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International Affairs


The Challenge from Iran and the American Response

Posted: February 8, 2008

Remarks by The Hon. Robert Kimmitt

Deputy Secretary of the Treasury

(as prepared)

to the Anti-Defamation League

National Executive Committee Meeting

Palm Beach, Florida

February 8, 2008

 

 

Introduction

Thank you, Tony Schneider, for that kind introduction.  Hearing my work history always makes me wonder if the audience wishes the organizers had found a speaker who did not have so much trouble holding a job!

 

For over 30 years, it has been my honor and pleasure to work with the Anti-Defamation League.  The pursuit of your vital mission with diligence and vigilance was important when we met; it is important today; and it will remain important for generations to come. 

 

It has been my particular pleasure to work with individuals the quality of Abe Foxman, Jess Hordes, and Ken Bialkin.  Jess, like Ken Bialkin, is a consummate professional, very buttoned down, with a great smile and firm handshake.  Abe is equally professional, also has a great smile, but, as this group well knows, whenever Abe sees you, you better be ready not for a firm handshake but rather a bear hug!

 

My relationship with the Anti-Defamation League continued during my tour as American Ambassador to Germany.  I am reminded of the counsel I received from my predecessor, Ambassador Vernon Walters, who told me: "Don't ever forget how important speeches are to the Germans.  They like to give speeches, listen to speeches, and analyze speeches far more than is the case in the United States."  He recounted a story of speaking once to a distinguished group like the one assembled here today.  He spoke in his excellent German for 40 minutes and sat down, rather pleased with himself, only to have the host of the event stand and say, "Mr. Ambassador, thank you so much for your remarks.  If you ever have time for a real speech, please come back to see us again."  Well, if 40 minutes is when a "real speech" starts, my allotted 20 minutes only leaves me time today for "remarks."  But I hope these remarks and the question period to follow will give you new insights into the work your Treasury Department is doing to stop the flow of illicit finance to Iran and other state sponsors of terror and proliferation.

 


The U.S. Economy, Credit Markets, and Housing Markets

Before turning to Treasury's growing role in protecting our Nation's security, including countering the challenge from Iran, let me say a few words about the state of the U.S. economy – an issue always at the forefront of Treasury's agenda, and one that was a key topic of interest at the World Economic Forum in Davos, which I attended last month.

 

As the President said last week in his State of the Union address, U.S. economic fundamentals are sound, and the economy is expected to continue to grow.  At the same time, growth has clearly slowed; real GDP growth slipped to 0.6 percent at an annual rate in the fourth quarter last year.  The U.S. economy is facing significant headwinds from housing, credit markets, and energy prices.

 

The correction we are experiencing in the housing market remains formidable, coming as it does after years of rapid, unsustainable home price appreciation.  Housing starts have fallen over 50 percent from their peak, and, nationwide, home prices are roughly flat over the past year.

 

Some of the incoming economic data are raising concerns about the health of our expansion, including reports that consumer spending is slowing.  Also, while over 8 million jobs have been created since August 2003, including over 1 million just in the past year, January saw the first decline in payrolls in over 4 years, with payroll employment dropping by 17,000.


Therefore, while we are confident about our long-term economic strength, there are downside risks to near-term growth.  For this reason, the Administration has worked closely with Congress to reach a bipartisan agreement on a short-term economic growth package that can be put in place as soon as possible to keep our economy growing and creating jobs this year.

 

After much hard work with the House and Senate, the Administration has reached final agreement on a package that is temporary, broad-based, and will have an impact immediately.  The House led this important bipartisan effort by passing its bill on January 29th, and it included measures to bolster business investment and consumer spending – both of which are critical to economic growth.  Last night, the Senate passed an amended version of the bill, and the House quickly approved, clearing the measure for the President's signature in the coming days.

 

The experience of the 2001 and 2003 tax cuts showed that providing tax relief to families stimulated the broader economy by boosting household spending.  Furthermore, offering incentives to spur business investment will encourage businesses to expand and create new jobs.  By quickly putting in place this short-term package, we can protect the strength of our economy as we weather the housing correction.


The Administration is also continuing to promote initiatives to minimize the impact of the housing market downturn.  In the short term, we are focusing on the number of preventable foreclosures we can avoid.  And we have made progress.  The HOPE NOW alliance, a private-sector coalition of mortgage servicers, mortgage counselors, investors, and trade associations, has announced promising developments by stepping up the rate at which they are modifying subprime mortgages to stave off foreclosures.  In fact, mortgage servicers modified subprime loans in the fourth quarter at a rate three times faster than in the preceding quarter.  But much more needs to be done, on a bipartisan basis, to ensure that we avoid a recurrence of excesses and abuses by addressing the underlying causes of today's turbulence.

 

In short, to be effective managers of the U.S. economy, we need to be forthright about the challenges we face, find bipartisan solutions where government action is warranted, and look to market participants also to play their very important role.

 

 

Iranian Threat and Deception

I am reminded of the importance of good economic management when I look half way around the world at Iran, where the regime's economic mismanagement has led to deteriorating living standards for the Iranian people:

 

·         Both unemployment and inflation rates in Iran are on the rise, with independent experts estimating the unemployment rate to be roughly twice the 11 percent claimed by the regime.

·         In the face of staggering inflation, Iran's President ordered the Central Bank to cut interest rates far below the inflation rate and then fired his central bank governor for questioning this irresponsible decision.

·         Iran is rife with corruption, as the Iranian regime grants profitable "no-bid" contracts to the Islamic Revolutionary Guard Corps, whose leadership has been sanctioned by the UN Security Council.

·         Finally, the regime is spending the profits of the country's oil revenue reserve fund in an attempt to hide the effects of these reckless economic policies, at a time when the fund should be growing to benefit the future of the Iranian people.

 

These conditions have led to growing dissatisfaction among the Iranian people.  Rather than working to correct the worsening economic situation, however, the Iranian regime has instead focused its efforts on silencing critics and using its resources to pursue dangerous and destabilizing activities. 

 

Over the past 30 years, my work has focused largely on national security issues, and one of the most challenging concerns I have encountered is the threat we face from Iran.  From the Iranian regime's facilitation of millions of dollars to deadly terrorist organizations to its pursuit of a nuclear capability and ballistic missiles, Iran poses a threat to the security of the United States, Europe, and the Middle East.  But perhaps the greatest threat is to our strongest ally in the region: the State of Israel.

 

Iran has ignored repeated calls from the International Atomic Energy Agency (IAEA) and the UN Security Council to suspend its nuclear enrichment and reprocessing activities and to comply with its obligations under the Nuclear Non-Proliferation Treaty.  Just this past Monday, Iran launched a research rocket and unveiled its first major space center.  This rocket technology could have a dual-use purpose serving as a possible cover for further development of ballistic missiles of increasing range and sophistication in violation of UN Security Council Resolutions.  Given Iran's record of deceptive behavior in pursuing proliferation activities, this launch serves as a reminder of the need for continued action as well as vigilance in dealing with Iran.

 

Iran's role in supporting international terrorism is also of serious concern.  The regime spends hundreds of millions of dollars each year to fund terrorist groups.  Iran uses its Qods Force, a branch of the Islamic Revolutionary Guard Corps, to provide material support for terrorist organizations.  Those groups include the Taliban, the Palestinian Islamic Jihad, Hamas, the Popular Front for the Liberation of Palestine-General Command, and Hizballah – an organization that has killed more Americans than any terrorist network except for al Qaida.  In the case of the Palestinian Islamic Jihad, Iran's financial support has been made expressly contingent upon the group carrying out attacks against Israel.  And we are all familiar with Iran's funding and equipping of elements of the insurgency in Iraq, further destabilizing that country and resulting in the deaths of American and Iraqi forces and innocent civilians.

 

Iran's long-time integration into the international financial and commercial systems has aided the regime in supporting and carrying out its dangerous activities.  The Iranian regime disguises its involvement in proliferation and terrorism activities through an array of deceptive practices specifically designed to evade detection from the international community.  We have seen entities associated with Iran's nuclear and missile programs utilize an extensive network of front companies to conceal the true ownership of funds and end-use of commercial goods.  Teheran also uses financial intermediaries to engage in ostensibly innocent commercial transactions that are actually related to its WMD programs.  These front companies and intermediaries enable the regime to obtain dual-use technology and materials from countries that would typically prohibit such exports to Iran.

 

These deceptive practices are specifically designed to evade the risk-management controls put in place by responsible financial institutions and have allowed actions by Iranian banks to remain undetected as they move funds through the international financial system to pay for the Iranian regime's illicit activities.

 

Iran uses its state-owned banks to facilitate this conduct, and those banks engage in a range of deceptive practices.  For example, some have requested that other financial institutions take their names off transaction documents when processing them globally.  This practice, which makes it difficult, if not impossible, to determine the true parties in the transaction, is even used by Bank Markazi, Iran's Central Bank.

 

Iranian state-owned banks provide financial services to Iranian entities that have been sanctioned by the UN Security Council.  Bank Melli, Iran's largest bank, has provided a range of financial services on behalf of Iran's nuclear and missile industries, including opening letters of credit and maintaining accounts.  In addition, Bank Melli facilitated transactions for Bank Sepah and the Iranian Defense Industries Organization after they were both sanctioned by the United Nations.  Another Iranian state-owned bank, Bank Saderat, has channeled funds to terrorist groups.  Between 2001 and 2006, Bank Saderat moved $50 million from the Central Bank of Iran through its subsidiary in London to its branch in Beirut to the benefit of Hizballah front organizations in Lebanon that support acts of violence.

 

 

The Financial Strategy on Iran and our Multilateral Efforts

The Treasury Department is playing an integral role in the Administration's Iran strategy.  The financial component of the Iran strategy is aimed at highlighting the reckless and threatening conduct of the Iranian regime, deterring Teheran's dangerous activities through the use of targeted financial measures, and preventing the regime's abuse and manipulation of the international financial system.

 

Over the past two years, senior Treasury Department officials, including Secretary Henry Paulson, Under Secretary Stuart Levey, and I have met with our finance ministry and central bank counterparts from around the world to discuss the importance of ensuring that the international financial system is not tainted or harmed by Iran's abuse.  In December, I traveled again to the Middle East, including Israel, to advance our efforts.  We have also engaged in unprecedented outreach to the international private sector, meeting with over 40 banks around the world to share information and discuss the inherent risks of doing business with Iran.  Our message is clear: when dealing with Iran, it is impossible to "know your customer," which any reputable bank knows is a fundamental responsibility for protecting its business and reputation.

 

Most importantly, we have backed up our words of caution with concrete action.  Since 2006, the U.S. government has targeted key Iranian entities of proliferation concern, including the Islamic Revolutionary Guard Corps, the Ministry of Defense, and Armed Forces Logistics, as well as three Iranian state-owned banks – Banks Sepah, Melli, and Mellat.  The United States has also designated the IRGC Qods Force and Bank Saderat for their role in facilitating Iran's support to terrorist groups.  These measures not only prevent U.S. persons from doing business with these targeted persons and require any of their assets subject to U.S. jurisdiction to be frozen, but also highlight to the global financial community these actors' dangerous conduct.

 

Of all these measures, the U.S. designation of Iranian banks has proven particularly significant, as they signal to the private sector that Iran is using its state-owned banking network to facilitate proliferation-related activities and to finance terrorism.  Bank Sepah, in particular, has not only been designated by the United States, but also by the UN – a historic move – thereby obligating the international community to freeze the assets of this institution along with all other listed enemies and individuals.  We urge countries to implement fully their UN obligations against Bank Sepah, and we are working to ensure that the international community will continue to act against other Iranian financial institutions facilitating illicit proliferation activity.

 

Our financial enforcement efforts have come a long way from the sanctions measures we have applied to threats in the past.  The U.S. Government has been implementing sanctions with respect to Iran for some time, and we have come to learn that the most effective measures meet the following criteria:

 

  • They are carefully targeted at illicit conduct;
  • They are multilateral in scope; and
  • They are combined with private sector and foreign government outreach.

While in the past our broad-based country sanctions have been criticized by some as an inappropriate extension of U.S. law, these new targeted efforts serve to engage our allies, rather than confront them.  As a result, a greater number of international partners who share our objective of stopping Iran from acquiring a nuclear capability have joined our efforts.  Sanctions have the most comprehensive impact when applied cooperatively and collectively.

 

The combination of Treasury's financial sanctions authorities and the State Department's intensive diplomatic efforts have served to catalyze international action, resulting in two unanimous United Nations Security Council Resolutions targeting Iran's pursuit of nuclear capabilities and ballistic missiles.  Negotiations on a third resolution are currently underway.  Member states are required to freeze the assets of, and prohibit persons from doing business with, a number of entities and individuals supporting these activities.

 

Additionally, last October, the world's premier standard-setting body on countering money laundering and terrorist financing – the Financial Action Task Force, or FATF – issued a public statement confirming the extraordinary systemic risks that Iran poses to the global financial system.  Further, the FATF issued guidance to assist countries in implementing the financial provisions of the UN resolutions on Iran.  That guidance identified customers and transactions associated with Iran as representing a significant risk of involvement in proliferation finance.

 

 

Challenges Facing the Administration

U.S. and international measures are having an impact, but it is clear that much more work remains to be done if we are to compel the Iranian regime to change its behavior.  With years of experience under its belt, Iran has become very savvy at using deceptive practices to trick its partners into thinking transactions are for commercial uses, when in reality they are intended to support their proliferation activities.

 

Over many years, the United States has developed a robust and flexible set of tools that can be adapted easily to combat new and emerging challenges.  While we have the power to impose targeted economic sanctions against threats to our national security through strong domestic authorities – namely the International Emergency Economic Powers Act – many of our allies and partners lack the necessary flexibility to take the types of action that we have taken.  The development of similar tools by our international partners is necessary if we are to maintain a comprehensive and multilateral coalition against the threats of terrorism and proliferation.

 

An additional challenge lies in foreign government-sponsored trade finance programs, which effectively subsidize companies willing to take on the risk of dealing with Iran.  While there will always be a company or bank willing to take on a risky business venture at some price, we have asked our foreign partners to consider whether governments should be subsidizing this risk in the form of export credit programs that only serve to reinforce the very activity we are trying to stop.  The good news is that we have seen a decrease in export credits from countries such as Germany, France, and Japan, and as more countries realize the inherent risk associated with doing business in Iran, we expect to see a continued downward trend.

 


National Intelligence Estimate

In recent months, some have questioned the immediacy of the threat posed by Iran in light of the release of the National Intelligence Estimate, which concluded that Iran halted its nuclear weapon design and weaponization work in 2003.  Let me make clear: Iran remains a serious threat, a threat that needs to be countered.  Indeed, rather than dismiss Iran's illicit conduct, the NIE affirms Iran's continued enrichment of uranium and its simultaneous pursuit of ballistic missile delivery capabilities. This dangerous combination remains a cause for real concern and warrants continued action by the United States and the world community.


The NIE also verifies the effectiveness of diplomacy, and we have found financial pressure to be the central factor in the overall diplomatic effort.  The United States and our allies have worked to build an international alliance, effectuated through UN and other actions, condemning Iran's continued defiance of the international community.  We know from the NIE that Iran watches carefully and responds to this international pressure.

 

We have also seen the isolating effect that financial pressure has had on the Iranian regime, with more and more members of the global community working together to counter the threats posed by Iran.  Iranian state-owned banks, in particular, are finding themselves increasingly isolated, threatening the viability of their foreign-based branches and subsidiaries.  We will continue to work with our international partners in both the public and private sectors to implement the United Nations Security Council resolutions, pursue additional multilateral steps, share information, and protect the international financial system from deceptive conduct and abuse.  The National Intelligence Estimate should spur, not deter, additional international action.

 

 

Conclusion

Treasury has an important role to play in protecting our national security by ensuring that our financial system is not only safe and sound, but also secure from exploitation by illicit actors.  The use of targeted financial measures against Iran is just one way we have used these tools.  In recent months, the United States Government has also demonstrated the agility and adaptability of targeted financial measures to address other threats to international peace and security, including the flow of foreign fighters and weapons into Iraq, continued attempts by Syria to reassert control over the Lebanese political system, and the atrocities committed in Darfur.

 

Treasury's engagement in these issues also helps ensure that we take a comprehensive view of the security challenges we face – that we examine them not only from military and political perspectives, but from an economic perspective as well.

 

Looking forward, I see a world in which economic issues will play an even more prominent role in our nation's security, and Treasury will continue to integrate its activities even closer with other national security departments. We will also continue to engage our international partners on issues of mutual concern, since it is clear that sanctions, and especially targeted financial measures, will always be more effective when done on a multilateral basis.  Nowhere is this multilateral action more important today, and in the future, than in our common effort and responsibility to deter Iran's threat to the security of Israel, the Middle East, and the world. 

 

Thank you again for your kind invitation and may God bless you all and your families.  At this time, I would like to open the floor to questions.

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