Congressman Brad Sherman

Opening Statement

COMMITTEE ON FOREIGN AFFAIRS

SUBCOMMITTEE ON TERRORISM, NOPROLIFERATION, AND TRADE

COMMITTEE ON FINANCIAL SERVICES

Subcommittee on Domestic and International Monetary Policy,

Trade, and Technology

Isolating Proliferators and Sponsors of Terror: The Use of Sanctions and the International Financial System to Change Regime Behavior

April 18, 2007

This joint subcommittee hearing has been called to look at what I believe to be the most important goal of our foreign policy: our efforts to produce the type of economic pressure on regimes that will force them out of the business of promoting terrorism and the development and proliferation of nuclear weapons.

Three countries come to mind as the greatest challenges to our foreign policy: Iran, North Korea and Sudan, all listed as State Sponsors of Terrorism by our State Department; two of these states have nuclear weapons programs and the third, Sudan, is complicit in the greatest humanitarian catastrophe of this young century, the genocide in Darfur.

North Korea, already one of the poorest and most isolated countries in the world, was brought back to the six-sided table at least in part due to the pressure exerted by the Treasury’s actions against Banco Delta Asia, a small bank in Macao that had been accused of money laundering activity, including moving counterfeit U.S. dollars for the regime. The action against Banco Delta Asia had a ripple effect; never a popular business partner, North Korea found itself cut off from most of the banks that had previously done business with Pyongyang.

Of course, it will take a lot more than action against one or two banks to bring Iran to the table. I laud Treasury for the work it is doing to dissuade European banks from doing business with Iran, and for cutting two Iranian banks off from the U.S. financial system entirely. These are small steps, but good initial steps. Clearly, the Iranian economy has not been so severely dislocated as to cause a change of policy in Tehran.

Our failure to use all of the sanctions tools at our disposal, especially those contained in the Iran Sanctions Act (ISA), has led to a continued flow of investment into Iran’s energy sector. I am entering into the record as part of my statement a document prepared by the Congressional Research Service detailing more than $100 billion in energy investments since 1999 that are either underway or planned for the Iranian energy sector.

Post-1999 Foreign Investment in Iran Energy Sector

Date	Field	Company(ies)	Value	Output Goal
Feb. 1999	Doroud (oil)	Totalfina Elf (France)/ENI (Italy)	$1 billion	205,000 bpd
Apr. 1999	Balal (oil)	Totalfina Elf/ Bow Valley (Canada)/ENI	$300 million	40,000 bpd
Nov. 1999	Soroush and Nowruz (oil)	Royal Dutch Shell	$800 million	190,000 bpd
Apr. 2000	Anaran (oil)	Norsk Hydro (Norway)		?
July 2000	Phase 4 and 5, South Pars (gas)	ENI	$1.9 billion	2 billion cu.ft./day
Mar. 2001	Caspian Sea oil exploration	GVA Consultants (Sweden)	$225 million	?
June 2001	Darkhovin (oil)	ENI	$1 billion	160,000 bpd
May 2002	Masjid-e-Soleyman (oil)	Sheer Energy (Canada)	$80 million	25,000 bpd
Sep. 2002	Phase 9 and 10, South Pars (gas)	LG (South Korea)	$1.6 billion	?
Oct. 2002	Phase 6, 7, 8, South Pars (gas)	Statoil (Norway)	$2.65 billion	3 billion cu.ft./day
Feb. 2004	Azadegan (oil)	Inpex (Japan) 10% stake	$200 million Japan stake	260,000 bpd
Oct. 2004	Yadavaran (oil); deal includes gas purchases for 30 years	Sinopec (China) and ONGC (India)	$70 billion (value of exploration not known)	300,000 bpd
June 2006	Gamsar block (oil)	Sinopec (China)	$50 million	?
Jan. 2007	Golshan and Ferdows (offshore gas, includes downstream development and transportation)	SKS Ventures (Malaysia)	$20 billion	100 million cu.ft/day
Totals			$100 billion+	Oil: 1.2 million bpd Gas: 5.1 billion cu.ft/day+
Pending Deals
North Pars Gas Field (offshore gas)		China National Offshore Oil Co.	$16 billion (includes purchases of the gas	3.6 billion cu.ft/day
Phase 13 and 14 - South Pars (gas); includes building a liquified natural gas (LNG) terminal		Royal Dutch Shell and Repsol (Spain)	$10 billion	?

Source: CRS Report for Congress, The Iran Sanctions Act. By Kenneth Katzman. Updated March 23, 2007

I know that the State Department may claim that many of these deals are not going to go through, or the full extent of the investments will not be realized; but it strains credulity to say that no single $20 million investment has occurred in Iran in the past decade during any calendar year. The fact of the matter is that the State Department refuses to find evidence of the investments that would trigger the Act because they do not want to find evidence of such investments.

The argument against applying the Iran Sanctions Act is that by punishing Western and Asian oil companies we would punish the wrong people: our allies. But doing business with Iran at a time when we are trying to end that regime’s pursuit of nuclear weapons is not a friendly act. Quite simply, we are running out of time to apply the kind of pressure on Iran it will take to end their nuclear weapons program. I hope that our State Department will show the resolve necessary to bring our European and Asian friends along on a program of tough economic sanctions – measures strong enough to cause the Iranian regime to rethink its drive for nuclear weapons.

Beyond the secondary sanctions in the ISA, the United States has not even taken the basic step of cutting Iranian goods off from the U.S. market. In 2000, during a brief and largely imagined thaw in US-Iranian relations, the Clinton Administration decided to lift the total embargo on Iranian goods in the US. About $170 million in goods are shipped from Iran to the United States every year. We do not import oil; instead we import things we do not need and that Iran cannot sell elsewhere: caviar and carpets. While not a massive sum, I would hope that in an effort to isolate the number one state sponsor of terrorism, we could learn to live without the caviar and carpets that the Iranians send us. What message does it send when we ourselves cannot even do that much?

Then there is the World Bank. Also starting in 2000-2005, the United States barely lifted a finger as $1.35 billion in loans were approved by the Bank for nine separate projects in Iran. It is true that the U.S. Director at the Bank was required to vote no on these loans, but other than that, the Clinton and Bush Administrations both did little to prevent these loans. How isolated is a regime that receives loans from the World Bank, with the major Western economies happily supporting these loans over lame U.S. opposition? We should not be focused on whether Mr. Wolfowitz’s friend received roughly $200,000 from the World Bank, but instead whether that body disburses $1.3 billion to Iran.

Finally, I want to mention another policy initiative, one that will add another layer of pressure on companies to stop doing business in Iran, Sudan, and other state sponsors of terror. A number of states, including California, are considering legislation that would require divestment of state funds from companies that do business in these countries. We are honored to have, as part of our second panel, a leader in this movement, Missouri State Treasurer Sarah Steelman.

Her state has already gone “terror-free.” As she will point out, this has not caused her state to see diminished investment returns. Missouri’s terror-free investment strategy is now actually outperforming the previous state investment strategy. This is not merely a feel-good strategy of investment. I support divestment and terror-free investment in both the public and private sector because I believe that it will serve to isolate these regimes from foreign capital, will curtail their exports, and will help deprive these regimes of the goods their economies require. Divestment should be part of our strategy to isolate these regimes until they give up their drive for nuclear weapons and/or their support for terror.

I am working with Congressman Barney Frank and others on legislation that will provide a boost to the divestment and terror-free movement with respect to Iran. I will also begin the process this week of seeking cosponsors on a bill I am drafting that will address the tax consequences of divestment -- when an individual or entity divests from a security or other investment because it is tainted by business connections to a state sponsor of terrorism, they should not face immediate tax liability. Instead, they should carry their basis over into their new, terror-free investments and pay the tax only when they sell those investments.

We need to use every economic and political lever at our disposal against countries that seek to develop nuclear weapons and support terrorism. Right now, we are not doing nearly enough.