Background Briefing on the Recently Announced Sanctions on Iran

Special Briefing
Senior Administration Officials
Via teleconference
Washington, DC
November 21, 2011

MODERATOR: Hi folks, thank you so much for joining us this evening for this call. We just wanted to get on the line to answer any questions you might have and run through today’s actions and how those fit into the broader Iran strategy. So you should all have the Executive Order, multiple fact sheets, statements from the President and Secretaries Geithner and Clinton. So with that, just a reminder we’re on a background attributable to Senior Administration Officials. So I’ll turn it over to our first official.

SENIOR ADMINISTRATION OFFICIAL ONE: Great. Thanks, everybody, for joining the call. Sorry it’s a bit late in the day. I’ll just make a few opening comments and then turn it over to my colleagues to get into the details of today’s actions.

As you know, since the beginning of the Administration, we’ve pursued a process of steadily ratcheting up the pressure on the Iranian Government because of its failure to live up to its obligations with regard to its nuclear program. That is an effort that we are pursuing on several fronts and it’s included the most robust sanctions that have been applied to the Iranian Government to date. Of course, we’ve achieved a very strong basis of international unity for those sanctions through UN Security Council Resolution 1929, which in its own right imposed very strong sanctions on the Iranian Government but also provided a platform for us to continue ratcheting up the pressure on the Iranian Government through our own actions and through coordinated actions with likeminded partners.

Iran has continued to fail to live up to its obligations, and in recent days we’ve taken a number of steps to hold Iran accountable and to increase its international isolation and to increase its international isolation and to increase the costs on the Iranian Government for its actions. That includes in the aftermath of the IAEA report a very strong vote at the IAEA Board of Governors that made it clear that Iran needed to meet its obligations with regard to its nuclear program, on a separate line of effort that included a very strong resolution at the UN General Assembly which condemned the Iranian-sponsored plot to assassinate the Saudi ambassador here in the United States. That includes continued work that we’re doing to isolate and pressure Iran for its violation of human rights. So on a number of fronts, we see the Iranian Government is more isolated than it’s ever been. We see the sanctions we’ve applied on Iran having a real bite in terms of significantly impacting its economy and its activities in several areas. Today’s efforts represent a significant step forward in our ongoing process of ratcheting up the pressure on Iran. As we said in the aftermath of the IAEA report, we were looking to build out our sanctions in a number of areas, and that is what we’ve done. We’ve also been looking to do so in a coordinated basis with other nations, and we’re pleased that the United Kingdom and Canada took similar steps today. And in the days ahead we’re going to continue to work with other countries to build out international pressure on the Iranian Government and to continue to increase the costs on the Iranian Government for its activities.

But with that, I’m going to turn it over to one of my colleague to walk through one set of the sanctions, and then we’ll hand it over to one more of our colleagues to take your questions.

SENIOR ADMINISTRATION OFFICIAL TWO: Thank you. Thank you very much. And again, I join the first speaker in thanking you for being on the call. As he mentioned, the sanctions we’ve imposed so far over the last year and a half have already had a major impact. But what we’ve today have – these steps have added very significantly to those already dramatic effects. I’ll go over a few of them and the third speaker will go over some other ones.

The steps today were especially important and impactful in the area of energy. We expand significantly our energy-related sanctions. The President issued today a new Executive Order. Its number is 13590, 135-90, and it allows us to impose sanctions on companies that provide goods and services to upstream Iranian oil and gas activities like development, exploration, extraction of oil and gas. As I’m sure most of you know, U.S. law already prohibits large-scale investment in these upstream oil and gas activities. And what’s happened is the major oil companies have all left Iran, and what Iran has done to circumvent this sanction is to get domestic Iranian companies and smaller foreign companies to provide technology, equipment, and engineering services to help them develop their oil and gas resources. They’re desperately in need of capital and technology because their oil production is declining. And what this measure will do is to impede their efforts to reverse this decline. And this is critical because oil production is critical to the Iranian economy. It’s the main source of revenue for Iran. So this is a very important step.

A second step was also covered by this Executive Order 13590 and that is it allows us to impose sanctions on companies that provide goods, services, and technology to Iran’s petrochemical industry. This is the first time we have targeted Iran’s petrochemical industry. It’s a very important sector of the Iranian economy. After crude oil, it’s the biggest export earner for Iran. Indeed, about 50 percent of Iran’s non crude oil exports come from the sale of petrochemicals.

So what we’re doing is making it very difficult for Iran to maintain and expand its petrochemical industry. Now, that’s part of the Executive Order. But independently of that, we are beginning today to launch a worldwide diplomatic campaign to encourage governments and companies that purchase petrochemicals from Iran to switch to alternative sources of supply. Now, this is not like crude oil, where there are difficulties in companies simply agreeing to forego imports of Iranian crude oil. There are lots of good producers of petrochemical products, and they can switch easily. And if they did, this would dramatically reduce Iran’s export earnings. So we think this is a very significant step.

A third step we took, both State and Treasury have designated, in combination, 11 Iranian companies for activities related to the procurement of items for their nuclear program – their enrichment program, their heavy water research reactor program. The State Department designated four of these entities, Treasury seven of them. These – what this will do is freeze the assets of these entities under U.S. jurisdiction, make it illegal for U.S. persons to engage in transactions with any of them. But there will be secondary effects, I think, by listing these companies, companies and governments around the world are going to be very wary of having any engagement with these companies whatsoever. But another major area covered today was in the financial area, and the third speaker will cover that.

SENIOR ADMINISTRATION OFFICIAL THREE: Hi, everybody. Thanks for taking the time to hear us out this evening. What I’d like to talk about is the Section 311 action that we took today. I think it’s a very important action; I think it’s one that we’ve been waiting to do for some time now. It’s really – it’s one of the strongest financial tools that the Treasury Department has in its arsenal to target illicit finance anywhere in the world. And this is the first time since 2003 that we’ve used this authority with respect to a foreign jurisdiction, as opposed to simply a foreign financial institution; that we’ve taken the step of saying an entire jurisdiction is a primary money laundering concern under Section 311 of the Patriot Act. So what I’d like to do is just take a few minutes to explain to you exactly what Section 311 is as a technical* matter, talk about the case that we made with respect to Iran under Section 311, and then talk a little bit about what I think the impact of that is going to be. And then I’ll certainly be happy to answer any questions, and I’ll try to move through this fairly quickly.

Section 311 of the USA Patriot Act gives the Secretary of the Treasury the authority to identify a foreign financial institution or a foreign jurisdiction as being of primary money laundering concern. And that’s a statutory term of art, “primary money laundering concern,” but in actuality, it’s much broader than simply money laundering and covers all areas of illicit finance. It covers money laundering, it covers terrorist financing, it covers WMD proliferation finance, it covers deceptive financial practices, it covers just about any form of illicit finance that we’d be concerned about. It all gets wrapped up under the statutory term “primary money laundering concern.” So it gives the Secretary of the Treasury the authority to designate a foreign financial institution or a foreign jurisdiction as being of primary money laundering concern.

Once this identification has occurred, the Secretary has the authority to issue a regulation on U.S. financial institutions requiring them to take steps to protect themselves from the identified threat, up to and including requiring them to take actions to ensure that the designated threat does not have any direct or indirect financial access to the United States. And that’s the measure that the Secretary took today. So today, we designated Iran as a jurisdiction of being a primary money laundering concern and issued a Notice of Proposed Rule Making to U.S. financial institutions that, when made final, will require them to take steps to ensure that none of their relationships with foreign financial institutions are used to provide direct or indirect access of any Iranian entity to the U.S. financial system.

One of the things that I think is important about the action we took today is that it’s the first time, I think, you could find anywhere, in a formal way, a complete lay-down of all the illicit activities that Iran currently engages in and has engaged in for many, many years. It goes through – it’s a full exposition and it makes a very, very clear case against Iran. It covers terrorist financing, it talks about Iran’s activities as a state sponsor of terrorism with Hezbollah, with Hamas, and with so many other terrorist organizations. It talks about the role that the IRGC and the IRGC Qods Force plays in particular, with respect to Iran’s support for terrorism. It talks about the Iranian plot to assassinate the Saudi ambassador to the United States here in Washington, recently. It talks about Iran’s cooperation with al-Qaida. It talks about Iran’s use of its private banks like Bank Saderat to provide terrorist financing. So it goes and makes the full case with respect to Iran’s involvement in terrorist financing.

It also makes the full case with respect to Iran’s involvement in financing the proliferation of weapons of mass destruction, and goes through all of the banks in Iran that engage in that activity - Banks like Bank Sepah, Bank Melli, Bank Mellat, Post Bank. The list goes on and on. And then it talks about the deceptive financial practices that Iran, Iranian entities, Iranian banks engage in, in order to disguise this nefarious conduct. It talks about their use of exchange houses and hawala. It talks about the stripping of originator information off of wires. It talks about the use of front companies. It talks about the penetration of the IRGC into the Iranian economy, so that when you’re dealing with any entity in the Iranian economy, you don’t know that you’re not indirectly supporting the IRGC. Highlights in particular are actions taken earlier this year, with respect to Tidewater and with respect to Iran Air and the IRGC’s involvement with those organizations.

And then it talks about the Central Bank of Iran funneling billions of dollars to designated Iranian banks that are involved in WMD proliferation finance and the attempts of the Central Bank of Iran to conceal those; to engage in deceptive financial practices to conceal those payments. It talks about the Central Bank of Iran’s relationship with Khatam al-Anbiya, which is a big Iranian conglomerate controlled by the IRGC. And so, again, for the first time, all in one place, it makes the case, as Secretary Geithner said earlier today, that any transaction with Iran, any business dealing with Iran, is of grave risk, is subjecting the party engaging in that transaction to grave risk. And so that’s what the designation lays out, or the – I’m sorry, the 311 lays out.

With respect to the impact of the Section 311, as a technical matter, it will require banks to take additional due diligence steps – U.S. banks to take additional due diligence steps to firewall off their operations from any foreign – from any operation that its international partners might have with Iran, to make sure that those international partners are not using their relationship with the U.S. bank to provide direct or indirect access to the U.S. financial system.

But I think the impact is going to be much, much greater with respect to how the international financial community reacts to this act. As I said, this is an authority that we use at the Treasury Department very sparingly. It is an authority that we haven’t used with respect to an entire jurisdiction in many years. And we’ve seen in the past that when we do use this action, foreign financial institutions take it very seriously, and I think it’s going to create a serious chilling effect on the willingness of any foreign financial institution anywhere in the world to do business – to continue to do business with Iran.

The most recent use of Section 311 was with respect to Lebanese Canadian Bank in Beirut, which we – an action we took in January of this year. Lebanese Canadian Bank no longer exists. We’ve used Section 311 with respect to Banco Delta Asia in 2005, and the result of that was the complete shunning of North Korea from the international financial system at that time. So I do think that when financial institutions see this action, when they hear the words that Secretary Geithner spoke today about his views about the risks of doing business with Iran of any kind, I do think that they’re going to take this and act accordingly.

I also think that it provides us with a very strong platform for engagement with other countries, as the other speakers were saying, for engagement with other countries – to have a conversation with them about the steps that they need to take with respect to Iran as a whole and with respect to Iranian entities like the Central Bank of Iran, to show in one place that this is the type of activity that the Central Bank of Iran is engaging in, and then we can have a conversation about what the appropriate next steps with the Central Bank of Iran are.

So anyway, I think that’s my explanation.

SENIOR ADMINISTRATION OFFICIAL ONE: Great. We’ll take your questions.

OPERATOR: Thank you. And ladies and gentlemen, if you do have a question, you may press * then 1 on your touchtone phone. You’ll hear a tone indicating you’ve been placed into queue. You can withdraw your question by pressing the pound key, and if you are using a speaker phone, please pick up the handset before pressing the numbers. Once again, if you have a question, press * then 1 at this time. It has been requested that you limit yourself to one question. If you have additional questions, you may return to the question queue.

And our first question, from the line of Arshad Mohammed, with Reuters. Please go ahead.

QUESTION: My first question is for the third official who spoke. Am I correct in understanding that designating Iran as a jurisdiction of primary money laundering concern does not, in fact, bar any transaction today by a U.S. financial entity that was not already barred yesterday? If that is the case, can you then explain why you are so convinced that this will have a chilling effect on foreign financial entities, who presumably could just be very careful to make sure that any dealings they have with Iran don’t impinge on their U.S. subsidiaries or U.S. banks, if they have them?

The other question I have is for the second official who spoke. Can you explain more clearly how it is that the sanctions on the development of the petroleum – of the energy sector go beyond what is already provided for in CISADA, which also describes goods, services, technology, and the provision of goods, services, technology, information, or support, and which has, if I’m not mistaken, pretty much the same triggers or thresholds of a million dollars in any one transaction or five million dollars for a series of transactions within one year?

SENIOR ADMINISTRATION OFFICIAL THREE: Okay, let me take the first question. So thanks for that question because it gives me an opportunity to clarify a couple of things. First of all, it’s important to understand that Section 311 is not a sanction. Section 311 is a protective measure, a defensive measure that the Treasury Department employs to protect the U.S. financial system from abuse, to protect the U.S. financial system from allowing threats to access the U.S. financial system. So I probably in my explanation used the term “designation” a couple of times. That’s a term we normally associate with sanctions. It’s probably better to use the actual technical statutory terms. So what happened today was that the Treasury Department issued a finding where it found that Iran is a primary money laundering concern, and in response to that finding we issued a Notice of Proposed Rule Making. Again, that would – that has the impact that I said it would.

With respect to the second part of your question, what the measure does is ensure that financial institutions around the world do not use their relationships with their U.S. correspondents to allow Iran to have indirect access to the U.S. financial system. As such, you are correct; those financial institutions can continue doing whatever lawful business that they’re currently doing, but it places a heavy burden on them to ensure that in doing that that they’re not providing access to the United States financial system to Iran. Because if it turns out that they are, then whatever profits that they’re making with respect to their relationship with Iran is going to have to be balanced against the risk of being cut off entirely from the U.S. financial system. For most financial institutions, that’s simply not a risk that they’re willing to take, and that’s why traditionally, historically, Section 311 has been so powerful with respect to foreign financial institutions and their willingness to immediately bring themselves into compliance with it.

SENIOR ADMINISTRATION OFFICIAL TWO: Let me address Arshad’s second question, what’s new in the energy sanctions area. Currently, the ISA-CISADA legislation covers large-scale investments in upstream oil and gas activities like exploration, development, extraction, so on. CISADA deals with refined petroleum in one of two ways: It sanctions the provision of goods and services and technology for Iran’s refinery industry; it also sanctions the provision of refined petroleum products, for example the sale of gasoline to Iran. That’s what existing measures call for.

This does two – this Executive Order does two very different things. For upstream oil and gas activities, it goes beyond investment to the provision of goods and services, for example, the sale of drilling equipment, the provision of engineering services. These are very, very important to help Iran develop its energy, its petroleum resources. And they’re vital to enable Iran to reverse this long-term decline in its production of oil, which means a decline in oil revenue. So that’s a vital loophole to fill.

Second, it deals for the first time with Iran’s petroleum – I’m sorry, petrochemical industry, which is distinct from its refinery industry. And it allows us to sanction companies providing goods and services and technology to help maintain and expand the petrochemical industry. And as I also said, we’re launching a diplomatic campaign to discourage purchases of Iran’s petrochemical products, which are a major source of export earnings for Iran.

SENIOR ADMINISTRATION OFFICIAL ONE: Great. We’ll take the next question.

OPERATOR: That is from the line of Peter Cheremushkin with Interfax. Please go ahead.

QUESTION: Thank you. Thank you very much for the opportunity to ask this question. Actually, I am interested if there are any Russian companies in oil and gas sector that could be covered by these sanctions. Thank you.

SENIOR ADMINISTRATION OFFICIAL TWO: I don’t have in front of me a list of companies who are engaged in these kinds of activities. We know there are some European, there are some Asian companies. I wouldn't want to name any specific ones that are involved in the provision of these goods and services. But I cannot off the top of my head think of any Russian companies.

SENIOR ADMINISTRATION OFFICIAL ONE: Yeah, I’d only add that when we have been building out this sanctions regime and these pressure mechanisms on the Iranian Government, the foundation of those efforts is the international unity that we achieved through the P-5+1 and UN Security Council Resolution 1929, which of course had important Russian support that provided essentially a foundation and platform from which we’ve been building out our sanctions ever since, understanding that different nations were going to be able to take unique steps on their own and that, of course, the position of the United States is to coordinate as intensive pressure as we can upon the Iranian Government. But the Russian Government, of course, has provided critical support for the basis of that multilateral sanctions regime that has been imposed on the Iranian Government. Similarly, the Russian Government provided important support for the statement of unity at the IAEA Board of Governors meeting as well. So separate and apart from the specific question of companies, I think it is important to underscore that we’re building out here from a position of unity in the international community and in the P-5+1, and the cooperation between the United States and Russia has been important to that.

MODERATOR: We’ll take the next question.

OPERATOR: We have a question from the line of Ilhan Tanir with Vatan Turkish daily. Please go ahead.

QUESTION: Thank you. I’m not sure who would like to take this question, but I am going to be little more particular. Apparently, these new measures the U.S. is launching a worldwide diplomatic campaign and you are encouraging other countries to join you. Particularly Turkey, Iran is a country which provides substantial part of Turkey’s energy needs and we all know Turkey’s disagreements at the UN Security Council last year. My question is have you been able to talk to Turkish Government for their role in this renewed effort? How the partnership between the two countries is going to happen at this time? Thank you.

SENIOR ADMINISTRATION OFFICIAL: We have been in continuous contact with the Turkish Government as well as other governments in the region and throughout the world about the implementation of Security Council Resolution 1929. And the Turkish Government has assured us that it’s fully committed to implementing conscientiously Resolution 1929. We welcome their assurances in that regard.

Obviously, Turkey is a kind of so-called frontline state. It’s located near Iran and has to take special measures, exercise special vigilance in ensuring that it’s implementing Resolution 1929 effectively. But we have constant discussions with the Turkish Government and we very much appreciate the cooperation we’ve had.

MODERATOR: Great. We’ll take the next question.

OPERATOR: We go to Cheyenne Hopkins of Bloomberg. Please go ahead.

QUESTION: Hi, just on the Section 311, can you describe what the impact of that is, given that banks already are banned from doing business with Iranian institutions? I mean, how much – expanding that to correspondent accounts – how big of an impact will that have?

SENIOR ADMINISTRATION OFFICIAL THREE: As you point out, U.S. financial institutions are already prohibited in most instances from doing any business at all with any Iranian financial institution, including the Central Bank of Iran. What this measure does – as a technical matter, what this measure does is require U.S. financial institutions to take additional due diligence steps to ensure that any foreign relationship that they have is not being used to provide indirect access to Iran – for Iran to the U.S. financial system. So, as you point out, in most instances, this type of access is already going to be prohibited. What this requires is that – for U.S. financial institutions to take additional measures to ensure that there’s no direct or indirect access.

What I think is important to underscore, though, is that an additional impact – and I think a very significant impact – is the fact that the international financial community pays very, very careful attention to when the U.S. Treasury Department identifies a threat to the U.S. financial system of this size. We do it – the Treasury Department does it very rarely. It’s only done it a handful of times ever, and it’s been eight years since the Treasury Department has done it with respect to an entire jurisdiction, and certainly never a financial jurisdiction with the financial importance of Iran.

What this is is a – really, a wake-up call to all banks anywhere in the world that are still doing business with Iran, letting them know that it is certainly the view of the U.S. Treasury Department that any of this business is highly risky business that’s fraught with grave risks, and the U.S. Treasury Department is going to certainly ensure that those transactions are not coming through the United States. And what this has done in the past is create a chilling effect, and I think it will in the future create a chilling effect on the willingness of any bank anywhere in the world to continue with this business.

It’s not going to eliminate the financial connections with Iran anywhere in the world, but it is certainly going to create a chilling effect and continue what has been the dynamic that’s been building within the international financial community for many years, a dynamic that has tended to isolate Iran and that has tended to ostracize Iran from the international financial community. We’ve seen a tremendous – a precipitous drop in Iran’s access to the international financial system, and I think that this 311 is going to continue to move the international financial community in that direction.

SENIOR ADMINISTRATION OFFICIAL ONE: Yeah, I’d just add that we’ve already seen, in other circumstances, for instance, companies, banks assess that the costs and risks of doing business with Iran outweigh the benefits, and therefore we’ve seen a chilling effect take hold from previous measures that is a part of the reason why we’ve seen such a dramatic economic impact on the Iranian Government. Obviously, economic indicators in Iran have showed that growth has slowed to a halt. You’ve had the Iranian president himself say that this is, quote, “The heaviest economic onslaught on a nation in history,” end quote. That was before this round of sanctions and finding, and I think what this does is again further reinforces and ratchets up the pressure that we’re applying on the Iranian Government and again further identifies the costs and risks associated with doing business with Iran around the world.

We’ll take the next question.

MODERATOR: We go to Dmitri Zlodorev with ITAR TASS. Please go ahead.

QUESTION: Hello, my name is Dmitri Zlodorev, ITAR TASS News Agency, Russia. Did you inform Russians about your – today’s steps? And if yes, what was their reaction, and if no, when and how do you plan to discuss this issue with Russians? Thank you.

SENIOR ADMINISTRATION OFFICIAL TWO: We have a constant set of consultations with the Russian Government about dealing with Iran both on the engagement side and on the pressure side. A number of senior officials are traveling to Moscow quite frequently for these consultations, so all aspects of these matters are discussed very, very carefully and closely with the Russian Government.

Because Russia is such a valued partner for us in dealing with Iran, we did indicate to the Russian Government that these steps were coming. We provided some advance notice. I think the Russian Government – I won’t say they agreed or disagreed with the measures, but I think the Russian Government was grateful for the advanced notification. But yes, we did this because we value our relationship with Russia and our cooperation on this issue so much.

SENIOR ADMINISTRATION OFFICIAL ONE: And I’d just add generally that in their bilateral meeting in Honolulu, President Obama and President Medvedev spent some time talking about Iran. President Obama underscored the importance of taking action in light of the IAEA report, specifically addressing the upcoming Board of Governors meeting which, of course, has taken place, and indicated that we would be taking steps in response to that IAEA report. He, of course, didn’t get into specific details of the nature of the precise actions taken today, but there was certainly a discussion at the level of the leaders about the approach going forward of the United States and of the international community as relates to Iran.

MODERATOR: We’ll take one more question.

MODERATOR: And that is from the line of Karaman Helacelic with Turkish Radio and Television. Please go ahead.

QUESTION: Thank you. This question, I guess, is for any of the briefers. According to an organization called United Against Nuclear and led by Ambassador Mark Wallace, there are more U.S. companies doing business with Iran either than Turkish companies or Russian companies or any of Iran’s neighbor’s companies. What are you going to do first to implement these measures to the U.S. companies, or are you going to just pressure – keep pressuring Turkey or other countries to stop dealing with Iran or doing business with Iran? Thank you.

SENIOR ADMINISTRATION OFFICIAL ONE: Well, I’d just offer an initial comment. I think that we’ve, in fact, imposed a very robust set of sanctions as it relates to the ability of U.S. businesses and banks to do business with Iran. So I would say that the United States has led in this matter, above all, by our own example and our own sanctions, as it relates to U.S. companies and banks. And it’s certainly not the case that we have taken action that excludes any U.S. entities from our sanctions regime, and in fact, what we’ve done is work with likeminded countries around the world so that we’re coordinating our actions with their governments as it relates to their own sectors. But I don’t know if any of my colleagues have anything to add to that.

SENIOR ADMINISTRATION OFFICIAL TWO: No, I don’t have much to add. I’ll just note that U.S. financial institutions are almost entirely barred from doing any financial transactions with any Iranian bank, any Iranian financial institution, any Iranian entity, with very small humanitarian exceptions to that. They are entirely barred from conducting such transactions.

The U.S. has the broadest financial – set of financial sanctions and economic sanctions against Iran in the world, and we certainly have never asked any of our partners anywhere in the world to take any action that we haven’t been perfectly willing to take ourselves and, in fact, have, in most instances, already taken ourselves for some time. So I feel very comfortable that the U.S. is willing to impose on itself not only any restrictions that we ask other countries to impose on their entities but have, in fact, imposed on ourselves the strongest set of restrictions anywhere in the world.

SENIOR ADMINISTRATION OFFICIAL: Great, well, thanks everybody for joining the call. I appreciate your questions, and we’ll, of course, be able to talk to you about this in the coming days, as well. Thanks.

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PRN: 2011/1988