August 4, 2015 | Senate Committee on Banking, Housing, and Urban Affairs

The Implications of Sanctions Relief Under the Iran Agreement

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Patient Path to Nuclear Weapons

The JCPOA provides Iran with patient paths to a nuclear weapon and intercontinental ballistic missile (ICBM) capability over the next decade and a half. As I explain below in Parts 1 and 2 of the testimony, Tehran has to simply abide by the agreement to emerge as a threshold nuclear power with an industrial-size enrichment program; near-zero breakout time; an easier clandestine sneak-out pathway; an advanced long-range ballistic missile program, including ICBMs; access to advanced heavy weaponry; and a more powerful economy increasing immunized against Western sanctions.

First, on so-called “Implementation Day,” Iran will receive substantial sanctions relief with which it can defend its economy against future sanctions pressure. Iran may also use sanctions relief to increase its support for terrorism and other rogue regimes and to expand its conventional military power. The JCPOA front-loads sanctions relief, providing Iran with access to around $100 billion in restricted oil revenues and reconnecting Iranian banks, including the Central Bank of Iran, back into the global financial system. Sanctions on Iran’s crude oil export transactions will be lifted, as will sanctions on key sectors of the Iranian economy including upstream energy investment and energy-related technology transfers, the auto industry, petrochemicals, and shipping, as well as the precious metals trade. This sanctions relief will enable Iran to build greater economic resilience against future pressure—both sanctions aimed at isolating other illicit financial conduct and so-called “snapback” sanctions in the event of Iranian nuclear non-compliance.

Then, after five years, or earlier if the International Atomic Energy Agency (IAEA) reaches a broader conclusion that Iran’s nuclear program is only for peaceful purposes, the international arms embargo will be lifted, meaning that Iran can also expand its conventional military capabilities and those of its proxies. Former Under Secretary of State for Political Affairs Nicholas Burns, one of the other witnesses at this hearing, noted one week before the announcement of the JCPOA that lifting the arms embargo “would be a great mistake. Iran is selling arms, giving arms, fueling civil wars in Yemen, in Lebanon, in Syria and Iraq, and so those arms prohibitions on Iran are very important.” He also has explained that the arms embargo was put in place “for very good reason.” He continued that it is not in the interest of the United States “to see these arms embargos lifted from Iran. It is an issue that should not be part of these negotiations. … I think we ought to maintain these U.N. embargos.” In five years, however, they will disappear, giving Iran access to combat aircraft, attack helicopters, battle tanks, among other advanced weapons systems.

After eight years, and even earlier if the IAEA reaches a broader conclusion, restrictions on Iran’s ballistic missile development will lapse, despite recommendations from Chairman of the Joint Chiefs of Staff Gen. Martin Dempsey that “[u]nder no circumstances should we relieve pressure on Iran relative to ballistic missile capabilities and arms trafficking.”

Between years eight and 15, restrictions on Iran’s nuclear activities will begin to lapse whether or not the IAEA has concluded that Iran’s nuclear program is entirely peaceful.

After ten years, the U.N. Security Council will close the Iranian nuclear portfolio and no longer be “seized” on the issue. The file will return to the IAEA, and Iran will be considered to have a normal, legal nuclear program. Iran will be converted from one-time nuclear pariah to nuclear partner. At that time, and especially after year 15 when Iran’s nuclear program will be poised for much greater expansion to industrial-size, Iran will be better positioned to stymie IAEA verification and monitoring and to avoid cooperating with IAEA inspections. The United States will have a greatly diminished economic sanctions capability to force the Iranian government back into compliance on remaining obligations and to enforce the deal against Iranian stonewalling of the IAEA. Indeed, the only choice at that point may be the use of U.S. military force against a much more powerful Iran to prevent it from building nuclear weapons.

Nuclear Snapback vs Sanctions Snapback

In addition to this “patient pathway,” the JCPOA also creates an Iranian “nuclear snapback” instead of an effective economic sanctions snapback. Throughout the negotiations, the Obama Administration assured the public and Congress that if Iran violated its nuclear commitments under the final deal, sanctions could be “snapped back” into place. This reflects a too-optimistic assessment of the following: the lag-time between the imposition of sanctions and market and Iranian reaction; the willingness of companies to terminate business relationships; the extent to which “grandfather” provisions would immunize international investments from snapback sanctions; and, the eventual impact on Iran’s economy. Given these factors, there is likely very little “snap” in snapback sanctions.

The current United Nations sanctions snapback architecture in the JCPOA further limits Washington’s ability to re-impose sanctions by creating a drawn out dispute resolution mechanism. The mechanism creates a 60-plus day delay between the time that the United States (or another P5+1 member) announces that a violation has occurred and the time that U.N. sanctions may be re-imposed.

The process is governed by a Joint Commission on which Iran sits as an equal voting member. The Obama Administration presumes that even if Russia and China were to take Iran’s side in a dispute, Washington could count on the votes of France, Britain, and Germany as well as the EU representative. This 5-3 vote breakdown assumes no geopolitical or domestic political changes in European countries. Is it not just as plausible that the United States will find itself on the Joint Commission not with President Holland and Chancellor Merkel but with new European leaders less amenable to a new U.S. president’s demands to snap back U.N. sanctions? Even though the U.N. snapback sanctions mechanism permits the United States to move unilaterally at the U.N. Security Council to overcome Chinese and Russian objections to snapbacks, it is difficult to imagine that Washington would act without the support of its key European allies.

Furthermore, as international companies reengage in the Iranian market, European countries may experience domestic economic pressure not to re-impose sanctions. These companies may have invested billions of dollars back into Iran and may be unwilling to walk away from those investments despite Iranian nuclear non-compliance.

As a result, in a scenario of Iranian non-compliance, Washington may face European leaders less supportive of U.S. positions, European companies heavily invested in and less willing to leave Iran, and the specter of Iran threatening to walk away from its nuclear commitments (the Iranian “nuclear snapback,” as discussed below). If Washington subsequently loses a vote in the Joint Commission, will Washington be willing to unilaterally escalate the matter to the U.N. Security Council for further consideration?

Instead of an effective sanctions snapback, the JCPOA provides Iran with a powerful “nuclear snapback.” In three places, the JCPOA makes it clear that using snapback sanctions may lead to a cancelling of the agreement, with Iran walking away from its commitments and resuming its nuclear program. In short, it will be difficult to persuade our P5+1 partners to punish Iran for any violations short of the most flagrant and egregious because any punishment of a small-to-medium level violation may lead Iran to stop complying with the agreement. As discussed, Iran may also use an implicit—or explicit—threat of nuclear escalation to pressure U.S. allies not to support efforts to address Iranian non-compliance

The United States may be left with a choice of either not addressing examples of minor-to-medium levels of cheating—notwithstanding that Iran historically has used incremental cheating to expand its nuclear program—or allowing Iran to walk away from the deal as the aggrieved party if Washington tries to re-impose sanctions.

Sanctions Relief Benefits Hardliners

The sanctions relief provided for under the JCPOA will benefit the most hardline element of the regime: Iran’s Islamic Revolutionary Guard Corps (IRGC) and Supreme Leader Ali Khamenei’s financial empire—a “shadowy network of off-the-books front companies,” according to the U.S. Treasury. The network, headed by an organization known as the Execution of Imam Khomeini’s Order (EIKO) or Setad, is reportedly worth $95 billion. EIKO and its subsidaries will be de-listed by both the EU and United States on Implementation Day. Rather than benefit independent Iranian businesses, the sanctions relief may reinforce IRGC and state control of key sectors of Iran’s economy and the empowerment of Iranian oligarchs.

The European Union will lift sanctions against major IRGC-controlled entities like the IRGC Cooperative Foundation (the Guard’s investment arm) and Khatam Al Anbiya (the construction conglomerate); the United States will de-list four IRGC-linked banks on Implementation Day: Arian Bank, Bank Kargoshaee, Bank Melli, and Future Bank. In reference to Bank Melli, the U.S. Treasury Department has stated:

“Bank Melli also provides banking services to the IRGC and the Qods Force. Entities owned or controlled by the IRGC or the Qods Force use Bank Melli for a variety of financial services. From 2002 to 2006, Bank Melli was used to send at least $100 million to the Qods Force. When handling financial transactions on behalf of the IRGC, Bank Melli has employed deceptive banking practices to obscure its involvement from the international banking system. For example, Bank Melli has requested that its name be removed from financial transactions.”

Lifting sanctions on Bank Melli, among others, will provide the IRGC and Qods Force with renewed access to the international financial systems and an easier ability to finance their illicit activities. De-listed banks, including the Central Bank of Iran, will be allowed back onto the SWIFT financial messaging system, and Europe may increasingly become the economic destination of choice for regime-connected, corrupt, IRGC oligarchs.

Hampering Our Ability to Address Iran’s Other Illicit Conduct

This “nuclear snapback” not only provides Tehran with the ability to immunize itself against both political and economic pressure and block the enforcement of the agreement, it also diminishes the ability of the United States to apply any sanctions, including non-nuclear sanctions, against the full range of Iran’s illicit conduct.

The JCPOA effectively dismantles the U.S. and international economic sanctions architecture, which was designed to address the full range of Iran’s illicit activities. As a result of these illicit activities, Iranian banks including the Central Bank of Iran (CBI) were banned from SWIFT. The JCPOA severely undermines these measures, but not because Iran has halted its financial crimes. If the United States finds, for example, that Iran is using its central bank to facilitate terror financing, as it has done in the past, will Washington be able to impose new sanctions? The JCPOA appears to provide Iran with grounds to walk away from the deal if any sanctions are imposed. Iran has already stated that it may “reconsider its commitments” under the JCPOA if “new sanctions [are imposed] with a nature and scope identical or similar to those that were in place prior to the implementation date, irrespective of whether such new sanctions are introduced on nuclear related or other grounds.” It seems improbable that the United States would be willing to reimpose sanctions on Iran’s central bank, and pressure Europe to expel CBI from SWIFT, under any scenario short of the most egregious—especially if Iran threatens to walk away from the agreement and resume its nuclear activities.

The current JCPOA is deeply-flawed because it fails to permanently block the Islamic Republic’s pathways to nuclear weapons; it is also dangerous for American national security because it degrades Washington’s ability to use non-military means to protect its national security interests and its allies against a range of Iranian illicit and destabilizing activities. If the United States cannot use economic pressure effectively to address future Iranian nuclear non-compliance or to target the full range of Iran’s illicit nuclear activities, military force may become the only means available to U.S. policymakers. As a result, the JCPOA may make war with Iran more not less likely, and when that war comes, Iran will be stronger and the consequences will be more severe.

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