Terrorism, Missiles and Corruption: The Risks of Economic Engagement with Iran

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Chairman Royce, Ranking Member Engel, members of the Committee, on behalf of the Foundation for Defense of Democracies and its Center on Sanctions and Illicit Finance, thank you for the opportunity to testify.

EXECUTIVE SUMMARY

The Joint Comprehensive Plan of Action (JCPOA) provided Iran with a patient pathway to nuclear weapons capability by placing limited, temporary, and reversible constraints on Iran’s nuclear activities. The deal (as well as the interim agreement in place during the negotiations) provided Iran with substantial economic relief that helped Iran avoid a severe economic crisis and return to a modest recovery path. The lifting of restrictions on Iran’s use of frozen overseas assets of about $100 billion gave Tehran badly needed hard currency to settle its outstanding debts, begin to repair its economy, build up its diminished foreign exchange reserves, and ease a budgetary crisis, which in turn freed up funds for the financing of terrorism.

The nuclear deal also did nothing to address the full range of Iran’s illicit activities, including ballistic missile development, support for terrorism, regional destabilization, and human rights abuses. Indeed, the weakening of missile language in the key UN Security Council Resolution and the lifting of a conventional arms embargo after five years and the missile embargo after eight undermine international efforts to combat Iran’s illicit activities.

Simultaneously, Iran’s domestic repression intensified with a record number of executions in 2015. When President Rouhani was elected in June 2013, there was a widespread, but incorrect, assumption that he would shepherd in an era of greater freedoms in Iran. Instead, however, domestic repression has intensified. As United Nations Special Rapporteur on the situation of human rights in the Islamic Republic of Iran Dr. Ahmed Shaheed reports, despite a “noticeable change in the tone and tenor of the government’s approach to human rights,” there has been no “meaningful change on the ground.”

As international businesses re-enter the Iranian market, the regime continues to oppress its citizens and deny their basic human rights. The regime seems to hope that the promise of profits will blind the international community to Iran’s vast system of domestic repression. As Iranian officials attempt to whitewash their government’s actions to gain international legitimacy, it is critical that Congress and the administration continue to monitor the human rights conditions in Iran and use existing human rights-related executive orders and statutes to punish those violating the basic human freedoms of Iran’s citizens.

During last summer’s congressional review period, Obama administration officials pledged that the United States would continue to enforce non-nuclear sanctions and oppose the full range of Iran’s illicit and dangerous activities. While the JCPOA lifts sanctions on Iran’s nuclear activities, it does not preclude the United States from using these non-nuclear sanctions – despite statements from Iran that it will view any imposition of sanctions as a violation of the deal and grounds to “snapback” its nuclear program.

Congress should reject that Iranian position – which amounts to a form of nuclear blackmail – and hold the administration accountable for its commitments. Sanctions need to be imposed to target Iran’s support for terrorism, ballistic missile program, support for the Assad regime in Syria and designated Shiite militias in Iraq, and human rights abuses. 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.”

Since the JCPOA was reached, the administration has only imposed a handful of new sanctions designations; only nine individuals and nine entities have been added to Treasury’s sanctions list as a result of Iran’s ongoing illicit activities. These designations include ineffectual sanctions targeting Iran’s missile procurement networks. Tehran can easily reconstitute these networks, and therefore the designations do not impose the kind of economic costs that changed the regime’s strategic calculus with respect to its nuclear program. Discussions at the UN Security Council are unlikely to lead to any meaningful response to Iran’s repeated ballistic missile tests. Indeed, the administration has backed away from language of “violations,” instead arguing that these missile activities are “inconsistent” with UN Security Council Resolution 2231.

The administration also has failed to vigorously enforced human rights sanctions against Iran. Indeed, since the JCPOA was concluded last summer, the administration has designated no individuals or entities for human rights abuses. Indeed only one individual and two entities have been sanctioned for human rights violations since Rouhani came to power in the summer of 2013. This is a sharp drop from the 34 individuals and entities designated between 2009 and 2013, itself a relatively dismal record compared to the European Union, which designated 84 individuals and one entity between 2009 and 2015.

Even as the administration’s enforcement of non-nuclear sanctions is far less robust than many in Congress expected, the administration reportedly is considering providing a new unilateral concession that Iran did not negotiate as part of the JCPOA: Iranian use of dollarized financial transactions through offshore dollar-clearing, intra-bank book transfers and conversions, or some other kind of mechanism. This concession, a response to threats from Iran’s Supreme Leader Ali Khamenei, undercuts the effectiveness of future non-nuclear sanctions, which depend on the private sector’s perception of the overwhelming illicit financial risks involved in transactions with Iran. Easing dollarized transaction restrictions also aids an Iranian push to legitimize its financial sector without ceasing the terror, nuclear, and missile financing and related money-laundering and sanctions evasion that violate international norms of responsible financial activities.

Instead, Congress can maintain pressure on the Iranian regime to change its behavior and defend the sanctions architecture by strengthening non-nuclear sanctions and by linking the removal of sanctions to demonstrable changes in the behavior that prompted sanctions in the first place. Specifically, I recommend that Congress consider taking the following steps.

1. Protect the integrity of the U.S. dollar from Iranian illicit finance by codifying existing restrictions, reporting on financial institutions involved in dollarization, and linking the termination of these measures to the end of Iranian support for terrorism and missile development as well as compensation for victims of Iranian terrorism.

2. Strengthen sanctions against the Islamic Revolutionary Guard Corps (IRGC) for its support for terrorism by designating it under Executive Order 13224 or by declaring it to be a Foreign Terrorist Organization. If the administration refuses to designate the IRGC for terrorism, Congress should impose the same penalties provided for under the Executive Order 13224 or FTO designation.

3. Impose sanctions on the IRGC’s penetration in sectors of the Iranian economy and on sectors involved in Iran’s ballistic missile development, with regular reports on the sectors and Iranian and foreign entities involved. These sectors include metallurgy and mining; chemicals, petrochemicals, and energy; construction; automotive; and electronic, telecommunication, and computer science.

4. Require the administration to report to Congress on Iran’s deceptive conduct and illicit activities as well as the role of the IRGC and other rogue actors in Iran’s illicit financial networks.

5. Create an IRGC Watch List to identify companies with connections to the IRGC but that do not meet thresholds for designation as owned or controlled by sanctioned entities.

6. Expand designations of companies that are owned or controlled by the IRGC or Iran’s Ministry of Defense.

7. Require reporting on transactions with IRGC Watch List companies or joint ventures with IRGC entities.

8. Require Treasury to explain the qualitative and quantitative effects of individual designations against Iranian entities.

9. Expand human rights sanctions against all entities and individuals complicit in Iran’s systemic human rights abuses.

10. Target Iranian corruption and kleptocracy for both anti-money laundering and human rights.

In remarks before the Carnegie Endowment for International Peace, Treasury Secretary Jack Lew argued that sanctions are an effective instrument to address illicit activities, but they must be lifted when the illicit behavior changes. This is an important principle, but the commentary surrounding these remarks misses a crucial detail: Iran has not addressed the underlying behavior that prompted many of the U.S. sanctions.