also as it has been widely publicized is that for many of them it was their own economic interests. The EU in particular, a number of countries in Europe have very strong economic ties to Iran and were reluctant to go forward as were Japan, China and Russia which also have strong economic ties. The second reason why a new strategy was needed was that this dynamic made it hard for the US to get things to the Security Council at the UN where China and Russia were two of the five permanent members. So the US needed a strategy to address all these issues. One, they had to find their way to convince foreign governments that their strategy was not just politically driven. Second, they had to find a way to bring non US banks and non US companies on board which is a real challenge given that the US doesn't have the same type of jurisdiction over them and three, the US wanted to continue to use the UN where possible but not to get locked down in the UN context. The strategy that Treasury and state department ultimately came up with was focused on conduct. And it was and that was the strategy it was designed to build international support. To keep the focus not on Iran or at large, but on the dangerous activities that Iran was engaged in, to talk about their WMD programs, to talk about their support for terrorism as well as this is one thing the treasuries were really highlighting, the deceptive financial practices which I will get into a little more later. This Treasury strategy then had two separate components. One, it was using what are called targeted financial measures, which I'll define shortly, to blacklist individual Iranian entities that were involved in this type of nefarious activity that I mentioned support for terrorism, WMD programs etcetera. The second aspect of the Treasury strategy was outreach to non US financial institutions, to leverage what they are calling market forces against Iran, to try to convince them that it's bad business, its risky business and bad from a reputation or risk perspective, to do business with Iran. Treasuries tried to make clear that these actions are being taken not for political reasons, but due to their role in protecting the international financial system and some of Iran's activities there. And they are trying to make clear that they are going after these entities for their specific bad conduct. This is what our background in what I mean when I say targeted financial measures, the first part of this Treasury strategy. What are really professional sanctions? When you refer to sanctions, most people are talking about the broad based sanctions against the country; broad based trade sanctions often, as have been the case against Cuba what the US has had against Iran for a number of years and these types of sanctions have a bad rep. When you look particularly in the Iraq context, some of the images that emerge from Iraq in the 90s some of the humanitarian, civilian suffering really I think gave sanctions a bad rep. The people thought that they hurt innocent civilians and didn't actually address didn't actually target the people it needed to. So smart sanctions or targeted financial measures, those are really a type of financial sanctions and they are meant to go specifically after the individual bad actors rather than entire countries. For example, instead of banning all financial interaction with Iran, you would go after a specific Iranian bank or a specific company that was supporting its terrorists or its WMD programs. I think from the US perspective it's a much easier sell to foreign audiences when you make the case that it's narrow, more tailored and focused on conduct. Even though the when you look at these targeted financial measures that the Treasury department has been employing, they are they really consider it unilateral. So in other words they only technically affect the US companies at least under the US jurisdiction. But the reality is that the US unilateral sanctions have a much broader impact than they would seem on their face. As the Director of Treasury's Office of Foreign Assets Control said, "Our unilateral sanctions are anything but." And there are a few reasons for this. Many non US banks will use the Treasury the Treasury list, keep it on their their compliance officers have it on their computers, and will refuse to do business with black listed unilaterally listed black listed entities, even though they are not required to, because one, they don't want to associate with known and identified bad actors because it is bad for reputations, and second, they don't want to risk their ability to do business in the US, because as the saying goes, "All financial roads lead to New York". And I think the 2005 case from an enforcement perspective, the $80 million fine against the Dutch bank ABN AMRO for not having an adequate compliance program that place to catch the Iran- Libya related transactions that were going through its New York office send a big message to other US to non US financial institutions. In terms of targeted financial measures what actions has Treasury taken? Well most of them have been focused on Iran's WMD related activity. They have designated more than 20 Iranian entities under their executive orders related to WMD and relating to Iran's WMD program and their ballistic missile program. These have included probably the most highly publicized there was Bank Sepah, which is Iran's fifth largest state owned bank, which is providing financial services to entities involved in Iran's ballistic missile program. They have also designated a number of other Iranian entities, the Atomic Energy Organization; some of its in city areas and others. I think going after Iran with these targeted these targeted of financial measures primarily for WMD activities is a strategy that makes sense. There is a broader international support on the need the stop this than there is for example on Iran's terrorist related activates. There was less consensus it's harder to build international support if you go after Iran for its support for Hezbollah or some of the other some of the other terrorist related activities. That being said Treasury has taken its action against Iran with targeted financial measure for terrorist related activities as well. Bank Saderat was probably the best the most publicized example and they the Treasury talked about the fact that they send $50 million through their London branch to Hezbollah and other terrorist groups from 2001. Where possible Treasury is trying to more and the state is trying to multi-lateralize these targeted financial measures to the UN. So even where Treasury has unilaterally gone after these entities, they have been trying to get the UN to list them as well on the Iran resolutions. And it had some success. If you look at the two Iran related resolutions, a number of entities listed there had been previously designated by Treasury. So in other words the US government is trying to use UN Security Council where they can but not get locked down in this. The second part of the strategy was designed to leverage market forces against Iran, and this really more an approach of persuasion then coercion. Senior Treasury officials have gone around the world meeting with about 40 non US global financial institutions and highlighting the threat that Iran poses to the international financial system, and they have been making the argument that these banks should not be doing business with Iran because it's risky, and they have shared information about Iran's deceptive financial practices which has concerned these banks. And that includes Iranian banks asking that their name be taken off transactions so that they go through. And in fact even Iran's Central Bank has been involved in that particular that particular practice. And Treasury Secretary Paulson has made clear that he thinks that, having been in the financial sector and the private sector; it makes it hard to know who is on the other end of the transaction when you are when you are dealing with Iran. And it can lead respectable financial institutions to get involved in banks that they wouldn't otherwise. Treasury has also pointed out that these some of these same banks some of these same Iranian banks are actually directly involved in Iran's WMD programs and Iran and support for terrorism. And finally, they have also shared information about the Iran's extensive use of front companies. So the bottom line is Treasury's argument is that when you are dealing with Iran you don't really know who you are dealing with. One thing that has really been popping up recently and they have been making the case is that one particular danger with Iran is that if you are dealing with Iran, you may be dealing with the Islamic Revolutionary Guards Corps the IRGC, and that's a growing economic force in Iran. And Secretary Paulson in his recent speech talked about, "The IRGC is so deeply in entrenched in Iran's economy and commercial enterprises. It is increasingly likely that if you are doing business with Iran, you are somehow doing business with the IRGC." So why is this so disturbing? I think it's because the IRGC is playing an important role in Iran's WMD programs. Several IRGC entities have been specifically designated for by the UN. And they also maintain a special branch the Quds Force, which plays an important role in Iran's terrorist related activities. And they are as I mentioned they are growing economic force, their annual revenue is now up in the billions and with their ties to the leadership they are getting access to huge contracts with a no bid fashion. And so, I think this role is growing. Our Treasury's outreach to the foreign private sector is not always appreciated by the foreign governments. I think they consider the they consider some of these banks to be under their jurisdiction. They say the US has jurisdiction over its own banks, why is the US coming to Europe and meeting with with their banks? But the reality is it has been a very effective approach because when you are dealing with foreign governments and you are asking them to take certain action; a lot of the different calculations enter the question. What do they think of the US? What other the issues are on the plate etc? For banks it's a business decision. And if you can convince them that the practice what their involvement is actually bad for is bad for their reputation potentially, and that they are interacting with individuals who are involved in various deceptive financial practices etc, they will make the business decision just cease to engage. So is this strategy working? Well, I think it's a mixed bag so far. I think, first I will start with the the positive. A number of European banks have ramped down significantly their Iran related business and UBS for example cut off all business, HSBC and Credit Suisse reduced their exposure to Iran. And I think a statement by a Credit Suisse spokesman seems to indicate that the Treasury message had gotten through. He said, "It was our decision made in light of the increase in political, financial and reputational risk." More recently Deutsche Bank announced that they would no longer be doing business with Iran and the Deutsche Bank's spokesman statement was interesting. He said that "The increased effort required to ensure compliance with EU and UN guidelines in so great; it just isn't worth to continue this business." I think also if you look at the at them, so that that is certainly a positive. I think one of the and if you look at the impact on individual entities that have been designated like Bank Sepah, I think the effect has been huge. Bank Sepah now have I know its branch in Rome is under some sort of administrative special administration by the Italians, and I think its international business is really hurt by that which is a big step. I think that the the sanctions have also have had a psychological impact; I think there is pessimism now in the Iranian business community. And I think the fact that these sanctions have been done in a in a graduated fashion instead of all at once, I think it leaves I think if they had done all at once, then Iran knows what it's dealing with. They know they know how to how they should adapt. But if you don't know what's coming next, you think something is coming next but you are just not sure what, I think its makes a lot harder to figure out how to how to cope with with these graduated sanctions. And if you look at I think there are some indications that some of exports from European countries, for example, Germany I think was down about 15 percent over the last year. So there are some positives on that front as well. I think there is still a long way to go though. Some of the business being dropped by the European is being picked up else where in Dubai, in Malaysia and China. I think China in particular have used export sensitive military technology to Iran. It just signed a deal with for $600million to supply subway trains for Tehran's Metro. And interestingly that was a contract that had been awarded to the IRGC. And I think on the on the bank front, there had been recent reports that, as the the global financial institutions that are really concerned about their reputational risk are stepping out, that some of the smaller banks who are more interested and just focused on profit on short term profit, are beginning to step in. And I think if you look particularly at at companies and financial institutions that don't have a US presence, they are less like they will be concerned by US warnings. And I think the bottom line is of course that Iran still has not changed its behavior in a serious way. And that of course has to remain the bottom line. I think there I think one reason it has been a mixed bag is that there are a number of obstacles that the US is facing both at the UN and outside of the UN. At the UN, I think the pace been fairly slow; I think right now it looks like China has been the biggest problem, although Russia has been somewhat problematic as well. China reportedly does not sound particularly interested in a third round of sanctions and then don't want to target financial institutions. Outside of the UN I think in addition the more the more obvious problems they are running into is countries' business ties to Iran. And there are a number of systemic obstacles that the US is facing. One is that a lot of countries don't have the authority to target WMD proliferators the domestic authority. This is in spite of the UN obligations in developing authorities. And this has really hindered the Treasury effort. For example on Bank Sepah, Secretary Paulson talked about how they tried to get another country to take the lead undesignated. They know that what just a US Designation unilateral designation, it plays very differently than if they can get buy in if they can get other countries to join in or other countries to take the lead. They tried that in Bank Sepah and failed and then they are doing unilateral designation first, and it was in part because other countries didn't have the domestic authorities to target WMD proliferators. Another reason is that the US is the only country in the world which has an intelligence shop in its finance ministry. And I think the difficulty then is that the finance ministries don't all receive the relevant information on Iran and then they are left they are the ones with the responsibility for protecting the financial system and don't have access to all the information about Iran's financial practices and the danger that this poses to the financial system. And I think on the deceptive financial practices, another problem has been that Treasury is really the only entity out there, the US is the only entity out there that's going around talking about these issues. I don't think any international organization has weighed in on that. I don't think any other countries have issued any kind of domestic alerts to their financial system and this has been this has been somewhat troubling. In terms of what more needs to be done, I think first you will need a strong third round of sanctions of the UN. I think the first two were people have criticized them for being too weak. But I think it did send an important message that you could get all of the permanent five members of the Security Council on board for sanctions against Iran which Iran was reportedly pretty surprised about. I think this should include the next round should include additional financial institutions. I think and there are a few different possible candidates for that, but I think this is this is something that has a real impact you see what you see with Sepah. It's not that easy for a financial institution to just change its name, assume a different identity etcetera. So I think when you actually target and a financial institution that depends on being connected to the global economy, it's very it's very effective. I think there also should be additional IRGC entities listed in the in the third round. And I think the the next round should also close a number of the loopholes from the first two rounds. Right now in the first two rounds, there was the one way arms embargo for example. And also I think significantly there was no monitoring team in either of the first two rounds. And this is very important because you put these resolutions on paper and then there is no one to actually focused on, ensuring that countries are complying with this. And you you can actually see with some of the other UN monitoring teams on Sudan, on Al Qaeda, that they play a very important role, that they can they actually, when you have an independent monitoring team usually based outside of the US who can basically write and say whatever they want, it can have an important naming and shaming aspect to this. And I think the monitoring team ideally should be based in Dubai which is a very, very important Iranian trading partner. I think there are also steps that should be taken outside of the UN. First I think the pressure needs to be stepped up considerably on the on Asia and on the UAE. I think while the number of the European countries and financial institutions are moving in the right direction as I said earlier, some others are stepping in where Europe steps out. And I think as US pressure has its limits, I think getting others in Europe to to work the pressure in Asia and the UAE would be would be helpful as well. I do think the US should continue to aggressively, unilaterally designate Iranian entities that they find are involved in support for terrorism, in their WMD program, etcetera. It should it's obviously better in case whether they can get other countries in joining these designations, its best when you can get with the UN, but where they can't, I think they should continue to do this. And it's actually interesting to know that the EU in this regard has actually gone farther than the UN. There were number of there were number of entities that were listed by the EU after the UN resolutions that were not listed by the by the UN, which was actually very interesting and the arms embargo that the EU put in place against Iran goes further than the UN resolution as well. I think the US should also right now there is a in some way it's not a great positive dynamic unfolding in the US on this, where the Congress feels that the administration is not going nearly far enough on the sanctions and there has been a growing momentum in the US to start sanctioning foreign companies that are involved in the Iranian energy sector. And the administration is talking about the Congress is talking about bringing sanctions against any foreign company that's that's doing more than $20 million at business a year in the Iranian energy sector. This is something that really concerns the administration. I think that the feeling is that it could really undermine any efforts to build multilateral consensus on this issue. And I have had Europeans say to me that if if this happens, what the end result will be will be a US-EU trade war, which is certainly not a positive thing. I think where Congress can be very useful actually is that before that I wanted to mention that I think that the administration probably has and should continue to use the congressional pressure though to try to move foreign countries forward. I think that they I think they are probably making the case that the best way to forestall congressional action in the US and to reduce the pressure from Congress is if they can show that there are that there is progress with the UN, that the EU is making progress etcetera. And I do think where Congress can be useful is really in the naming and shaming. If you look at the one of the exceptions in the Iran sanctions is foreign subsidiaries of US companies, so for example, Halliburton had an office in Tehran for a number of years, which was actually legal under US law. But as it was a foreign subsidiary it was run by entirely by foreigners, non US citizens etcetera, but they have actually since backed out because there were media reports Congress started holding hearings, so I think that's a more useful for I think it's actually useful when Congress will name and shame, but not actually bring formal sanctions. I think also that there is a need to involve international institutions more. As I mentioned earlier there is no one other than the US Treasury really talking about Iran's deceptive financial practices. There are organizations like the Financial Action Task Force, which is a little known organization in Paris, which should be playing a role in this area. They actually used to have a basically a black list, they got rid of it about two years ago, but when they did have the black list of non compliant countries, it was a really effective tool. I mean it was it didn't have enforcement power, but it was important in naming and shaming, and when the financial sector sees a country in that list they are going to be much more leery about doing business with them. So I think that would be an example of an important step. I think and as I mentioned earlier, I think that the Finance Ministries, Foreign Finance Ministries need to be more engaged. One step would be to as I mentioned to create their own intelligence shops, but they also need to be alerting their financial sectors that they oversee, from a regulatory capacity, about these risks and letting them know what actions they should or should not be taking based on the Iran's financial practices. And I think finally there is a need this is becomes a longer term solution, but it's also a need for a country to develop, the authorities that I mentioned were lacking in the WMD area. There is a UN resolution which actually instructs countries to develop their own authorities to target WMD proliferators, but very few countries out there have actually put that kind of that kind of that power in place. The US only did it in June 2005 and that's actually been one of the real reasons why the US has been able to aggressively go after Iran. And I think if other countries did create authorities in this area it would be an important step forward. So in conclusion, I think we are at a critical stage. I think the effort to this point that's clearly had some impact and it's demonstrated that it can be an effective approach. I think as I mentioned, both the US and UN sanctions have been done in a graduated fashion instead of all at once. But for graduated sanctions to be effective there has got to be more. Iran has to feel like there is some thing else coming like they know something else is coming but they are not sure what. As I mentioned not only the economic impact of this is serious, but the psychological as well. They must feel like they are isolated and under siege. And I think what the sanctions currently in place are not enough and more is needed. But I think if the US and the UN can build on what's already in place then we have a strategy that just might work. Thank you.