[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
FINANCIAL HARDBALL: CORRALLING TERRORISTS AND PROLIFERATORS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION, AND TRADE
OF THE
COMMITTEE ON FOREIGN AFFAIRS
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
APRIL 6, 2011
__________
Serial No. 112-9
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Printed for the use of the Committee on Foreign Affairs
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Available via the World Wide Web: http://www.foreignaffairs.house.gov/
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COMMITTEE ON FOREIGN AFFAIRS
ILEANA ROS-LEHTINEN, Florida, Chairman
CHRISTOPHER H. SMITH, New Jersey HOWARD L. BERMAN, California
DAN BURTON, Indiana GARY L. ACKERMAN, New York
ELTON GALLEGLY, California ENI F.H. FALEOMAVAEGA, American
DANA ROHRABACHER, California Samoa
DONALD A. MANZULLO, Illinois DONALD M. PAYNE, New Jersey
EDWARD R. ROYCE, California BRAD SHERMAN, California
STEVE CHABOT, Ohio ELIOT L. ENGEL, New York
RON PAUL, Texas GREGORY W. MEEKS, New York
MIKE PENCE, Indiana RUSS CARNAHAN, Missouri
JOE WILSON, South Carolina ALBIO SIRES, New Jersey
CONNIE MACK, Florida GERALD E. CONNOLLY, Virginia
JEFF FORTENBERRY, Nebraska THEODORE E. DEUTCH, Florida
MICHAEL T. McCAUL, Texas DENNIS CARDOZA, California
TED POE, Texas BEN CHANDLER, Kentucky
GUS M. BILIRAKIS, Florida BRIAN HIGGINS, New York
JEAN SCHMIDT, Ohio ALLYSON SCHWARTZ, Pennsylvania
BILL JOHNSON, Ohio CHRISTOPHER S. MURPHY, Connecticut
DAVID RIVERA, Florida FREDERICA WILSON, Florida
MIKE KELLY, Pennsylvania KAREN BASS, California
TIM GRIFFIN, Arkansas WILLIAM KEATING, Massachusetts
TOM MARINO, Pennsylvania DAVID CICILLINE, Rhode Island
JEFF DUNCAN, South Carolina
ANN MARIE BUERKLE, New York
RENEE ELLMERS, North Carolina
VACANT
Yleem D.S. Poblete, Staff Director
Richard J. Kessler, Democratic Staff Director
------
Subcommittee on Terrorism, Nonproliferation, and Trade
EDWARD R. ROYCE, California, Chairman
TED POE, Texas BRAD SHERMAN, California
JEFF DUNCAN, South Carolina DAVID CICILLINE, Rhode Island
BILL JOHNSON, Ohio GERALD E. CONNOLLY, Virginia
TIM GRIFFIN, Arkansas BRIAN HIGGINS, New York
ANN MARIE BUERKLE, New York ALLYSON SCHWARTZ, Pennsylvania
RENEE ELLMERS, North Carolina
C O N T E N T S
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Page
WITNESSES
Mr. Juan C. Zarate, Senior Adviser, Center for Strategic and
International Studies (former Deputy Assistant to the President
and Deputy National Security Advisor for Combating Terrorism,
and former Assistant Secretary for Terrorist Financing and
Financial Crimes, U.S. Department of the Treasury)............. 7
David Asher, Ph.D., non-resident senior fellow, Center for a New
American Security (former Senior Adviser, East Asian and
Pacific Affairs, and Coordinator, North Korea Working Group,
U.S. Department of State)...................................... 32
Professor Orde F. Kittrie, Sandra Day O'Connor College of Law,
Arizona State University....................................... 39
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
The Honorable Edward R. Royce, a Representative in Congress from
the State of California, and chairman, Subcommittee on
Terrorism, Nonproliferation, and Trade: Prepared statement..... 4
Mr. Juan C. Zarate: Prepared statement........................... 10
David Asher, Ph.D.: Prepared statement........................... 34
Professor Orde F. Kittrie: Prepared statement.................... 42
APPENDIX
Hearing notice................................................... 62
Hearing minutes.................................................. 63
FINANCIAL HARDBALL: CORRALLING TERRORISTS AND PROLIFERATORS
----------
WEDNESDAY, APRIL 6, 2011
House of Representatives,
Subcommittee on Terrorism,
Nonproliferation, and Trade,
Committee on Foreign Affairs,
Washington, DC.
The subcommittee met, pursuant to notice, at 3:04 p.m., in
room 2172, Rayburn House Office Building, Hon. Edward R. Royce
(chairman of the subcommittee) presiding.
Mr. Royce. This hearing of the Subcommittee on Terrorism,
Nonproliferation, and Trade today will look at corralling
terrorists and proliferators--financial hardball, in other
words.
Economic sanctions have long been a key diplomatic tool.
Athens imposed a trade boycott on Sparta's ally Megara. And, of
course, it is a long history, but in recent years the United
States has increasingly relied upon reputational financial
sanctions, particularly against North Korea and Iran. These
sanctions target financial institutions employed by rogue
states for illicit transactions. To preserve their reputation
and protect their businesses, other banks shun the targeted
institution, restricting the rogue's ability to finance
proliferation or terrorist activities.
This model was effectively used in 2005 with Banco Delta
Asia hitting North Korea. Once BDA was identified as complicit
in North Korea's money laundering and WMD activities, banks
throughout the region shunned Banco Delta Asia and other North
Korean transactions, effectively shutting the regime out of the
international system. As Dr. David Asher, a key architect of
this policy, will testify, this was a ``financial shot heard
around the world.''
The key to this action was Section 311 of the PATRIOT Act,
which allows the Treasury Department to designate a particular
financial entity as a ``primary money laundering concern,''
barring it from the U.S. financial system. One witness, Juan
Zarate, pioneered the use of this sanction against ``bad
banks'' during his tenure at Treasury.
After being used against North Korea and BDA, this
``unprecedented power'' took a 5-year vacation. That is until
this year, when the Beirut-based Lebanese Canadian bank was
sanctioned. Treasury found that as much as $200 million per
month in drug money was laundered through this bank to the
benefit of Hezbollah, financing weapons, financing logistics,
financing training.
The ``market-based financial isolation'' that was used
against North Korea set the stage for Treasury's campaign
against Iran. Beginning in 2006, senior U.S. officials visited
some five dozen banks, seeking to persuade them to reconsider
their business with Iranian financial institutions. Dubious
transactions by Iranian banks, like the $50 million transmitted
by Iran's bank Saderat through a London subsidiary to
Hezbollah, were spotlighted. In this ``whisper campaign,''
Treasury officials revealed the high cost foreign institutions
could bear if found to be facilitating illicit Iranian
transactions.
This has caused economic hassle and even pain for the
regime in Iran, but it is yet to alter its nuclear weapons
drive.
But neither has our financial pressure been turned to the
max. Treasury has yet to designate a single bank under Section
311 of the PATRIOT Act for Iran-related sanctions. Nor has
Treasury imposed any sanctions against Iran's Central Bank,
which has reportedly assisted Iranian banks to sidestep U.S.
financial pressure.
Nor have new financial sanctions that were included in the
Comprehensive Iran Sanctions, Accountability, and Divestment
Act been fully implemented. Nine months after the bill was
signed, Treasury is yet to issue regulations to bar foreign
banks from doing business with designated Iranian entities from
the U.S. financial market. If fully implemented, this would
transform Treasury's whispers into a loud bark and a bite.
Successive administrations have shown little interest in
sanctioning firms investing in Iranian's energy sector. Last
week's sanctioning of an already sanctioned and largely
insignificant Belarusian energy firm was embarrassing for the
Obama administration. It was just a gesture.
Our witnesses today suggest that financial sanctions, if
made a cornerstone of a coordinated campaign, could tip the
playing field. In North Korea's case, one suggests they could
have proven ``decisive'' had naive diplomats not demanded that
they be dismantled.
Lastly, I should note that our hearing comes as the
Treasury Department is in transition. Under Secretary Stuart
Levey left his post just days ago. He was innovative and
aggressive. The administration insists his departure won't
affect policy. Let's hope that is the case.
I will now introduce our witnesses.
Mr. Juan Zarate is a senior adviser at the Center for
Strategic and International Studies. Mr. Zarate previously
served as Deputy Assistant to the President and Deputy National
Security Adviser for Combating Terrorism from 2005 to 2009.
Prior to that, Juan served as the first Assistant Secretary for
Terrorist Financing and Financial Crimes. He is actually from
my county, Orange County, California.
I am going to mention the ranking member after I go through
the witnesses and then go to you for your opening statement, if
that is all right.
Mr. Sherman. Very good.
Mr. Royce. Dr. David Asher is a non-resident senior fellow
at the Center for a New American Security. Previously, Dr.
Asher served as a Senior Asia Adviser at the State Department
and was the Coordinator for the North Korea Working Group that
attacked Kim Jong Il's illicit activities and finances. He is a
coauthor of a new report, ``Pressure,'' in which he documents
those efforts.
Professor Orde Kittrie is professor of law at Arizona State
University's Sandra Day O'Connor College of Law. He focuses on
legal and policy issues relating to the proliferation of
weapons of mass destruction. Prior to academia, Mr. Kittrie
served for 11 years at the State Department as an attorney.
I would like to turn now to our ranking member, Mr. Brad
Sherman from California, for his opening statement; and then we
will go to Mr. Zarate, Dr. Asher, and Mr. Kittrie, in that
order, for their statements.
Mr. Sherman.
[The prepared statement of Mr. Royce follows:]
Mr. Sherman. American national security depends upon our
nonproliferation efforts, particularly against Iran. The issue
is raised, can sanctions work? The answer is, obviously, of
course, definitely, but only if you are willing to make our
international businesses and trading partners angry. We have
been absolutely unwilling to do that to any degree whatsoever,
and our sanctions program has manifestly failed to slow the
times centrifuges.
Let me give an extreme example that demonstrates what I am
saying. Imagine if the United States had a rule that you could
not trade with the United States, not one paperclip, if you
conducted any trade with Iran--a single paperclip, perhaps
excluding medicine and food. The result would be an immediate
shutdown of the Iranian economy, as it couldn't get spare parts
for oil field equipment, elevators, et cetera. Iran would have
to discontinue its program within weeks.
And, of course, this would make all of our trading partners
angry, not the least of which would be the Chinese. We would
see our ports locked to their exports until such time as they
bend to our nonproliferation strategy, which I think they would
do within hours.
Wall Street is simply too powerful, the business community
is too powerful, the State Department is too deferential for us
to do anything close to what I am talking about. So, instead,
we have a policy of sanctions to the full extent that can be
implemented without making anybody upset, except the Iranians.
And within that range we have at least been able to annoy the
North Koreans and the Iranians with our very limited efforts.
Financial measures play an important role in applying this
level of pressure, and financial institutions seem particularly
concerned about their reputations and susceptible to things
that pose reputational risks. You can demonstrate tactical
results. A bank quits doing business for Iran, for example. But
what does that mean? That just means they have got to go to
another bank. Iran is not going to abandon its nuclear program
just because they have to go to the bank with the high ATM
fees.
Big Western banks do tend to be wary institutions. They
respond to pressure, to whisper campaigns. Stuart Levey did an
outstanding job within the constraint that he couldn't make
anybody angry. He accomplished all that could be.
Financial institutions, in an effort to protect their
reputation, often go well beyond letter of the law. At least
initially the Bush administration designated Banco Delta Asia
under the PATRIOT Act in September, 2005. The order only
affected that one bank. Yet almost all reputable institutions
stayed away from North Korea and its banking institutions,
causing a cash crunch for the North Korean Government that led
to a little bit of more reasonable negotiating from them for a
while.
We have to play financial hardball and will learn about
that at these hearings. But we also have to impose trade as
well as financial pressures.
The fact that we are doing the exact opposite was
illustrated a couple weeks ago when, on March 16th, the State
Department sent notice to Congress saying that it was going to
give a license to GE to repair the jet engines of supposedly
civilian Iranian aircraft. Well, how civilian are these
aircraft? We know that they are used to take weapons to
Hezbollah. We know that they were used in intelligence
operations involving Iranian dissidents and assassinations and
assassination attempts. And we know that they were used, as
shown on page 240, 241 of the 9/11 Commission Report, to ferry
9/11 highjackers in and out of Afghanistan prior to the 9/11
incident.
These are their civilian aircraft. We are going to license
their repair.
What we should have the guts to do is simply tell Iran,
ground your airplanes until you ground your nuclear program.
Unfortunately, while many of us, including, I believe, the
chairman, the chairwoman of the full committee, the ranking
member of this full committee, are urging the State Department
to do just that, I suspect that the administration will bow to
corporate pressure and license this, while at the same time
telling the American people that we are using all the economic
power of the United States to try to prevent the Iranians from
developing a nuclear weapon.
We can and should go way beyond CISADA. Last Congress,
joined by our chairman, I introduced the Stop Iran's Nuclear
Weapons Program Act. That would, among other things, sanction
those who would buy bonds from the Iranian Government. Recent
news reports suggest that some $4.2 billion in bonds will soon
be issued by an agency of that government, the Power Oil and
Gas Company. I will be reintroducing that legislation next
week, and I want to urge all our colleagues to cosponsor that
legislation.
Finally, I want to mention that some $33 billion was seized
and frozen by Treasury because those assets were owned by Libya
and the Qadhafi family. It is time that those assets be used to
pay the costs of Operation Odyssey Dawn. That is an operation
designed to protect the Libyan people.
The fact that we have not even asked the Benghazi
government--I don't think we need to ask, but we haven't even
bothered to ask--for a clear declaration that those funds
should be used to support our efforts shows a real lack of
respect to the American taxpayers.
I would point out that Libya produces more oil per capita
than any country that you can find on the map without a
magnifying glass.
So there is still much to be done. I want to commend our
Treasury Department for what they have been able to do under
the political constraints they face, and I yield back.
Mr. Royce. Thank you, Mr. Sherman.
Mr. Zarate.
STATEMENT OF MR. JUAN C. ZARATE, SENIOR ADVISER, CENTER FOR
STRATEGIC AND INTERNATIONAL STUDIES (FORMER DEPUTY ASSISTANT TO
THE PRESIDENT AND DEPUTY NATIONAL SECURITY ADVISOR FOR
COMBATING TERRORISM, AND FORMER ASSISTANT SECRETARY FOR
TERRORIST FINANCING AND FINANCIAL CRIMES, U.S. DEPARTMENT OF
THE TREASURY)
Mr. Zarate. Thank you Chairman Royce, Ranking Member
Sherman. It is an honor to be here with you today. Thank you
for the invitation, always an honor to be with southern
Californians.
I submitted written testimony and ask that it be entered in
the record, Mr. Chairman.
Mr. Chairman, I was privileged to serve at the Treasury
Department and the National Security Council after 9/11 with a
team of remarkably dedicated public servants like Dr. David
Asher sitting to my right, who are dedicated to deploying these
innovative financial tools to promote and defend the national
security of our Nation.
David, in particular, was critical as the State
Department's point man in devising new ways of integrating law
enforcement, financial, and diplomatic tracks to squeeze the
regime in Pyongyang.
Mr. Chairman, I would also like to thank you for your
consistent support on these issues, especially as we deploy
targeted financial sanctions against international scofflaws
like Viktor Bout and his international business empire.
Mr. Chairman, between diplomacy and war lies the realm of
economic influence and financial power. Over the past decade,
we have developed a new brand of financial suasion used to
constrict the budgets and global reach of terrorist networks
and to isolate and diminish the international financial and
commercial access of rogue regimes like North Korea and Iran.
This new paradigm leverages the integration of complementary
financial and national security objectives to protect the
integrity of the international financial system and isolate
rogue financial activity.
What makes this approach so powerful is that it relies more
on the risk-based calculus of global financial and commercial
institutions than the policy decisions of governments. This is
why we have seen banks and insurance companies end their
dealings with North Korea and Iran, even absent government
decrees or U.N. sanctions.
Enabling this new power is the suspect or illicit behavior
of rogue actors themselves. With sensitivities embedded in the
financial system to illicit financial behavior, such activities
become the Achilles' heel of rogue actors. This is why the
Iranian Revolutionary Guard forces growing control of the
Iranian economy is a central vulnerability.
This system of financial suasion relies on a virtuous cycle
where rogue behavior is exposed or targeted by governments and
shunned by the private sector, reinforcing financial isolation.
This then puts a premium on government exposure of masked
financial transactions.
Importantly, this new paradigm has done away with the old
orthodoxy that defines sanctions as being either unilateral or
multilateral. This new brand of financial power is multilateral
by nature. This explains why a domestic proposed administrative
rule under Section 311 of the PATRIOT Act can lead to the
global financial isolation of the North Korean regime.
Financial suasion is now central to our national security
approach. It can cut off funding for rogue regimes, heighten
scrutiny of suspect international activity, amplify the
financial pressure and political fissures within regimes and
societies, and anchor the international isolation of the rogue
regime and its leadership.
These financial campaigns also alter the strategic
environment, and so we need to be aware of the trends that
could dull the sharp edge of this new power.
Criminal and terrorist networks and sanction states will
continue to need access to the international financial system.
This will breed innovation in circumventing sanctions and the
creation of shadow banking networks. We then need to continue
to shine a light on those actors engaged in illicit and suspect
conduct, especially the financial facilitators.
Governments need to remain acutely aware of the reliance on
the private sector and maintain focus on conduct-based
sanctions that have direct relevance to the integrity of the
financial system. It is critical as well that we tend to the
economic and enforcement environment that makes this power
possible. In the first instance, it requires maintaining and
using the tools and authorities we already have in place,
drawing the sharp distinction between legitimate and
illegitimate financial activity. It also requires strengthening
the United States as a central financial and commercial center
to ensure that what the United States says and does has global
impact.
And we can't remain static in our application of financial
pressure against rogues. We need to integrate law enforcement
and other tools to amplify the effects of these powers and
launch new campaigns to address plutocracy and human rights to
underscore the illegitimacy of rogue actors in the
international financial arena.
The recent steps taken to expose Hezbollah's international
drug trafficking and money laundering activity is a welcome
strategic move. We may also need to think more creatively about
positive finance incentives, both to reward the right behavior
by the financial community and punish illicit financial actors.
It is important as well as not to view these powers as a magic
bullet for all our hard transnational problems. This power
needs to be an enabler for our broader national security
strategies.
Finally, Congress plays an important role in this realm.
Congress should hold the executive's feet to the fire in
implementing existing authorities to isolate rogue behavior. As
it has done with CISADA, Congress can affect the international
environment and pressure on foreign governments, the private
sector nongovernmental organizations to ensure there is a clear
dividing line between legitimate financial activity and
activities that serve to circumvent controls on illicit
behavior.
As the world faces challenges from rogue states' networks
and actors, there now exists a well-developed international
system to use financial information, power, and suasion to
isolate rogues from the legitimate financial system. If
maintained properly and used aggressively, this new paradigm of
smart financial power will remain an effective cornerstone of
our national security approach, keeping both the financial
system and our citizens safe.
Thank you very much, and I look forward to your questions.
[The prepared statement of Mr. Zarate follows:]
Mr. Duncan [presiding]. Dr. Asher.
STATEMENT OF DAVID ASHER, PH.D., NON-RESIDENT SENIOR FELLOW,
CENTER FOR A NEW AMERICAN SECURITY (FORMER SENIOR ADVISER, EAST
ASIAN AND PACIFIC AFFAIRS, AND COORDINATOR, NORTH KOREA WORKING
GROUP, U.S. DEPARTMENT OF STATE)
Mr. Asher. Chairman Royce, Ranking Member Sherman, and
members of the committee, thank you very much for the
opportunity to testify here today.
I had the great pleasure, as a colleague and counterpart of
Juan Zarate during the Bush administration, to go to work on
the North Korea problem set in particular but also to help
develop the use of finance as a fulcrum element in applying
nonkinetic pressure against some of our most difficult
adversaries and most defiant regimes and networks.
Recently, I had the pleasure of being a coauthor of this
report from the Center for New American Security called
Pressure, which reviews the history not only of the Bush
administration's North Korea Illicit Activities Initiative but
also the Clinton administration's path-breaking initiative to
put financial pressure on Slobodan Milosevic, something which I
encourage people to pay attention to.
And with your permission, sirs, I would like to submit for
the record at least the text as well as my written statement
today. I would like to highlight five points briefly from this
report.
The first is essentially covering what Juan just mentioned.
In the last decade, the Treasury Department has pioneered a new
era of financial operations other than war and created what I
would say is a revolution in financial affairs equivalent to
the revolution in military affairs engendered by the use of
precision-guided munitions and sort of smart warfare
capabilities.
We have the ability today, given the interconnectivity of
the global financial system to apply nonkinetic pressure
coercively against nations by combining economic sanctions,
precision-guided financial measures using Treasury authorities
and, really importantly, law enforcement, in my mind, in a way
that you can essentially intimidate, deter, deny, coerce, and I
think even defeat, in some cases, adversaries who may otherwise
be difficult to have any effect on. And I think on the Iran
problems set we would have to look at nonkinetic ways and means
as the primary.
The effectiveness, of course, of economic statecraft, a
second point, really depends on the clarity of the desired end
state. That is why, Ranking Member Sherman, I totally
understand your point. I mean, the administration has to decide
what it wants to achieve and what it is willing to do to
achieve it.
Because the stakes on the Iran problem set are so
incredibly high they go well beyond just Iran's nuclear threat,
which is considerable looking ahead, but also the threat of
proliferation throughout the Middle East triggered by the
Iranian regime's development, especially in the wake of this
revolutionary sea change in the political environment in the
entire Middle East.
The third point, which I already sort of touched on, is I
believe law enforcement remains the most neglected element of
national power. One of the most important things we did
together, working with the Department of Justice during the
Bush administration, was launch global undercover
investigations against the North Korean networks which were
engaged in weapons proliferation and illicit procurement as
well as the funding of the regime of Kim Jong Il.
Law enforcement evidence is much more compelling than
intelligence in convincing foreign governments to act; and by
providing an evidentiary basis that is acceptable under
national legal rules, as well as the rules of foreign partner
countries, I think we can find we can freeze much more money
than we can simply through Treasury designations or even the
United Nations sanctions.
But what is one very important point is that the financial
actors that are complicit within the world of weapons
proliferation, for example, have to be held accountable. The
Department of Justice apparently has investigated maybe as many
as a dozen banks for complicity and falsifying wire transfers
on behalf of the Iranian regime, billions and billions of
dollars. None of those bankers has been essentially taken away
in handcuffs or with his head on a stick, in effect, as a
criminal. Instead, they have been given fines. I don't believe
that policy is a sound policy in the long haul.
The fourth is the economic course of diplomacy has a very
important role within the military context, and I think that
these threat finance cells within Afghanistan and within Iraq
are playing an important role and continue to play an important
role within the military complex. It is not just a shaping
mechanism. Denying the means of sustainment to our adversaries
has been a fundamental principle of warfare since time
immemorial. After all, Marcus Tullius Cicero wrote, I think in
44 B.C., that endless money forms the sinews of war; and its
insight remains very significant today.
We can be doing a much better job I believe going after,
for example, the financing of the Taliban, but the problem is
we would have to look at Pakistan, and this is the problem set
we are going to have to face.
Finally, the power of economic and financial coercive
diplomacy which we found in reviewing the history in this
report can be underestimated. Had we known how successful our
sanctions had been against Saddam Hussein there would never
have been a need to invade that country. Not underestimating
ourselves and having an accurate measure of the actual effects
of our policies is critical.
On that note, I turn over to you. Thank you, sir.
[The prepared statement of Mr. Asher follows:]
Mr. Duncan. Thank you.
Professor Kittrie is recognized for 5 minutes.
STATEMENT OF PROFESSOR ORDE F. KITTRIE, SANDRA DAY O'CONNOR
COLLEGE OF LAW, ARIZONA STATE UNIVERSITY
Mr. Kittrie. Thank you, Mr. Duncan, Ranking Member Sherman.
Thank you for the invitation.
It is a pleasure to be here today. Since you have such
great experts alongside me on North Korea and terrorism finance
in David Asher and Juan Zarate, who literally have those topics
covered from A to Z, and I primarily follow Iran issues, I will
focus my remarks on the application of sanctions to Iran.
U.S. Government officials have stated that the current
sanctions on Iran are designed to both coerce and constrain
Iran. How is the international community, led by the U.S.,
doing in achieving those goals?
With regard to coercion, while sanctions on Iran have
undoubtedly increased the costs to Iran of its illegal
behavior, they have clearly not raised the costs sufficiently
to outweigh the benefits to the Iranian regime of proceeding
with its nuclear program and state sponsorship of terrorism. We
know that because Iran is clearly still choosing to proceed
with both.
The bottom line with regard to the efforts to constrain
Iran is that, while Iran's capacity to pursue its illicit
behavior is undoubtedly being hindered, it is clearly still
making progress, albeit somewhat more slowly, toward its
illicit goals.
What more needs to be done if we are to tip the balance and
succeed in both coercing Iran and halting its capacity to
conduct illicit activities? I have detailed in my written
testimony several ideas for tipping that balance. The following
are some highlights, which I would be happy to discuss in more
detail during Q&A.
In light of the hearing's title, I will start with some
financial measures.
Number one, sanctioning the Central Bank of Iran. In light
of the key role played by the Central Bank of Iran in financing
Iran's illicit state sponsorship of terrorism and illicit
proliferation activities, the imposition of sanctions on the
Central Bank, ideally in conjunction with key allies, is
looking like an increasingly smart option.
Number two, curtail Iran's ability to issue bonds. With
most major international banks and energy companies having
stopped doing business with Iran, it is harder for Iran to
attract the investment it needs to develop its energy sector.
In response, as Ranking Minority Member Sherman mentioned, Iran
recently announced the issuance of billions of dollars in bonds
to support development of its South Pars natural gas field.
The Stop Iran's Nuclear Weapons Program Act, H.R. 6296,
which was introduced in the last Congress by the chair and
ranking member of this subcommittee, would address this by
making sanctionable the buying or facilitating of Iranian
bonds. I am glad to hear that excellent bill is going to be
reintroduced soon, and I hope it gains the widespread support
it deserves.
Number three, probably the most important steps to be taken
to ratchet up the pressure on Iran involve China. Only some of
the steps involve financial sanctions, but I will mention them
all because they are so important.
China is reportedly failing to comply with the several U.N.
Security Council resolutions which prohibit the transfer to
Iran of proliferation-sensitive equipment and materials.
Robert Einhorn, the State Department's Special Advisor for
Nonproliferation and Arms Control, last month stated that, ``We
continue to have concerns about the transfer of proliferation-
sensitive equipment and materials to Iran by Chinese
companies.''
Such transactions are crucially important to the Iranian
nuclear program, which reportedly is still dependent on the
import of high-strength maraging steel, vacuum pumps, and other
critical items.
In light of the continued contributions by some Chinese
companies to Iran's proliferation activities, it may be wise to
sanction those companies, for example, under the Iran, Syria,
North Korea Nonproliferation Act and/or Executive Order 13382.
It may also be worth considering a more systemic response,
such as assessing whether China meets the criteria set forth in
CISADA for designation as a destination of diversion concern.
Chinese banks are also reportedly involved in violating
sanctions on Iran, including by facilitating the provision to
Iran of restricted technology and materials.
A failure to take decisive action in response to Chinese
violations and backfilling provides Iran with an important
loophole in the sanctions regime. It also risks undercutting
the more helpful compliance records of other companies and
countries.
A fourth and final idea I would highlight involves
hindering Iran's ability to benefit from crude oil sales. Doing
to Iran's crude oil exports what CISADA did to Iran's refined
petroleum imports could have an enormous impact on Iran. Crude
oil exports are the lifeblood of the Iranian regime, reportedly
accounting for 80 percent of Iran's export earnings and a
quarter of its GDP.
In light of the current worldwide price of crude, I don't
see much support out there for a blanket sanctioning of all
companies that are involved with Iran's crude oil exports.
However, there are measures short of such blanket sanctions
that might be able to hinder the Iranian regime's ability to
benefit from its crude oil sales without depriving the world
market of so much Iranian crude.
These measures include Treasury publicly identifying IRGC
subsidiaries which are involved in Iran's crude oil export
chain and enactment of the provision in H.R. 6296, introduced
by the chair and ranking member that would sanction entities
that pay in advance for oil deliveries or sign long-term
contracts to purchase oil and gas from Iran. If members of the
international community have to buy Iranian crude oil and
natural gas, they should at least do so on a cash basis,
without long-term commitment, lest they provide the Iranian
Government with a financial lifeline it doesn't deserve.
There is plenty of work to be done if we are to tip the
balance and succeed in our efforts to peacefully coerce and
constrain the Iranian regime and achieve a halt to its illicit
nuclear weapons program and support for terrorism.
Thank you.
[The prepared statement of Mr. Kittrie follows:]
Mr. Duncan. Thank you, gentlemen, for a very timely
testimony today.
And Mr. Zarate--have I pronounced that correctly? I wasn't
here during the opening of that--you have written that China,
Malaysia, Russia, Qatar, and Venezuela may serve as potential
alternate banking outlets that would be willing to file U.S.
pressure for economic or political reasons. And I know that was
a few years ago, but the question I have for you is, have you
changed your view, and if you could elaborate on your
perspective there.
Mr. Zarate. I have not. I think my diagnosis is that you
have very real potential of the creation of alternate banking
networks, what I call shadow banking networks or alliance of
financial rogues, that are intended to circumvent existing
legitimate financial controls on rogue behavior. And so could
you very well have--and we have seen in the past--a merger of
those rogues who are outside the legitimate financial system
beginning to cooperate to provide each other the financial
facilities to not only trade but then to reenter the financial
system in a layered way, that is, to hide their activities but
ultimately to gain access to the international financial
system. That I think is a fundamental challenge to this very
power that we developed.
And as Professor Kittrie mentioned, a major dimension of
that is the challenge of China, which is a major economy now,
the second-largest economy the world, which has a thriving
banking sector and which is playing both sides of the fence in
many ways, both wanting to be a legitimate financial power and
wanting to play by the rules but also then facilitating
activity that skates the line in terms of its international
obligations. It is not just with respect to Iran but it is also
North Korea, with some of the mining contracts and deals that
have been made recently.
And so I think this is a major concern, and I think we need
to not only shine the light on the individual entities that
exist that are providing the services but also the regimes that
provide the legitimacy for that kind of activity. That is why I
think countries like Venezuela deserve greater scrutiny.
Mr. Duncan. As a follow-up, other than the countries
mentioned, would you identify any other countries that may act
in that same capacity?
Mr. Zarate. Well, the first thing I would do in looking at
the strategy is look at where there are legitimate alternate
banking centers around the world and where are there potential
outlets or safety valves for illegitimate financial actors who
are trying to avoid the scrutiny in New York or London or
Frankfort but may find financial institutions in places like
Kuala Lumpur, Beijing, or in other capitals. So the first thing
I would do in this context is map the world in terms of where
there are outlets. And then I would start to look at where the
particular institutions are being used or misused for purposes
of illicit financial behavior.
We have seen some very good actions by the Treasury
Department, for example, with joint ventures between Iran and
Venezuela. I think that is helpful.
So I would continue to look for those points in the system
that are the manifestations of that vulnerability, and I would
shine a light on it. And you can do it in a variety of ways. As
David mentioned, you can use not only Treasury tools but State
Department tools, law enforcement tools. And there is a real
sort of all-of-government approach that can be applied to this
problem.
Mr. Duncan. I thank you for that.
The chair will now recognize the ranking member, Mr.
Sherman, for 5 minutes.
Mr. Sherman. Thank you.
For the record, I mentioned the importance of this proposed
license to GE to repair the supposedly civilian aircraft. That
would be bad enough. It certainly undercuts our argument that
others should sanction Iran. But I should point out that four
of the planes that will be the subject of this inspection and
possible repair are owned by Mahan Air, which has already been
designated by the U.S. Department of Commerce as a company of
proliferation concern. It has already been designated similarly
by the U.K. Government, and most in the field view it as an
IRGC front company.
So if American companies can make a buck providing jet
aircraft engine repair to an entity so deeply involved in the
terrorist activities and proliferation activities of Iran, then
it makes a mockery of everything we are discussing here today.
What I would like each of the witnesses to do is to submit
by Friday, if at all possible, a list in as close to statutory
language as possible of everything that should be added to the
Stop Iran's Nuclear Weapons Program Act. Include mandatory
designations of certain entities in Iran instead of leaving it
to the administration to designate this or that bank or this or
that company or this or that airline. Let's put them in by
name.
I think you know me well enough to know that you should not
be shy in your draftsmanship, and I look forward to getting
your comments, and hopefully this will just add to the
enthusiasm of our cosponsors.
One thing I want to focus on here are those sanctions that
have an immediate affect. You know, the original idea of the
Iran Sanctions Act, once known as the Iran-Libya Sanctions Act,
was to deter investment in oil fields. Well, that affects
revenue maybe a decade later, maybe a little less; and then the
lack of revenue begins to pinch when you burn through your
currency reserves. That is a long time.
What acts much more quickly is when Iran cannot get
replacement parts for every elevator, for every oil pump, for
every aircraft, et cetera.
I don't know which of the witnesses want to comment, but
what can we do to have an immediate effect on whether things in
Iran work or fail to work?
Mr. Kittrie. Thanks, and thank you for the invitation to
submit.
My own sense is that with regard to Iran the two things
that can be done most quickly would be, one, to respond
vigorously to Chinese violations and backfilling, as I
mentioned. Iran still needs to purchase parts----
Mr. Sherman. Now, what would you tell the Chinese? You are
going to be sending them a really strong letter or would we
have to, say, find a day or a week when this or that boat
filled with tennis shoes couldn't be inspected or unloaded in
the L.A. Harbor. What do you do to China, other than point your
finger and look stern?
Mr. Kittrie. I think probably the first thing to do would
be to consider sanctioning those Chinese companies, for
example, under the Iran, Syria, North Korea Nonproliferation
Act or Executive Order 13382, that are involved in this
activity.
Mr. Sherman. That would be a good first step. Although it
is easy for companies to come up with aliases, even easier if
their host governments cooperate. So that might work, depending
upon how agile the company is.
Mr. Kittrie. Well, it has been reported that at least some
of the transfers to Iran may be taking place without the
knowledge of the Chinese Government and are the result of a
kind of lax oversight and weak enforcement. To the degree that
that is true, it may help to encourage the Chinese to crack
down. For instance, as I mentioned earlier it may be worth
considering a more systemic response, such as assessing whether
China meets the criteria set forth in CISADA for designation as
a destination of diversion concern.
It has been reported that it has not just been parts and
components manufactured in China that have ended up in Iran,
but also some of these parts and components apparently
originate with European companies who are duped into selling it
to Chinese companies that are fronting for Iranian smugglers.
To the degree that that may be happening also--and I have no
information on that--to the degree that that may be happening
also with U.S. origin parts and components, that would
certainly bring China--or might bring China within the criteria
for designation as a destination of diversion concern.
Mr. Sherman. Or maybe that should be specified by statute,
which is more likely to occur than a State Department
designation. I look forward to you including that on your list,
even if you list it as nonrecommended.
Mr. Zarate.
Mr. Zarate. Ranking Member Sherman, I would take the
approach of picking targets and actions that have a strategic
impact and a ripple affect, as opposed to doing things,
designations, other activities that appear to be more ``Whac-A-
Mole'' as you described with companies, individuals renaming
themselves.
So I would recommend three categories of activities.
One, I think a Section 311 designation of the Central Bank
of Iran, something I have been calling for a long time, I think
that would have a dramatic ripple affect in terms of Iran's
ability to finance its activities.
Second, I would pick a Chinese bank that is of grave
concern and not only use it as a prompt for diplomatic
discussions with the Chinese but hold the Sword of Damocles of
some sort of designation or action against that Chinese bank.
Mr. Sherman. You want to pick one?
Mr. Zarate. I am not in a position----
Mr. Sherman. I look forward to talking to you.
Mr. Zarate [continuing]. To know all the ins and outs. But
I would say a good place to start, sir, is the March 10th,
2011, letter from the senators concerned with this issue to the
Secretary of State which lays out a number of companies and
banks of growing concerns.
Mr. Sherman. I would say if we want to actually do
something we have got to pick one in Congress, and we have got
to decide what sanctions would be applied and make them
mandatory, with no waivers.
Mr. Zarate. The one thing I would recommend, Congressman,
is coordination with the administration. Because I think,
again, this cannot be--in all seriousness, this cannot be a
one-off action. It has to be part of an ongoing campaign.
Mr. Sherman. Did I mention this is the administration that
wants to take affirmative action to license the repair of the
aircraft, the very aircraft that were used to ferry the 9/11
highjackers in and out of Afghanistan?
Mr. Zarate. Congressman, I don't disagree with you and sort
of subscribe to your view of that decision as being a mistake,
but I would say that a piece of legislation that has a singular
action in it or a set of actions that doesn't have a commitment
by the administration to make it part of a strategy and a
pressure strategy that is going to be part of the leverage
change to the decision making in Tehran----
Mr. Sherman. Sir, if we leave the decision making to this
or the last administration, we will see Iran have a nuclear and
then a thermonuclear device. There is no doubt about that.
Mr. Zarate. Well, I agree with you, sir. There is an
important role, and I mentioned in my testimony, for Congress
to not only hold the executive's feet to the fire but also to
push particular actions. But, again, having one-off, Whack-A-
Mole actions is not the right approach. I think having
strategic steps of the kind you mentioned and the kind that we
are talking about here is really----
Mr. Sherman. Do any harm to whack a few moles while you are
taking the strategic steps? And I see no reason to have a short
bill when they will print a long bill for me for the same
price.
Mr. Asher.
Ms. Asher. Thank you very much, Congressman Sherman.
I would add a focus on the potential sources of nuclear
weapons. Because what is missing from our picture right now is
an understanding, based on our own experience and personal
experience, is that the Government of North Korea, for example,
blasted through every redline we ever delivered in the Six-
Party Talks which I participated in and helped start as well as
was involved in the pressure.
They really just--it was very, very difficult to stop them.
They are sanctioned under the United Nations Security Council
now. But I would sense that many entities that are sanctioned
are still actually in business. They are operating under
diplomatic cover, through the network of North Korean Embassies
around the world and their commercial officers in the Embassies
or their intelligence service. And there really needs to be a
look at the potential connection of the dots between North
Korea's rapidly growing supply of apparently highly enriched
uranium or at least certainly enriched uranium which could be
highly enriched and Iran's demand.
I just feel like the North Korea problems that have been
sort of put off to the side, but you can't approach the Iran
problem set as seriously as I know you do and I know Chairman
Royce does without understanding North Korea is the most likely
source of nuclear material and even weapons to the Iranian
regime in the world. And the Iranians, the more they get
financially squeezed and the more the North Korean's economy
erodes, supply and demand seems to set the price. I urge to you
consider adding that to your legislation.
Mr. Sherman. Can you be more specific on the legislation? I
realize the chairman has already indulged me with way too much
time.
Ms. Asher. Well, I think there should be serious review of
the current sanctions and whether they actually have
effectively crippled the companies which have been designated,
to include Nom Chom Gong Corporation, ComEd, the missile
company. Are these companies out of business or not?
I mean, one simple thing I saw a reporter do was just start
making phone calls looking up numbers in the phonebooks in
different countries, and people were answering the phones. So,
obviously, somebody must be in business to some degree.
That is a problem, and that we may need to remedy perhaps
through a further U.N. Security Council action or further
unilateral U.S. action.
Mr. Sherman. My bill to revoke MFN for China might be
called for here, and I yield back.
Ms. Asher. I yield back.
Mr. Royce [presiding]. Thank you, Mr. Sherman.
Dr. David Asher, you call for relaunching the Illicit
Activities Initiative. Last summer on a trip to South Korea,
Secretary Clinton announced that the administration would take
steps to tackle the illicit activity coming out of the North.
Is there evidence of the type of coordinated campaign that you
led in the past, the type of success we saw? Is there evidence
of that? Because I haven't seen any.
Ms. Asher. The ultimate evidence of the Illicit Activities
Initiative was evidence. We developed tremendous undercover
investigations through the Department of Justice with the State
Department's full support.
And I sort of acted as a bit of an ambassador, opening
doors for Department of Justice law enforcement officers
globally, into 15 different countries, 5 global investigations.
And at the end of the first term of the Bush administration--
actually, at the beginning of the second term, I should say--it
was decided essentially to remove that evidence from the
judicial process.
We had two of the largest Asian organized crime cases in
United States history, involving the Gambino crime family at
one end, Chinese triads at the other, and the North Korean
Government sort of in the middle. It was quite spectacular
stuff. And although there were people arrested in some pretty
interesting operations in the United States and elsewhere, the
hand of North Korea was never fully identified.
Mr. Royce. You think that was for diplomatic reasons?
Ms. Asher. It was for diplomatic reasons, and I seriously
objected to it. Because it wasn't like the North Koreans didn't
know they were engaged in counterfeiting the U.S. dollar,
cooperation with organized crime groups, including Chinese
triads, and work on illicit proliferation, which we approached
as a criminal activity as well. There was preparation to bring
criminal charges against some of the proliferation networks
down the road as well. So the question is, whatever happened to
all that information?
Mr. Royce. Right.
Ms. Asher. At the very least, I would encourage this
administration to consider briefing the American people on what
we learned and perhaps briefing the United Nation's Security
Council, probably in the context of reexamining whether they
should be back on the terrorism list.
I found the Cheonan incident, where the South Korean ship
was sunk, vicious, savage, and absolutely inconsistent with a
terrorist-type approach. I think that would cause North Korea
some concern if it were coupled with revelations of some of the
law enforcement information or restarting of an active
initiative which involved, in our case, 14 different government
agencies and departments and 15 government partners around the
world. I can't imagine that is going on right now.
Mr. Royce. This takes me to an issue that we have long
talked about in this committee. But you note that the Illicit
Activities Initiative could have had a much broader impact to
affect North Korea's proliferation activities. And, as you
said, ``we never were given sufficient latitude to have a
deeper and sustained counterproliferation impact, and on
repeated occasions were waved off from taking actions that were
well within our mandate and authorities.'' You have laid out
some of this, and I know a lot of it just from our engagement
at the time. I remember how desperate the effort was to shut
down what you were doing. What do you think drove that?
Ms. Asher. I think there was--I have discussed this with
several senior colleagues before. Part of it appears to be a
misperception at the highest levels in the administration as to
what was actually going on.
I recall a conversation I had with Secretary Powell at the
very end of his time where he said, what do you mean? We are
not doing this stuff?
I think that sometimes there were discussions--and this is
in some of these memoirs which are coming out--at the
principals' level during the Bush administration where they
sort of agreed on something and then it sort of got--somehow it
didn't quite happen.
I did co-chair a coordinating committee at the National
Security Council in addition to being at State, and it was
directly involved in this issue set.
Mr. Royce. It was a coordinated campaign that somebody shut
down.
Ms. Asher. We were essentially abbreviated, and then we
were emasculated. And this was a problem. Because this was
right when the North Korean Government was building illicitly a
Syrian nuclear reactor. All sorts of very strange and extremely
disturbing stuff was going on with Iran. We have heard about
Burma in the press recently.
Mr. Royce. And you had them dead to rights. I was in Macau.
I have seen the phony Treasury notes that were counterfeited by
the North Koreans, our Treasury notes.
Ms. Asher. Yeah. That was really a tool. The fact that they
were engaged in illegal activities put them in their own trap.
We thought it was almost essentially self-sanctioning. So all
we had do, without using sanctions, which we felt we couldn't
get without the evidence coming out on nuclear proliferation,
was just to start charging them for their own offenses, knowing
that the leadership in North Korea itself was directly engaged
in those activities.
Mr. Royce. Right.
Now, let me ask a question of Juan Zarate. You call in your
testimony for deploying the 311 sanctions against Iran and its
Central Bank. I talked about that in my opening statement. What
is the holdup and does the fact that Section 311 sanctions were
only just deployed after a 5-year hiatus reflect the difficulty
of identifying targets, or is it the result of the restrictions
that political considerations place on their use?
Mr. Zarate. I think there are three issues, Congressman
Royce.
I think, first, that was a tendency not to use 311 after
Banco Delta Asia. There was a string of 311 actions that we
used against bad banks in my tenure at the Treasury. And I
think a tendency was shifted to use other tools, executive
orders and other tools of financial suasion, which is fine, but
there was less of an emphasis on the development of the use of
311.
Second, you have a concern about using a financial tool of
this magnitude against the central bank of a country, which has
never been done before and would call into question how the
mechanics of that would actually work. And I think there are
ways of crafting a 311 regulation that would allow you to get
around some of the sensitivities of targeting a central bank
while getting at the illicit activity that the Central Bank of
Iran is actually facilitating.
Finally, I think there is a deeper policy question at play,
which is how far are we willing to go to actually strangle the
Iranian economy? Part of the challenge here has been a message
and a policy decision that the efforts we would undertake
publicly and diplomatically would be targeted at the regime
itself.
Mr. Royce. Yeah, but we targeted Iraq's Central Bank under
Saddam Hussein, so----
Mr. Zarate. That is right. Again, this goes to the deep
fundamental policy question. Will this be a maximalist pressure
campaign that ultimately impacts the people in Iran or will we
constrain ourselves to the effect we really don't want to
demonstrate we are going after the whole of Iranian society?
And so I think that is at play as well in the context of the
debate about 311.
Mr. Royce. Mr. Zarate, I want to thank you and Dr. Asher
and Mr. Kittrie and all of those who have been architects of a
policy here that had great promise, great likelihood of success
if fully deployed, in my opinion.
I hope you will continue to work in this direction. Because
I think it is the least confrontational way in order to engage
and prevent the types of proliferation activities that we have
seen, for example, in North Korea. If they can't get the hard
currency--we know from talking to detectors who worked in their
military and their civilian government, if they can't get the
hard currency, it is very difficult for them to buy the
gyroscopes on the black market that they need for their missile
systems. It is very difficult for them to pay for the type of
hardware that they need to go forward.
So I want to thank you. We appreciate the time and
expertise you brought to this; and when considering states like
Iran and North Korea, the stakes for us, frankly, do not get
any higher. So we appreciate your insights in how to tackle the
challenges that these two states pose, and we look forward to
pressing the Obama administration on many of the points that
you made here today.
This hearing is adjourned.
[Whereupon, at 4 o'clock p.m., the subcommittee was
adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record