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FINANCIAL HARDBALL: CORRALLING TERRORISTS

AND PROLIFERATORS

HEARING

BEFORE THE

SUBCOMMITTEE ON TERRORISM, 

NONPROLIFERATION, AND TRADE

OF THE

COMMITTEE ON FOREIGN AFFAIRS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

APRIL 6, 2011

Serial No. 112–9

Printed for the use of the Committee on Foreign Affairs

(

Available via the World Wide Web: http://www.foreignaffairs.house.gov/

(II)

COMMITTEE ON FOREIGN AFFAIRS 

ILEANA ROS-LEHTINEN, Florida, Chairman 

CHRISTOPHER H. SMITH, New Jersey 

DAN BURTON, Indiana 

ELTON GALLEGLY, California 

DANA ROHRABACHER, California 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

STEVE CHABOT, Ohio 

RON PAUL, Texas 

MIKE PENCE, Indiana 

JOE WILSON, South Carolina 

CONNIE MACK, Florida 

JEFF FORTENBERRY, Nebraska 

MICHAEL T. MCCAUL, Texas 

TED POE, Texas 

GUS M. BILIRAKIS, Florida 

JEAN SCHMIDT, Ohio 

BILL JOHNSON, Ohio 

DAVID RIVERA, Florida 

MIKE KELLY, Pennsylvania 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

JEFF DUNCAN, South Carolina 

ANN MARIE BUERKLE, New York 

RENEE ELLMERS, North Carolina 

VACANT 

HOWARD L. BERMAN, California 

GARY L. ACKERMAN, New York 

ENI F.H. FALEOMAVAEGA, American 

Samoa 

DONALD M. PAYNE, New Jersey 

BRAD SHERMAN, California 

ELIOT L. ENGEL, New York 

GREGORY W. MEEKS, New York 

RUSS CARNAHAN, Missouri 

ALBIO SIRES, New Jersey 

GERALD E. CONNOLLY, Virginia 

THEODORE E. DEUTCH, Florida 

DENNIS CARDOZA, California 

BEN CHANDLER, Kentucky 

BRIAN HIGGINS, New York 

ALLYSON SCHWARTZ, Pennsylvania 

CHRISTOPHER S. MURPHY, Connecticut 

FREDERICA WILSON, Florida 

KAREN BASS, California 

WILLIAM KEATING, Massachusetts 

DAVID CICILLINE, Rhode Island 

YLEEM D.S. POBLETE, Staff Director 

RICHARD J. KESSLER, Democratic Staff Director 

SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION, AND TRADE

EDWARD R. ROYCE, California, Chairman 

TED POE, Texas 

JEFF DUNCAN, South Carolina 

BILL JOHNSON, Ohio 

TIM GRIFFIN, Arkansas 

ANN MARIE BUERKLE, New York 

RENEE ELLMERS, North Carolina 

BRAD SHERMAN, California 

DAVID CICILLINE, Rhode Island 

GERALD E. CONNOLLY, Virginia 

BRIAN HIGGINS, New York 

ALLYSON SCHWARTZ, Pennsylvania 

(III)

C O N T E N T S 

Page

WITNESSES 

Mr. Juan C. Zarate, Senior Adviser, Center for Strategic and International 

Studies (former Deputy Assistant to the President and Deputy National 

Security Advisor for Combating Terrorism, and former Assistant Secretary 

for Terrorist Financing and Financial Crimes, U.S. Department of the 

Treasury) ............................................................................................................... 7

David Asher, Ph.D., non-resident senior fellow, Center for a New American 

Security (former Senior Adviser, East Asian and Pacific Affairs, and Coordinator, North Korea Working Group, U.S. Department of State) ..................... 32

Professor Orde F. Kittrie, Sandra Day O’Connor College of Law, Arizona 

State University ................................................................................................... 39

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

The Honorable Edward R. Royce, a Representative in Congress from the 

State of California, and chairman, Subcommittee on Terrorism, Nonproliferation, and Trade: Prepared statement ................................................... 4

Mr. Juan C. Zarate: Prepared statement .............................................................. 10

David Asher, Ph.D.: Prepared statement .............................................................. 34

Professor Orde F. Kittrie: Prepared statement ..................................................... 42

APPENDIX 

Hearing notice .......................................................................................................... 62

Hearing minutes ...................................................................................................... 63

(1)

FINANCIAL HARDBALL: CORRALLING 

TERRORISTS AND PROLIFERATORS 

WEDNESDAY, APRIL 6, 2011

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON TERRORISM,

NONPROLIFERATION, AND TRADE,

COMMITTEE ON FOREIGN AFFAIRS, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 3:04 p.m., in room 

2172, Rayburn House Office Building, Hon. Edward R. Royce 

(chairman of the subcommittee) presiding. 

Mr. ROYCE. This hearing of the Subcommittee on Terrorism, 

Nonproliferation, and Trade today will look at corralling terrorists 

and proliferators—financial hardball, in other words. 

Economic sanctions have long been a key diplomatic tool. Athens 

imposed a trade boycott on Sparta’s ally Megara. And, of course, 

it is a long history, but in recent years the United States has increasingly relied upon reputational financial sanctions, particularly 

against North Korea and Iran. These sanctions target financial institutions employed by rogue states for illicit transactions. To preserve their reputation and protect their businesses, other banks 

shun the targeted institution, restricting the rogue’s ability to finance proliferation or terrorist activities. 

This model was effectively used in 2005 with Banco Delta Asia 

hitting North Korea. Once BDA was identified as complicit in 

North Korea’s money laundering and WMD activities, banks 

throughout the region shunned Banco Delta Asia and other North 

Korean transactions, effectively shutting the regime out of the 

international system. As Dr. David Asher, a key architect of this 

policy, will testify, this was a ‘‘financial shot heard around the 

world.’’

The key to this action was Section 311 of the PATRIOT Act, 

which allows the Treasury Department to designate a particular financial entity as a ‘‘primary money laundering concern,’’ barring it 

from the U.S. financial system. One witness, Juan Zarate, pioneered the use of this sanction against ‘‘bad banks’’ during his tenure at Treasury. 

After being used against North Korea and BDA, this ‘‘unprecedented power’’ took a 5-year vacation. That is until this year, when 

the Beirut-based Lebanese Canadian bank was sanctioned. Treasury found that as much as $200 million per month in drug money 

was laundered through this bank to the benefit of Hezbollah, financing weapons, financing logistics, financing training. 

2

The ‘‘market-based financial isolation’’ that was used against 

North Korea set the stage for Treasury’s campaign against Iran. 

Beginning in 2006, senior U.S. officials visited some five dozen 

banks, seeking to persuade them to reconsider their business with 

Iranian financial institutions. Dubious transactions by Iranian 

banks, like the $50 million transmitted by Iran’s bank Saderat 

through a London subsidiary to Hezbollah, were spotlighted. In 

this ‘‘whisper campaign,’’ Treasury officials revealed the high cost 

foreign institutions could bear if found to be facilitating illicit Iranian transactions. 

This has caused economic hassle and even pain for the regime in 

Iran, but it is yet to alter its nuclear weapons drive. 

But neither has our financial pressure been turned to the max. 

Treasury has yet to designate a single bank under Section 311 of 

the PATRIOT Act for Iran-related sanctions. Nor has Treasury imposed any sanctions against Iran’s Central Bank, which has reportedly assisted Iranian banks to sidestep U.S. financial pressure. 

Nor have new financial sanctions that were included in the Comprehensive Iran Sanctions, Accountability, and Divestment Act 

been fully implemented. Nine months after the bill was signed, 

Treasury is yet to issue regulations to bar foreign banks from doing 

business with designated Iranian entities from the U.S. financial 

market. If fully implemented, this would transform Treasury’s 

whispers into a loud bark and a bite. 

Successive administrations have shown little interest in sanctioning firms investing in Iranian’s energy sector. Last week’s sanctioning of an already sanctioned and largely insignificant 

Belarusian energy firm was embarrassing for the Obama administration. It was just a gesture. 

Our witnesses today suggest that financial sanctions, if made a 

cornerstone of a coordinated campaign, could tip the playing field. 

In North Korea’s case, one suggests they could have proven ‘‘decisive’’ had naive diplomats not demanded that they be dismantled. 

Lastly, I should note that our hearing comes as the Treasury Department is in transition. Under Secretary Stuart Levey left his 

post just days ago. He was innovative and aggressive. The administration insists his departure won’t affect policy. Let’s hope that is 

the case. 

I will now introduce our witnesses. 

Mr. Juan Zarate is a senior adviser at the Center for Strategic 

and International Studies. Mr. Zarate previously served as Deputy 

Assistant to the President and Deputy National Security Adviser 

for Combating Terrorism from 2005 to 2009. Prior to that, Juan 

served as the first Assistant Secretary for Terrorist Financing and 

Financial Crimes. He is actually from my county, Orange County, 

California. 

I am going to mention the ranking member after I go through 

the witnesses and then go to you for your opening statement, if 

that is all right. 

Mr. SHERMAN. Very good. 

Mr. ROYCE. Dr. David Asher is a non-resident senior fellow at 

the Center for a New American Security. Previously, Dr. Asher 

served as a Senior Asia Adviser at the State Department and was 

the Coordinator for the North Korea Working Group that attacked 

3

Kim Jong Il’s illicit activities and finances. He is a coauthor of a 

new report, ‘‘Pressure,’’ in which he documents those efforts. 

Professor Orde Kittrie is professor of law at Arizona State University’s Sandra Day O’Connor College of Law. He focuses on legal 

and policy issues relating to the proliferation of weapons of mass 

destruction. Prior to academia, Mr. Kittrie served for 11 years at 

the State Department as an attorney. 

I would like to turn now to our ranking member, Mr. Brad Sherman from California, for his opening statement; and then we will 

go to Mr. Zarate, Dr. Asher, and Mr. Kittrie, in that order, for their 

statements. 

Mr. Sherman. 

[The prepared statement of Mr. Royce follows:]

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Mr. SHERMAN. American national security depends upon our nonproliferation efforts, particularly against Iran. The issue is raised, 

can sanctions work? The answer is, obviously, of course, definitely, 

but only if you are willing to make our international businesses 

and trading partners angry. We have been absolutely unwilling to 

do that to any degree whatsoever, and our sanctions program has 

manifestly failed to slow the times centrifuges. 

Let me give an extreme example that demonstrates what I am 

saying. Imagine if the United States had a rule that you could not 

trade with the United States, not one paperclip, if you conducted 

any trade with Iran—a single paperclip, perhaps excluding medicine and food. The result would be an immediate shutdown of the 

Iranian economy, as it couldn’t get spare parts for oil field equipment, elevators, et cetera. Iran would have to discontinue its program within weeks. 

And, of course, this would make all of our trading partners 

angry, not the least of which would be the Chinese. We would see 

our ports locked to their exports until such time as they bend to 

our nonproliferation strategy, which I think they would do within 

hours. 

Wall Street is simply too powerful, the business community is too 

powerful, the State Department is too deferential for us to do anything close to what I am talking about. So, instead, we have a policy of sanctions to the full extent that can be implemented without 

making anybody upset, except the Iranians. And within that range 

we have at least been able to annoy the North Koreans and the 

Iranians with our very limited efforts. 

Financial measures play an important role in applying this level 

of pressure, and financial institutions seem particularly concerned 

about their reputations and susceptible to things that pose 

reputational risks. You can demonstrate tactical results. A bank 

quits doing business for Iran, for example. But what does that 

mean? That just means they have got to go to another bank. Iran 

is not going to abandon its nuclear program just because they have 

to go to the bank with the high ATM fees. 


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Big Western banks do tend to be wary institutions. They respond 

to pressure, to whisper campaigns. Stuart Levey did an outstanding job within the constraint that he couldn’t make anybody 

angry. He accomplished all that could be. 

Financial institutions, in an effort to protect their reputation, 

often go well beyond letter of the law. At least initially the Bush 

administration designated Banco Delta Asia under the PATRIOT 

Act in September, 2005. The order only affected that one bank. Yet 

almost all reputable institutions stayed away from North Korea 

and its banking institutions, causing a cash crunch for the North 

Korean Government that led to a little bit of more reasonable negotiating from them for a while. 

We have to play financial hardball and will learn about that at 

these hearings. But we also have to impose trade as well as financial pressures. 

The fact that we are doing the exact opposite was illustrated a 

couple weeks ago when, on March 16th, the State Department sent 

notice to Congress saying that it was going to give a license to GE 

to repair the jet engines of supposedly civilian Iranian aircraft. 

Well, how civilian are these aircraft? We know that they are used 

to take weapons to Hezbollah. We know that they were used in intelligence operations involving Iranian dissidents and assassinations and assassination attempts. And we know that they were 

used, as shown on page 240, 241 of the 9/11 Commission Report, 

to ferry 9/11 highjackers in and out of Afghanistan prior to the 9/11 

incident. 

These are their civilian aircraft. We are going to license their repair. 

What we should have the guts to do is simply tell Iran, ground 

your airplanes until you ground your nuclear program. Unfortunately, while many of us, including, I believe, the chairman, the 

chairwoman of the full committee, the ranking member of this full 

committee, are urging the State Department to do just that, I suspect that the administration will bow to corporate pressure and license this, while at the same time telling the American people that 

we are using all the economic power of the United States to try to 

prevent the Iranians from developing a nuclear weapon. 

We can and should go way beyond CISADA. Last Congress, 

joined by our chairman, I introduced the Stop Iran’s Nuclear Weapons Program Act. That would, among other things, sanction those 

who would buy bonds from the Iranian Government. Recent news 

reports suggest that some $4.2 billion in bonds will soon be issued 

by an agency of that government, the Power Oil and Gas Company. 

I will be reintroducing that legislation next week, and I want to 

urge all our colleagues to cosponsor that legislation. 

Finally, I want to mention that some $33 billion was seized and 

frozen by Treasury because those assets were owned by Libya and 

the Qadhafi family. It is time that those assets be used to pay the 

costs of Operation Odyssey Dawn. That is an operation designed to 

protect the Libyan people. 

The fact that we have not even asked the Benghazi government—I don’t think we need to ask, but we haven’t even bothered 

to ask—for a clear declaration that those funds should be used to 

7

support our efforts shows a real lack of respect to the American 

taxpayers. 

I would point out that Libya produces more oil per capita than 

any country that you can find on the map without a magnifying 

glass. 

So there is still much to be done. I want to commend our Treasury Department for what they have been able to do under the political constraints they face, and I yield back. 

Mr. ROYCE. Thank you, Mr. Sherman. 

Mr. Zarate. 

STATEMENT OF MR. JUAN C. ZARATE, SENIOR ADVISER, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES 

(FORMER DEPUTY ASSISTANT TO THE PRESIDENT AND DEPUTY NATIONAL SECURITY ADVISOR FOR COMBATING TERRORISM, AND FORMER ASSISTANT SECRETARY FOR TERRORIST FINANCING AND FINANCIAL CRIMES, U.S. DEPARTMENT OF THE TREASURY) 

Mr. ZARATE. Thank you Chairman Royce, Ranking Member Sherman. It is an honor to be here with you today. Thank you for the 

invitation, always an honor to be with southern Californians. 

I submitted written testimony and ask that it be entered in the 

record, Mr. Chairman. 

Mr. Chairman, I was privileged to serve at the Treasury Department and the National Security Council after 9/11 with a team of 

remarkably dedicated public servants like Dr. David Asher sitting 

to my right, who are dedicated to deploying these innovative financial tools to promote and defend the national security of our Nation. 

David, in particular, was critical as the State Department’s point 

man in devising new ways of integrating law enforcement, financial, and diplomatic tracks to squeeze the regime in Pyongyang. 

Mr. Chairman, I would also like to thank you for your consistent 

support on these issues, especially as we deploy targeted financial 

sanctions against international scofflaws like Viktor Bout and his 

international business empire. 

Mr. Chairman, between diplomacy and war lies the realm of economic influence and financial power. Over the past decade, we 

have developed a new brand of financial suasion used to constrict 

the budgets and global reach of terrorist networks and to isolate 

and diminish the international financial and commercial access of 

rogue regimes like North Korea and Iran. This new paradigm 

leverages the integration of complementary financial and national 

security objectives to protect the integrity of the international financial system and isolate rogue financial activity. 

What makes this approach so powerful is that it relies more on 

the risk-based calculus of global financial and commercial institutions than the policy decisions of governments. This is why we have 

seen banks and insurance companies end their dealings with North 

Korea and Iran, even absent government decrees or U.N. sanctions. 

Enabling this new power is the suspect or illicit behavior of 

rogue actors themselves. With sensitivities embedded in the financial system to illicit financial behavior, such activities become the 

Achilles’ heel of rogue actors. This is why the Iranian RevoluVerDate 0ct 09 2002 15:53 May 05, 2011 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 F:\WORK\TNT\040611\65629 HFA PsN: SHIRL
8

tionary Guard forces growing control of the Iranian economy is a 

central vulnerability. 

This system of financial suasion relies on a virtuous cycle where 

rogue behavior is exposed or targeted by governments and shunned 

by the private sector, reinforcing financial isolation. This then puts 

a premium on government exposure of masked financial transactions. 

Importantly, this new paradigm has done away with the old orthodoxy that defines sanctions as being either unilateral or multilateral. This new brand of financial power is multilateral by nature. This explains why a domestic proposed administrative rule 

under Section 311 of the PATRIOT Act can lead to the global financial isolation of the North Korean regime. 

Financial suasion is now central to our national security approach. It can cut off funding for rogue regimes, heighten scrutiny 

of suspect international activity, amplify the financial pressure and 

political fissures within regimes and societies, and anchor the 

international isolation of the rogue regime and its leadership. 

These financial campaigns also alter the strategic environment, 

and so we need to be aware of the trends that could dull the sharp 

edge of this new power. 

Criminal and terrorist networks and sanction states will continue to need access to the international financial system. This will 

breed innovation in circumventing sanctions and the creation of 

shadow banking networks. We then need to continue to shine a 

light on those actors engaged in illicit and suspect conduct, especially the financial facilitators. 

Governments need to remain acutely aware of the reliance on the 

private sector and maintain focus on conduct-based sanctions that 

have direct relevance to the integrity of the financial system. It is 

critical as well that we tend to the economic and enforcement environment that makes this power possible. In the first instance, it requires maintaining and using the tools and authorities we already 

have in place, drawing the sharp distinction between legitimate 

and illegitimate financial activity. It also requires strengthening 

the United States as a central financial and commercial center to 

ensure that what the United States says and does has global impact. 

And we can’t remain static in our application of financial pressure against rogues. We need to integrate law enforcement and 

other tools to amplify the effects of these powers and launch new 

campaigns to address plutocracy and human rights to underscore 

the illegitimacy of rogue actors in the international financial arena. 

The recent steps taken to expose Hezbollah’s international drug 

trafficking and money laundering activity is a welcome strategic 

move. We may also need to think more creatively about positive finance incentives, both to reward the right behavior by the financial 

community and punish illicit financial actors. It is important as 

well as not to view these powers as a magic bullet for all our hard 

transnational problems. This power needs to be an enabler for our 

broader national security strategies. 

Finally, Congress plays an important role in this realm. Congress 

should hold the executive’s feet to the fire in implementing existing 

authorities to isolate rogue behavior. As it has done with CISADA, 

9

Congress can affect the international environment and pressure on 

foreign governments, the private sector nongovernmental organizations to ensure there is a clear dividing line between legitimate financial activity and activities that serve to circumvent controls on 

illicit behavior. 

As the world faces challenges from rogue states’ networks and 

actors, there now exists a well-developed international system to 

use financial information, power, and suasion to isolate rogues 

from the legitimate financial system. If maintained properly and 

used aggressively, this new paradigm of smart financial power will 

remain an effective cornerstone of our national security approach, 

keeping both the financial system and our citizens safe. 

Thank you very much, and I look forward to your questions. 

[The prepared statement of Mr. Zarate follows:]

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Mr. DUNCAN [presiding]. Dr. Asher. 

STATEMENT OF DAVID ASHER, PH.D., NON-RESIDENT SENIOR 

FELLOW, CENTER FOR A NEW AMERICAN SECURITY 

(FORMER SENIOR ADVISER, EAST ASIAN AND PACIFIC AFFAIRS, AND COORDINATOR, NORTH KOREA WORKING 

GROUP, U.S. DEPARTMENT OF STATE) 

Mr. ASHER. Chairman Royce, Ranking Member Sherman, and 

members of the committee, thank you very much for the opportunity to testify here today. 

I had the great pleasure, as a colleague and counterpart of Juan 

Zarate during the Bush administration, to go to work on the North 

Korea problem set in particular but also to help develop the use of 

finance as a fulcrum element in applying nonkinetic pressure 

against some of our most difficult adversaries and most defiant regimes and networks. 

Recently, I had the pleasure of being a coauthor of this report 

from the Center for New American Security called Pressure, which 

reviews the history not only of the Bush administration’s North 

Korea Illicit Activities Initiative but also the Clinton administration’s path-breaking initiative to put financial pressure on 

Slobodan Milosevic, something which I encourage people to pay attention to. 

And with your permission, sirs, I would like to submit for the 

record at least the text as well as my written statement today. I 

would like to highlight five points briefly from this report. 

The first is essentially covering what Juan just mentioned. In the 

last decade, the Treasury Department has pioneered a new era of 

financial operations other than war and created what I would say 

is a revolution in financial affairs equivalent to the revolution in 

military affairs engendered by the use of precision-guided munitions and sort of smart warfare capabilities. 

We have the ability today, given the interconnectivity of the global financial system to apply nonkinetic pressure coercively against 

nations by combining economic sanctions, precision-guided financial 

measures using Treasury authorities and, really importantly, law 

enforcement, in my mind, in a way that you can essentially intimidate, deter, deny, coerce, and I think even defeat, in some cases, 

adversaries who may otherwise be difficult to have any effect on. 

And I think on the Iran problems set we would have to look at nonkinetic ways and means as the primary. 

The effectiveness, of course, of economic statecraft, a second 

point, really depends on the clarity of the desired end state. That 

is why, Ranking Member Sherman, I totally understand your point. 

I mean, the administration has to decide what it wants to achieve 

and what it is willing to do to achieve it. 

Because the stakes on the Iran problem set are so incredibly high 

they go well beyond just Iran’s nuclear threat, which is considerable looking ahead, but also the threat of proliferation throughout 

the Middle East triggered by the Iranian regime’s development, especially in the wake of this revolutionary sea change in the political environment in the entire Middle East. 

The third point, which I already sort of touched on, is I believe 

law enforcement remains the most neglected element of national 

33

power. One of the most important things we did together, working 

with the Department of Justice during the Bush administration, 

was launch global undercover investigations against the North Korean networks which were engaged in weapons proliferation and illicit procurement as well as the funding of the regime of Kim Jong 

Il. 

Law enforcement evidence is much more compelling than intelligence in convincing foreign governments to act; and by providing 

an evidentiary basis that is acceptable under national legal rules, 

as well as the rules of foreign partner countries, I think we can 

find we can freeze much more money than we can simply through 

Treasury designations or even the United Nations sanctions. 

But what is one very important point is that the financial actors 

that are complicit within the world of weapons proliferation, for example, have to be held accountable. The Department of Justice apparently has investigated maybe as many as a dozen banks for 

complicity and falsifying wire transfers on behalf of the Iranian regime, billions and billions of dollars. None of those bankers has 

been essentially taken away in handcuffs or with his head on a 

stick, in effect, as a criminal. Instead, they have been given fines. 

I don’t believe that policy is a sound policy in the long haul. 

The fourth is the economic course of diplomacy has a very important role within the military context, and I think that these threat 

finance cells within Afghanistan and within Iraq are playing an important role and continue to play an important role within the military complex. It is not just a shaping mechanism. Denying the 

means of sustainment to our adversaries has been a fundamental 

principle of warfare since time immemorial. After all, Marcus 

Tullius Cicero wrote, I think in 44 B.C., that endless money forms 

the sinews of war; and its insight remains very significant today. 

We can be doing a much better job I believe going after, for example, the financing of the Taliban, but the problem is we would 

have to look at Pakistan, and this is the problem set we are going 

to have to face. 

Finally, the power of economic and financial coercive diplomacy 

which we found in reviewing the history in this report can be underestimated. Had we known how successful our sanctions had 

been against Saddam Hussein there would never have been a need 

to invade that country. Not underestimating ourselves and having 

an accurate measure of the actual effects of our policies is critical. 

On that note, I turn over to you. Thank you, sir. 

[The prepared statement of Mr. Asher follows:]

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Mr. DUNCAN. Thank you. 

Professor Kittrie is recognized for 5 minutes. 

STATEMENT OF PROFESSOR ORDE F. KITTRIE, SANDRA DAY 

O’CONNOR COLLEGE OF LAW, ARIZONA STATE UNIVERSITY 

Mr. KITTRIE. Thank you, Mr. Duncan, Ranking Member Sherman. Thank you for the invitation. 

It is a pleasure to be here today. Since you have such great experts alongside me on North Korea and terrorism finance in David 

Asher and Juan Zarate, who literally have those topics covered 

from A to Z, and I primarily follow Iran issues, I will focus my remarks on the application of sanctions to Iran. 

U.S. Government officials have stated that the current sanctions 

on Iran are designed to both coerce and constrain Iran. How is the 

international community, led by the U.S., doing in achieving those 

goals? 

With regard to coercion, while sanctions on Iran have undoubtedly increased the costs to Iran of its illegal behavior, they have 


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clearly not raised the costs sufficiently to outweigh the benefits to 

the Iranian regime of proceeding with its nuclear program and 

state sponsorship of terrorism. We know that because Iran is clearly still choosing to proceed with both. 

The bottom line with regard to the efforts to constrain Iran is 

that, while Iran’s capacity to pursue its illicit behavior is undoubtedly being hindered, it is clearly still making progress, albeit somewhat more slowly, toward its illicit goals. 

What more needs to be done if we are to tip the balance and succeed in both coercing Iran and halting its capacity to conduct illicit 

activities? I have detailed in my written testimony several ideas for 

tipping that balance. The following are some highlights, which I 

would be happy to discuss in more detail during Q&A. 

In light of the hearing’s title, I will start with some financial 

measures. 

Number one, sanctioning the Central Bank of Iran. In light of 

the key role played by the Central Bank of Iran in financing Iran’s 

illicit state sponsorship of terrorism and illicit proliferation activities, the imposition of sanctions on the Central Bank, ideally in 

conjunction with key allies, is looking like an increasingly smart 

option. 

Number two, curtail Iran’s ability to issue bonds. With most 

major international banks and energy companies having stopped 

doing business with Iran, it is harder for Iran to attract the investment it needs to develop its energy sector. In response, as Ranking 

Minority Member Sherman mentioned, Iran recently announced 

the issuance of billions of dollars in bonds to support development 

of its South Pars natural gas field. 

The Stop Iran’s Nuclear Weapons Program Act, H.R. 6296, which 

was introduced in the last Congress by the chair and ranking member of this subcommittee, would address this by making sanctionable the buying or facilitating of Iranian bonds. I am glad to hear 

that excellent bill is going to be reintroduced soon, and I hope it 

gains the widespread support it deserves. 

Number three, probably the most important steps to be taken to 

ratchet up the pressure on Iran involve China. Only some of the 

steps involve financial sanctions, but I will mention them all because they are so important. 

China is reportedly failing to comply with the several U.N. Security Council resolutions which prohibit the transfer to Iran of proliferation-sensitive equipment and materials. 

Robert Einhorn, the State Department’s Special Advisor for Nonproliferation and Arms Control, last month stated that, ‘‘We continue to have concerns about the transfer of proliferation-sensitive 

equipment and materials to Iran by Chinese companies.’’

Such transactions are crucially important to the Iranian nuclear 

program, which reportedly is still dependent on the import of highstrength maraging steel, vacuum pumps, and other critical items. 

In light of the continued contributions by some Chinese companies to Iran’s proliferation activities, it may be wise to sanction 

those companies, for example, under the Iran, Syria, North Korea 

Nonproliferation Act and/or Executive Order 13382. 

41

It may also be worth considering a more systemic response, such 

as assessing whether China meets the criteria set forth in CISADA 

for designation as a destination of diversion concern. 

Chinese banks are also reportedly involved in violating sanctions 

on Iran, including by facilitating the provision to Iran of restricted 

technology and materials. 

A failure to take decisive action in response to Chinese violations 

and backfilling provides Iran with an important loophole in the 

sanctions regime. It also risks undercutting the more helpful compliance records of other companies and countries. 

A fourth and final idea I would highlight involves hindering 

Iran’s ability to benefit from crude oil sales. Doing to Iran’s crude 

oil exports what CISADA did to Iran’s refined petroleum imports 

could have an enormous impact on Iran. Crude oil exports are the 

lifeblood of the Iranian regime, reportedly accounting for 80 percent of Iran’s export earnings and a quarter of its GDP. 

In light of the current worldwide price of crude, I don’t see much 

support out there for a blanket sanctioning of all companies that 

are involved with Iran’s crude oil exports. However, there are 

measures short of such blanket sanctions that might be able to 

hinder the Iranian regime’s ability to benefit from its crude oil 

sales without depriving the world market of so much Iranian crude. 

These measures include Treasury publicly identifying IRGC subsidiaries which are involved in Iran’s crude oil export chain and enactment of the provision in H.R. 6296, introduced by the chair and 

ranking member that would sanction entities that pay in advance 

for oil deliveries or sign long-term contracts to purchase oil and gas 

from Iran. If members of the international community have to buy 

Iranian crude oil and natural gas, they should at least do so on a 

cash basis, without long-term commitment, lest they provide the 

Iranian Government with a financial lifeline it doesn’t deserve. 

There is plenty of work to be done if we are to tip the balance 

and succeed in our efforts to peacefully coerce and constrain the 

Iranian regime and achieve a halt to its illicit nuclear weapons program and support for terrorism. 

Thank you. 

[The prepared statement of Mr. Kittrie follows:]

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Mr. DUNCAN. Thank you, gentlemen, for a very timely testimony 

today. 

And Mr. Zarate—have I pronounced that correctly? I wasn’t here 

during the opening of that—you have written that China, Malaysia, Russia, Qatar, and Venezuela may serve as potential alternate 

banking outlets that would be willing to file U.S. pressure for economic or political reasons. And I know that was a few years ago, 

but the question I have for you is, have you changed your view, 

and if you could elaborate on your perspective there. 

Mr. ZARATE. I have not. I think my diagnosis is that you have 

very real potential of the creation of alternate banking networks, 

what I call shadow banking networks or alliance of financial 

rogues, that are intended to circumvent existing legitimate financial controls on rogue behavior. And so could you very well have—

and we have seen in the past—a merger of those rogues who are 

outside the legitimate financial system beginning to cooperate to 

provide each other the financial facilities to not only trade but then 

to reenter the financial system in a layered way, that is, to hide 

their activities but ultimately to gain access to the international financial system. That I think is a fundamental challenge to this 

very power that we developed. 

And as Professor Kittrie mentioned, a major dimension of that is 

the challenge of China, which is a major economy now, the secondlargest economy the world, which has a thriving banking sector 

and which is playing both sides of the fence in many ways, both 

wanting to be a legitimate financial power and wanting to play by 

the rules but also then facilitating activity that skates the line in 

terms of its international obligations. It is not just with respect to 

Iran but it is also North Korea, with some of the mining contracts 

and deals that have been made recently. 

And so I think this is a major concern, and I think we need to 

not only shine the light on the individual entities that exist that 

are providing the services but also the regimes that provide the legitimacy for that kind of activity. That is why I think countries like 

Venezuela deserve greater scrutiny. 

Mr. DUNCAN. As a follow-up, other than the countries mentioned, 

would you identify any other countries that may act in that same 

capacity? 

Mr. ZARATE. Well, the first thing I would do in looking at the 

strategy is look at where there are legitimate alternate banking 

centers around the world and where are there potential outlets or 

safety valves for illegitimate financial actors who are trying to 

avoid the scrutiny in New York or London or Frankfort but may 

find financial institutions in places like Kuala Lumpur, Beijing, or 

in other capitals. So the first thing I would do in this context is 

map the world in terms of where there are outlets. And then I 

would start to look at where the particular institutions are being 

used or misused for purposes of illicit financial behavior. 

We have seen some very good actions by the Treasury Department, for example, with joint ventures between Iran and Venezuela. I think that is helpful. 

So I would continue to look for those points in the system that 

are the manifestations of that vulnerability, and I would shine a 

light on it. And you can do it in a variety of ways. As David menVerDate 0ct 09 2002 15:53 May 05, 2011 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 F:\WORK\TNT\040611\65629 HFA PsN: SHIRL
54

tioned, you can use not only Treasury tools but State Department 

tools, law enforcement tools. And there is a real sort of all-of-government approach that can be applied to this problem. 

Mr. DUNCAN. I thank you for that. 

The chair will now recognize the ranking member, Mr. Sherman, 

for 5 minutes. 

Mr. SHERMAN. Thank you. 

For the record, I mentioned the importance of this proposed license to GE to repair the supposedly civilian aircraft. That would 

be bad enough. It certainly undercuts our argument that others 

should sanction Iran. But I should point out that four of the planes 

that will be the subject of this inspection and possible repair are 

owned by Mahan Air, which has already been designated by the 

U.S. Department of Commerce as a company of proliferation concern. It has already been designated similarly by the U.K. Government, and most in the field view it as an IRGC front company. 

So if American companies can make a buck providing jet aircraft 

engine repair to an entity so deeply involved in the terrorist activities and proliferation activities of Iran, then it makes a mockery of 

everything we are discussing here today. 

What I would like each of the witnesses to do is to submit by Friday, if at all possible, a list in as close to statutory language as possible of everything that should be added to the Stop Iran’s Nuclear 

Weapons Program Act. Include mandatory designations of certain 

entities in Iran instead of leaving it to the administration to designate this or that bank or this or that company or this or that airline. Let’s put them in by name. 

I think you know me well enough to know that you should not 

be shy in your draftsmanship, and I look forward to getting your 

comments, and hopefully this will just add to the enthusiasm of our 

cosponsors. 

One thing I want to focus on here are those sanctions that have 

an immediate affect. You know, the original idea of the Iran Sanctions Act, once known as the Iran-Libya Sanctions Act, was to 

deter investment in oil fields. Well, that affects revenue maybe a 

decade later, maybe a little less; and then the lack of revenue begins to pinch when you burn through your currency reserves. That 

is a long time. 

What acts much more quickly is when Iran cannot get replacement parts for every elevator, for every oil pump, for every aircraft, 

et cetera. 

I don’t know which of the witnesses want to comment, but what 

can we do to have an immediate effect on whether things in Iran 

work or fail to work? 

Mr. KITTRIE. Thanks, and thank you for the invitation to submit. 

My own sense is that with regard to Iran the two things that can 

be done most quickly would be, one, to respond vigorously to Chinese violations and backfilling, as I mentioned. Iran still needs to 

purchase parts——

Mr. SHERMAN. Now, what would you tell the Chinese? You are 

going to be sending them a really strong letter or would we have 

to, say, find a day or a week when this or that boat filled with tennis shoes couldn’t be inspected or unloaded in the L.A. Harbor. 

55

What do you do to China, other than point your finger and look 

stern? 

Mr. KITTRIE. I think probably the first thing to do would be to 

consider sanctioning those Chinese companies, for example, under 

the Iran, Syria, North Korea Nonproliferation Act or Executive 

Order 13382, that are involved in this activity. 

Mr. SHERMAN. That would be a good first step. Although it is 

easy for companies to come up with aliases, even easier if their 

host governments cooperate. So that might work, depending upon 

how agile the company is. 

Mr. KITTRIE. Well, it has been reported that at least some of the 

transfers to Iran may be taking place without the knowledge of the 

Chinese Government and are the result of a kind of lax oversight 

and weak enforcement. To the degree that that is true, it may help 

to encourage the Chinese to crack down. For instance, as I mentioned earlier it may be worth considering a more systemic response, such as assessing whether China meets the criteria set 

forth in CISADA for designation as a destination of diversion concern. 

It has been reported that it has not just been parts and components manufactured in China that have ended up in Iran, but also 

some of these parts and components apparently originate with European companies who are duped into selling it to Chinese companies that are fronting for Iranian smugglers. To the degree that 

that may be happening also—and I have no information on that—

to the degree that that may be happening also with U.S. origin 

parts and components, that would certainly bring China—or might 

bring China within the criteria for designation as a destination of 

diversion concern. 

Mr. SHERMAN. Or maybe that should be specified by statute, 

which is more likely to occur than a State Department designation. 

I look forward to you including that on your list, even if you list 

it as nonrecommended. 

Mr. Zarate. 

Mr. ZARATE. Ranking Member Sherman, I would take the approach of picking targets and actions that have a strategic impact 

and a ripple affect, as opposed to doing things, designations, other 

activities that appear to be more ‘‘Whac-A-Mole’’ as you described 

with companies, individuals renaming themselves. 

So I would recommend three categories of activities. 

One, I think a Section 311 designation of the Central Bank of 

Iran, something I have been calling for a long time, I think that 

would have a dramatic ripple affect in terms of Iran’s ability to finance its activities. 

Second, I would pick a Chinese bank that is of grave concern and 

not only use it as a prompt for diplomatic discussions with the Chinese but hold the Sword of Damocles of some sort of designation 

or action against that Chinese bank. 

Mr. SHERMAN. You want to pick one? 

Mr. ZARATE. I am not in a position——

Mr. SHERMAN. I look forward to talking to you. 

Mr. ZARATE [continuing]. To know all the ins and outs. But I 

would say a good place to start, sir, is the March 10th, 2011, letter 

from the senators concerned with this issue to the Secretary of 

56

State which lays out a number of companies and banks of growing 

concerns. 

Mr. SHERMAN. I would say if we want to actually do something 

we have got to pick one in Congress, and we have got to decide 

what sanctions would be applied and make them mandatory, with 

no waivers. 

Mr. ZARATE. The one thing I would recommend, Congressman, is 

coordination with the administration. Because I think, again, this 

cannot be—in all seriousness, this cannot be a one-off action. It has 

to be part of an ongoing campaign. 

Mr. SHERMAN. Did I mention this is the administration that 

wants to take affirmative action to license the repair of the aircraft, 

the very aircraft that were used to ferry the 9/11 highjackers in 

and out of Afghanistan? 

Mr. ZARATE. Congressman, I don’t disagree with you and sort of 

subscribe to your view of that decision as being a mistake, but I 

would say that a piece of legislation that has a singular action in 

it or a set of actions that doesn’t have a commitment by the administration to make it part of a strategy and a pressure strategy that 

is going to be part of the leverage change to the decision making 

in Tehran——

Mr. SHERMAN. Sir, if we leave the decision making to this or the 

last administration, we will see Iran have a nuclear and then a 

thermonuclear device. There is no doubt about that. 

Mr. ZARATE. Well, I agree with you, sir. There is an important 

role, and I mentioned in my testimony, for Congress to not only 

hold the executive’s feet to the fire but also to push particular actions. But, again, having one-off, Whack-A-Mole actions is not the 

right approach. I think having strategic steps of the kind you mentioned and the kind that we are talking about here is really——

Mr. SHERMAN. Do any harm to whack a few moles while you are 

taking the strategic steps? And I see no reason to have a short bill 

when they will print a long bill for me for the same price. 

Mr. Asher. 

Ms. ASHER. Thank you very much, Congressman Sherman. 

I would add a focus on the potential sources of nuclear weapons. 

Because what is missing from our picture right now is an understanding, based on our own experience and personal experience, is 

that the Government of North Korea, for example, blasted through 

every redline we ever delivered in the Six-Party Talks which I participated in and helped start as well as was involved in the pressure. 

They really just—it was very, very difficult to stop them. They 

are sanctioned under the United Nations Security Council now. But 

I would sense that many entities that are sanctioned are still actually in business. They are operating under diplomatic cover, 

through the network of North Korean Embassies around the world 

and their commercial officers in the Embassies or their intelligence 

service. And there really needs to be a look at the potential connection of the dots between North Korea’s rapidly growing supply of 

apparently highly enriched uranium or at least certainly enriched 

uranium which could be highly enriched and Iran’s demand. 

I just feel like the North Korea problems that have been sort of 

put off to the side, but you can’t approach the Iran problem set as 

57

seriously as I know you do and I know Chairman Royce does without understanding North Korea is the most likely source of nuclear 

material and even weapons to the Iranian regime in the world. And 

the Iranians, the more they get financially squeezed and the more 

the North Korean’s economy erodes, supply and demand seems to 

set the price. I urge to you consider adding that to your legislation. 

Mr. SHERMAN. Can you be more specific on the legislation? I realize the chairman has already indulged me with way too much time. 

Ms. ASHER. Well, I think there should be serious review of the 

current sanctions and whether they actually have effectively crippled the companies which have been designated, to include Nom 

Chom Gong Corporation, ComEd, the missile company. Are these 

companies out of business or not? 

I mean, one simple thing I saw a reporter do was just start making phone calls looking up numbers in the phonebooks in different 

countries, and people were answering the phones. So, obviously, 

somebody must be in business to some degree. 

That is a problem, and that we may need to remedy perhaps 

through a further U.N. Security Council action or further unilateral U.S. action. 

Mr. SHERMAN. My bill to revoke MFN for China might be called 

for here, and I yield back. 

Ms. ASHER. I yield back. 

Mr. ROYCE [presiding]. Thank you, Mr. Sherman. 

Dr. David Asher, you call for relaunching the Illicit Activities Initiative. Last summer on a trip to South Korea, Secretary Clinton 

announced that the administration would take steps to tackle the 

illicit activity coming out of the North. Is there evidence of the type 

of coordinated campaign that you led in the past, the type of success we saw? Is there evidence of that? Because I haven’t seen any. 

Ms. ASHER. The ultimate evidence of the Illicit Activities Initiative was evidence. We developed tremendous undercover investigations through the Department of Justice with the State Department’s full support. 

And I sort of acted as a bit of an ambassador, opening doors for 

Department of Justice law enforcement officers globally, into 15 different countries, 5 global investigations. And at the end of the first 

term of the Bush administration—actually, at the beginning of the 

second term, I should say—it was decided essentially to remove 

that evidence from the judicial process. 

We had two of the largest Asian organized crime cases in United 

States history, involving the Gambino crime family at one end, Chinese triads at the other, and the North Korean Government sort 

of in the middle. It was quite spectacular stuff. And although there 

were people arrested in some pretty interesting operations in the 

United States and elsewhere, the hand of North Korea was never 

fully identified. 

Mr. ROYCE. You think that was for diplomatic reasons? 

Ms. ASHER. It was for diplomatic reasons, and I seriously objected to it. Because it wasn’t like the North Koreans didn’t know 

they were engaged in counterfeiting the U.S. dollar, cooperation 

with organized crime groups, including Chinese triads, and work 

on illicit proliferation, which we approached as a criminal activity 

as well. There was preparation to bring criminal charges against 

58

some of the proliferation networks down the road as well. So the 

question is, whatever happened to all that information? 

Mr. ROYCE. Right. 

Ms. ASHER. At the very least, I would encourage this administration to consider briefing the American people on what we learned 

and perhaps briefing the United Nation’s Security Council, probably in the context of reexamining whether they should be back on 

the terrorism list. 

I found the Cheonan incident, where the South Korean ship was 

sunk, vicious, savage, and absolutely inconsistent with a terroristtype approach. I think that would cause North Korea some concern 

if it were coupled with revelations of some of the law enforcement 

information or restarting of an active initiative which involved, in 

our case, 14 different government agencies and departments and 15 

government partners around the world. I can’t imagine that is 

going on right now. 

Mr. ROYCE. This takes me to an issue that we have long talked 

about in this committee. But you note that the Illicit Activities Initiative could have had a much broader impact to affect North Korea’s proliferation activities. And, as you said, ‘‘we never were given 

sufficient latitude to have a deeper and sustained counterproliferation impact, and on repeated occasions were waved off from taking 

actions that were well within our mandate and authorities.’’ You 

have laid out some of this, and I know a lot of it just from our engagement at the time. I remember how desperate the effort was to 

shut down what you were doing. What do you think drove that? 

Ms. ASHER. I think there was—I have discussed this with several 

senior colleagues before. Part of it appears to be a misperception 

at the highest levels in the administration as to what was actually 

going on. 

I recall a conversation I had with Secretary Powell at the very 

end of his time where he said, what do you mean? We are not 

doing this stuff? 

I think that sometimes there were discussions—and this is in 

some of these memoirs which are coming out—at the principals’ 

level during the Bush administration where they sort of agreed on 

something and then it sort of got—somehow it didn’t quite happen. 

I did co-chair a coordinating committee at the National Security 

Council in addition to being at State, and it was directly involved 

in this issue set. 

Mr. ROYCE. It was a coordinated campaign that somebody shut 

down. 

Ms. ASHER. We were essentially abbreviated, and then we were 

emasculated. And this was a problem. Because this was right when 

the North Korean Government was building illicitly a Syrian nuclear reactor. All sorts of very strange and extremely disturbing 

stuff was going on with Iran. We have heard about Burma in the 

press recently. 

Mr. ROYCE. And you had them dead to rights. I was in Macau. 

I have seen the phony Treasury notes that were counterfeited by 

the North Koreans, our Treasury notes. 

Ms. ASHER. Yeah. That was really a tool. The fact that they were 

engaged in illegal activities put them in their own trap. We 

thought it was almost essentially self-sanctioning. So all we had do, 

59

without using sanctions, which we felt we couldn’t get without the 

evidence coming out on nuclear proliferation, was just to start 

charging them for their own offenses, knowing that the leadership 

in North Korea itself was directly engaged in those activities. 

Mr. ROYCE. Right. 

Now, let me ask a question of Juan Zarate. You call in your testimony for deploying the 311 sanctions against Iran and its Central 

Bank. I talked about that in my opening statement. What is the 

holdup and does the fact that Section 311 sanctions were only just 

deployed after a 5-year hiatus reflect the difficulty of identifying 

targets, or is it the result of the restrictions that political considerations place on their use? 

Mr. ZARATE. I think there are three issues, Congressman Royce. 

I think, first, that was a tendency not to use 311 after Banco 

Delta Asia. There was a string of 311 actions that we used against 

bad banks in my tenure at the Treasury. And I think a tendency 

was shifted to use other tools, executive orders and other tools of 

financial suasion, which is fine, but there was less of an emphasis 

on the development of the use of 311. 

Second, you have a concern about using a financial tool of this 

magnitude against the central bank of a country, which has never 

been done before and would call into question how the mechanics 

of that would actually work. And I think there are ways of crafting 

a 311 regulation that would allow you to get around some of the 

sensitivities of targeting a central bank while getting at the illicit 

activity that the Central Bank of Iran is actually facilitating. 

Finally, I think there is a deeper policy question at play, which 

is how far are we willing to go to actually strangle the Iranian 

economy? Part of the challenge here has been a message and a policy decision that the efforts we would undertake publicly and diplomatically would be targeted at the regime itself. 

Mr. ROYCE. Yeah, but we targeted Iraq’s Central Bank under 

Saddam Hussein, so——

Mr. ZARATE. That is right. Again, this goes to the deep fundamental policy question. Will this be a maximalist pressure campaign that ultimately impacts the people in Iran or will we constrain ourselves to the effect we really don’t want to demonstrate 

we are going after the whole of Iranian society? And so I think that 

is at play as well in the context of the debate about 311. 

Mr. ROYCE. Mr. Zarate, I want to thank you and Dr. Asher and 

Mr. Kittrie and all of those who have been architects of a policy 

here that had great promise, great likelihood of success if fully deployed, in my opinion. 

I hope you will continue to work in this direction. Because I 

think it is the least confrontational way in order to engage and prevent the types of proliferation activities that we have seen, for example, in North Korea. If they can’t get the hard currency—we 

know from talking to detectors who worked in their military and 

their civilian government, if they can’t get the hard currency, it is 

very difficult for them to buy the gyroscopes on the black market 

that they need for their missile systems. It is very difficult for them 

to pay for the type of hardware that they need to go forward. 

So I want to thank you. We appreciate the time and expertise 

you brought to this; and when considering states like Iran and 

60

North Korea, the stakes for us, frankly, do not get any higher. So 

we appreciate your insights in how to tackle the challenges that 

these two states pose, and we look forward to pressing the Obama 

administration on many of the points that you made here today. 

This hearing is adjourned. 

[Whereupon, at 4 o’clock p.m., the subcommittee was adjourned.] 

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