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Testimony

Understanding the Role of Sanctions Under the Iran Deal

Testimony for Senate Committee on Banking, Housing, and Urban Affairs
23rd May 2016

Download the full testimony here

Chairman Shelby, Ranking Member Brown, 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.

Iran is engaged in a robust effort to legitimize its financial sector despite a decades-long rap sheet of financial crimes and illicit financial activities that it shows no sign of curbing. Since the conclusion of the JPCOA, the Obama administration has missed numerous opportunities to push back against Iran’s legitimization campaign. Instead of insisting on an end to Iran’s continuing malign activities (terrorism, human rights violations, and other destabilizing activities in Syria, Iraq, Yemen, Lebanon, and other countries across the Middle East), and using non-nuclear sanctions to deter and punish these activities, the administration is now effectively acting as Iran’s trade promotion and business development authority. Indeed, the administration may be departing from its original JCPOA negotiating position that it would only suspend or lift so-called U.S. “nuclear sanctions” under its executive authority. Rather, the administration is allowing Iran to hold the U.S. responsible for delivering financial and economic outcomes.

Iran complains that it has not received the sanctions relief it was promised. But the regulatory and economic realities are very different. The administration honored its commitments on Implementation Day in lifting or suspending the entire “nuclear-related” sanctions architecture. Iran already has received an economic windfall: The JCPOA (as well as the interim agreement in place during the negotiations) provided Iran with substantial economic relief that helped Tehran avoid a severe economic crisis and even return to a modest recovery path. The lifting of restrictions on Iran’s use of frozen overseas assets of about $100 billion gives it badly needed hard currency to settle its outstanding debts, repair its economy, build up its diminished foreign exchange reserves, and ease a budgetary crisis, which has actually freed up funds for the regime to increase its financing of terrorism.

The nuclear deal also did nothing to address the full range of Iran’s other 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 coupled with the lifting of a conventional arms embargo after five years and the missile embargo after eight will undermine international efforts to combat these activities. Meanwhile, Iran’s domestic repression has intensified with a record number of executions in 2015.  When President Rouhani was elected in June 2013, there was a widespread assumption that he would shepherd in an era of greater freedoms in Iran. Yet, domestic repression has intensified. As United Nations Special Rapporteur on human rights in the Islamic Republic of Iran Ahmed Shaheed reports, there has been no “meaningful change on the ground.” 

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. This was a very logical approach. While the JCPOA lifts sanctions on Iran’s nuclear activities, it does not preclude the United States from using these non-nuclear sanctions – despite Iranian threats that it would view any imposition of sanctions as a violation of the deal and grounds to “snapback” its nuclear program. 

Congress should reject the Iranian position – which amounts to nuclear blackmail – and hold the administration to its commitments. Sanctions need 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 stated U.S. policy to “oppose Iran’s destabilizing policies with every national security tool available.” 

Sadly, since the JCPOA was reached, the administration has only issued a handful of new designations; only nine individuals and nine entities have been added to Treasury’s sanctions list.  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 needed to change Tehran’s calculus. Discussions at the UN Security Council are unlikely to lead to any meaningful response to Iran’s repeated ballistic missile tests,  and the administration has backed away from language of “violations,” instead arguing that missile activities are “inconsistent” with UN Security Council Resolution 2231.

The administration also has failed to enforce 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. In fact, 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.

And even this is a relatively dismal record compared to the European Union, which designated 84 individuals and one entity between 2009 and 2015. 

Meanwhile, the administration is touring Western capitals to encourage banks to re-enter the Iranian market and is reportedly mulling 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 that would allow Iran access to the dollar. This concession, a response to threats from Iran’s Supreme Leader Ali Khamenei,  undercuts the efficacy of future non-nuclear sanctions, which depend on the private sector’s perception of the severe financial risks involved in transactions with Iran. Easing dollarized transaction restrictions also aids an Iranian push to legitimize its financial sector without halting the terror, nuclear, and missile financing, not to mention the money-laundering and sanctions evasion that violate international norms of responsible financial activities.

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.