Iran Terror Financing and the Tax Code

Despite the fanfare over the recently reached Iran deal, the Iranian regime remains involved in a range of destabilizing activities and illicit conduct. Recently, Iran tested a missile capable of carrying a nuclear warhead in violation of a key U.N. Security Council resolution,  increased its crackdown on its citizens,  and expanded its support for Syria’s Assad regime and terrorist organizations like Hezbollah and Hamas.  Meanwhile, Iran remains the leading state sponsor of terrorism,  and is currently holding as hostages four Iranian-American citizens (Siamak Namazi, Jason Rezaian, Saeed Abedini, and Amir Hekmati) and refuses to give information on a missing American citizen (Robert Levinson) who vanished after traveling to Iran over eight years ago. While the Obama administration repeatedly has made it clear that the Joint Comprehensive Plan of Action (JCPOA) does not prevent the imposition of non-nuclear sanctions,  the administration has done little to respond to the Iranian regime’s threatening behavior.

The JCPOA does not address the full range of Iran’s record of illicit activities and lifts many of the most impactful sanctions on Iran. It also fails to achieve the stated goal of the P5+1: blocking all pathways to an Iranian nuclear bomb. Iran has merely agreed to certain limitations on its nuclear activities—a departure from the original U.S. policy goal of dismantling Iran’s illicit nuclear infrastructure. Unfortunately, even these modest restrictions are fatally flawed because they disappear over time. Iran, instead, will mothball certain equipment and reduce enriched uranium stockpiles for ten to fifteen years, after which Tehran can expand its nuclear activities, build an industrial-scale infrastructure powered by easier-to-hide advanced centrifuges, and develop an intercontinental ballistic missile program.

As the United States and its partners dismantle the global sanctions regime, Iran can build greater economic resiliency against future sanctions pressure. The deal will provide extensive sanctions relief to Iran, and the impact of this relief will expand over time. Economic forecasts estimate that Iran’s economic growth will expand to 4-5 percent annually for the next three years.  The IMF estimates that Iran’s real GDP growth may reach 5.5 percent in FY 2016/17 and FY 2017/18.  This is a significant rebound from Iran’s negative growth rate of 6 percent in FY 2012/13.

Despite wishful thinking that the nuclear deal will empower the moderate forces in Iran, the deal is more likely to enrich the most dangerous elements of the regime, in particular Iran’s Islamic Revolutionary Guard Corps (IRGC), as well as the massive business interests of Supreme Leader Ali Khamenei. The IRGC controls a vast business empire which is positioned to reap the benefits of sanctions relief. The IRGC directs Iran’s external regional aggression, its nuclear and ballistic missile programs, and its vast system of domestic repression.

The IRGC also controls large swaths of Iran’s economy. “The IRGC is Iran’s most powerful economic actor,” the U.S. Treasury Department explained, “dominating many sectors of the economy, including energy, construction, and banking” —precisely those sectors set to receive sanctions relief under the JCPOA. Likewise, Supreme Leader Ali Khamenei controls a vast business empire estimated to be worth at least $95 billion through a holding company called the Execution of Imam Khomenei’s Order (EIKO, or Setad in Farsi). EIKO will be de-designated by the U.S. government on Implementation Day under the JCPOA. It is difficult to image a significant business transaction in these key sectors where the IRGC or EIKO won’t be in on the deal. The financial gains from the JCPOA will enable the IRGC and EIKO to expand their dangerous activities.

While the JCPOA lifts sanctions on Iran’s nuclear activities, it does not preclude the United States from using economic tools to address the full range of Iran’s illicit activities—despite statements from Iran that it will view any imposition of sanctions, nuclear or non-nuclear, as a violation of the deal. Giving into that interpretation would significantly undermine Washington’s ability to use non-military tools to address national security threats. Instead, Congress should take the lead and impose measures to target Iran’s support for terrorism, ballistic missile program, support for the Assad regime in Syria, human rights abuses, and systemic corruption. An important first step in this approach is to designate the IRGC as a terrorist organization and to sanction those Iranian entities like EIKO where the nexus between corruption and sponsorship of terrorism is clear. These steps are not a violation of the JCPOA, but rather an affirmation of the stated U.S. policy to “oppose Iran’s destabilizing policies with every national security tool available.” 

Congress should act to defend the sanctions architecture established to address the full range of Iran’s illicit activities. Even within the confines of the JCPOA, there are significant “non-nuclear” measures, including through the use of the tax code, that Congress should consider to prevent the enrichment of those in the Iranian regime who continue to engage in terrorism and other activities inimical to U.S. interests. 

My specific recommendations in this testimony are:

1. Designate the IRGC for terrorism;

2. Designate additional IRGC entities and individuals and foreign companies that do business with the IRGC;

3. Sanction the Supreme Leader’s financial empire for its use of funds from corruption to support terrorism;

4. Prevent tax breaks for companies doing business in Iran;

5. Prevent the re-opening of the U.S. parent-foreign subsidiary loophole;

6. Develop a rehabilitation program for designated Iranian banks that relies on a change in illicit financial conduct; and,

7. Legislate criteria for the lifting of the Section 311 finding.