Plug the Sanctions Hole on Iran

With a short time left before the U.S. Congress finalizes an energy sanctions bill on Iran, the Iranian regime is already exploiting what could be a gaping loophole in Iran sanctions laws.

Iranian leaders are skillfully pursuing partnerships outside Iran with European and Asian energy companies to frustrate American attempts to build a consensus for action over their ongoing refusal to comply with their international obligations regarding their nuclear program.

Consider the implications of a joint venture now in place between a major European energy company and the National Iranian Oil Company, which would develop a significant natural gas project off the coast of Scotland. Would the Iranian regime have rights to any natural gas discovered? What additional leverage would the deal enable the regime to exert over the European company? What pressure could Tehran impose on European governments that are counting on developing their own domestic natural gas resources to lessen their dependence on Iranian (and Russian) natural gas?

In addition, according to the Croatian Times, the Spanish company Gas Natural SDG S.A. and the National Iranian Oil Company are planning to build a liquefied natural gas terminal for Central Europe off the port of Ploce on the Adriatic Sea in Croatia. The project is said to be worth ¤700 million.

As a further example, consider the implications of the Iranian government's ownership of 4.5 percent of German engineering and steel giant ThyssenKrupp. My colleague Benjamin Weinthal reports in the Jerusalem Post that the engineering conglomerate conducted roughly ¤200 million in trade last year in Iran's “chemical, systems engineering, cement [and] railway” sectors.

Iran is also investing in petroleum refineries as far away as Malaysia, Indonesia and Vietnam. While the sanctions bill would target the gasoline produced by these refineries, it would not apply to Iranian investment in the actual refineries. It is easier to target these investments and limit Iran's influence over the refineries than it is to track the actual gasoline that might end up being shipped through a number of parties before ending up in Iran.

As long as the Iranian regime has capital available to invest in joint ventures for the development of foreign energy projects, provides its own technology and expertise for these projects, or buys shares in foreign companies that provide critical infrastructure for Iran, what is to stop European, Asian, Canadian and other companies from making deals with Tehran? At the moment, not much.

If the Iranian leaders are to take a sanctions bill seriously, it must make it harder for them to invest in energy projects and companies outside their borders.

For months, President Obama has been working to bring the U.N. Security Council along with a resolution imposing sanctions on Iran. To buy time for this, the White House asked Congress to delay the passage of its own energy sanctions legislation – which passed the House in December and the Senate in January with overwhelming bipartisan support – and has been in conference committee since April.

The Obama administration's decision to delay new sanctions may prove fateful if Tehran acquires a bomb before they have time to bite, but it affords Washington an opportunity to plug a hole in the existing approach. Congress can capitalize on the delay by strengthening U.S. energy sanctions on Iran with an eye toward undermining the Iranian energy sector – which remains the economic and political lifeblood of the ruling elites.

The proposed sanctions bill would extend the earlier Iran Sanctions Act. It would give the president authority to sanction foreign companies involved in Iran's refined petroleum trade, including suppliers, insurers, banks, shippers, investors and providers of technology, services and other expertise.

The bill targets the entire supply chain for gasoline, and thanks to work done in conference committee during the months-long delay, should include language that addresses what had been a major loophole in Iran sanctions law.

According to congressional sources, unlike the original versions passed by the House and Senate, the bill likely will address the supply of critical technology, products, services, support and specialized information required for oil and natural gas projects inside Iran.

As written, however, both the old law and the current legislation do nothing to contend with Iran's business relationships with foreign companies for projects outside Iran. If this loophole was addressed, the U.S. could apply the sanctions stipulated in the legislation which would penalize international companies that pursue partnerships and joint ventures with Iran by denying them support from the U.S. Export-Import Bank, prohibiting them from receiving U.S. government contracts, or restricting imports to the U.S. from these companies.

In the absence of any clear reason not to, energy companies will assess the benefits of Iranian resources and act accordingly. Iran is the world's fourth-largest producer of crude oil, and at 981 trillion cubic feet, its natural gas reserves are second only to Russia's. The country already enjoys substantial international leverage thanks to oil. Once it becomes a major exporter of natural gas, it will have exponentially more wealth and power.

To prevent Iran from flouting the will of the entire international community – not only the United States – Congress must prohibit foreign companies from receiving Iranian capital, technology and expertise, and place legislative roadblocks in the way of joint ventures, investments and other partnerships.

If Washington doesn't close this loophole, the Iranian regime may soon be a partner in an energy project off our own shores.

Mark Dubowitz is executive director of the Foundation for Defense of Democracies and leads its Iran Energy Project (www.IranEnergyProject.org).