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[Senate Hearing 107-501]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-501

                         REAUTHORIZATION OF THE
                      IRAN AND LIBYA SANCTIONS ACT

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   ON

      REAUTHORIZATION OF THE IRAN AND LIBYA SANCTIONS ACT OF 1996

                               __________

                             JUNE 28, 2001

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

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                            WASHINGTON : 2002

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut     PHIL GRAMM, Texas
JOHN F. KERRY, Massachusetts         RICHARD C. SHELBY, Alabama
TIM JOHNSON, South Dakota            ROBERT F. BENNETT, Utah
JACK REED, Rhode Island              WAYNE ALLARD, Colorado
CHARLES E. SCHUMER, New York         MICHAEL B. ENZI, Wyoming
EVAN BAYH, Indiana                   CHUCK HAGEL, Nebraska
JOHN EDWARDS, North Carolina         RICK SANTORUM, Pennsylvania
ZELL MILLER, Georgia                 JIM BUNNING, Kentucky
                                     MIKE CRAPO, Idaho
                                     DON NICKLES, Oklahoma

           Steven B. Harris, Staff Director and Chief Counsel

             Wayne A. Abernathy, Republican Staff Director

                  Martin J. Gruenberg, Senior Counsel

              Rohit Kumar, Republican Deputy Chief Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)

                            C O N T E N T S

                              ----------                              

                        THURSDAY, JUNE 28, 2001

                                                                   Page

Opening statement of Chairman Sarbanes...........................     1
    Prepared statement...........................................    40

Opening statements, comments, or prepared statements of:
    Senator Miller...............................................     2
    Senator Schumer..............................................     4
        Prepared statement.......................................    41
    Senator Hagel................................................    11
        Prepared statement.......................................    41
    Senator Carper...............................................    14
    Senator Corzine..............................................    15
    Senator Stabenow.............................................    17
    Senator Enzi.................................................    44
    Senator Bunning..............................................    45
    Senator Kennedy..............................................    46

                               WITNESSES

Gordon Smith, a U.S. Senator from the State of Oregon............     3
    Prepared statement...........................................    45
E. Anthony Wayne, Assistant Secretary for Economic and Business 
  Affairs, Accompanied by: Ambassador James Larocco, Deputy 
  Assistant Secretary for Near Eastern Affairs, U.S. Department 
  of State.......................................................     6
    Prepared statement...........................................    52
Stephanie Bernstein, Justice for Pan Am 103......................    20
    Prepared statement...........................................    53
Patrick Clawson, Director for Research, Washington Institute for 
  Near East Policy...............................................    24
    Prepared statement...........................................    56
Bradley Gordon, Legislative Director, American Israel Public 
  Affairs
  Committee......................................................    26
    Prepared statement...........................................    58
William Reinsch, President, National Foreign Trade Council.......    28
    Prepared statement...........................................    62
William F. Martin, Chairman, Washington Policy & Analysis........    31
    Prepared statement...........................................    65

              Additional Material Supplied for the Record

Prepared statement of Willard M. Berry, President, European-
  American
  Business Council...............................................    74

                                 (iii)

 
                        REAUTHORIZATION OF THE 
                      IRAN AND LIBYA SANCTIONS ACT

                              ----------                              

                        THURSDAY, JUNE 28, 2001

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:45 a.m., in room SD-538 of the 
Dirksen Senate Office Building, Senator Paul S. Sarbanes 
(Chairman of the Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. Let me call the Committee to order.
    The Banking, Housing, and Urban Affairs Committee meets 
this morning to hear testimony with respect to the reauthoriza-
tion of the Iran and Libya Sanctions Act, commonly known as 
ILSA. This Act, which was passed by Congress in 1996, expires 
on 
August 5 of this year, therefore, we face an immediate 
reauthorization question.
    I would like to note for the record that there is strong 
support in the Congress for the reauthorization. Seventy-seven 
Senators have cosponsored such legislation, led by Senators 
Schumer and Smith, who are to appear before us shortly. In the 
House of Representatives, the International Relations Committee 
on June 20, passed a 5 year reauthorization of ILSA, including 
in it a strengthening of the Libyan component. That came out of 
the Committee on a vote of 41 to 3.
    ILSA was enacted in 1996, in response to Iran's support for 
terrorism and its pursuit of weapons of mass destruction. 
Concerning Libya, ILSA was enacted to compel the regime in 
Tripoli to abide by all of the U.N. Security Council 
Resolutions concerning the bombing of the Pan Am 103 flight.
    ILSA requires the President to impose two out of a list of 
six sanctions against foreign firms that invest in the energy 
sectors of Iran and Libya, respectively. It should be noted 
that under the terms of ILSA, its application would end to 
Libya if the President of the United States determined that 
Libya had fulfilled all U.N. Security Council Resolutions 
relating to the bombing of Pan Am 103. For Iran, ILSA would 
terminate if Iran ceases its efforts to acquire weapons of mass 
destruction and is removed from the State Department's list of 
state sponsors of terrorism. ILSA does contain a Presidential 
waiver for U.S. national interest reasons or if the parent 
country of a violating firm agrees to impose economic sanctions 
on Iran.
    Let me just briefly turn to each country.
    The latest State Department report--``Patterns of Global 
Terrorism''--states, and I quote the State Department now:

          Iran remains the most active state sponsor of terrorism in 
        2000. Its Revolutionary Guard Corps and Ministry of 
        Intelligence and Security continue to be involved in the 
        planning and execution of terrorist acts and continue to 
        support a variety of groups that use terrorism to pursue their 
        goals.

    Iran is also stepping up its efforts to acquire weapons of 
mass destruction. The latest unclassified CIA report to 
Congress on worldwide acquisition of weapons of mass 
destruction notes:

          Iran remains one of the most active countries seeking to 
        acquire weapons of mass destruction and advanced chemical 
        weapons technology from abroad. In doing so, Tehran is 
        attempting to develop an indigenous capability to produce 
        various types of weapons--chemical, biological, and nuclear--
        and their delivery systems.

    As for Libya, it has fulfilled only one aspect of the U.N. 
Security Council Resolutions relating to the Pan Am 103 
bombing--handing over suspects for trial. It has not fulfilled 
the requirement to pay compensation for the families of the 
victims, to accept responsibility for the actions of its 
intelligence officers, and to fully renounce international 
terrorism.
    In fact, on April 19, President Bush stated, and I quote 
him:

          We have made it clear to the Libyans that sanctions will 
        remain until such time as they not only compensate for the 
        bombing of the aircraft, but also admit their guilt and express 
        remorse.

    Because Iran and Libya have clearly not fulfilled the 
requirements of the ILSA legislation, I think to terminate 
these sanctions would send the wrong message, and therefore, I 
support reauthorizing this legislation.
    Just last week, indictments were handed down by our Justice 
Department in the Khobar Towers bombing case, in which 19 of 
our airmen in Saudi Arabia were killed in 1996. Attorney 
General Ashcroft stated publicly at the time that Iranian 
officials, ``I am now quoting the Attorney General: Inspired, 
supported and supervised members of Saudi Hizballah, which 
carried out the attack.''
    We have delayed the hearing this morning, as I think 
everyone knows, because there were votes on the floor of the 
Senate. I hope that does not create any inconvenience.
    We have, I think, a very good panel of witnesses that we 
are going to be hearing from this morning. First, we are going 
to hear from the two original cosponsors of the legislation, 
our colleagues, Senators Schumer and Smith.
    Then we will go to a panel that will include two witnesses 
from the State Department. And then we will go to a second 
panel, which includes a number of people from the private 
sector that we are looking forward to hearing from.
    With that, I will turn to my colleagues for their 
statements.
    Senator Miller, do you have an opening statement?

                 COMMENT OF SENATOR ZELL MILLER

    Senator Miller. No, thank you, Mr. Chairman.
    Chairman Sarbanes. All right. Senator Smith, I think I saw 
you come in first, why do we not proceed in that order.

                 STATEMENT OF GORDON H. SMITH 
            A U.S. SENATOR FROM THE STATE OF OREGON

    Senator Smith. Thank you, Mr. Chairman.
    This bill truly may be one where, as our Nation pursues its 
national interests, we may be running up against our national 
values. And Senator Schumer and I are here to stand for the 
proposition that we must not surrender our national values.
    Mr. Chairman, I thank you for allowing me to testify before 
the Senate Banking Committee regarding the reauthorization of 
the Iran and Libya Sanctions Act, or ILSA. I am proud to be 
here with my colleague from New York, Senator Schumer, who has 
been a stalwart and outstanding advocate of ILSA and its 
reauthorization.
    Our legislation, as we are here before you today, has 76 
co-
sponsors and we expect more to sign on now that the legislation 
has been introduced. It is truly a bipartisan effort and we 
hope to have the reauthorization signed into law before the 
August 5 expiration date.
    Iran continues to support international terrorism and is 
developing weapons of mass destruction at an alarming rate. 
Iran is the leading state sponsor of international terrorism in 
the world.
    Iran not only finances Hizballah, Islamic Jihad, and Hamas, 
reportedly providing them $100 million a year, but also trains 
them and supplies them with munitions. Further, we now hear 
reports that Iran has moved on from proliferation to 
proliferator, with exports of fuel and missile guidance systems 
to export to other terrorist states.
    Mr. Chairman, it is not in my statement, but as I read the 
news, the rhetoric of the leaders of Iran, even of their 
moderates, they speak in terms of the extermination of Israel, 
of its elimination, removing it from the map, and that is 
something that we cannot take as anything but deadly serious.
    Also, Libya still refuses to abide by the United Nations 
Security Council Resolutions regarding the bombing of Pan Am 
103, which requires that Tripoli formally renounce terrorism, 
accept responsibility for the actions of its government 
officials, convicted of masterminding the bombing, provide 
information about the bombing and pay appropriate compensation 
to the families of the victims. Further, Libya is a prime 
suspect of many past terrorist operations.
    ILSA threatens the imposition of economic sanctions against 
foreign entities investing in Iran and Libya's energy sectors. 
It has been very effective. Of 55 major petroleum projects for 
which Iran has sought foreign investment in the last 5 years, 
only a half dozen or so have received any foreign investment, 
and none have been 
completed. Without such investment, Iran's oil production will 
con-
tinue to decline, as will its ability to pay for its expensive 
weapons 
programs.
    While I have never been a strong supporter of unilateral 
sanctions as an effective diplomatic weapon, I do believe that 
ILSA is an exception. ILSA works.
    We can and must continue to send a signal to those 
governments in the Middle East that sponsor terrorism that the 
U.S. Government will do all it can to work against their goals 
to prevent new holocausts and to stand by our allies, such as 
Israel.
    I hope that this Committee will swiftly and favorably 
report out this legislation and that it will pass quickly on 
the Senate floor. And I look forward to your questions.
    Chairman Sarbanes. Thank you very much, Senator Smith.
    Senator Schumer.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman. I want to thank 
you for holding this hearing and for granting Senator Smith and 
me the opportunity to open this hearing. And I want to thank 
Gordon Smith, who on every issue we have worked on is just a 
terrific partner to work with. And I thank him for his true 
leadership on this legislation.
    I know we are beginning late here today, so I will try to 
be brief.
    I think that is all right because everyone on this 
Committee is acquainted with what ILSA is all about, and 16 of 
the 20 Members of this Committee signed as original cosponsors. 
Senator Smith and I introduced the bill a few weeks ago with a 
total of 77 original cosponsors. So, let me just say a few 
words.
    There has been movement on the part of the Administration 
and some here in Congress to weaken ILSA by watering down its 
provisions. Many of these people would do away with ILSA 
altogether, but because of the enormous support in Congress for 
the 5 year reauthorization, their strategy is to reduce the 
extension of ILSA to 2 years and add new waiver provisions that 
would effectively kill the bill.
    I am here today to say that ILSA must be renewed fully 
intact for a 5 year term. Over the past 5 years, Iran and Libya 
have done nothing to show they would be welcomed into the 
community of nations and benefit from better relationships with 
the United States and our allies. Despite the election of the 
so-called moderate President Khatami in 1997, Iran remains the 
most active sponsor of terrorism and has been feverishly 
seeking to develop weapons of mass destruction, as Senator 
Smith has outlined.
    Just last week, a Federal grand jury found that Iranian 
government officials, quote, ``supported and directed'' the 
Hizballah terrorists who blew up the Khobar Towers in Saudi 
Arabia, killing 19 brave American servicemen. Iran proudly 
supports Hamas, whose most recent claim to fame was sending a 
suicide bomber into a crowded disco in Tel Aviv, killing 21 
young Israelis and injuring dozens more.
    These are not actions worthy of American concessions. I 
agree completely with Gordon Smith. This is an issue of 
morality. What would the world think when its greatest power 
relaxes sanctions on a nation, two nations, that have shown 
themselves to be so outside the family of nations, not simply 
engaged in a dispute, not simply trying two sides to an 
argument, but some of the most dastardly acts that we have 
seen?
    The bottom line is simple. If these nations are serious 
about entering the community of nations and seeing their 
economies benefit from global integration, they must change 
their behavior. The argument that we should lift sanctions in 
hopes that Iran and Libya might change their behavior is 
backward reasoning, backward logic, backward morality. And so, 
I would hope, Mr. Chairman, that we would continue ILSA.
    I just want to say a few words about sanctions policy in 
general.
    I think it is understandable that the Administration would 
want to review U.S. sanctions policy to make sure it is working 
effectively. But ILSA is about the best we have. It is highly 
flexible. It grants the President full waiver authority on a 
case-by-case basis. It contains a menu of sanctions, ranging 
from a slap on the wrist to more serious economic retaliation. 
And its sunset provisions are profoundly reasonable.
    If we are not going to maintain ILSA, then we are not going 
to maintain any sanctions policy at all. And I think there are 
a couple of reasons that we are the greatest country in the 
world. One is our economic might, but another is that Statue of 
Liberty that stands so proudly in the harbor of the city that I 
come from, New York. It is a beacon of freedom. It is a beacon 
of what is right.
    We are known as a country who tries to do the right thing. 
To simply cave in to economic pressure at this point in time, I 
think, would not only hurt our relationships in the Middle 
East. It would do some serious harm to the greatness of this 
country. And so, I urge that ILSA be reauthorized.
    Chairman Sarbanes. Thank you.
    We thank both of you for your very strong statements. I 
just have one sort of modification.
    Jefferson, right back at the beginning of the Republic said 
that--I am trying to paraphrase it now. I will get the actual 
quote and put it in the record--but that staying true to our 
national values actually served our national interest, that 
that was encompassed within the concept of national interest 
and therefore, we ought not to allow ourselves to fall into the 
habit of thinking that somehow, they are contradictory to one 
another. And I think it is important to think of it in this 
context. I have no questions.
    Senator Miller.
    Senator Miller. No questions, Mr. Chairman. Thank you and 
thank the witnesses.
    Chairman Sarbanes. Thank you all very much and thank you 
for the leadership you have taken on this issue.
    We will now turn to our panel with our two representatives 
from the State Department, Anthony Wayne, Assistant Secretary 
for Economic and Business Affairs and Ambassador James Larocco, 
who is the Deputy Assistant Secretary for Near East Affairs.
    Presumably, gentlemen, you have worked out between 
yourselves who is to go first.
    Mr. Wayne. Yes. Thank you, Mr. Chairman. I think I will, if 
it suits you, make an introductory statement and then we will 
both take questions.
    Chairman Sarbanes. I think it would be helpful if you 
pulled the microphone closer.
    Mr. Wayne. Sorry.
    Chairman Sarbanes. You have to really speak right into it 
in order to be heard.

       STATEMENT OF E. ANTHONY WAYNE, ASSISTANT SECRETARY
               FOR ECONOMIC AND BUSINESS AFFAIRS
           ACCOMPANIED BY AMBASSADOR JAMES A. LAROCCO
      DEPUTY ASSISTANT SECRETARY FOR NEAR EASTERN AFFAIRS
                    U.S. DEPARTMENT OF STATE

    Mr. Wayne. Mr. Chairman, if it meets with your approval, I 
would make a shortened introductory statement, submit a longer 
statement for the record, and then we would both be available 
to take your questions.
    Chairman Sarbanes. Fine. And let me say, because I want to 
put it in after the statements of Senators Schumer and Smith, I 
have a statement from Senator Kennedy, who was not able to be 
with us, but the statement and its attachments will be included 
in full in the record.
    Thank you.
    Mr. Wayne, please go ahead.
    Mr. Wayne. Thank you very much, Mr. Chairman. We are very 
pleased to have the opportunity to appear before this Committee 
today and to testify regarding S. 994, on the renewal of the 
Iran and Libya Sanctions Act.
    My name is Tony Wayne. I am the Assistant Secretary for 
Economic and Business Affairs at the State Department. And I am 
happy to be accompanied by Jim Larocco, who has just returned 
from being our Ambassador in Kuwait and is currently serving as 
the principal Deputy Assistant Secretary in our Near Eastern 
Affairs Bureau. He is actually the Acting Assistant Secretary 
today, as Bill Burns is with Secretary Powell in the Middle 
East.
    As you know, Mr. Chairman, the Administration supports the 
renewal of ILSA, in its original form, but for 2 years, rather 
than the 5 years proposed. We entirely share the concerns of 
Congress, the concerns that you mentioned and that your two 
colleagues mentioned, about the objectionable policies and 
behaviors of Iran and Libya. Opposing those behaviors and those 
policies and changing them is a top priority. We have 
repeatedly condemned Iran's pursuit of weapons of mass 
destruction and the missile delivery systems for them, and its 
support of terrorism, including support for those using 
violence to oppose peace in the Middle East. Although no 
Iranian individual was charged in the recent indictments 
related to the Khobar bombing, the investigation confirmed, as 
you noted, our concerns about Iranian support for terrorism and 
that those are well-founded.
    As for Libya, it has not yet complied with the relevant 
U.N. Security Council Resolutions and we are focused on 
securing Libya's compliance with those Security Council 
obligations, including the payment of appropriate compensation 
and acceptance of responsibility of Libyan officials in 
connection with the bombing of Pan Am Flight 103.
    The Administration's decision to support a 2 year renewal 
reflects no diminution in our concern about the objectionable 
behavior of Iran and Libya. Our concerns in these areas 
continue to be reflected in a wide variety of policies and 
actions--their designation as state-sponsors of terrorism, our 
continued efforts to bolster international cooperation to stop 
terrorist activities.
    We are also playing a leadership role in the multilateral, 
nonproliferation area, in such regimes as the Missile 
Technology Control Regime, the Nuclear Suppliers Group, the 
Australia Group, and the Wassenaar Agreement, where we work in 
close partnership with our European allies and other member 
governments, to restrict the ability of countries such as Iran 
and Libya to have access to the equipment, technology, and 
materials necessary to develop weapons of mass destruction and 
long-range missiles.
    Rather, our support for a 2 year term reflects this 
Administration's view that sanctions should be reviewed, 
thought about, and debated at frequent intervals. Sanctions, as 
you know, Mr. Chairman, are one set of tools that we have to 
pursue our national interests and our important national 
values. As we are working to counter such abhorrent practices 
as proliferation and terrorism, we need to build effective 
international cooperation. We need to regularly reevaluate our 
sanctions tools, assessing how well they are working, whether 
they should be altered or amended, whether they can be fine-
tuned, whether there are other instruments or approaches that 
should be applied, whether there are unintended effects and how 
to take those into account.
    And this process of reevaluation affords a further 
opportunity for all points of view to be heard as we look at 
how best to pursue our national values and objectives. In sum, 
we believe that regular reevaluation is essential to ensure 
that we are attacking critical problems in the most effective 
way.
    Questions about effectiveness, impact, cost, and relevance 
inevitably arise in connection with any sanctions regime. ILSA 
is no exception, particularly since its approach is indirect. 
It focuses on investment, in order to limit revenue, rather 
than focusing directly on actions by Iran and Libya to procure 
weapons of mass destruction or to support terrorism. It targets 
petroleum-sector investors--many of them from friendly 
countries whose cooperation we need in working toward 
nonproliferation and counterterrorism goals--rather than 
targeting parties who are engaged in inherently objectionable 
behavior.
    The Administration, Mr. Chairman, is embarking on an 
overall review of sanctions policy that will include examining 
the cost and effectiveness of our sanctions efforts--in 
general, and with respect to specific sanctions laws, such as 
ILSA.
    For its part, the State Department believes that economic 
sanctions laws should reflect several common sense principles. 
They should allow the President sufficient flexibility to 
modify or terminate sanctions as conditions change, or as he 
sees fit in balancing other important U.S. interests. They must 
be part of an integrated policy that considers other options 
and weighs the costs and benefits of economic sanctions for the 
range of U.S. interests. In general, sanctions should be 
directly targeted at objectionable behavior by foreign 
governments or entities that threaten our values or interests, 
and should minimize the unintended harmful conse-
quences. Sanctions that are indirectly targeted are likely to 
be 
less effective and need to be weighed with particular care for 
unintended effects. When sanctions are appropriate, it is far 
preferable that they be employed through a multilateral 
approach. We may, however, occasionally need to be prepared to 
act unilaterally when necessary to defend important U.S. values 
and interests. As we have said, in general, we believe that 
sanctions should be reviewed periodically and relatively 
frequently.
    Finally, I want to stress that, whenever possible, any 
decision to impose sanctions should be the product of 
collaboration and consultation between the Administration and 
Congress. Through a close dialogue, we can make sanctions more 
rational, more coherent, and more effective in support of U.S. 
foreign policy and national security interests.
    We are grateful for this opportunity to appear before you 
and we would be happy to respond to any of your questions.
    Thank you.
    Chairman Sarbanes. Thank you.
    Ambassador Larocco, did you want to add anything?
    Mr. Larocco. No, I have no additional remarks.
    Chairman Sarbanes. I am a little puzzled by your references 
to fine-tuning and flexibility, since the statute, as currently 
written and as proposed for extension, provides quite a broad 
waiver authority to the President, does it not?
    Mr. Wayne. It does, Senator.
    Chairman Sarbanes. I mean, the President can, by 
determining that it is important and that it is a national 
interest. It is not even a national security interest 
determination. He can waive the application of the sanctions. 
Is that right?
    Mr. Wayne. Correct.
    Chairman Sarbanes. What is the problem, then, with 
extending it for another 5 years since the President has that 
authority? Or let me put the question this way. If I accept 
your argument that you need frequent and periodic review, with 
which the Congress would involve itself, would it not be 
reasonable in that circum-
stance to tighten up the waiver authority very significantly if 
you are going to shorten the time period?
    In other words, suppose we did a 2 year time period, but 
eliminated the waiver authority? Then every 2 years, we would 
have a chance to look at this thing. Meanwhile, the sanctions 
would go into effect, so you get a shorter time period, but you 
do not then have the same latitude to waive the sanctions.
    Now, we have a longer time period, which we think serves 
some other important purposes, but you do have this waiver.
    What is your reaction to that?
    Mr. Wayne. I think, as you pointed out in your introductory 
statement just now, the waiver authority in this bill is broad. 
And as I tried to talk about, we think there are several 
different things that it is important to have in an approach to 
sanctions in general and in this bill.
    Chairman Sarbanes. Would you rather have a broad waiver 
authority and a 5 year period or a very narrow or no waiver 
authority at all and a 2 year period?
    Mr. Wayne. Mr. Chairman, what I think we very much favor is 
a 2 year period on this of the current bill without any 
changes. I do not think there is a downside in that. What we 
are very much proposing is that we all have the opportunity to 
come together in 2 years and again look at the set of issues.
    Chairman Sarbanes. Why would it not be an invitation to 
Gaddafi to wait out the period and not pay the compensation?
    Mr. Wayne. No, sir, I do not think it would be, because 
there is no sign at all that we would not renew ILSA again in 2 
years.
    Chairman Sarbanes. Well, I do not know. I mean, here we are 
trying to renew it and we thought the obvious thing to do would 
be to take it out for another 5 year term. And you are here 
telling us, no, just do it for 2 years. Then while you support 
the legislation, most of your statement has been spent sort of 
questioning the whole notion of sanctions.
    Mr. Wayne. I am sorry, sir, if I was not clear in that or 
if my statement conveyed a different impression than I intended 
to.
    What we are suggesting is that sanctions, an important tool 
in our foreign policy, need to be used carefully and as are 
other tools, need to be reviewed and discussed and debated on a 
frequent basis, and that as we have looked back, sir, over the 
past decade in the range of sanctions that have been used and 
that we have undertaken, that one of the lessons that we think 
we have drawn from that is that there should be a periodic and 
frequent review of them for all sanctions, not just ILSA. But 
in general, that this would be a good practice to have.
    Chairman Sarbanes. Of course, the legislation as written 
gives the President the opportunity to conduct that review at 
any time and with considerably flexible authority, then, to act 
upon it.
    Well, I want to put one other question to you and then I 
will yield to my colleagues. Is the Supreme Council for 
National Security the Iranian decisionmaking body for 
establishing major Iranian security policies?
    Mr. Larocco. That is my understanding. It is very clear 
that while President Khatami has the title of president, that 
the true authority in the country for many decisions remains in 
the hands of what we would consider to be the hard-line 
conservatives.
    Chairman Sarbanes. Is that exercised through the Supreme 
Council for National Security? That is the decisionmaking body 
for national security policies.
    Mr. Larocco. That is my understanding.
    Chairman Sarbanes. Now is President Khatami a member of the 
Supreme Council for National Security?
    Mr. Larocco. I would have to check that, sir. I do 
apologize. I have only been here for one week and I would have 
to look further into that.
    Chairman Sarbanes. Well, for the record, it is my 
understanding that he is a member of the council, as is the 
supreme religious leader, the Ayatollah Khamene'i, and the 
minister of intelligence and a number of others.
    So, if that is the case, clearly, the president is not out 
of the loop in these national security decisions. Would that be 
correct?
    Mr. Larocco. I was not suggesting that he is out of the 
loop, sir.
    Chairman Sarbanes. Senator Schumer.
    Senator Schumer. Thank you, Senator.
    I want to follow up on the last part of Senator Sarbanes' 
question. I would just like to know, you know, we had a time 
when we were trying to improve relations with concessions and 
nice talk and everything about that. I think there was more 
hope about Khatami a year or two ago than there is today.
    I think you have seen a hardening of opinion because people 
have seen nothing. And in fact, a large number of people I 
speak to think Khatami is nothing more--this is not everybody. 
But there is a group who think he is nothing more than a 
puppet, a way of saying, hey, look. We have this guy who is not 
as bad as the rest of us out there and he has no control over 
anything.
    When has this softening policy in whatever way ever 
produced results with Iran, and what results are they?
    Clearly, if we go to the Administration's recommendation, 
it is going to look like an olive branch, a softening. And the 
question is, when has softening worked in the past? Or why 
isn't it equally or even more plausible to say, if they get the 
feeling, being hard-line as they are, being as ideological as 
they are, thinking that they have the message from God, as they 
do, say, see, our tough nastiness is working. The west is 
weakening. And if we act even nastier, maybe they will even 
next time have a weaker bill.
    So just give me some logic as to why we should not be as 
strong as we have been when to me at least I have seen no 
change. It is not that Khatami is the new kid on the block any 
more. In fact, you can argue that things have gotten worse. 
Support for Hamas has gotten worse, the arrest of the 13 and 
conviction of the 10 Jewish citizens that, for all practical 
purposes seems as if it was done for their religion, their 
nuclear program, everything.
    Tell me where there has been some element. What makes the 
Administration decide to do this? Is it that there is some 
evidence in the past that when olive branches or little winks 
were extended, that it produced results? Is it an attempt to 
try it again even though it has not worked? Is there some 
information you have that we do not?
    Mr. Larocco. Senator, if I could first comment about the 
Iranian situation. I think it is important to set that 
framework.
    To begin with, I think we have all seen, and we had great 
hopes when the election of President Khatami took place, that 
there would be some changes in policy.
    But it has become very clear, even with his reelection now, 
that while there has been broad-based support for reform, and 
we are talking primarily because of demographics of the younger 
population. They enfranchise their voters at the age of 15. 
This support has not been translated into the kind of policies 
that we believe serve our interests or, in many respects, the 
interests of those same constituencies.
    We have seen in the short-term, even now, continued 
crackdown on dissidents and closing of newspapers, at the same 
time as we have stated in our patterns of global terrorism, it 
is very clear that there has been no diminution in terms of 
their support for terrorism, and their active support for 
terrorism, particularly directed at peace efforts. At the same 
time they continue dogged pursuit of weapons of mass 
destruction. So, I want to make that very clear.
    If we are taking a look at the aspirations of the people, 
we have to conclude that they are longer-term, but they are not 
short-term.
    And so, you are correct in the sense that the leadership of 
that country continues to take them in a direction that does 
not serve our interest.
    Senator Schumer. Give me the logic as to why a weakening--
it will be perceived as a weakening--of ILSA would change any 
of that. My guess is that if you talk to some of the young 
people, the dissidents, privately, they probably say, keep the 
heat on the Government as much as you could.
    Mr. Wayne. Senator, I guess I would say to that that we do 
not see a 2 year renewal versus a 5 year renewal as a 
weakening. It is the same law that we support renewing. We 
think it just makes sense to come together in 2 years and again 
have a discussion.
    Senator Schumer. We could do that anyway. We are open to 
discussion. I am. I am sure all of my colleagues are, any time 
of day. We could have a discussion any time we sit.
    We could write in the 5 year that 2 years from now, there 
shall be a little conclave and we shall discuss this and 
reevaluate.
    But clearly, it would be perceived as a weakening. Whether 
you intend it to be or not, you certainly would admit that some 
could make the plausible argument that it is a weakening. And 
there are a lot better ways in my judgment of indicating that 
we have to reevaluate based on, hopefully, some change in 
action, without saying, let this expire in 2 years.
    I still do not see the logic if, as Ambassador Larocco has 
honestly and forthrightly stated, we have not seen any change 
in policy.
    Mr. Wayne. Senator, we believe, one, no diminution in our 
concern, as Ambassador Larocco said. No change in our policy.
    In fact, just yesterday, you may have noted we announced 
some new steps taken under another law, the Iran 
Nonproliferation Act, to sanction companies for certain 
dealings with Iran.
    Senator Schumer. Do you not think that some would perceive 
it as such?
    Mr. Wayne. Certainly some might perceive it as such. But we 
are making very clear that that is not what it is. Our 
convictions remain as firm as ever, that we need to respond 
effectively to this objectionable behavior.
    And we just think that coming back in 2 years, we would 
have a good opportunity to see where we are and discuss it 
again and discuss the range of issues.
    Senator Schumer. Thank you, Mr. Chairman.
    Chairman Sarbanes. Senator Hagel.

                STATEMENT OF SENATOR CHUCK HAGEL

    Senator Hagel. Mr. Chairman, thank you. I apologize for 
being late. I have through my staff monitored this. This is a 
very important issue.
    I find myself much in the minority on this issue and 
certainly do not agree with my friend and colleague from New 
York on the issue. And I would first like to ask unanimous 
consent that a statement and a speech be allowed to be included 
in the record.
    Chairman Sarbanes. It will be so included.
    Senator Hagel. Thank you, Mr. Chairman.
    Mr. Chairman, I would like to offer a couple of thoughts 
and then a question within my timeframe.
    It is my opinion that a face-value policy, which I consider 
this policy to be--meaning that it is in face only. It is not 
enforceable, has not been enforced. We have not pulled the 
trigger on this. We have deferred the tough decisions--is not 
the right way to do this. And I say that because if the focus 
is on terrorism and proliferation and the interest of America 
in the Middle East, the interest of Israel, the interest of our 
friends and allies, the civilized world, then I find this 
legislation, this law that we are looking at renewing, a bit 
farcical.
    What are we accomplishing? Senator Schumer has asked some 
good questions. But I think the better questions are, what 
results has ILSA produced? What clout do we have? What can we 
do?
    Symbolism is important. This is an imperfect world. Surely 
there are forces within Iran that are moving in the right 
direction.
    It may take a generation. But I start with Israel's 
position here as well.
    Why is this in the best interest for this policy to 
arbitrarily, unilaterally, needlessly make enemies for Israel 
and the United States of this new generation of Iranians coming 
up, born after 1979, which is a large, large percentage of that 
population? And we are getting nothing for it.
    Has terrorism stopped? Has proliferation stopped?
    You might be able to enlighten us on that point. It seems 
to me that we as a great power should be far more imaginative 
here in finding a better way to do this than to just say, well, 
let us wait just five more years and see how the world looks.
    There are very little margins of error left in the world 
today. And if you break this down even further into information 
gathering, when we are shut out of a nation and trying to 
figure out what is going on in that country, how does that 
serve our interests, to be shut out? How does that serve our 
geopolitical, strategic, and economic interests, to be shut 
out? I do not see how that does.
    I do not think you make the Middle East more stable. I do 
not think you bring more security to Israel by this kind of 
policy, which, again, unless you can tell me otherwise, has not 
produced any results. The one time that I am aware of, the 
South Pars decision that President Clinton gave a waiver to 
Total, the rest of the issues we are studying, we are looking 
at.
    I am not aware of the fact that President Clinton pulled 
the trigger on any of these issues. And in fact, if he did, 
what would we get? We are alienating much of the Middle East. 
We are alienating our friends and our allies. And I guess more 
to the point, this is a multilateral effort.
    We do not combat the twin scourges of terrorism and 
proliferation unilaterally. It is impossible to do that.
    So, I think the far wiser course of action for the 
interests of this country and for Israel is to find a better 
way to do this. And surely, we are capable of doing that. We 
have a lot of smart people in Congress. We have a lot of smart 
people on the outside. I think the President has surrounded 
himself with some pretty smart people, starting with the two of 
you, and Secretary Powell. It seems to me that we can figure 
this out.
    I want to go on record, I suspect in an unequivocal way, my 
opposition to this. Again, I recognize that I may have two 
votes with me and I may be exaggerating one. Nonetheless, 
somebody has 
to give another point of view here and I am incapable of being 
that articulate, but I will try to continue to give another 
view on 
this issue.
    Now with the time I have, if I have any left, the yellow 
light is on. Maybe I will get a question in.
    Let us take the question that my good friend from New York 
asked. What results have there been? Give me an example, or as 
many as you can, of what ILSA has produced in the way of 
tangible evidence on how we have stopped terrorism and 
proliferation.
    Mr. Wayne. Thank you, Senator. Let me take a crack at that 
first. As I think was evident in a number of the statements, it 
is clear that Iran continues to support terrorism and it 
continues to pursue the weapons of mass destruction and their 
delivery systems. That speaks of itself. Those remain very, 
very serious problems.
    If you look at the effectiveness of ILSA, there are a 
number of different measures. And I know some of the other 
panelists will comment on this.
    If we look at oil production, Iran has continued to be able 
to meet or exceed its quota in OPEC.
    If we look at the price of oil and the money that is been 
received in that, I guess I would say another way, the price of 
oil globally has been a much more powerful determinant of how 
much money Iran takes in than probably any other factor.
    When oil prices were low at $10 a barrel, their income 
dropped. It is currently about $25 a barrel and their income 
has soared.
    We do believe that ILSA did have, and has had some 
deterrent effect with those seeking to invest in Iran. The 
exact weight of that is very hard to measure because Iran is 
not an easy place to do business, even for those who are 
willing to do business there.
    I even read in the Financial Times yesterday an article 
about current debates going on within Iran among different 
power centers about whether to accept certain foreign oil deals 
that have been put forward. There are just a lot of problems in 
doing business there. So to weigh out the effects of deterrents 
of ILSA and other factors is a hard thing to do and there can 
be different analyses of that.
    Using our dialogue about ILSA, we have regularly called our 

opposition to investment in Iran to the attention of others. 
When 
we have press reports of companies that are going in there we 
have regularly had a dialogue with the companies and with their 

governments on that, expressed our opposition, expressed why we 

oppose this.
    We have during this period, I think, deepened our 
cooperation with a number of our friends and allies in the 
nonproliferation area and in the counterterrorism area because 
they accept our goals and our objectives to change that 
objectionable behavior. And we have made a number of steps 
during the last 5 year period to improve those regimes.
    Chairman Sarbanes. Thank you.
    Senator Carper.

              COMMENTS OF SENATOR THOMAS R. CARPER

    Senator Carper. Thank you, Mr. Chairman. To our witnesses, 
I would like to start out by saying that I apologize for 
missing your statements. I have them and I will read them.
    I have run for State-wide office 11 times in Delaware and 
served in the Senate, the House, and as Governor. I have a real 
interest in the political system in our State and in politics 
and follow it rather closely in our country.
    I am also intrigued by the political changing scene in 
Israel and have been a student from afar and a visitor to the 
country from time to time.
    I am intrigued by what is going on politically in Iran and 
followed the recent elections with some interest, and the 
preceding elections with equal interest.
    My recollection is that voter turn-out this last time was 
down a bit, but those who seemed to be voting for reform were a 
greater percentage than had previously occurred.
    I hear what you are saying about Iran continuing to pursue 
the development of weapons of mass destruction and supporting 
terrorism, none of which we want or like.
    Having said that, I know that there are substantial numbers 
of people in Iran who want to change the status quo in their 
country. And you may have said this in your testimony, but I 
would just ask of you, what policy or policies do we pursue to 
strengthen the hand of those in Iran who genuinely seek 
reforms, who seek to lift the repression and to take a 
different path? What policy or policies can we take to 
strengthen their hand rather than to weaken it?
    Mr. Larocco. Thank you very much. I think I would like to 
start out by saying how much I appreciate your comments and 
note that Secretary Powell, when he appeared in his 
confirmation hearing, did note that Iran is indeed an important 
country in the region 
and to our interest, that it is undergoing profound change from 

within. It is very, very clear that the aspirations, 
particularly of 
the younger people, are for reform, political and democratic 
reform, and economic reform.
    What we have been doing consistently is to speak out in 
support of that reform and particularly for human rights, for 
freedom of expression, for all the freedoms that we cherish. We 
believe by doing that, they are getting a clear message. And 
this we believe is extremely important in broadcasting the 
messages to them.
    So that is what I would like to offer to you on that.
    But I think we need to be very clear on this: we believe 
that our influence is in fact quite limited. This is a true 
domestic reform effort. It is coming from within. It is 
grassroots. It is not coming from the top. It is coming from 
the bottom up. And so, our best influence is indeed to be 
consistent in what we say and to support all those reforms and 
further democratization, since we believe that this is a 
longer-term process, as you noted yourself.
    Senator Carper. Mr. Wayne, would you like to add anything 
to that?
    Mr. Wayne. I think I agree with Ambassador Larocco.
    Senator Carper. I had the privilege of meeting with several 
representatives of the Administration a couple of weeks ago to 
discuss this issue at some length. And they were calling for an 
extension of ILSA of 2 years rather than 5 years. And that 
would apply to both Iran and to Libya. Is that correct?
    [Mr. Wayne. Nods in the affirmative.]
    Senator Carper. Does it make any sense to consider treating 
the two separately, one the extension of the provisions of the 
legislation for 2 years and the other for 5 years? Does that 
make no sense at all? What are the problems with doing that? 
Two years for Iran, five for Libya.
    Mr. Wayne. Well, we would have to think about that, 
Senator. Our position has been, as you correctly put it, that 
we would favor a 2 year rollover of the law as it is.
    Senator Carper. Okay. Mr. Ambassador.
    Mr. Larocco. I think it is fair to say that our concerns 
related to Iran are far different than our concerns related to 
Libya and the situations are different. That is all I can say.
    Senator Carper. You say the concerns are different. Can you 
just elaborate on that a little bit?
    Mr. Larocco. Yes. Our concerns with Iran as we know are 
related to some of our most important national security 
interests when it comes to development of weapons of mass 
destruction and the development of the capability to deliver 
those weapons of mass destruction to some of our most important 
allies, including Israel, and our strategic interest in the 
energy field that could be threatened by that.
    At the same time, we have primarily a unilateral framework 
which we try to work in consultations with our friends and 
allies to prevent Iran from developing those weapons of mass 
destruction in particular and to try to curb the terrorism.
    In the case of Libya, we have a multilateral framework that 
has been agreed upon and that we adhere to strictly. And we 
believe to this point, while it has been very painful for the 
families and it has been much too slow, it is something that we 
and the international community has stuck with. It is a 
different situation. But that is all I wanted to point out from 
a policy point of view.
    Chairman Sarbanes. Senator Corzine.

               COMMENTS OF SENATOR JON S. CORZINE

    Senator Corzine. Thank you, Mr. Chairman, for holding this 
hearing. And I appreciate the folks who are testifying and 
their insights on this, I believe, truly important issue.
    I feel very strongly, both history and not only as it 
relates to Iran and Libya, but in other instances, that 
economic sanctions end up having influence.
    I also understand that we cannot let the perfect be the 
enemy of the good and therefore, I can identify with some of 
the things that the Senator from Nebraska talked about. But I 
believe that there is some influence that comes about by 
diminished economic activity that flows from sanctions.
    There has been profound changes, as you verbalized, within 
Iran. Haven't these sanctions had some relevance to making that 
a possibility? And is it not part and parcel of some of the 
elements of change that are occurring, knowing that everything 
has a balance sheet? There are pluses and minuses associated 
with all. But are we not moving in a better direction than we 
would otherwise be if we did not have these sanctions in place?
    I feel very strongly that we should keep them in place by 
my own understanding of those changes. But I would like to hear 
the reason that these have not been effective as was suggested 
by one of the Senators, relative to my own impression that they 
have had a meaningful impact.
    Mr. Wayne. Let me, if I could, Senator, take a first crack 
at that.
    First, it is important to remember that we have a whole 
series of different kinds of sanctions in place with Iran, and 
with Libya, also. In both cases, we have identified them as 
state supporters of terrorism for a long time, which in and of 
itself brings a number of sanctions with that.
    So, I think that we would fully and totally agree that 
sanctions are an important tool that we have. They have had an 
effect, all the way from the very symbolic effect of signaling 
that this is not acceptable behavior, to concrete effects in 
specific areas.
    Our nonproliferation sanctions and actions that have taken 
in the multilateral arrangements have clearly cut off the 
supply of technology and weapons and equipment, as have a 
number of the other sanctions.
    As I said in the case of ILSA, and you will hear, you will 
get several different measurements of the effectiveness of 
this, we do think that there has been a deterrent effect from 
ILSA to add to the questioning that companies have had when 
they have considered investing.
    Chairman Sarbanes. There are some countries, significant 
economic players, whose companies have not invested in Iran, 
who otherwise might have been expected to do so. Is that not 
the case?
    Mr. Wayne. That is the case. But in all cases, when you are 
talking about a hypothetical, it is a hard thing to measure.
    I guess that is what I would say. We do think, that there 
has been some deterrent effect. We know that we have had good 
conversations with other governments and people about the bad 
behavior, about why we believe that there should be no 
investment in Iran's petroleum industry. The exact weighing of 
that is a hard thing to do.
    Senator Corzine. Without ILSA, I can be clear that, from my 
own experience, the secondary implications of how one company 
deals with another would not be an issue that was addressed at 
all in those relationships and partnerships and joint ventures 
if this Act were not in place. And so it has to, in practical 
impact, have some flow-through to those relations.
    Mr. Wayne. Yes. But I think it is also fair to note that it 
also have effect with our friends and allies who consider this 
to be a unilateral imposition of our preferences on them.
    In the European Union, there is a European Union-wide rule 
that forbids any company in the European Union from complying 
with ILSA.
    So, there are other tensions that come up as we seek to 
implement this law, as we have been doing and will do if it is 
renewed.
    I do not know, Ambassador, if you want to add anything to 
that.
    [Mr. Larocco. Nods in the negative.]
    Senator Schumer. Senator Stabenow.

              COMMENTS OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman. I first want to 
apologize for coming into the Committee late. All four of my 
Committees have met this morning at the same time.

    [Laughter.]

    And so, I am seriously considering joining the discussion 
on cloning in order to be able to achieve my assignments.

    [Laughter.]

    I wanted to be sure to be here, though, to indicate my 
pleasure of being a cosponsor of this bill and the importance 
of the reauthorization of the Iran and Libya Sanctions Act.

    I would ask one question and I apologize if you have 
already addressed this issue this morning. But I would like to 
know your thoughts concerning lowering the threshold trigger 
for Libya to coincide more with the trigger for sanctions with 
Iran. If you could just speak for a moment regarding that, I 
would appreciate it.

    Mr. Wayne. Well, we favor a rollover of the bill without 
any changes in it. We have in the case of Libya and Iran, in 
both cases, since the bill has been in place for 5 years, there 
is an understanding of those limits and of the rules and 
regulations with our friends and allies.

    In the case of Libya, as Ambassador Larocco mentioned 
earlier, a great part of the effectiveness in dealing with 
Libya has been the fact that there have been U.N. Security 
Council Resolutions passed. And there has been an international 
and multilateral consensus that exists and still exists in 
urging Libya to do the right thing. There is a need to maintain 
and even bolster that pressure, that international consensus.

    We believe approving a renewal of the bill in its current 
form would be the most propitious for maintaining that 
international consensus.

    Senator Stabenow. Mr. Ambassador, would you want to add 
anything to that?

    [Mr. Larocco. Nods in the negative.]

    Senator Stabenow. Thank you, Mr. Chairman.

    Chairman Sarbanes. Thank you very much.

    Senator Hagel, did you have anything else?

    Senator Hagel. If I could take a minute or two, Mr. 
Chairman, I would like to follow up on a couple of the points 
that were made here. The response that you each have given to 
some of the questions here about the results--and I have yet to 
hear a tangible result of where you can point to that 
proliferation, terrorism was stopped, oil is still running 
rather well out of Iran. Show me something, rather than just 
some reference, to, well, these are difficult, tangible kinds 
of things to put on the record here.

    Intelligence, for example. Do you think we know more about 
Iran? Do you think we know enough about Iran? Do we know enough 
about what Senator Carper was talking about in regard to what 
is going on in Iran?

    Maybe there is no reform effort going on. I think there is. 
I think Senator Carper thinks there is. I think a number of 
people think there is.

    And with these sanctions and a continuation, how then do we 
reinforce that reform effort? How do we by symbolism that I 
have heard many times from the two of you gentlemen, how do we 
through symbolism or any gesture give these people any hope?
    What we do is continue to allow ourselves to be vilified--
and Israel--by these actions, and whose interest does that 
serve? Certainly, the mullahs, who are in charge.
    What no one is saying here, and we should be very clear 
about this, is that Mr. Khatami is an Islamic Thomas Jefferson. 
I do not think anybody believes that. I do not. I think I have 
a pretty clear understanding of the real world. I have lived in 
the real world.
    And so, it is not a matter of being weak-kneed about our 
foreign policy. But what I think we should focus on always in 
foreign policy is what works, what is effective.
    I am going to ask you each again, if you could give the 
Committee some tangible evidence of where ILSA has produced 
some real change. Has there been less oil pumped, for example, 
in Iran?
    Mr. Wayne. What I can say for sure is that they have 
continued to meet their OPEC production quota during this 
period of time.
    Now, I am not an oil expert. I think you will hear from 
some people who studied this on the next panel. Whether there 
are differences between what might have been a projected 
production and what the current production is, I am not expert 
to say.
    All I can really say is they have met their OPEC quotas 
during that period.
    Senator Hagel. Well, what does that mean? So, you are 
crediting ILSA for not allowing to go beyond meeting the OPEC 
projections?
    Mr. Wayne. I think the effect of not having additional 
investment, foreign investment, coming into their oil sector 
has meant that they have not exploited new areas and they have 
not maximized their production in existing areas. And I think 
ILSA has had some effect in that.
    The exact weight of ILSA versus the difficulty of doing 
business in Iran, of having Iran manage this complex buy-back 
procedures that they were doing----
    Senator Hagel. But the fact is that when President Clinton 
gave the waiver to Total, didn't that allow Total to put some 
investment into Iran?
    Mr. Wayne. It did.
    Senator Hagel. Why are we touting ILSA as being effective?
    Mr. Wayne. Well, I do know that none of the new projects, 
even those that have started, have yet come on stream in this. 
I believe even the one project, the South Pars project.
    Senator Hagel. You give ILSA credit for that, even though 
President Clinton gave the waiver, waived ILSA.
    Mr. Wayne. I believe the deterrent effect of ILSA has had 
an effect in that process.
    Senator Hagel. I do not understand how, but Mr. Ambassador, 
one of your people gave you a note. Maybe you have the answer.
    [Laughter.]
    Mr. Wayne. It was the one reminder that none of the 
projects have come on line.
    Senator Hagel. He works for you. Therefore, we do not have 
an answer.
    Mr. Larocco. If I could just add something, Senator.
    Senator Hagel. Yes.
    Mr. Larocco. Drawing from my own recent experience, having 
been Ambassador to Kuwait the last 4 years and having spoken 
with many businessmen who do business in Iraq, there are many 
factors. And it would be very difficult to single out anything.
    Frankly, one of the main reasons why there is not 
investment in Iran is because they simply have a totally 
ossified economic system that is not conducive to investment. 
They are not part of the WTO. They do not have a rule of law in 
commercial behavior that is recognized that is conducive to 
investment.
    That is a factor. I leave it to Tony and, as he said, that 
perhaps ILSA is a factor as well.
    But I think we need to keep in mind that it is going to be 
very difficult to measure any one factor in terms of why Iran 
does not have more investment than it has.
    Senator Hagel. All the more reason just to go another 5 
years blindly into the black hole of ILSA.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Well, we could continue for quite a 
while, but we have another panel and I am anxious to get to 
them, so I am going to close this out.
    I want to make just a couple of observations in doing so. 
One, the Jefferson quote that I was searching for at the outset 
of the hearing, which some will recall is: ``The interests of a 
Nation, when well understood, will be found to coincide with 
their moral duties.''
    I would like to make just two observations. You all may 
submit something in writing if you choose to.
    I think most observers would accept the proposition that 
there would have been more investment from abroad in Iran's oil 
industry without ILSA than there has been with ILSA.
    Now, it is difficult to quantify that. I know of very few 
people who would say that it has not had any impact, perhaps a 
substantial impact. You can point to certain countries where 
companies have not gone in, where they might otherwise have 
been expected to do so. And I think it acts as a general 
restraint. You do not quarrel with that, do you, Mr. Wayne?
    [Mr. Wayne. Nods in the negative.]
    Chairman Sarbanes. You shook your head. Why do you not say 
no so we can get it on the record?
    Mr. Wayne. No, Mr. Chairman.
    Chairman Sarbanes. The other point is, there is all this 
talk about reform in Iran, but I think there are a number of 
observers who perceive that reform as directed toward domestic 
issues and not toward international issues.
    In other words, at least thus far, there doesn't seem to be 
a reform that is addressed toward changing Iran's role in the 
Middle East, its spoiler role in the Middle East, changing its 
support 
for terrorism outside, shifting markedly on weapons of mass de-
struction. I do not see anything that reflects that. Has not 
the 
focus of this, ``reform'' movement, been primarily on internal 
domestic matters?
    Mr. Larocco. Mr. Chairman, that is absolutely correct. From 
what we have seen and observed, it is very clear that the 
reform that is taking place is primarily for domestic political 
rights and economic reform.
    However, many people, I think even in the region, interpret 
that as a move toward moderation. But to move to the next level 
and say that this would necessarily have an impact on foreign 
policy is something that would be very difficult to conclude, 
which is why, for example, Secretary Powell said that, despite 
our differences, we believe that we need not preclude greater 
interaction with the Iranians to talk over these issues.
    Chairman Sarbanes. Well, gentlemen, thank you very much. We 
appreciate your testimony.
    Mr. Wayne. Thank you, Mr. Chairman.
    Mr. Larocco. Thank you.
    Chairman Sarbanes. And now, we will move on to our 
concluding panel. If they would come forward and take their 
places at the table, we would appreciate that very much.
    Ms. Bernstein, I know that you had to adjust your schedule 
in order to be with us this morning and we very much appreciate 
that. And I know you may have to depart, depending upon how 
long this panel continues. So, I think we will lead off with 
you. Ms. Bernstein is here representing the Justice for Pan Am 
103 group.

              STATEMENT OF STEPHANIE L. BERNSTEIN

                     JUSTICE FOR PAN AM 103

    Ms. Bernstein. Thank you, Senator Sarbanes. It is 
particularly gratifying to be here today since you are one of 
my Senators and I thank you for your support, and for providing 
me with this opportunity to testify before the Banking 
Committee today.
    I am here to support the extension of the Iran and Libya 
Sanctions Act because my husband, Michael S. Bernstein, was one 
of 270 people, including, as you know, 189 U.S. citizens, 
murdered in the Lockerbie bombing. This savage crime was placed 
squarely at the feet of the Libyan government on January 31 of 
this year, when a high level Libyan intelligence operative was 
convicted of 270 counts of murder.
    My husband was a Federal employee. He was Assistant Deputy 
Director of the Office of Special Investigations at the 
Department of Justice. This office finds, denaturalizes, and 
deports those who participated in Nazi atrocities during World 
War II. Mike graduated with distinction and high honors from 
the University of Michigan, and received his law degree from 
the University of Chicago, where he was an Associate Editor of 
the Law Review. He was 36 years old.
    Mike was a valued member of the Criminal Division at the 
Department of Justice, where he was given the Department's 
Special Achievement Award in 1986. In a memo to Criminal 
Division Employees after Mike's death, Assistant Attorney 
General Edward S.G. Dennis wrote that after joining the 
Department from the Washington firm of Covington and Burling, 
Mike ``quickly established himself as an outstanding trial 
lawyer whose persistent but low-key approach to his work won 
him the respect and highest praise from both his colleagues and 
his adversaries.'' Colleagues at the Justice Department wrote 
in a memorial notice placed in The New York Times that Mike was 
a ``lawyer's lawyer, whose clarity of purpose, intellectual 
gifts, sound and ethical judgment, exceptional wit, and 
boundless compassion and good will earned him a place of deep 
affection and respect in the hearts of all who were privileged 
to know him.''
    Mike chose to use his gifts in the service of his country 
as an example for our children, who were ages 7 and 4 at the 
time he was murdered. In a letter to my daughter, Sara, 
Assistant Attorney General Edward Dennis wrote that her Dad, 
``expressed his love for you, in part, through his work and his 
efforts to build a better world through service to the public 
good.''
    I have told you a little about Mike because I think it is 
important to convey the scale of the mayhem committed by the 
government of Libya on December 21, 1988.
    As The Lord Advocate of Scotland stated on January 31, in 
his remarks to the Scottish Court prior to the sentencing of 
the defendant, Abdel Basset al-Megrahi: ``More than 400 parents 
lost a son or daughter, 45 parents lost their only child, 65 
women were widowed, 11 men lost their wives. More than 140 
children lost a parent and 7 children lost both parents.''
    The Scottish Court wrote in its opinion that Megrahi was 
acting under orders from the Libyan government: ``The clear 
inference which we draw from this evidence is that the 
conception, planning and execution of the plot which led to the 
planting of the explosive device was of Libyan origin.''
    Since the verdict, the Bush Administration has been firm in 
its public insistence that Libya abide by the terms of the 
United Nations Security Council Resolutions. These require that 
Libya accept responsibility for the bombing, disclose all it 
knows about the bombing, fully renounce international 
terrorism, and pay appropriate compensation to the families.
    In addition, the Administration has indicated that the 
investigation into the Lockerbie bombing is still open. This 
was conveyed to me and other family members in meetings held 
over the last several months with Secretary of State Powell and 
Attorney General Ashcroft.
    Indeed, Secretary Powell stated that: ``However we resolve 
this and however we move forward from this point on, we reserve 
the right to continue to gather more evidence and to bring more 
charges and new indictments. . . . So accepting responsibility 
as a leader of a nation, and as a nation, does not excuse other 
criminals who might come to the fore and be subject to 
indictment.''
    Unfortunately, pressures on the Administration from the oil 
industry have revealed cracks in this resolve. Shortly after 
the verdict, a draft report of Vice President Cheney's Energy 
Task Force was leaked, and we learned that one of the options 
under consideration was dropping the unilateral United States 
sanctions against Libya. Although these sanctions predate the 
Lockerbie bombing, the families felt that such a move would 
send the wrong message to the Libyans. After protests from the 
families and from our allies in the Congress, this was dropped 
from the final report.
    More recently, in arguing for a 2 year rather than a 5 year 
extension of ILSA, a senior State Department official was 
quoted in a Reuters article as saying that our Government has 
begun to ``reassess'' Gaddafi: ``He is older and wiser and more 
mellow in his old age. We have been fairly clear in documenting 
the change.''
    This new and mellow Gaddafi is news to me. I wish that the 
unnamed senior official could have been present on March 16 of 
this year at a conference on United States-Libya relations 
after the Lockerbie trial sponsored by the Atlantic Council, 
the Middle East Institute, and the Woodrow Wilson Center. I was 
a speaker at the conference, along with Ambassador Dorda, the 
Libyan Ambassador to the United Nations, who was allowed by the 
State Department to travel to Washington for the day to 
participate.
    With the exception of myself and a Libyan expatriate, the 
remarks of the other presenters were measured and extended a 
hand to the government of Libya to rejoin the family of 
civilized nations once the conditions stated in the U.N. 
sanctions were met. Ambassador Dorda responded with a lengthy 
tirade stating that the United States was responsible for many 
of the bad things which have happened to Libya over the last 
200 years, beginning with U.S. forces fighting the Barbary 
pirates. He said that there was no evidence that Libya was 
involved in the ``so-called'' Lockerbie bombing. In commenting 
on the United States bombing of Libya in 1986 after the La 
Belle Disco bombing by Libya, Dorda, who was slightly wounded 
in the United States retaliation along with his son, asked: 
``Who is the terrorist and who is the victim?''
    Dorda said that the indictment of the two Libyans for the 
Lockerbie bombing in 1992 was ``only political,'' and designed 
to pressure the Security Council. He went on to say, however: 
``Let's forget about the past.'' Dorda described the unilateral 
United States sanctions as ``useless,'' stating that Libya can 
get anything it wants from anywhere. He referred to allegations 
that the Libyan government has been involved in terrorist 
activity as ``so-called terrorism.'' He denied that his 
government has ever trained, financed, or supported terrorists. 
``We never supported terrorism.''
    This tirade by Ambassador Dorda was no doubt fueled by 
Libyan allies in the international community such as Nelson 
Mandela, who helped arrange the agreement which persuaded 
Gaddafi to turn the suspects over for trial. After the verdict, 
Mandela accused the United States and Great Britain of having 
``moved the goalposts'' on the issue of lifting the U.N. 
sanctions: ``The condition that Gaddafi must accept 
responsibility for Lockerbie is totally unacceptable. As 
President for 5 years, I know that my intelligence services 
many times did not inform me before they took action. Sometimes 
I approved, sometimes I reprimanded them. Unless it is clear 
that Gaddafi was involved in giving orders, it is unfair to act 
on that basis.''
    Unfortunately, the Libyans have been given succor by the 
United States oil industry as well. In February of this year, 
Archie Dunham, the Chairman and CEO of Conoco, said that he was 
``very optimistic'' that the Bush Administration would lift the 
unilateral sanctions against Libya, in part because of the 
President and Vice President's ties to the industry.
    International pressure, influence from the oil industry, 
and the intransigence of the Libyan government all argue for a 
5 year extension of ILSA. I am concerned that a 2 year 
extension will send a message to the Libyans that we are not 
serious about seeing that they live up to their obligations, 
allowing them to run out the clock. It is important to add that 
the impact of ILSA on Libya will end immediately if the 
President determines that Libya has met the requirements of the 
United Nations Security Council Resolutions dealing with the 
Lockerbie bombing. It is up to the Libyans.
    In addition, I urge this Committee to support two changes 
in the existing law. First, I believe that we must close the 
loophole which has permitted oil companies to add on to 
contracts signed prior to enactment of ILSA. Second, we must 
reduce the threshold for violation of the law from $40 million 
of investment to $20 million, as is the case with Iran. These 
changes in ILSA are supported by my group, Justice for Pan Am 
103, as well as by Victims of Pan Am Flight 103, the largest 
group of family members.
    For 12\1/2\ years, the Lockerbie families and our allies in 
Congress have kept pressure on three administrations to find 
and hold accountable those who carried out the bombing of Pan-
Am 103. Our support in Congress has been bipartisan. Our 
supporters understand that the bombing of Pan Am 103 was an 
attack on the United States, and that we must show countries 
like Libya that when they attack our civilians, they will not 
enjoy the benefits of participating in the community of nations 
which abide by the rule of law. Our supporters understand that 
doing business with terrorists is not good business. Those who 
have stood by us know that ``constructive engagement,'' or 
whatever diplomatic terms are used to pretty up our dealings 
with regimes which murder innocents around the world, will not 
prevent future terrorist attacks, and will only expose our 
naivete, and worse, our citizens, to further attacks.
    The next several months will be critical. Megrahi's 
attorneys have filed an appeal. There will be attempts by the 
Libyans and their supporters to get the families to back off. 
On February 13 of this year, a London-based attorney who has 
advised the Libyans was quoted as follows: ``The more the 
United States sticks to the original agreement that the aim of 
the process was the surrender and trial of the two accused, the 
more the Libyans will cooperate and compensate the families.''
    The Lockerbie families do not seek justice as something for 
which we bargain in the bazaar. The suggestion that the 
families would trade the pursuit of justice for money is 
cynical and dishonors the memories of our loved ones. A British 
expert on Libya was quoted in the same article as follows: 
``Gaddafi knows he is going to have to pay compensation. The 
question is whether he can control the domestic agenda and curb 
his own tongue over the next few months, and whether extremists 
on the other side of the Atlantic among the families and their 
supporters in Congress can be kept under control.''
    I hope that you will join me and other Lockerbie family 
members in showing the Libyans and their apologists that, when 
it comes to pursuing justice, we will not be ``kept under 
control.''
    Thank you.
    Chairman Sarbanes. Thank you for a very strong statement.
    Mr. Clawson.

                  STATEMENT OF PATRICK CLAWSON
                     DIRECTOR FOR RESEARCH
         THE WASHINGTON INSTITUTE FOR NEAR EAST POLICY

    Mr. Clawson. Thank you.
    Chairman Sarbanes. We will include everyone's full 
statement in the record. And so, you can proceed on that 
assumption as you make your comments.
    Mr. Clawson. Thank you, Mr. Chairman. Thank you for having 
me here today.
    After the election of President Mohammed Khatami in 1997, 
there was an expectation that the reformist tide would win out 
over the hard-liners in Iran. So far, that has not been the 
case. Despite some progress the reformers have made on the 
domestic scene, little has changed in terms of those Iranian 
policies that pose the greatest threat to U.S. interests and 
allies.
    The prospects are so poor that Khatami will do much to 
change 
Iranian policy during his second term. Indeed, what is striking 
about Khatami's situation is how little he offers to address 
Iran's most pressing problems, namely, the stagnant economy, 
political repression, and security threats.
    Washington has offered to reduce restrictions on Iran and 
to resolve differences in a step-by-step process, so long as 
the process is reciprocal rather than one-sided. To demonstrate 
its continued interest in such a process, and to show its 
support for the Iranian reform program, the United States 
should take further steps to relax those sanctions which hit 
the Iranian people as distinct from the Iranian government. As 
with the effort to make the sanctions on Iraq smarter by 
concentrating more on the regime and less on the people, so too 
the sanctions on Iran could be changed to facilitate people-to-
people exchanges. In particular, the current rules forbid 
transactions incidental to education and to nongovernmental 
organization activities, with the practical effect of making 
education and NGO activities very difficult. For example, the 
rules allow Iranians to study at American universities, but 
Iranians 
have great difficulty taking the English language exam required 

by American universities because payment for that exam is 
considered a forbidden transaction. I would strongly urge that 
Congress express to the Administration its desire to promote a 
dialogue of civilizations with Iran by lifting the restrictions 
on activities incidental to education and on people-to-people 
exchanges conducted by American nonprofit organizations.
    The United States should also continue its efforts to 
encourage government-to-government dialogue with Iran. Iran has 
refused 
to talk with the United States, not vice-versa. Iran has the 
only 
government in the world which refuses to talk to the United 
States. It is Iran which generates isolation, not the United 
States. We have consistently called for dialogue, which Iran 
consistently refuses.
    At the same time as it pushes for diplomatic dialogue and 
extends a hand of friendship to the Iranian people, the United 
States should continue to press the Iranian government. In 
particular, the U.S. Government should reduce the Iranian 
government's income so long as Tehran uses extra money to 
finance terrorism and purchase destabilizing weapons.
    We cannot stop Iran's weapons of mass destruction programs, 
but we can slow them greatly. And personally, I am optimistic 
that some day there will come a change in Iran and that there 
will be a new government which will not be interested in 
pursuing those weapons programs, so that if we can slow them, 
we will achieve ultimately success.

    It is in this context that we should consider the renewal 
of ILSA.

    The Iranian government and every major oil industry 
magazine in the United States have said that ILSA reduces 
Iran's ability to attract investment in its oil and gas 
industry.

    Iran has privately announced $11 billion in foreign oil 
deals. But that is hot air. Very few of those announced deals 
are now proceeding. Indeed, yesterday's Financial Times 
reported how one of the largest deals is at risk of unraveling. 
And ILSA is a major reason that few such investments have 
actually proceeded.

    I am a frequent traveler to Japan, which is worried about 
United States reactions to an investment that it is 
considering.

    To be sure, ILSA's impact is limited. Iran's oil income 
depends much more on the price of oil than on ILSA. We can all 
speculate about where the price of oil will go. No one has a 
good record at making predictions, because none of us can tell 
how OPEC politics will play out. Economic models have a 
singularly bad record at forecasting oil prices, precisely 
because oil prices are as much a matter of geopolitics as of 
markets. One thing we can know for sure is that Iran has always 
been the most hawkish member of OPEC, that is, arguing for the 
highest possible price. The more powerful Iran is, the more 
likely it will campaign for tight OPEC quotas that drive the 
price up.

    ILSA has reduced Iran's ability to export oil in order to 
finance its arms programs, but at the same time ILSA has 
exacerbated trade tensions with America's most important allies 
including the European Union states. Most in Europe regard ILSA 
as too intrusive on Europe's turf. I have never understood how 
the United States and the European Union decide which issues 
are sufficiently important that the two sides will risk a trade 
war. Offhand, I would have said that bananas are less of a 
threat to U.S. security and prosperity than are prospective 
Iranian nuclear missiles. But with strong support from the 
American business community, the U.S. Government has proposed 
far-reaching sanctions against banana offenders, while Iranian 
proliferation of terrorism has not been seen as rising to that 
level of importance. I beg to differ. Indeed, I would be 
prepared to accept Europe's silly banana trade rules if Europe 
agreed to stop investing in Iranian oil and gas.

    However, there is a real issue of how to use ILSA to press 
Europe to be more helpful in containing Iran's destabilizing 
behavior.

    ILSA has already had a positive effect at promoting 
multilateral cooperation against proliferation. Indeed, then-
Secretary of State Albright explained that the European Union's 
accelerated cooperation about Iranian proliferation was the 
reason why the United States granted a waiver to the ILSA 
provisions regarding the South Pars project.

    My preferred approach would be for the Administration to 
make creative use of provisions already in ILSA for a country 
waiver; that is, a waiver on all investment from a country, as 
distinct from a waiver applying to only one project. The 
Administration should interpret those provisions broadly to 
allow consultations with the EU on measures that the EU may 
take to reach our common objective of countering proliferation 
and terrorism. For instance, it would be very useful if the EU 
countries joined with the United States in applying pressure on 
Russia, China and North Korea to stop the proliferation of 
dangerous nuclear and missile technologies to Iran.
    In short, ILSA is a good law, and it provides the 
flexibility to allow the Administration to conduct vigorous 
diplomacy. ILSA will not stop Iranian or Libyan terrorism or 
proliferation. It will not even stop all foreign investment in 
their oil industries. But ILSA will reduce the income available 
to those governments and therefore, put a crimp in some of 
their most dangerous activities.
    Chairman Sarbanes. Thank you very much.
    The bell that just rang signaled that there is a vote on. I 
think the most sensible thing to do is to take a brief recess 
and I will go and vote and then I will return and we will hear 
the balance of the testimony and have questions for the panel.
    Now, Mrs. Bernstein, I understand you may have to go and if 
that is the case, we quite understand and we very much 
appreciate your coming today and we particularly appreciate 
your very strong and focused statement.
    The Committee stands in recess.
    [Recess.]
    Chairman Sarbanes. The Committee will resume.
    Why don't we continue moving across the table. Mr. Gordon, 
we will go to you.

                  STATEMENT OF BRADLEY GORDON

                      LEGISLATIVE DIRECTOR

            AMERICAN ISRAEL PUBLIC AFFAIRS COMMITTEE

    Mr. Gordon. Thank you, Mr. Chairman.
    I want to thank you and the Committee for holding this 
hearing on the renewal of the Iran and Libya Sanctions Act, 
ILSA, and for inviting me to testify before you this morning. 
The American Israel Public Affairs Committee strongly supports 
the efforts led by Senators Smith and Schumer to extend ILSA 
for another 5 year period.
    I thought I would use my time to address some of the issues 
that I have heard already this morning and respond to them.
    There are roughly three general criticisms that people make 
of ILSA, and Senator Hagel touched on a couple of them. One is 
that unilateral sanctions do not work and ILSA in particular is 
not working and that it only serves to isolate us.
    I think it is important, first of all, for us to define 
what we mean by ``work.'' I believe the point of ILSA is to 
raise the costs and delay the time it takes Iran to get weapons 
of mass destruction. Their petroleum production capability is 
now only 60 percent of what it was during the Shah's time. They 
are in desperate need of foreign investment in order to keep 
oil production at its current level. If it does not receive 
that investment, its production capability will continue to 
decline. And so, although it may have been able to keep meeting 
its OPEC allotments until now, in fact, their production 
capability is declining. The CIA predicts that without that 
foreign investment, Iran will become a net energy importer by 
the end of this decade.
    So, I would argue that in fact ILSA is working both to 
deter that investment and that it is raising the costs and 
delaying the time that it takes Iran to develop weapons of mass 
destruction.
    Second, I would argue that unilateral sanctions do 
sometimes work. In the early 1980's, Argentina, Brazil, and 
Chile all had nuclear weapons programs. We imposed unilateral 
sanctions. We delayed the time it took to get them. And 
political change occurred in all three countries and none of 
them have nuclear weapons programs today.
    The United States led, vis-a-vis South Africa, with 
unilateral sanctions that ultimately led to multilateral 
sanctions and change occurred there.
    We imposed unilateral sanctions with China because of its 
missile proliferation and it eventually, as a result of those 
sanctions, signed up to the MTCR guidelines. So, in fact, 
economic sanctions do sometimes work, even unilateral ones.
    ILSA in particular is working, as we already noted this 
morning, that it has deterred foreign investment, that it does 
create uncertainty in the minds of investors. And as I look in 
comparative terms, Qatar, over the last 5 years, a much smaller 
country with a much smaller energy potential for development, 
has received twice as much foreign investment than did Iran 
over that same period of time.
    And with respect to the fact that ILSA isolates us from our 
allies, I would point to what the State Department said this 
morning, that in fact, over the last 5 years that ILSA has been 
law, we 
have deepened our nonproliferation cooperation with our allies. 

That is what the State Department asserted during this same 
period of time.
    Moreover, there are times in which American leadership is 
absolutely vital. This new Administration has already 
demonstrated this principle several times in its young life, 
where it has differed from our allies on issues. I do not 
believe the general notion that unilateral sanctions or that 
ILSA is not working applies. In fact, ILSA is working.
    The second kind of general criticism about ILSA is, my God, 
it actually might work, and in so doing, would remove needed 
energy supplies from the world.
    And so, the logic of this argument is that we should allow 
investment in Iran, thereby increasing our dependence on Iran's 
oil and, by the way, help them get the wherewithal to afford 
weapons of mass destruction. It is a curious logic.
    Moreover, I would argue that the amount of proven petroleum 
reserves in the world is around 1 trillion barrels. If you 
removed Iran entirely from that, there would still be well over 
900 billion barrels of proven oil reserves in the world.
    Many, many countries with proven reserves are not under 
sanctions. Venezuela has a proven reserve of 72 billion 
barrels. Mexico, 28 billion barrels, Brazil and Argentina, 10 
billion barrels. In the Caspian region, there are 20 to 35 
billion barrels. In Africa, which desperately needs the 
development, there are 25 billion barrels. China has 25 billion 
barrels of proven reserves. And I have not even touched the 
Middle East, where most countries who have oil potential are 
not under U.S. sanctions.
    And the third criticism that people make about ILSA, and we 
heard it this morning, is that there is a reform effort in 
Iran, and our sanctions legislation hurts our ability to deal 
with moderates.
    Well, it is an interesting argument. I would argue that if 
one looks at the last election in Iran, there were over 800 
candidates for president. The clerical Council of Guardians 
which approves candidates, allowed 10 to run. The Iranian 
people voted for the most moderate allowed to run, and that was 
President Khatami.
    But when you remove 98 percent of the political spectrum, 
it is hard to argue that someone who might stand to the left of 
that remaining 2 percent is a moderate. And he may be in favor 
of some domestic liberalization, but he has given no indication 
that he is at all in favor of moderation on the issues of 
concern to the United States--with respect to weapons of mass 
destruction, support of terrorism, and calling for the 
destruction of Israel.
    I do believe that the overwhelming majority of Iranians do 
want political change in Iran, and that is precisely the point. 
By maintaining our sanctions regime on ILSA, we give them the 
fortitude to carry on that struggle, to produce political 
change in Iran. We encourage their reform efforts.
    Yes, the regime does vilify the United States and it does 
vilify Israel. But the people who are pushing for change in 
Iran are opposed to those people who are vilifying the United 
States in Iran.
    Over the last several years, we have tried to engage the 
Iranians. It is they who have said, no, not us. I argue that in 
fact we need to hold out hope to the people who are really 
trying to produce change in Iran so that some day, we might 
look forward to deepened relations with an Iran that is not 
pursuing weapons of mass destruction, nor supporting terrorism.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Thank you very much, Mr. Gordon.
    Mr. Reinsch.

                STATEMENT OF WILLIAM A. REINSCH

        PRESIDENT, NATIONAL FOREIGN TRADE COUNCIL, INC.

                   VICE CHAIRMAN, USA*ENGAGE

    Mr. Reinsch. Thank you, Mr. Chairman. Let me say it is a 
pleasure for me to be able to call you Mr. Chairman.
    Chairman Sarbanes. Well, it is always a pleasure for the 
Committee to have a former staff person come back before us. We 
are delighted to see you.
    Mr. Reinsch. Thank you. I am glad to be back. I think I am 
outnumbered on this one, but it is nice to be here, anyway.
    The thought crossed my mind that it would be simpler, 
rather than deliver my statement, to insert into the Committee 
record the speech that Senator Hagel gave yesterday to the 
American Iranian Council, which I thought was a far more 
eloquent description of the situation than anything that I am 
going to say.
    I would ask, Mr. Chairman, if he has not inserted it 
himself, that you include it in the record because I think it 
is a very thoughtful statement on the subject.
    Chairman Sarbanes. Actually, we did put it in. Senator 
Hagel asked that we put it in.
    Mr. Reinsch. Wonderful. Thank you.
    The National Foreign Trade Council and USA*Engage, a broad-
based coalition of over 670 American companies and trade and 
agricultural organizations that support sanctions reform, also 
oppose ILSA extension.
    We support ILSA's goals--``preventing proliferation of 
weapons of mass destruction and the means to deliver them, and 
acts of international terrorism''--and we support full 
compliance by Libya with U.N. Security Council Resolutions 
regarding Pan Am Flight 103. However, we believe ILSA has been 
ineffective and counter-productive to American interests, and 
it has no chance of achieving 
its goals.
    We support the Administration's thorough review of United 
States policy toward Iran and Libya, and, if Congress is not 
prepared simply to let ILSA expire, we would urge you to agree 
to the Administration's request for a 2 year renewal to allow 
time to conduct its review of sanctions policy.
    Certainly, sanctions in this complex part of the world 
should be reviewed more frequently than every 5 years, and we 
believe that the statutory limit that is imposed by this act 
serves as an action-forcing event that prompts and assures such 
review, which might otherwise not take place.
    At this point, 5 years after enactment, we believe any 
objective review of the record will conclude that ILSA has not 
achieved 
its own objectives and that it has created collateral damage to 
U.S. 
interests.
    The reality is, as several previous witnesses have said, 
that it is the world price of oil that determines Iran and 
Libya's income from oil and gas production, not United States 
sanctions. And it is that rising price level that is 
encouraging now exactly the investment ILSA sought to block. 
Foreign investment in Iran or Libya's en-
ergy sector is increasing with total disregard for ILSA and in 
full 
confidence that this United States secondary boycott will never 
be implemented.
    Last March, the Congressional Research Service reported 
that $10.5 billion worth of foreign investment has taken place 
in Iran's oil and gas sector since 1997. Iran expects an 
additional $1.5 billion to be invested in its petrochemical 
sector this year. These investments are from France, Canada, 
Italy, the Netherlands, the U.K., Japan and Norway--companies 
from our closest allies and most 
important trading partners, which have not joined our sanctions 

nor have been deterred by the threat of ILSA.
    Just last week, The Wall Street Journal reported that 
British Petroleum, Royal Dutch Shell, Italy's ENI, France's 
TotalFinaElf, and Spain's Cepsa were making $4 billion in new 
investments.
    The only success of our sanctions policy toward Iran and 
Libya has been ceding those markets to our foreign competitors.
    My written statement, Mr. Chairman, has some examples of 
what the consequences of our policy have been that I will not 
read now in the interest of time.
    We believe that unilateral sanctions have not only failed 
to achieve their stated purposes, but also we believe they 
cannot achieve those purposes. To prolong their life may 
provide the illusion of taking action and cause us to feel 
better, but nothing more.
    Equally important, if the benefits are ephemeral, the costs 
are real. Unilateral sanctions are doing significant damage to 
U.S. commercial prospects at a time of economic downturn and 
energy shortage.
    A recent study shows that if we were actually successful in 
reducing Iran and Libya's oil production, it would have the 
perverse consequence of raising world oil prices, increasing 
revenues to the sanctioned countries, and costing United States 
consumers over $150 billion.
    More broadly, referring not only to ILSA, but also to the 
executive orders that are in place, to the extent that U.S. 
exports to these countries are prohibited, American workers and 
farmers are damaged and U.S. consumer product manufacturers are 
seriously compromised in their future competitiveness in those 
markets.
    Foreign affiliates of United States companies, where they 
need parent company approval, are also excluded from Iran and 
Libya. Yet, foreign affiliate sales are three times as large as 
total United States exports--$2.4 trillion in 1998.
    Some argue that ILSA has not worked because it has not been 
tried. In fact, ILSA could not have worked. ILSA forces the 
President either to implement sanctions that he knows will be 
ineffective, or to waive the law.
    That is what happened in 1998, when the Clinton 
Administration waived ILSA sanctions on Russian, French, and 
Malaysian companies. It took this action, among other reasons, 
to prevent retaliation against U.S. firms and to avoid 
provoking a trade war with the European Union, which regards 
secondary boycotts such as ILSA as illegal under the World 
Trade Organization.
    It is also ironic that U.S. law prohibits American 
companies from cooperating with secondary boycotts. Yet in the 
case of ILSA, we are imposing one and insisting that our allies 
comply with it, which can only undercut our efforts to weaken 
the Arab boycott of Israel.
    Implementation of ILSA today, just as the United States is 
preparing for a new round of global trade talks in which EU 
cooperation is crucial, would involve this country in another 
bitter trade dispute with the European Union. The 
reauthorization of ILSA for any period of time puts us at 
serious odds with our major allies and threatens cooperative 
action on a range of issues, including policy toward Iran and 
Libya.
    Nor does the inclusion of Presidential waiver authority 
mitigate the negative impact of a reauthorized ILSA. If the Act 
is waived, it becomes meaningless. If it is not waived, the 
negative effects that I have cited in this testimony will be 
exacerbated.
    We are convinced that expanded private contact with Iran, 
including business contact, will reinforce positive trends in 
that country in the long-term.
    But let me be very clear, Mr. Chairman. A Congressional 
decision to let ILSA expire is not a concession to Iran or to 
Libya. Renewing ILSA sends a decidedly negative message that 
ignores any changes that have taken place since 1996 and sends 
a powerful message to our European allies that we are 
continuing a failed unilateral policy.
    Allowing ILSA to expire would send the signal that I think 
Senator Carper was talking about in his remarks and would clear 
the way for a new policy based on current realities, one better 
tailored to U.S. interests and policy objectives.
    Acceding to the Administration's requests for a 2 year 
extension will at least permit a sober reconsideration of 
policies that will serve the U.S. national interest. We believe 
the choice is clear.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Thank you very much.
    Mr. Martin.

                 STATEMENT OF WILLIAM F. MARTIN

             CHAIRMAN, WASHINGTON POLICY & ANALYSIS

    Mr. Martin. Thank you, Mr. Chairman. It is a pleasure to be 
here today to speak on the issue that has come up quite a few 
times today--the effect of sanctions on world oil markets.
    I would like to make a stab at that, even though Mr. 
Clawson correctly said that so often we have been poor in our 
forecasting. I have been at this 25 years since being a modeler 
at MIT and also served as U.S. Deputy Secretary of Energy.
    We use a model which has been endorsed by the Senate Energy 
and Natural Resources Committee and, in fact, we are using that 
model to look at Senate and Administration energy policies at 
the moment, and their impact. This model is called WPA Global.
    It is very important in looking at oil markets to recognize 
that, presently, we do have a relatively tight oil market. And 
it is very interesting to note that even in the last 3 years, 
the oil price has fluctuated, on the one hand, at $13 and up to 
$40. The reason for this is that there is less flexibility in 
the oil market than there has been in past years, due to a 
number of reasons.
    First, the ability of OPEC and non-OPEC countries to 
provide surge capacity has been limited.
    Second, demand is growing very rapidly, particularly 
outside the United States and Europe, especially in China and 
India.
    And third, inventories of oil are very low. This is very 
important to understand because oil prices are today, and 
probably in the future, going to be set at the margin.
    As we look out 6 years, and in this analysis, we looked out 
to the year 2008, we looked at two cases. What would happen to 
oil markets if sanctions were continued for Iran, Iraq and 
Libya? And what would happen to the oil market if sanctions 
were lifted? What would be, for example, the impact on American 
energy security and prices to consumers, and what, indeed, 
would be the revenue gains or subtractions to the sanctioned 
governments?
    If we were to lift sanctions in the next few years, almost 
five million barrels a day of oil would be put on the world oil 
market. Also, if we keep sanctions, five million barrels a day 
would be left off.
    If we keep sanctions, we estimate that the world oil price 
will rise to $40 per barrel by 2008. This is in light of 
growing world 
demand. But we have also been rather optimistic about supply. 
We, for example, assume the equivalent of 10 ANWAR's comes on 
to the market. But even in this optimistic supply case, if we 
keep sanctions, oil prices are likely to rise to the $40 range.
    If, however, we lift sanctions and five million barrels a 
day comes on to the world oil market, then we believe that oil 
prices will remain in the mid-$20 range.
    So the difference between with sanctions and without 
sanctions is roughly $15 a barrel over the period. Now what 
does this mean in practical terms?
    Well, in practical terms, this means that we reward Iran, 
Iraq and Libya with roughly $63 billion more in revenue by 2008 
if we keep sanctions. At the same time, American consumers will 
pay about 50 cents more per gallon of gasoline. The average 
household will pay about $400 more per year to fuel its 
vehicles, with these sanctions.
    So, the bottom line, are sanctions effective, I am actually 
saying that they can be made effective. And indeed, the more 
effective sanctions are, the more we do not provide waivers to 
multinational oil companies, the reality is the more effective 
they are for also Iran, Iraq and Libya, because we are 
rewarding them with higher income because by keeping five 
million barrels a day off the market, we dramatically increase 
their revenue.
    Let me say that our analysis was done independently, but 
there are other analyses which have recently been done which 
come to the same conclusion.
    I quote, for example, Ed Morse, a former editor of 
Petroleum Intelligence Weekly, Amy Jaffe of Rice University, 
and a recent study by the American Petroleum Institute.
    The reality is that these sanctions, if effective, might 
ultimately hurt our consumers and, indeed, help the sanctioned 
countries.
    I think this is certainly open to debate. All of our 
assumptions are here and for inspection. But what it really 
shows is that we need--I think the Administration's point that 
they need perhaps more time to negotiate really truly effective 
sanctions with the allies is very worthwhile.
    If we are serious about weapons of mass destruction, 
terrorism, and interference with the peace process, as I 
believe many witnesses have pointed out today, then the extent 
that this can be made a multilateral effort and not a 
unilateral effort, we will actually have more impact.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Thank you very much.
    Do you favor a multilateral imposition of sanctions on 
Iran?
    Mr. Martin. What I would like to see, Mr. Chairman, is 
something very similar to what we did in the early 1980's when 
we had Siberian pipeline sanctions on the Soviet Union.
    Like today, we were in as much of a row with our allies as 
we were with the country that we were trying to target, which 
was the Soviet Union, who had imposed martial law on Poland.
    What we did with the allies is, after a terrible year of 
going back and forth with the trade war, we decided that we 
would do a series of studies with the allies to look at the 
underlying issues of sanctions. How could they be made more 
effective?
    My recommendation for President Bush as he goes to the G-8 
this year is to do precisely that--engage the allies in a 
series of studies. What is the impact of sanctions on oil 
markets? How can we make multilateral controls on militarily 
useful technology stick when it comes to Iran, Iraq and Libya?
    Maybe the Administration might even say, for a year, we 
will not give a waiver. In other words, until these studies are 
done, until we are satisfied there is a multilateral approach 
to this, we are going to be tough and we are going to implement 
ILSA.
    Chairman Sarbanes. I take it that you favor objective 
multilateral sanctions against Iran.
    Mr. Martin. Again, I am not an expert on what Iran is doing 
as these other experts are.
    Chairman Sarbanes. All right.
    Mr. Martin. But to the extent that it can be multilateral, 
if these problems are as severe as people have stated, 
absolutely.
    Chairman Sarbanes. Mr. Reinsch, does the National Foreign 
Trade Council favor lifting the trade and investment ban on 
United States firms investing in Iran?
    Mr. Reinsch. Yes, sir, we would because we do not support 
unilateral sanctions. That is not on the table with respect to 
this legislation, but yes.
    Chairman Sarbanes. I just want to understand what your 
position is and where you are coming from.
    Mr. Reinsch. Yes. We believe that unilateral sanctions are 
ineffective and that is one that is ineffective.
    Chairman Sarbanes. Now if these sanctions are so 
ineffective, why are Iran and Libya complaining about them so 
strenuously? And why, as one of the witnesses testified, in all 
the oil magazines, are there extensive stories about the impact 
of these sanctions?
    Now who wants to take a crack at that? Go ahead. Bill, I do 
not want to cut you off.
    If, as is asserted, they are just not working and do not 
have any impact, why these complaints about them?
    Mr. Reinsch. Well, I can see why the target countries are 
always going to complain about these things. Because they 
regard them as, from their point of view, unjustifiable 
measures that they would complain about whether they were being 
effective or not.
    I am not surprised that they complain. I mean, I would 
hardly expect them to welcome them. I thought that the 
statements of the Libyan Ambassador that Mrs. Bernstein quoted 
saying that the sanctions were not having an effect--we can get 
whatever we want--that was a complaint about the sanctions, but 
it was not a statement that they were having an impact on the 
country. The truth of these things I think is probably 
contained in some statements that were made in the dialogue 
with the previous panel.
    Making a decision to embark on an extensive oil investment 
is not a small consideration. It is a multiyear project. There 
are many aspects of it that create a high degree of risk, that 
do not have anything to do with foreign policy or sanctions.
    As you will notice from my comments, many of these 
investments are from consortia, in which there are many 
partners. Why someone invests or does not is often very 
difficult to sort out.
    What I believe is happening now, in part, I think, for the 
reasons that Mr. Martin cited, is while immediately after the 
enactment of ILSA there was some decline, or at least people 
not going forward with investments in Iran and Libya because of 
the uncertainty generated by the Act and also because of 
economic conditions at that time, I think we have reached the 
point in the last 4 or 5 months where that is fairly rapidly 
changing.
    The economic considerations, the price, make the 
investments more favorable. The Iranians have begun to make 
decisions about bids that they have solicited in the past and 
have been sitting on. So many of these decisions, these things 
that I think Mr. Clawson referred to, investments that have 
been out there, but nobody has spent any money yet, are 
beginning to move into the stage where money is going to be 
spent because the Iranian government is starting to make 
decisions. And then you have in just the last few weeks an 
increasing number of European countries announcing that they 
are going to go into the country.
    So things are changing. And I think the record of 
ineffectiveness, if you will, will be much more dramatic 3 
months from now than it was 3 months ago.
    Mr. Clawson. If I may make a comment, Mr. Chairman.
    Chairman Sarbanes. Mr. Clawson.
    Mr. Clawson. I would quite agree with Mr. Reinsch that the 
reasons why one invests in a multibillion-dollar project are 
many and complex.
    What I find impressive is that the leaders of Iran and of 
Libya blame the United States on a regular basis and blame ILSA 
sanctions on a regular basis for preventing investment in their 
country.
    Now perhaps they are using the ILSA restrictions in part as 
an excuse for their own shortcomings. Well, if I can get credit 
for making the sun rise in the east, I am happy to claim it. It 
makes me look much more powerful.
    And if, indeed, the Iranian and Libyan leaders and the 
Iranian and Libyan people believe that we are responsible for 
the lack of investments in their country, all the better 
because it means that they recognize that they are paying, or 
they think that they are paying, a very high price for the kind 
of terrorism and proliferation activities that they are engaged 
in.
    So, I would quite agree that there are many reasons why 
they have had difficulty attracting investment, including their 
own incompetence. And I happen to believe that that 
incompetence will certainly continue.
    But to the extent that we can claim credit for that, I 
think that that makes U.S. foreign policy better off.
    Chairman Sarbanes. Mr. Gordon.
    Mr. Gordon. I would say two things. First is, yes, there 
are a variety of factors that go into making that kind of 
decision. But the uncertainty inherent in ILSA I think adds to 
the complications when one wants to make those decisions.
    Second, I would point to the fact that the State Department 
itself indicated that during this period of time that ILSA has 
been around, one, it has deterred investment and; two, it has 
heightened our cooperation with our allies on nonproliferation 
efforts.
    I would further say that, to assert that by removing 
sanctions, almost five million barrels of oil would be put on 
the world market, assumes that there would be a full investment 
in Iran, despite the problems that have been associated with 
investment in Iran. And I guess I would argue, why not invest 
elsewhere? If the petroleum can be found elsewhere, why invest 
in Iran and Libya and Iraq when one could find significant 
places elsewhere to invest that energy dollar?
    Mr. Reinsch. May I follow up on one point he just made, Mr. 
Chairman?
    Chairman Sarbanes. Certainly.
    Mr. Reinsch. Maybe I misheard what the State Department's 
representative said, but I do not think they said that ILSA has 

heightened our cooperation with the EU or the Europeans on 
nonproliferation matters. I think they said that we have had an 
extensive degree of cooperation with them on other 
nonproliferation matters that has proceeded, nonetheless.
    Mr. Gordon. I was referring to the point that ILSA in 
effect would hurt us with our allies. In fact that has not been 
the case because during that period of time when ILSA 
supposedly was hurting us with our allies, we were deepening 
our cooperation.
    Mr. Reinsch. It has not been the case because we have not 
implemented it and we waived the single case that came up.
    Mr. Clawson. Quite the contrary. Secretary of State 
Albright specifically said that the reason why she was waiving 
ILSA on South Pars was because of accelerated cooperation on 
these issues.
    Now you may call the Secretary of State a liar, but that 
was the reason which was cited by the Secretary of State in 
explaining why the waiver was granted. It was precisely because 
of that accelerated cooperation that a waiver was granted.
    Chairman Sarbanes. Well, I think that is an important 
point.
    At the time that the Clinton Administration granted the 
waiver, it followed on some extended negotiations led by Stuart 
Eizenstat, who is, in my judgment, a very skillful negotiator, 
with the EU to try to avoid a trade confrontation over ILSA in 
the Helms-Burton Cuba sanctions law. You had both of those 
outstanding.
    And that agreement contributed to the decision by the 
Clinton Administration to waive the ILSA sanctions on that 
project that was determined to be a violation. The European 
Union pledged to increase cooperation with the United States on 
nonproliferation and on counterterrorism.
    Now, we need to go back and check how carefully that has 
been followed through on, but they were seeking to get 
something back for it.
    I am kind of interested. The New York Times on June 22, 
which was not even a week ago, June 22 of this year, has this 
headline: ``14 Indicted by United States in 1996 Saudi Blast. 
Iran Link Is Cited. Bomb Killed 19 Airmen.'' Then the story 
begins.
    Attorney General John Ashcroft said at a news conference 
that while the attack was carried out by the Saudis and a 
Lebanese National, all members of the anti-American militant 
group, Hizballah, he blamed unnamed officials in Iran for the 
attack. Mr. Ashcroft said they inspired, supported, and 
supervised members of Saudi's Hizballah.
    Then later they say in this article: ``With dozens of 
references to Iran, the indictment demonstrated that American 
investigators were convinced that Iran was behind the attack. 
But the indictment also seemed to be carefully worded to avoid 
a direct accu-
sation against Iranian officials or the government in Tehran, 
an 
allegation that could have provoked demands in Congress for 
military retaliation.
    The White House has not considered such a step, a senior 
administration official said.''
    Now what do you think the United States should do about a 
country that is engaged in this practice. Well, let me ask you, 
first of all, do you dispute that they are embarked on a 
program to obtain weapons of mass destruction? Does anyone at 
the table dispute that?
    Mr. Reinsch. No, I would not, based on my past experience.
    Chairman Sarbanes. All right. Does anyone at the table 
dispute that Iran is providing support for terrorism and 
deserves to have been cited by the State Department in its 
report? In fact, they say they were the leading----
    Mr. Gordon. Leading sponsor, sir.
    Chairman Sarbanes. The leading sponsor of terrorism. Does 
anyone dispute that?
    Mr. Gordon. No, sir.
    Mr. Reinsch. No.
    Chairman Sarbanes. All right. Now, you get this asserted 
involvement in the bombing of the Khobar Towers in Saudi 
Arabia. By all reports, they are doing their best to undermine 
the Mideast peace process. Is it the view that we should simply 
have a normal relationship with such a country?
    Mr. Gordon. It is not our view, sir. We believe that we 
should do everything we can to maintain the status of Iran as a 
rogue regime and put it outside the family of nations until 
they are prepared to make the necessary policy changes to 
rejoin the family of nations. And in fact, by so doing, we 
encourage the very forces in Iran who want that, who seek that 
change.
    Chairman Sarbanes. Mr. Martin, did you want to address 
that?
    Mr. Martin. I think you made it very clear. All I am saying 
is, if we truly want to be effective in our approach to a 
belligerent nation and, again, it must be done in a 
multilateral sense. We need to work hard to get our allies with 
us on this.
    Chairman Sarbanes. That is not always possible. The others 
may not join with us. What do we do then? Nothing?
    This article suggests that there was some possibility of 
using military action. We get some arguments here where people 
do not want any economic action. I do not know. Do they want to 
push us to military action or do they want to push us to doing 
nothing? And how can you do nothing in the face of these kinds 
of activities?
    Let me ask you this question. What has Iran done over the 
last few years that would lead us to think that they are 
moderating and trying to reach some accommodation with the 
United States?
    Mr. Gordon. Absolutely nothing, sir.
    Chairman Sarbanes. Does anyone have anything to cite in 
that regard?
    Mr. Reinsch. I would just say that I think that Ambassador 
Larocco addressed that question better than I could. And his 
answer, I think, was in two parts, that as far as the 
Government is concerned, essentially what Brad just said--
nothing. There are, however, other forces of change in the 
country that the State Department seems to think are 
potentially favorable, moderating forces that are not yet 
reflected in any Government change, but that our overall policy 
ought to be to try to encourage the development of those 
forces.
    Chairman Sarbanes. Well, Mr. Clawson, I think, addressed 
that in a very sophisticated way in his statement and I thought 
he had some interesting suggestions as to how to encourage that 
aspect or dimension of a potential relationship, much more on a 
people-to-people basis and through the nongovernmental 
organizations.
    But that still leaves us with the question of how we deal 
with the regime. If the regime has not changed, as you say, I 
agree with Senator Schumer. I do not think you can come in here 
and go to 2 years instead of 5 years and plausibly argue that 
that does not represent an easing or some further accommodation 
by the United States. Why would that not then be a victory for 
the hard-liners who said, we did not do anything? We just hung 
in there. And now the United States is partially bowing to us 
and, you know, our policy sort of worked.
    Plus, I would like someone at the table, if they have it, 
to give me any evidence that shows that the so-called reform 
movement in Iran, which may in fact have some validity as it 
addresses domestic matters, how the society functions, the 
degree of oppression, the amount of secularism versus religious 
rule, sort of the openness of society in that sense, which I do 
think is probably important to a lot of the young people in 
which they place emphasis, I see no signs that that is 
reflected in support for terrorism, obtaining these weapons of 
mass destruction, playing the role of a regional power in terms 
of upsetting the potential stability in the area.
    Does anyone have any support for the proposition that this 
so-called reform effort extends into that arena?
    Mr. Reinsch. I do not, Mr. Chairman. But we are in touch 
with some people who would be pleased to speak to that for the 
record.
    Mr. Gordon. As far as I can tell, Mr. Chairman, there are 
not. And I am reminded of the debate that occurred in the 
Senate in 1986, when the Senate was considering the South 
African Sanctions Act on apartheid. The argument was made there 
that by imposing unilateral sanctions, we were in fact hurting 
the very people we wanted to help.
    But the stronger argument was that those very people 
themselves want American leadership on this effort, want us to 
impose those sanctions, and it helped produce the change which 
we have so welcomed in South Africa.
    It seems to me that the same argument applies here. The 
forces that could lead to change in Iran do not want to see 
America appear to be weaker on Iran.
    Mr. Reinsch. That argument would be more compelling if, as 
in the case of South Africa, most of the rest of the world 
joined in.
    Mr. Gordon. It took American unilateral leadership to begin 
with and then the rest of the world eventually did.
    Mr. Reinsch. I think that is a fair point. And this is a 
question that we discussed with one of Mr. Gordon's colleagues 
in the House hearing, the question of the role of leadership 
versus followership and at what point do you throw in the towel 
and recognize futility? At what point do you continue on? I 
think that is a fair question. You can argue in the case of 
South Africa that American leadership made a difference.
    Chairman Sarbanes. And is it your view that we are at the 
point here at which you throw in the towel on Iran and Libya?
    Mr. Reinsch. Well, looking at it, frankly, from my previous 
experience in the nonproliferation area, with respect to places 
where there is a multilateral consensus, which would be Iraq 
via the U.N., and also Libya to a degree, and certainly up 
until the trial with the U.N., there was a high degree of 
multilateral cooperation and respect for those resolutions.
    There is not and has not been in Europe the same degree of 
cooperation on export controls, for example, with respect to 
Iran, despite numerous American demarches over 20 years on that 
subject.
    I think, frankly, your recitation of the history of what 
Stu did is quite correct. He reached an accommodation, I 
assume, where we agreed to waive and they agreed to do certain 
things that Secretary Albright alluded to.
    That is one of the few examples of some success that we 
had. I think, overall, you can argue that cases like ILSA 
generally and most of the time, make the situation worse rather 
than better.
    Now if the incumbent Administration makes the same deal, or 
indicates that it intends to administer this law the same way, 
which I do not think they have said yet, but if they did, I 
think that would ease some of the European concern about it. 
But then it raises the question, if they are going to waive it 
every time and if they are going to say that up front, why are 
we passing it?
    Chairman Sarbanes. The fact that it is there I think 
clearly has been a deterrent to investment in the Iranian oil 
industry.
    If ILSA were not on the scene, had not been on the scene, I 
think you would have had a much more significant effort to 
invest in Iran and much further pressure for the United States 
to join in the effort to invest in Iran. But it is clear that 
some have been dissuaded from doing that.
    Mr. Clawson. Mr. Chairman, also, I would propose that one 
of the reasons to renew ILSA is precisely so that we can have a 
new round of negotiations with the Europeans and get something 
additional from them.
    Chairman Sarbanes. Yes, I do not understand why it is a 
problem to extend this for 5 years if the waiver authority of 
the President stays as it is.
    Mr. Gordon. We can negotiate and get something for it.
    Chairman Sarbanes. He can waive it if it is determined that 
it is necessary and he can use it as a weapon to negotiate an 
answer. If you take it off the books, none of that is going to 
be available to him. Now if you want to cut it to 1 year or 2 
years, but no waiver, and then they come back to the Congress 
every 1 or 2 years, and we are in the position of driving the 
negotiations, that is a different approach. Does the Foreign 
Trade Council want that?
    Mr. Reinsch. We have actually had some discussions about 
that, Mr. Chairman. We have, I think, some differences amongst 
our members on that question.
    I would say that is probably a little bit too Machiavellian 
for us, in the sense that if you did that and did not waive it, 
the trade war we would have with Europe would be so 
significant, we would actually get rid of it faster than if we 
continued on with the current practice of pretending that it 
exists and then not enforcing it. But that is a little bit too 
clever for us, Mr. Chairman. We would not advocate that.
    Chairman Sarbanes. I am told that Iran has stepped up its 
involvement in Hamas and Islamic Jihad over the last few 
months. Does anyone at the table have any information on that?
    Mr. Gordon. Yes, that is exactly correct, Mr. Chairman, 
they have. They have increased funding. They have had 
conferences with the leaders of Islamic Jihad and Hamas in 
Tehran and in Beirut to coordinate and step up activity of 
their terrorism.
    Mr. Clawson. And I am sorry to report that it was the 
chairman of the Iranian modulas, the leader in the Iranian 
parliament of the reform movement who convened the session Mr. 
Gordon is referring to in Tehran, at which Iran's leaders spoke 
about the need to eliminate Israel and the number of prominent 
Iranian moderates, including the President, Mr. Khatami, also 
spoke about getting rid of the scourge of Israel in the region.
    Chairman Sarbanes. Well, gentlemen, thank you very much. We 
appreciate your coming and we appreciate your testimony, both 
your oral testimony and the written statements, which will be 
included in the record and, obviously, by perusing them, I know 
a great deal of care and thought went into them and we 
appreciate that very much.
    The Committee stands adjourned.
    [Whereupon, at 1:10 p.m., the Committee was adjourned.]
    [Prepared statements and additional material supplied for 
the record follow:]
             PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
    The Banking Committee meets this morning to hear testimony on the 
issue of reauthorization of the Iran and Libya Sanctions Act, commonly 
known as ILSA. This Act, which was passed by Congress in 1996, expires 
on August 5 of this year unless Congress reauthorizes it. I would like 
to note for the record that there is strong support in the Congress for 
a 5 year reauthorization, as 77 Senators have cosponsored such 
legislation, led by Senators Chuck Schumer and Gordon Smith who appear 
before us today. In the House of Representatives, the International 
Relations Committee on June 20 passed a 5 year reauthorization of ILSA, 
including a strengthening of the Libyan component of the legislation, 
by a vote of 41 to 3.
    ILSA was enacted in 1996 in response to Iran's support for 
terrorism and its pursuit of WMD (weapons of mass destruction)--
policies that not only threaten the United States but our allies as 
well. Concerning Libya, ILSA was enacted to compel the regime in 
Tripoli to abide by all of the U.N. Security Council Resolutions 
concerning the bombing of the Pan Am 103 flight.
    ILSA requires the President of the United States to impose two out 
of a list of six sanctions against foreign firms that invest more than 
$20 million and $40 million in the energy sectors of Iran and Libya, 
respectively. It should be noted that ILSA would end if the President 
of the United States determines that Libya has fulfilled all U.N. 
Security Council Resolutions relating to the bombing of Pan Am 103. For 
Iran, ILSA would terminate if Iran ceases its efforts to acquire 
weapons 
of mass destruction and is removed from the State Department's list of 
state sponsors of terrorism. ILSA also contains a Presidential waiver 
for U.S. national interest reasons or if the parent country of a 
violating firm agrees to impose economic sanctions on Iran.
    Let me now turn to Iran. Iran's support for terrorism continues 
unabated. Indeed, the latest State Department report, Patterns of 
Global Terrorism, states: ``Iran remained the most active state sponsor 
of terrorism in 2000. Its Revolutionary Guard Corps (IRGC) and Ministry 
of Intelligence and Security (MOIS) continued to be involved in the 
planning and execution of terrorist acts and continued to support a 
variety of groups that use terrorism to pursue their goals.'' Iran is 
also stepping up efforts to acquire WMD. The latest unclassified CIA 
report to Congress on worldwide WMD acquisition notes that: ``Iran 
remains one of the most active countries seeking to acquire WMD and ACW 
(Advanced Chemical Weapons) technology from abroad. In doing so Tehran 
is attempting to develop an indigenous capability to produce various 
types of weapons--chemical, biological, and nuclear--and their delivery 
systems.''
    As for Libya, it has fulfilled only one aspect of the U.N. Security 
Council Resolutions related to the Pan Am 103 bombing--handing over 
suspects for trial. Libya has not fulfilled the requirement to pay 
compensation for the families of the victims, to accept responsibility 
for the actions of its intelligence officers and to fully renounce 
international terrorism. I would like to point out that President Bush 
on April 19 of this year stated: ``We have made it clear to the Libyans 
that sanctions will remain until such time as they not only compensate 
for the bombing of the aircraft but also admit their guilt and express 
remorse.''
    Because Iran and Libya have clearly not fulfilled the requirements 
of the ILSA legislation, I think to terminate these sanctions would 
send the wrong message.
    Just last week, indictments were handed down by our Justice 
Department in the Khobar Towers bombing case in which 19 of our airmen 
in Saudi Arabia were killed in 1996. Although the Justice Department 
did not indict Iran, Attorney General Ashcroft stated publicly that 
Iranian officials ``inspired, supported and supervised members of Saudi 
Hizbollah,'' which carried out the attack.
    I would like now to introduce our distinguished group of witnesses. 
In our first panel, our colleagues, Senator Chuck Schumer and Senator 
Gordon Smith, will start off with their testimonies. Senator Schumer is 
a Member of this Committee and Senator Smith is a Member of the Foreign 
Relations Committee. Both are the original cosponsors of the ILSA 
renewal legislation and are very knowledgeable about the issue. They 
will be followed by two witnesses from the State Department, the 
Honorable E. Anthony Wayne, Assistant Secretary of State for Economic 
and Business Affairs, and Ambassador James Larocco, Acting Assistant 
Secretary of State for Near Eastern Affairs, both of whom will present 
the Administration's position.
    In the second panel we will hear from Mrs. Stephanie Bernstein of 
the Justice for Pan Am 103 group; Dr. Patrick Clawson, Director for 
Research at The Washington Institute for Near East Policy; Mr. Bradley 
Gordon, Legislative Director for the American Israel Public Affairs 
Committee; Mr. William Reinsch, President of the National Foreign Trade 
Council; and Mr. William Martin, Chairman of Washington Policy & 
Analysis.
            PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER
    Thank you, Mr. Chairman: I want to thank you for holding these 
hearings and for granting Senator Smith and me the opportunity to open 
this hearing. And I want to thank Gordon Smith, who, on every issue we 
have worked on, is just a terrific partner to work with. I thank him 
for his true leadership on this legislation. I know we are beginning 
late here today, so I will try to be brief I think that is all right, 
because everyone on this Committee is acquainted with what ILSA is all 
about, and 16 of the 20 Members of this Committee signed as original 
cosponsors. Senator Smith and I introduced the bill a few weeks ago 
with a total of 77 original cosponsors.
    So let me just say a few words. There has been movement on the part 
of the Administration and some here in Congress to weaken ILSA by 
watering down its provisions. Many of these people would do away with 
ILSA altogether, but because of the enormous support in Congress for 
the 5 year reauthorization, their strategy is to reduce the extension 
of ILSA to 2 years and add new waiver provisions that would effectively 
kill the bill.
    I am here today to say that ILSA must be renewed fully intact for a 
5 year term. Over the past 5 years, Iran and Libya have done nothing to 
show they would be welcomed into the community of nations and benefit 
from better relationships with the United States and our allies. 
Despite the election of the so-called moderate President Khatami in 
1997, Iran remains the most active sponsor of terrorism and has been 
feverishly seeking to develop weapons of mass destruction, as Senator 
Smith has outlined.
    Just last week, a Federal grand jury found that Iranian government 
officials, ``supported and directed'' the Hizbollah terrorists who blew 
up the Khobar Towers in Saudi Arabia, killing 19 brave American 
servicemen. And Iran proudly supports Hamas, whose most recent claim to 
fame was sending a suicide bomber into a crowded disco in Tel Aviv, 
killing 21 young Israelis and injuring dozens more.
    These are not actions worthy of American concessions. I agree 
completely with Gordon Smith. This is an issue of morality. What would 
the world think when the world's greatest power relaxes sanctions on a 
nation, two nations, that have shown themselves to be so outside the 
family of nations, engaged in some of the most dastardly acts that we 
have seen?
    The bottom line is simple. If these nations are serious about 
entering the community of nations and seeing their economies benefit from 
global integration, they must change their behavior. The argument that we 
should lift sanctions in hopes that Iran and Libya might change their 
behavior is backward reasoning, backward logic, backward morality. And 
so I would hope, Mr. Chairman, that we would continue ILSA.
    I just want to say a few words about sanctions policy in general. I 
think it is understandable that the Administration would want to review 
U.S. sanctions policy to make sure it's working effectively. But ILSA 
is about the best we have. It is highly flexible. It grants the 
President full waiver authority on a case-by-case basis. It contains a 
menu of sanctions, ranging from a slap on the wrist to more serious 
economic retaliation. And its sunset provisions are profoundly 
reasonable.
    If we are not going to maintain ILSA, we are not going to maintain 
any sanctions policy at all. And I think, you know, there are a couple 
of reasons that we are in the greatest country in the world. One is our 
economic might, but another is that Statue of Liberty that stands so 
proudly in the harbor of the city I come from, New York. It is a beacon 
of freedom. It is a beacon of what is right.
    We are known as a country who tries to do the right thing. To 
simply cave in to economic pressure at this point in time, I think, 
would not only hurt our relationships in the Middle East, but also it 
would do serious harm to the greatness of this country. And so I urge 
that ILSA be renewed.

                               ----------
               PREPARED STATEMENT OF SENATOR CHUCK HAGEL

    The greatest threats facing mankind today are those from the 
increasing proliferation of weapons of mass destruction and the growing 
scourge of terrorism. I fully agree with the objectives of the Iran and 
Libya Sanctions Act (ILSA). Combating proliferation and terrorism must 
remain at the forefront of our foreign policy. I do not agree, however, 
with a ``face value'' policy that seeks to combat these twin scourges 
unilaterally. ILSA cannot work. It has not worked. Right objectives but 
wrong policy.
    We fight proliferation and terrorism through coordinated 
multilateral action, a strong intelligence capability, a strong 
national defense, and a strong economy. We accomplish this through 
engagement in the world, not isolation or unilateral action. We 
accomplish this through leadership. ILSA embodies none of these 
essential elements. ILSA does not directly sanction Iran or Libya--it 
directly sanctions our allies and friends. It should be clear that this 
is a policy that contradicts our end-game--stemming the tide of 
proliferation and terrorism--by breaching the spirit of multilateralism 
so necessary to achieve success.
    Instead of stopping proliferation and terrorism, ILSA has 
strengthened and encouraged the forces within Iran that are served by a 
policy of continued hostility toward the United States. These forces 
include radical Iranian clerics, Saddam Hussein, and radical Islamic 
forces throughout the Middle East focused on the elimination of the 
United States from the region, and the destruction of Israel. Israel 
is served by far sighted and wise policies that help open the eyes of 
the next gen-
eration of Iranians to the real possibilities for improving their 
lives--hope, peace, 
prosperity and stability. Israel's purposes are not served by polices 
that needlessly alienate this group. ILSA sends Iran's youth, which 
represents over 60 percent of its population, the very message Iran's 
mullahs want them to hear--the United States is our enemy.
    By discouraging a Western presence in Iran, we have also cut 
ourselves off from a source of information on terrorism and 
proliferation. We are left flailing for solutions to a problem we 
cannot fully understand.
    It is unlikely that we will ever pull the ILSA trigger, we never 
have . . . another example of the fundamental flaws in this law. It is 
unenforceable. The United States does not have legal jurisdiction over 
the commercial activities of foreign firms in foreign markets. Imposing 
unilateral sanctions that condition access to our financial markets on 
foreign policy considerations is a very risky business.
    A new relationship with Iran will require a change in attitude by 
both countries. We should start with ILSA. ILSA should not be renewed. 
It has no deterrent capability and is self-defeating for America. The 
United States is surely capable of developing a more imaginative and 
relevant policy toward Iran. We are a great Nation, and we should act 
like one.
                            *      *      *
                     REMARKS BY SENATOR CHUCK HAGEL
                    To The American Iranian Council
                             June 27, 2001
    The greatest threats facing mankind today are those from the 
increasing proliferation of weapons of mass destruction. Nuclear, 
biological and chemical weapons and their delivery vehicles are the 
most heinous and destructive forces on earth.
    Nations face the growing threat of terrorism--a threat that we have 
often found ourselves ill-prepared and unequipped to handle. The brave 
men and women of America's military and foreign service who have given 
their lives ensuring our security--the names associated with the 
tragedies at our embassies in Kenya and Tanzania, the Khobar Towers in 
Saudi Arabia and the USS Cole in Yemen to name a few--are forever 
burned in America's memory. All Americans are grateful for their 
sacrifice and the sacrifice of their families.
    Terrorism is the scourge of our time and the ultimate act of 
cowards. Terrorism does not distinguish between combatants and 
civilians, nor does it exclude children or the elderly . . . nor does 
it care. We remember the terrorist act of Pan Am Flight 103. This was 
the act of cowards. Libya must take full responsibility for the murder 
of all 244 passengers, 15 crew, and 11 residents of Lockerbie, 
Scotland.
    To deal with this reality, we must develop policies that are 
coherent, relevant and far-sighted to combat the dual threats of 
proliferation and terrorism. It does not serve our interests if we 
adopt policies that have only ``face value.'' It does not serve our 
interests if we fail to consider the long-term consequences of our 
actions by focusing on only the short-term.
    Our goal is to stop proliferation and terrorism. We do this through 
coordinated multilateral action, a strong intelligence capability, a 
strong national defense and a strong economy. We accomplish this 
through engagement in the world, not isolation. We accomplish this 
through leadership. We do not accomplish this with policies that are 
reactive and unimaginative. We do not accomplish it with unilateral 
sanctions and specifically the Iran and Libya Sanctions Act (ILSA).
    Congress will now be debating the relevance of unilateral sanctions 
embedded in the Iran and Libya Sanctions Act passed in 1996. ILSA was 
conceived as a unilateral action by the United States to tighten 
sanctions on Iran. Its goal was to stem Iran's weapons of mass 
destruction programs and support for terrorism, by crippling investment 
in its petroleum sector. Since we could not convince our allies to join 
us in isolating Iran, we threatened our allies with sanctions.
    It is important to remember that ILSA does not directly sanction 
Iran--it directly sanctions our allies and friends. It should be clear 
that this is a policy that contradicts our end-game--stemming the tide 
of proliferation and terrorism--by breaching the spirit of 
multilateralism so necessary to achieve success. We need the support 
and cooperation of our allies and friends. Stopping proliferation and 
preventing terrorism will take a multilateral effort. We should not be 
implementing policies that alienate the very allies and friends needed 
to accomplish that goal . . . and do nothing to advance it.
    ILSA compels the President to impose sanctions on foreign firms 
engaging in substantial investment in the Iranian or Libyan petroleum 
sectors. Some of these sanctions, like the procurement sanction against 
U.S. Government contracts, could 
violate our international obligations under the World Trade 
Organization. Other 
sanctions that would condition access to our financial markets threaten 
our own 
long-term interests much more than any firm or nation we might 
sanction.
    U.S. financial markets are the world's model for transparency, 
consistency, and trustworthiness, attracting $200 billion a year in new 
corporate bonds, $20 billion a year from the European Union alone. 
Pursuing policies that would endanger this trust is a very risky 
business.
    If we begin to condition access to our financial markets on foreign 
policy considerations, we also begin to generate doubt in those who may 
choose to invest in the United States. We are not the only choice for 
investors and source of capital. This would threaten not only our 
continued economic growth, but also the continued success and expansion 
of the global economy. Economic despair creates instability. 
Instability is the breeding ground for terrorism. We must be ever 
vigilant to this 
reality. An unstable world is a dangerous and unpredictable world.
    ILSA serves to isolate us. It isolates us from the forces of change 
growing within Iran. Iran's reformist President Mohammad Khatami was 
reelected on June 8 with a landside 77 percent of the vote, up from 69 
percent in 1997. The Iranian public categorically rejected the slate of 
nine far more conservative candidates. Within Iran, Khatami represents 
the hope for reform and greater personal freedom--the direction the 
vast majority of Iran's 70 million citizens want to move in. A 
farsighted and realistic foreign policy would seek to encourage this 
trend. ILSA does the opposite. ILSA strengthens the hand of the 
hardline mullahs and leaves the reformers without any gesture of 
support or encouragement. Symbolism is important.
    President Khatami faces a powerful block of conservative clerics 
who oppose loosening personal freedoms and moderating Iran's foreign 
policy. This block is also served by any policy that shows the United 
States to be the aggressive and implacable enemy of Iran. Obviously, we 
must approach Iran with our eyes wide open. Khatami is no great friend 
of the United States, or an Islamic Thomas Jefferson, but he does 
represent change in Iran that coincides with our national interests. We 
must encourage this trend with openness, not isolation.
    Iran closed itself to the West after its 1979 revolution. It is now 
beginning to open the door. Iran seeks trade and Western investment. It 
seeks access to the West. If we have learned anything in the last 
decade, it is that a policy of openness, encouraged by the United 
States, will bring change, and sometimes even revolutionary change for 
the better. I believe there is some evidence that there are forces for 
change and reform in Iran.
    By isolating ourselves from Iran we have also blinded ourselves to 
the actions and intentions inside Iran. ILSA discourages a Western 
presence in Iran. Combating proliferation and terrorism requires 
information-gathering. The closer to the source, the better the 
information. With ILSA, we have moved no closer to building the 
groundwork for our own future presence in Iran. This is an important, 
but often overlooked, consequence of this ill-considered law. By 
cutting ourselves off from a source of information on terrorism and 
proliferation, we have been left flailing for solutions to a problem we 
cannot, by our very policies, fully understand.
    ILSA has not stopped proliferation. ILSA has not stopped terrorism. 
It has, however, strengthened and encouraged the forces within Iran 
that are served by a policy of continued hostility toward the United 
States.
    The United States has appeared weak to these forces. Although 
threatening sanctions, we have chosen not to use them. In 1998, 
President Clinton chose to waive sanctions against French, Russian, and 
Malaysian firms investing in a major petroleum development project, the 
Iranian South Pars. Originally, this contract was going to an American 
firm, Conoco. The President waived the sanctions against the foreign 
firms investing in Iran, as provided for under ILSA, for reasons of 
national interest.
    The United States does not have legal jurisdiction over the 
commercial activities of foreign firms in foreign markets. It is 
unlikely that we will ever pull the ILSA trigger . . . another example 
of how fundamentally flawed this law. More important, now that we have 
deferred ILSA once, the commitment to use ILSA becomes increasingly 
more difficult to make. Foreign firms know this--ILSA has lost its 
credibility and thus lost its deterrent capability.
    Can the United States impose sanctions under ILSA once we have 
already chosen to defer them for a chosen few? Inconsistency is not the 
mark of a great power.
    The national security of the United States is not served by 
isolating Iran. Iran's strategic importance in the region cannot be 
underestimated.
    Located at the intersection of Asia and the Middle East, and 
bordering both the Caspian region and the Persian Gulf, there are few 
areas of the world more 
important to our long-term economic, strategic, geo-political and 
energy security. 
Iran affects and impacts our long-term Iraqi policy. Whether we like it 
or not, Iran is a key player. We cannot isolate it from the very region 
from which it belongs.
    The United States will be better served in the long-term by 
recognizing this and by designing policies that seek our common 
interests and act on them. Implacable hostility between the United 
States and Iran serves no one except radical Iranian clerics, Saddam 
Hussein, and radical Islamic forces throughout the Middle East focused 
on the elimination of the United States from the region, and the 
destruction of Israel.
    Sixty percent of Iran's 70 million citizens are under the age of 
25. They are impressionable. They are looking for a better life--and 
they have no memory of Iran's 1979 revolution. This is the group we 
must seek to influence--before they come under the influence of Iran's 
conservative clerics. Israel's purposes are not served by policies that 
alienate this group. Israel is served by far sighted and wise policies 
that help open the eyes of the next generation of Iranians to the real 
possibilities for improving their lives--hope, peace, prosperity and 
stability.
    ILSA sends Iran's youth the very message that Iran's mullahs want 
them to hear--the United States is our implacable enemy. Isolation and 
hostility is a two-way street. The isolation we generate with ILSA 
breeds hostility and instability in the region. This will not help 
those seeking peace in the Middle East. The long-term security of 
Israel depends on stability. Because of its destabilizing impact, I 
believe ILSA threatens Israel's long-term security.
    I fully agree with the objectives of ILSA. Combating proliferation 
and terrorism must remain at the forefront of our foreign policy. I do, 
however, disagree with a policy that seeks to combat these 
unilaterally, and without focus. It cannot work. It has not worked. A 
multilateral approach, not the unilateral sanctions embedded in ILSA, 
resulted in the successful conviction of a Libyan intelligence agent 
for the bombing of Pan Am 103.
    Although United Nations sanctions have been suspended, the pressure 
of world opinion remains. An end game is now in sight. The United 
States and the world will continue to call on Libya to take 
responsibility for its actions and compensate the victims' families.
    We must learn from this success and design far-sighted multilateral 
policies to combat terrorism and proliferation. These policies must 
truly serve our national interests, and not simply short-term political 
interests. The United States does not further its own interests by enacting 
policies that alienate us from our friends and allies. A new relationship 
will require a change in attitude by both the United States and Iran. 
Official relations between the United States and Iran can only move 
forward when both are ready to move forward. Any opening of the door by 
the United States must be met by reciprocal action from Iran. But it still 
serves our interests to have private channels of exchange and communication 
as broad and as deep as possible. This is a beginning.
    The United States will not win this war against terrorism and 
proliferation until we take a clear headed look at the situation on the 
ground and design policies that seek long-term stability in the region. 
Changes in Iran's domestic politics demand changes in United States policy. 
We should start with ILSA. ILSA should not be renewed. The United States 
is surely capable of developing a more imaginative and relevant policy 
toward Iran. We are a great Nation. We should act like a great Nation.

                               ----------

             PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI

    Thank you, Mr. Chairman for holding this hearing on the 
reauthorization of the Iran and Libya Sanctions Act (ILSA).
    I support the goals of ILSA. We want to prevent terrorist 
organizations from carrying out their activities and we want to stop 
the proliferation of weapons of mass destruction (WMD) technology. The 
United States carries out these goals in various ways through the 
multilateral regimes, organizations, and dialogue.
    However, some of our laws, such as ILSA, take a unilateral approach 
to dealing with these threats to our national security. This unilateral 
approach has at times undermined cooperation with our allies relating 
to the problems we are attempting to solve.
    We must do more than just feel-good exercises. So far, no ILSA 
sanctions have ever been levied against an entity and only one waiver 
has ever been granted. We have a patchwork of laws that are dealing 
with proliferation--ILSA, the Iran and Iraq Arms Nonproliferation Act 
of 1992, and other laws such as the Nuclear Nonproliferation Act of 
1978, the Nuclear Proliferation Prevention Act, and provisions in the 
Export Administration Act, the Arms Export Control Act, and the Foreign 
Assistance Act.
    The Administration is requesting a 2 year, instead of a 5 year, 
reauthorization. This allows a more frequent review of our sanctions 
laws and takes into account the evolving circumstances and developments 
with our allies and the countries with which we want to improve 
behavior. Review is necessary because the threats are changing in this 
complex and more globalized world. It is vital to examine these 
policies to ensure that we properly target the undesirable behavior or 
end-users instead of creating adverse consequences for the good actors 
in the international business community. I encourage a review of all of 
our sanctions statutes specifically relating to Iran to ensure a 
simplified, effective, and common-sense approach to United States 
sanctions policy.
    I look forward to hearing the responses and testimony of the 
witnesses. Thank you, Mr. Chairman.

                               ----------

               PREPARED STATEMENT OF SENATOR JIM BUNNING

    Mr. Chairman, I would like to thank you for holding this hearing on 
S. 994, the Iran and Libya Sanctions Act reauthorization.
    I would also like to thank all of our witnesses for coming before 
the Committee to testify.
    I am proud to be a cosponsor of this legislation. It is important 
that we enact this legislation and not let it expire.
    I believe that we must show leadership to the rest of the world in 
how we treat rogue states who do not behave like they want to be a part 
of the community of nations. I realize that not every nation believes 
in sanctions like we do.
    And, I also realize other nations' businesses gain an advantage 
over our businesses because of sanctions. However, I do not believe the 
answer is to throw up our hands and do business as usual with any 
nation, regardless of their human rights record, promotion of terrorism 
or record of proliferation of weapons of mass destruction.
    The answer is to encourage our friends and allies not to do 
business with these nations, even if it means setting a lonely example.
    The argument that ``other countries sell to them, why don't we'' 
does not hold a lot of water with me. Sometimes, it is more important 
to stand on principle than to show a higher profit margin. America must 
remain the shining city on a hill, whether the rest of the world likes 
it or not.
    I understand the Administration would rather have a 2 year 
reauthorization. I will listen to their reasoning intently, but I do 
believe the burden of proof is on the Administration to prove, to me at 
least, why I should not support a 5 year extension. I would like to 
commend my colleagues for their hard work on this bill. I look forward 
to hearing the testimony of all of our witnesses.
    Thank you Mr. Chairman.

                               ----------

                   PREPARED STATEMENT OF GORDON SMITH
                A U.S. SENATOR FROM THE STATE OF OREGON

    Iran continues to support international terrorism and is developing 
weapons of mass destruction at an alarming rate and Libya still refuses 
to abide by U.N. Security Council Resolutions regarding the bombing of 
Pan Am 103, said Smith. ``We can and must continue to send the signal 
to those governments that sponsor terrorism that the U.S. Government 
will do all it can to work against their goals.''
    First enacted in 1995, ILSA imposes an array of economic sanctions 
against foreign entities that invest in Iran and Libya's energy 
sectors. The law, which will expire in August unless Congress 
reauthorizes it, has proven very effective in preventing foreign 
investment in Iran and Libya's oil production industry, thereby making 
it more difficult for them to fund terrorism. Of the 55 major petroleum 
development projects for which Iran has sought foreign investment in 
the last 5 years, only a half dozen or so have received any foreign 
investment, and none have been completed.

                               ----------

            PREPARED STATEMENT OF SENATOR EDWARD M. KENNEDY
             A U.S. SENATOR FROM THE STATE OF MASSACHUSETTS

    I strongly support S. 994, to extend the Iran and Libya Sanctions 
Act for 5 years. Current United States law imposes economic sanctions 
on foreign companies that invest in Libyan and Iranian oil, but those 
sanctions expire on August 5. The need for the sanctions is as strong 
today as when they were enacted in 1996, and they deserve to be 
extended.
    According to the State Department, Iran continues to be ``the most 
active state sponsor of terrorism.'' Sanctions should continue on that 
nation.
    There is also a compelling foreign policy rationale for extending 
sanctions on Libya. As a primary sponsor of this provision in current 
law, I will focus my comments on Libya.
    Easing sanctions on Libya by allowing the law to expire would have 
a far-reaching negative effect on the battle against international 
terrorism and the 12 year pursuit of justice for the 270 victims of the 
bombing of Pan Am Flight 103.
    Current law requires the President to impose at least two out of 
six sanctions on foreign companies that invest more than $40 million in 
1 year in Libya's energy sector. The President may waive the sanctions 
on the ground that doing so is important to the U.S. national interest. 
For Libya, the law terminates if the President determines that Libya 
has fulfilled the requirements of all U.N. Resolutions relating to the 
1988 bombing of Pan Am Flight 103. Those conditions, which were imposed 
by the international community, require the Government of Libya to 
accept responsibility for the actions of its intelligence officer, 
disclose information about its involvement in the bombing, provide 
appropriate compensation for the families of the victims of Pan Am 
Flight 103, and fully renounce international terrorism.
    President Bush has emphasized his support for these conditions. As 
he stated on April 19, ``We have made it clear to the Libyans that 
sanctions will remain until such time as they not only compensate for 
the bombing of the aircraft, but also admit their guilt and express 
remorse.'' Yet the government of Libya continues to refuse to meet the 
conditions of the international community. Until it does, both the 
United States and the international community should continue to impose 
sanctions on the regime.
    Despite the conventional wisdom that economic sanctions do not 
work, they have been effective in the case of Libya. As a result of the 
United Nations sanctions, the United States sanctions, and diplomatic 
pressure, the Libyan government finally agreed in 1999 to a trial by a 
Scottish court sitting in the Netherlands of two Libyans indicted for 
the bombing. Last January 31, one of the defendants, a Libyan 
intelligence agent, was convicted of murder for that atrocity.
    The court's decision clearly implicated the Libyan government. The 
conviction was a significant diplomatic and legal victory for the world 
community, for our Nation, which was the real target of the terrorist 
attack, and for the families of the victims of Pan Am Flight 103.
    The Iran and Libya Sanctions Act is also intended to help level the 
playing field for American companies, which have been prohibited from 
investing in Libya by a Presidential Order issued by President Reagan in 
1986. The statute enacted in 1996 imposed sanctions on foreign companies 
that invest more than $40 million in any year in the Libyan energy sector. 
The objective of the 1996 law is to create a disincentive for foreign 
companies to invest in Libya and help ensure that American firms are not 
disadvantaged by the United States sanctions. Since the sanctions on U.S. 
firms will continue, it is essential to extend the sanctions on foreign 
firms as well.
    The Administration has indicated that it has no evidence of 
violations of the law by foreign companies. But some foreign companies 
are clearly poised to invest substantially in the Libyan petroleum 
sector, in violation of the law. A German company, Wintershall, is 
reportedly considering investing hundreds of millions of dollars in the 
Libyan oil industry in violation of the law.
    Allowing current law to lapse before the conditions specified by 
the international community are met would give a green light to foreign 
companies to invest in Libya, putting American companies at a clear 
disadvantage. It would reward the leader of Libya, Colonel Qadhafi, for 
his continuing refusal to comply with the U.N. Resolutions. It would 
set an unwise precedent of disregard for U.N. Security Council 
Resolutions. It would undermine our ongoing diplomatic efforts in the 
Security Council to prevent the international sanctions from being 
permanently lifted until Libya complies with the U.N. conditions. And 
it would prematurely signal a warming in United States-Libyan 
relations.
    Our European allies would undoubtedly welcome the expiration of the 
U.S. sanctions. European companies are eager to increase their 
investments in Libya, but they do not want to be sanctioned by the 
United States. They are ready to close the book on the bombing of Pan 
Am Flight 103, and open a new chapter in relations with Libya.
    But the pursuit of justice is not only for American citizens. 
Citizens of 22 countries were murdered on Pan Am Flight 103, including 
citizens of many of our allies. The current sanctions were enacted on 
behalf of these citizens as well. Our Government should be actively 
working to persuade European countries that it is premature to 
rehabilitate Libya.
    Some have proposed extending the law for 2 years, rather than 5 
years as our bill proposes. I strongly support a 5 year extension. If 
we reduce the time period, it only gives Colonel Qadhafi a strong 
incentive to continue stonewalling--as he has done since the verdict 
was announced last January--and wait until the law expires.
    When the Banking Committee marks up the Senate version of the bill, 
I hope two modifications to the Libya section made by the House 
International Relations Committee will be included. The first would 
reduce the threshold for a violation in Libya from $40 million to $20 
million. Under current law, a foreign company can invest $40 million in 
Libya before sanctions kick in, but it can only invest $20 million in 
Iran. When the law was originally drafted, the threshold for both Iran 
and Libya was $40 million. When it was reduced for Iran, it was not 
reduced for Libya. It should have been. The threshold for a violation 
should be $20 million for both Iran and Libya.
    The other modification included in the House version of the bill 
would close a loophole in the law that allows oil companies to expand 
upon contracts that were signed before the current law was enacted. A 
number of companies which signed contracts before ILSA became law are 
expanding their operations, such as by developing fields adjacent to 
those in which they made their original investment, and calling this 
expansion a part of the original contract. The law should cover 
modifications to existing contracts and agreements. Even if the 
original contract predates ILSA, subsequent investments that expand 
operations should be treated as a new contract. This point should be 
clarified in the law, and the Administration should aggressively seek 
the information necessary to enforce it.
    Bob Monetti, the President of the largest organization representing 
the families--the Victims of Pan Am Flight 103--has written letters 
asking the Congress to make these modifications to existing law and to 
oppose efforts to shorten the duration of the law from 5 years to 2 
years. I am submitting copies of his letters for the record along with 
my testimony.
    Extending the law that requires sanctions on foreign companies that 
invest in Libya for another 5 years is in both the security interest of 
the United States and the security interest of the international 
community. Profits in Libya should not come at the expense of progress 
against international terrorism and justice for the families of the 
victims of Pan Am Flight 103.
    I commend the Banking Committee for reviewing this law, which I 
hope will be extended swiftly.

                 PREPARED STATEMENT OF E. ANTHONY WAYNE
         Assistant Secretary for Economic and Business Affairs
                Accompanied By: Ambassador James Larocco
          Acting Assistant Secretary for Near Eastern Affairs
                        U.S. Department of State
                             June 28, 2001
    Mr. Chairman, we are very pleased to have the opportunity to appear 
before this Committee today, and to testify on S. 994 regarding renewal 
of the Iran and Libya Sanctions Act (ILSA).
    I am Tony Wayne, Assistant Secretary of State for Economic and 
Business Affairs. I am happy to be accompanied by Jim Larocco who has 
just returned from a tour as Ambassador to Kuwait to become the 
Principal Deputy Assistant Secretary in the Near East Bureau. Jim is 
Acting Assistant Secretary at the moment, while Assistant Secretary 
Bill Burns is traveling with Secretary Powell.
    Let me say a word about my background. Much of it, I think, has 
some relevance for ILSA. Before becoming Assistant Secretary for 
Economic and Business Affairs about a year ago, I was Principal Deputy 
Assistant Secretary in the European bureau--and ILSA certainly involves 
and affects our European allies. In this capacity, I was closely 
engaged in the discussions we had with the Europeans about cooperation 
on nonproliferation and counterterrorism in 1997 and 1998, as our 
decision process on the South Pars case moved forward. I also served in 
our Counter-
terrorism office from 1989 to 1991 where I helped to build our 
cooperation with 
others against terrorism, including activities supported by the 
governments of Iran and Libya. I thus have some perspective on that 
vitally important issue and its connection with ILSA.
    As you know, the Administration supports renewal of ILSA, in its 
original form, but for 2 years, rather than the 5 proposed in S. 994. 
We entirely share the concerns of Congress about the objectionable 
policies and behavior of Iran and Libya. Opposing that behavior is a 
top Administration priority. We have repeatedly condemned Iran's 
pursuit of weapons of mass destruction (WMD) and missile delivery 
systems and its support for terrorism, including support for groups 
using violence to oppose Middle East peace. Although no Iranian 
individual was charged in the recent indictments over the Khobar 
bombing, the investigation confirmed that our concerns about Iranian 
support for terrorism are well-founded. Libya has not yet complied with 
the relevant U.N. Security Council Resolutions. We are focused on 
securing Libya's compliance with its UNSC obligations, including 
payment of appropriate compensation and acceptance of responsibility 
for the actions of Libyan officials in connection with the bombing of 
Pan Am 103.
    The Administration's decision to support a 2 year renewal reflects 
no diminution in our concern for the objectionable behavior of Iran and 
Libya in the areas of terrorism and proliferation. Our concerns in 
these areas continue to be reflected in a wide variety of policies and 
actions we have adopted toward these countries, including their 
designation as state-sponsors of terrorism, and in enforcement of the 
sanctions and restrictions derived from that designation. Similar 
concerns are reflected in other legislation passed by Congress, such as 
last year's Iran Nonproliferation Act, the 1992 Iran and Iraq 
Nonproliferation Act, and a number of other statutes. We have played, 
and will continue to play, a leadership role in multilateral 
nonproliferation regimes, such as the Missile Technology Control Regime 
(MTCR), the Nuclear Suppliers Group, the Australia Group, and the 
Wassenaar Arrangement, where we work in close partnership with our 
European allies and other member governments, to restrict the access of 
countries such as Iran and Libya to equipment, technology, and 
materials necessary to develop WMD and long-range missiles.
    Support for a 2 year term reflects this Administration's view that 
sanctions should be reviewed, thought about, and debated at frequent 
intervals. Sanctions are one set of tools among the many we deploy for 
supporting important national objectives such as combating 
proliferation and terrorism. We are working to counter these abhorrent 
practices and to build a cohesive and effective international effort 
against them. Given the enormous importance of these objectives, we 
should regularly reevaluate our sanctions tools, assessing how well 
they are working; whether they should be altered or amended; whether 
they can be fine-tuned; whether there are other instruments or 
approaches that should be applied; whether there are ancillary effects, 
and how to take them into account. This process provides a further 
occasion for all points of view to be heard. In sum, regular 
reevaluation is essential to ensure that we are attacking critical 
problems in the most effective way.
    Questions about the effectiveness, impact, cost, and relevance 
inevitably arise in connection with any sanctions regime. ILSA is no 
exception, particularly since its approach is indirect: it focuses on 
investment, in order to limit revenue, rather than focusing directly on 
actions by Iran and Libya to procure weapons of mass destruction and 
support terrorism; and it targets petroleum-sector investors--some of 
them from friendly countries whose cooperation we need in working 
toward our nonproliferation and counterterrorism goals--rather than 
targeting parties who engage in inherently objectionable activity. We 
are working to maintain and strengthen cooperation with friends and 
allies to try to change objectionable aspects of Iranian and Libyan 
behavior.
    The Administration is embarking on an overall review of sanctions 
policy that will include examining the cost and effectiveness of our 
sanctions efforts--in general, and with respect to specific sanctions 
laws, such as ILSA. The review will also examine ways to make the 
administration of sanctions that affect U.S. business more efficient. 
At the Secretary's direction, the Department is working with other 
agencies to determine the extent to which economic sanctions laws 
achieve their objectives, have appropriate reporting requirements, or 
impede the President's ability to react to rapidly-changing 
international developments.
    At his confirmation hearing, Secretary Powell expressed concern 
about the number of existing sanctions laws and regulations; there is 
potential for overlap, inconsistency, and inappropriateness. He also 
noted that there have been instances in which sanctions have been 
useful. Carefully designed and prudently used, economic sanctions can 
be a valuable foreign policy and national security tool.
    For its part, the State Department believes that economic sanctions 
laws should reflect common-sense principles. They should allow the 
President sufficient flexibility to modify or to terminate sanctions as 
conditions change or as he sees fit in balancing other important U.S. 
interests. Sanctions must do more than provide psychological 
satisfaction. They must be part of an integrated policy, that considers 
other options and weighs the costs and benefits of economic sanctions 
for the range of U.S. interests. In general, sanctions should directly 
target the objectionable behavior by foreign governments or entities 
that threatens our values or interests and should minimize unintended 
harmful consequences. Sanctions that are indirectly targeted are likely 
to be less effective and need to be weighed with particular care for 
unintended effects. When sanctions are appropriate, it is far 
preferable that they be employed through a multilateral approach. 
Experience has shown that concerted multilateral efforts are almost 
always more effective than unilateral ones, although we may 
occasionally need to be prepared to act unilaterally when necessary to 
defend important U.S. values and interests. As we have said, sanctions 
should be reviewed periodically, and relatively frequently, to assess 
their continued effectiveness and relevance, and make appropriate 
adjustments.
    Finally, I want to stress that whenever possible, the decision to 
impose sanctions should be the product of collaboration and 
consultation between the Administra-
tion and Congress. We look forward to working with you and your 
colleagues on this important set of issues. Through a close dialogue, 
we can make sanctions more rational, coherent and effective in support 
of U.S. foreign policy and national security interests.
    We are grateful to the Committee for the opportunity to appear, and 
to make this statement. We would be happy to respond to any questions 
you might have.

                               ----------

              PREPARED STATEMENT OF STEPHANIE L. BERNSTEIN
                         Justice for Pan Am 103
                             June 28, 2001
    I would like to thank you, Senator Sarbanes, for the opportunity to 
testify before the Banking Committee today on this most important 
issue.
    I am here today to support extension of the Iran and Libya 
Sanctions Act because 
my husband, Michael S. Bernstein, was one of 270 people, including 189 
U.S. citizens, murdered in the Lockerbie bombing on December 21, 1988. 
This savage crime was placed squarely at the feet of the Libyan 
government on January 31 of this year, when a high level Libyan 
intelligence operative was convicted of 270 counts of murder.
    My husband was a Federal employee: he was the Assistant Deputy 
Director of the Office of Special Investigations at the Department of 
Justice. This office finds, denaturalizes, and deports those who 
participated in Nazi atrocities during World War II. Mike graduated 
with distinction and high honors from the University of Michigan, and 
received his law degree from the University of Chicago, where he was an 
Associate Editor of the Law Review. He was 36 years old.
    Mike was a valued member of the Criminal Division at the Department 
of Justice, where he was given the Department's Special Achievement 
Award in 1986. In a memo to Criminal Division employees after Mike's 
death, Assistant Attorney General Edward S.G. Dennis wrote that after 
joining the Department from the Washington firm of Covington and 
Burling, Mike ``quickly established himself as an outstanding trial 
lawyer whose persistent but low-key approach to his work won him the 
respect and highest praise from both his colleagues and his 
adversaries.'' Colleagues at the Justice Department wrote in a memorial 
notice placed in The New York Times that Mike was a ``lawyer's lawyer, 
whose clarity of purpose, intellectual gifts, sound and ethical 
judgment, exceptional wit, and boundless compassion and good will 
earned him a place of deep affection and respect in the hearts of all 
who were privileged to know him.''
    Mike chose to use his gifts in the service of his country as an 
example for our children, who were ages 7 and 4 at the time he was 
murdered. In a letter to my daughter, Sara, Assistant Attorney General 
Edward Dennis wrote that her Dad ``expressed his love for you, in part, 
through his work and his efforts to build a better world through 
service to the public good.''
    I have told you a little about Mike because I think it is important 
to convey the scale of the mayhem committed by the government of Libya 
on December 21, 1988. As The Lord Advocate of Scotland stated on 
January 31 during his remarks to the Scottish Court prior to the 
sentencing of the defendant, Abdel Basso al-Megrahi:

          More than 400 parents lost a son or daughter; 45 parents lost 
        their only child, 65 women were widowed; 11 men lost their 
        wives. More than 140 children lost a parent and 7 children lost 
        both parents.

    The Scottish Court wrote in its opinion that Megrahi was acting 
under orders from the Libyan government.

          The clear inference which we draw from this evidence is that 
        the conception, planning and execution of the plot which lead 
        to the planting of the explosive device was of Libyan origin. 
        (p. 75)

    Since the verdict, the Bush Administration has been firm in its 
public insistence that Libya abide by the terms of the United Nations 
Security Council Resolutions. These require that Libya accept 
responsibility for the bombing, disclose all it knows about the 
bombing, fully renounce international terrorism, and pay appropriate 
compensation to the families.
    In addition, the Administration has indicated that the 
investigation into the Lockerbie bombing is still open. This was 
conveyed to me and other family members in meetings held over the last 
several months with Secretary of State Powell and Attorney General 
Ashcroft. Indeed, Secretary Powell stated that:

          However we resolve this and however we move forward from this 
        point on, we reserve the right to continue to gather more 
        evidence and to bring more charges and new indictments. So 
        accepting responsibility as a leader of a Nation, and as a 
        Nation, doesn't excuse other criminals who might come to the 
        fore and be Subject to indictment. (February 8, 2001)

    Unfortunately, pressures on the Administration from the oil 
industry have revealed cracks in this resolve. Shortly after the 
verdict, a draft report of Vice President Cheney's Energy Task Force 
was leaked, and we learned that one of the 
options under consideration was dropping the unilateral United States 
sanctions against Libya. Although these sanctions predate the Lockerbie 
bombing, the families felt that such a move would send the wrong 
message to the Libyans. After protests from the families and from our 
allies in the Congress, this was dropped from the final report.
    More recently, in arguing for a 2 year rather than a 5 year 
extension of ILSA, a senior State Department official was quoted in a 
Reuters article as saying that our Government has begun to ``reassess'' 
Gaddafi:

          He's older and wiser and more mellow in his old age. We have 
        been fairly clear in documenting the change. (Reuters, 6/8/01)

    This new and mellow Gaddafi is news to me. I wish that the unnamed 
senior official could have been present on March 16 of this year at a 
conference on United States-Libya relations after the Lockerbie trial 
sponsored by the Atlantic Council, the Middle East Institute, and the 
Woodrow Wilson Center. I was a speaker at the conference, along with 
Ambassador Dorda, the Libyan Ambassador to the United Nations, who was 
allowed by the State Department to travel to Washington for the day to 
participate.
    With the exception of myself and a Libyan expatriate, the remarks 
of the other presenters were measured and extended a hand to the 
government of Libya to rejoin the family of civilized nations once the 
conditions stated in the U.N. sanctions were met. Ambassador Dorda 
responded with a lengthy tirade stating that the United States was 
responsible for many of the bad things which have happened to Libya 
over the last 200 years, beginning with United States forces fighting 
the Barbary pirates. He said that there was no evidence that Libya was 
involved in the ``so-called'' Lockerbie bombing. In commenting on the 
United States bombing of Libya in 1986 after the La Belle Disco bombing 
by Libya, Dorda, who was slightly wounded in the United States 
retaliation along with his son asked--``Who is the terrorist and who is 
the victim?''
    Dorda said that the indictment of the two Libyans for the Lockerbie 
bombing in 1992 was ``only political,'' and designed to pressure the 
Security Council. He went on to say, however: ``let's forget about the 
past.'' Dorda described the unilateral United States sanctions as 
``useless,'' stating that Libya can get anything it wants from 
anywhere. He referred to allegations that the Libyan government has 
been involved in terrorist activity as ``so-called terrorism.'' He 
denied that his government has ever trained, financed, or supported 
terrorists. ``We never supported terrorism.''
    This tirade by Ambassador Dorda was no doubt fueled by Libyan 
allies in the international community such as Nelson Mandela, who 
helped arrange the agreement which persuaded Gaddafi to turn the 
suspects over for trial. After the verdict, Mandela accused the United 
States and Great Britain of having ``moved the goalposts'' on the issue 
of lifting the U.N. sanctions.

          The condition that Gaddafi must accept responsibility for 
        Lockerbie is totally unacceptable. As President for 5 years I 
        know that my intelligence services many times did not inform me 
        before they took action. Sometimes I approved, sometimes I 
        reprimanded them. Unless it is clear that Gaddafi was involved 
        in giving orders it is unfair to act on that basis. (The 
        Independent, 2/09/01)

    Unfortunately, the Libyans have been given succor by the United 
States. oil industry as well. In February of this year, Archie Dunham, 
the Chairman and CEO of Conoco, said that he was ``very optimistic'' 
that the Bush Administration would lift the unilateral sanctions 
against Libya, in part because of the President and Vice President's 
ties to the industry.
    International pressure, influence from the oil industry, and the 
intransigence of the Libyan government all argue for a 5 year extension 
of ILSA. I am concerned that a 2 year extension will send a message to 
the Libyans that we are not serious about seeing that they live up to 
their obligations, allowing them to run out the clock. It is important 
to add that the impact of ILSA on Libya will end immediately if the 
President determines that Libya has met the requirements of the United 
Nations Security Council Resolutions dealing with the Lockerbie 
bombing. It is up to the Libyans.
    In addition, I urge this Committee to support two changes in the 
existing law. First, I believe that we must close the loophole which 
has permitted oil companies to add on to contracts signed prior to 
enactment of ILSA. Second, we must reduce the threshold for violation 
of the law from $40 million of investment to $20 million, as is the 
case with Iran. These changes in ILSA are supported by my group, 
Justice for Pan Am 103, as well as by Victims of Pan Am Flight 103, the 
largest group of family members.
    For 12\1/2\ years the Lockerbie families and our allies in Congress 
have kept pressure on three administrations to find and hold 
accountable those who carried out the bombing of Pan Am 103. Our 
support in Congress has been bipartisan. Our supporters understand that 
the bombing of Pan Am 103 was an attack on the United States, and that 
we must show countries like Libya that when they attack our civilians 
they will not enjoy the benefits of participating in the community of 
nations which abide by the rule of law. Our supporters understand that 
doing business with terrorists is not good business. Those who have 
stood by us know that ``constructive engagement,'' or whatever 
diplomatic terms are used to pretty up, our dealings with regimes which 
murder innocents around the world, will not prevent future terrorist 
attacks, and will only expose our naivete and worse, our citizens, to 
further attacks.
    The next several months will be critical. Megrahi's attorneys have 
filed an appeal. There will be attempts by the Libyans and their 
supporters to get the families to back off on February 13 of this year. 
A London-based attorney who has advised the Libyans was quoted as 
follows:

          The more the United States sticks to the original agreement 
        that the aim of the process was the surrender and trial of the 
        two accused, the more the Libyans will cooperate and compensate 
        the families. (Reuters article, 2/13/01)

    The Lockerbie families do not see justice as something for which we 
bargain in the bazaar. The suggestion that the families would trade the 
pursuit of justice for money is cynical and dishonors the memories of 
our loved ones.
    A British expert on Libya was quoted in the same article as 
follows:

          Gaddafi knows he is going to have to pay compensation. The 
        question is whether he can control the domestic agenda and curb 
        his own tongue over the next few months, and whether extremists 
        on the other side of the Atlantic among the families and their 
        supporters in Congress can be kept under control.

    I hope that you will join me and other Lockerbie family members in 
showing the Libyans and their apologists that, when it comes to 
pursuing justice, we will not be ``kept under control.''

                               ----------

                 PREPARED STATEMENT OF PATRICK CLAWSON
                         Director for Research
               Washington Institute for Near East Policy
                             June 28, 2001
    Renewing the Iran and Libya Sanctions Act (ILSA) is a good way to 
keep up the pressure on Iran about its hardline actions. Renewal should 
be accompanied by a hand of friendship extended to the Iranian people 
in support of their campaign for reform.
The Political Context in Iran
    Iran is one of the great political enigmas facing United States 
policy. Tehran sponsors international terrorist groups, lends support 
to the violent opposition to the Middle East peace process, and spends 
scarce capital on developing long-range missiles and a nuclear weapons 
program. At the same time, Iran has a political system that, outside 
Israel and Turkey, may be the most animated, vigorous, and dynamic in 
the region. After the election of President Mohammed Khatami in 1997, 
there was an expectation that the reformist tide will win out over the 
hardliners. So far, that has not been the case. Despite whatever 
progress the reformists have made on the domestic scene, little has 
changed in terms of those Iranian policies that pose the greatest 
threat to U.S. interests and allies.
    The prospects are poor that Khatami will do much to change Iranian 
policy during his second term. Indeed, what is striking about Khatami's 
situation is how little he offers to address Iran's most pressing 
problems, namely, the stagnant economy, political repression, and 
security threats.
    Consider Iran's security situation. To the east is Taliban-
dominated Afghanistan, which is openly hostile to Iran and from which 
emanates the opium and heroin to which two million Iranians are 
addicted. To the west is Iraq, which sponsors the People's Mojahedeen 
cult whose members carried out more than 20 armed attacks inside Iran 
in the last year, including some deadly mortar attacks in Tehran. The 
United States shares Iranian concerns about both Afghanistan and Iraq, 
as well as the Armenian-Azerbaijani conflict that is right on Iran's 
borders. But the Khatami government is locked in a needless 
confrontational posture against America. Evidently, Khatami puts 
ideological disdain for America and venom against Israel ahead of 
Iran's state interests.
    Overall, Khatami offers Iran little except an alternative to 
something worse. Khatami is popular both with the Iranian people and 
with the outside world because hardline opponents are truly dreadful. 
The search for ``Iranian moderates'' has a long history, and there is 
little reason to believe that Khatami will be any less hostile to the 
United States than were the ``Iranian moderates'' of Iran-Contra days.
The Framework for U.S. Policy
    So long as Iran continues to threaten regional stability by 
pursuing weapons of mass destruction and the means to deliver them, 
undermining the peace process--that is, arming Hizballah--and providing 
support for international terrorists, the United States-Iranian 
relations will be unfriendly or worse.
    America's allies generally cooperate well on the most critical 
issue here, namely, limiting supplies to Iran of major new arms and 
dual-use technology. At the same time, the United States and its allies 
differ on how best to press Iran to change its activities of concern. 
The United States prefers an approach of containment; its 
allies, one of engagement. The two approaches need not be opposites. 
Indeed, the history of Western policy toward the Soviet Union shows how 
they can be used together to good effect. The ``ostpolitik'' policy of 
engaging the Soviets begun by German chancellor Willy Brandt in the 
1970's did much to undermine the legitimacy of the Soviet system in the 
eyes of its people, while the military buildup under President Ronald 
Reagan--combined with the aid to the Afghan resistance--put the Soviet 
Union under so much pressure that it cracked. That said, during the 
cold war, the United States usually took the lead on the containment 
policies and U.S. allies usually took the lead on promoting engagement. 
That difference is likely to persist in dealing with the difficult 
states of the Middle East, including Iran.
    Washington has offered to reduce restrictions on Iran and resolve 
differences in a step-by-step process, so long as the process is 
reciprocal rather than one-sided. To demonstrate its continuing 
interest in such a process and to show its support for the Iranian 
reform program, the United States should take further steps to relax 
those sanctions which hit the Iranian people as distinct from the 
Iranian government. As with the effort to make the sanctions on Iraq 
smarter by concentrating more on the regime and less on the people, so 
too the sanctions on Iran could be changed to facilitate people-to-
people exchanges. In particular, the current rules forbid transactions 
incidental to education and to nongovernmental organization (NGO) 
activities, with the practical effect of making education and NGO 
activities very difficult. For example, the rules allow Iranians to 
study at American universities, but they must use subterfuges to pay 
the American company that administers the English language test 
required by American universities because direct payment is deemed an 
impermissible transaction with Iran. Similarly, Iranians can come to 
the United States for conferences, but NGO's cannot easily pay the 
travel expenses of these Iranian visitors nor for the costs of 
Americans going to Iran for conferences. I strongly urge that Congress 
express to the Administration its desire to promote a dialogue of 
civilizations with Iran by lifting the restrictions on activities 
incidental to education and on people-to-people exchanges conducted by 
American nonprofit 
organizations--that is, those with 501.c.3 status under the tax code.
    The United States should also continue with its efforts to 
encourage government-to-government dialogue with Iran. Iran has refused 
to talk with the United States, not vice versa. Iran has the only 
government in the world which refuses to talk to the United States. It 
is difficult to engage with Iran when Iran refuses to talk to 
Washington. We can proclaim until we are blue in the face that Iran 
would benefit from talking to Washington about issues of common concern 
to the two countries, such as the Taliban or counternarcotics. But the 
fact remains that Iran steadfastly refuses contact. At the same time as 
it pushes for diplomatic dialogue and extends a hand of friendship to 
the Iranian people, the United States will continue to press the 
Iranian government. In particular, will want to reduce the Iranian 
government's income, so long as Tehran uses extra money to finance 
terrorism and purchase destabilizing weapons.
ILSA
    ILSA reduces Iran's ability to attract investment in its oil and 
gas industry--income which accrues directly to the Iranian government. 
To be sure, ILSA's impact is limited; Iran's oil income depends much 
more on the price of oil than on ILSA. We can all speculate about where 
the price of oil will go; no one has a good record at making 
predictions, because none of us can tell how OPEC politics will play 
out. Economic models have a singularly bad record at forecasting oil 
prices, precisely because oil prices are as much a matter of geo-
politics as of markets. One thing we know for sure is that Iran has 
always been the most hawkish member of OPEC, that is, arguing for the 
highest possible price. The more powerful Iran is, the more likely it 
will campaign for tight OPEC quotas that drive the price up.
    ILSA has reduced Iran's ability to export oil to finance its arms 
programs, but it has exacerbated trade tensions with America's most 
important allies including the European Union (EU) states. Most in 
Europe regard ILSA as too intrusive on Europe's turf. I have never 
understood how the United States and the EU decide which issues are 
sufficiently important that the two sides will risk a trade war. 
Offhand, I would have said that bananas are less of a threat to U.S. 
security and prosperity than are prospective Iranian nuclear missiles. 
But the United States and Europe have repeatedly gone toe to toe over 
bananas. With strong support from the American business community, the 
U.S. Government has imposed far-reaching sanctions against banana 
offenders, while Iranian proliferation and terrorism has not been seen 
as rising to that level of importance. I beg to differ; indeed, I would 
be prepared to accept Europe's silly banana trade rules if Europe 
agreed to stop investing in Iranian oil and gas.
    However, there is a real issue of how to use ILSA to press Europe 
to be more helpful in containing Iran's destabilizing behavior. My 
preferred approach would be for the Administration to make more 
creative use of the provisions in ILSA for a country waiver--that is, a 
waiver on all investment from a country, as distinct from a waiver 
applying to only one project. The Administration should interpret those 
provisions broadly to allow consultations with the EU on measures the 
EU may take to reach our common objective of countering proliferation 
and terrorism. For instance, it would be very useful if the EU 
countries joined with the United States in applying pressure on Russia, 
China, and North Korea to stop the proliferation of dangerous nuclear 
and missile technologies to Iran. So long as only the United States is 
raising this matter, the Russians can dismiss the concerns as American 
exaggerations. The Russian reaction might be quite different if it were 
faced with concern from all the G-7 countries. And G-7 cooperation 
might make a difference not only to governments but also to businesses. 
If the EU, Japan, and Canada were to join with the United States in 
ferreting out and sanctioning Russian, Chinese, and North Korean firms 
that supply nuclear and missile technology to Iran, exporting such 
dangerous technology to Iran might look more risky and less attractive. 
It is worth considering making cooperation on these matters the basis 
for exempting a country from ILSA restrictions.
    In short, ILSA is a good law, and it provides the flexibility to 
allow the Administration to conduct vigorous diplomacy. ILSA will not 
stop Iranian or Libyan terrorism or proliferation; it will not even 
stop all foreign investment in their oil industries. But ILSA will 
reduce the income available to these governments and therefore put a 
crimp in some of their most dangerous activities.

                               ----------

                  PREPARED STATEMENT OF BRADLEY GORDON
                          Legislative Director
                American Israel Public Affairs Committee
                             June 28, 2001
    Thank you, Mr. Chairman. I want to thank the Subcommittee for 
holding this hearing on the renewal of the Iran and Libya Sanctions Act 
(ILSA) and for invit-
ing me to testify before you this afternoon. The American Israel Public 
Affairs 
Committee strongly supports the efforts led by Senators Gordon Smith 
and Chuck 
Schumer to extend ILSA for another 5 year period.
    Five years ago, when Congress unanimously enacted ILSA, it did so 
because Iran was the leading state sponsor of international terrorism, 
because it opposed the Arab-Israeli peace process, and, indeed, 
Israel's very right to exist, and because it was pursuing the 
acquisition of weapons of mass destruction and the missiles to deliver 
them. Libya, for its part, was under U.N. Security Council mandated 
sanctions for its suspected role in the downing of Pan Am 103. Today, a 
Libyan intelligence officer has been found guilty of murder for his 
involvement in Pan Am 103 in the words of the court ``in furtherance of 
the purposes of . . . Libyan Intelligence Services,'' yet Libya 
continues to refuse to acknowledge its role and to pay compensation to 
the families of the victims. Last week, 13 members of the Iranian 
backed group Hizballah were indicted for the 1996 bombing of the Khobar 
Towers. The indictment mentions Iran 35 times, yet Iran denies any 
connection to the attack. And Iran's objectionable policies and 
behavior have, if anything, gotten worse. In short, all of the factors 
which led Congress to act initially remain true today, and both Iran 
and Libya deserve to remain subject to the sanctions outlined in ILSA.
    I want to divide my testimony today into three parts: outline what 
Iran is doing today, to discuss the effectiveness of ILSA, and to look 
at the consequences of allowing ILSA to expire.
Iran's Threatening Policies
Support for International Terrorism and Rejection of Israel's Right to 
        Exist
    Let me start with Iran's state support for international terrorism. 
The latest State Department Report on Patterns of Global Terrorism, 
issued in April, again affirmed that, ``Iran remained the most active 
state sponsor of terrorism in 2000.'' The Report goes on to say that, 
``Iran provided increasing support [emphasis added] to numerous 
terrorist groups, including the Lebanese Hizballah, HAMAS, and the 
Palestine Islamic Jihad,'' the very groups responsible for the 
countless terrorist attacks against innocent Israelis. The Report notes 
that official Iranian agencies ``continue to be involved in the 
planning and the execution of terrorist acts,'' that Iran's support for 
Hizballah, HAMAS, and Islamic Jihad include ``funding, safehaven, 
training, and weapons,'' and that this support ``continued at its 
already high levels following the Israeli withdrawal from Lebanon in May 
and during the intifadah in the fall.'' Moreover, in the words of the 
Report, ``Iran continued to encourage Hizballah and the Palestinian groups 
to coordinate their planning and to escalate [emphasis added] their 
activities against Israel.''
    Iran is now reportedly spending $100 million annually on these 
groups. Iranian jetliners loaded with weaponry continue to land weekly 
in Damascus, where their cargoes are unloaded and trucked to Hizballah 
forces in southern Lebanon. Iran has recently begun supplying Hizballah 
with long-range 240mm mortars capable of reaching Haifa and beyond.
    Late last year, Iran announced the formation of the International 
Anti-Zionist Movement, an eight-member alliance designed to undermine 
the peace process. The head of the organization is Mohsen Rezaie, the 
former head of the Iranian Revolutionary Guard and a close associate of 
Iran's Supreme Leader, Ayatollah Khamene'i.
    A statement sent by the new organization to the heads of all 
Islamic states said, in part, ``We ask you, before the vast storm of 
Islamic countries, to mobilize to destroy Israel and create problems 
for those governments who defend it . . .'' Rezai said that, ``Iran 
will continue its campaign against Zionism until Israel is completely 
eradicated.''
    In January, Iranian officials met in Beirut with representatives of 
Hizballah, HAMAS, Islamic Jihad, and the Popular Front for the 
Liberation of Palestine--
General Command to discuss ways to cooperate in attacks aimed at Israel 
and United States targets. In April, Iran hosted a follow-up session in 
Tehran with the leaders of these groups.
    There are those who note a power struggle going on inside Iran 
between hard-line clerics, led by Iran's Supreme Leader, Ayatollah 
Khamene'i, and supposedly moderate clerics, led by President Khatami. 
Whatever the reality of that struggle, it is clear that their 
differences do not extend to Iran's support of international terrorism 
nor to their opposition to Israel's very existence. Last December, 
Ayatollah Khamene'i said that, ``Iran's stance has always been clear on 
this ugly phenomenon (Israel). We have repeatedly said that this 
cancerous tumor of a state should be removed from the region.'' In 
February of this year, Khamene'i stated that, ``It is the mission of 
the Islamic Republic of Iran to erase Israel from the map of the 
region.''
    And Iran's so-called ``moderate'' President Khatami last year 
called Israel an ``illegal state.'' Last August he told a visiting 
Yasir Arafat that the peace process was doomed to fail and that, ``All 
of Palestine [emphasis added] must be liberated.'' On April 25, Khatami 
said Israel ``is a parasite in the heart of the Muslim world.''
    Iran's support for international terrorists goes beyond Israel, 
however. The State Department Report noted that Iran continued funding, 
training, and logistical 
assistance to a variety of radical groups in the Persian Gulf, Africa, 
Turkey, and 
Central Asia.
    A stark example of Iran's support for terrorism is its role in the 
Khobar Towers bombing in 1996 that killed 19 Americans and wounded 372. 
Attorney General John Ashcroft and FBI Director Louis Freeh announced 
on June 21 the indictment of 13 members of the pro-Iranian group 
Hizballah for the bombing. This indictment, which mentions Iran 35 
times, describes the involvement of high Iranian government officials 
in the terrorist attack. The indictment reports that an Iranian 
military officer directed and paid the defendants to locate American 
sites for a terrorist attack. The indictment states ``that the attack 
was to serve Iran by driving the Americans out of the Gulf region.''

Iran's Pursuit of Weapons of Mass Destruction

    The U.S. Government has repeatedly reported on Iran's efforts to 
acquire weapons of mass destruction and the missiles to deliver them. 
The CIA's annual proliferation report to Congress has noted Iran's 
clandestine nuclear weapons program for a number of years. Russia is 
rebuilding Iran's nuclear power reactor at Bushehr that was damaged 
during the Iran-Iraq war. Iran, one of the world's richest countries in 
both petroleum and natural gas has, of course, absolutely no need to 
develop ``peaceful'' nuclear power; and yet it has agreed to pay the 
Russians billions of dollars for just such a capability.
    The Clinton Administration sanctioned a number of Russian entities 
for their clandestine nuclear weapons cooperation with Iran, yet the 
assistance continues. Just this past winter, the Clinton Administration 
vigorously sought to dissuade Russia from providing Iran isotope 
separation technology with which it could ultimately produce its own 
weapons-grade nuclear material. It is as yet unclear whether that 
transaction has been permanently shut down. China has also assisted 
Iran's nuclear weapons program, and both these countries, in addition 
to North Korea, have aided Iran's missile program.
    A Defense Department study entitled, ``Proliferation: Threat and 
Response,'' issued this past January stated that Iran is seeking the 
full range of weapons of mass destruction: nuclear, chemical, and 
biological weapons, and is expanding its missile program. Iran has 
already flight tested the Shahab-3, a medium range ballistic missile 
with a range of 900 miles--that is, a missile that can reach any point 
in Israel, as well as hitting American forces in the region.
    The study reported that Iran is eventually planning to develop 
intercontinental ballistic missiles that could threaten Europe and the 
United States directly. It added that ``Iran is striving to 
indigenously produce ballistic missiles and become a supplier state.''
    The report came to the not startling conclusion that were Iran to 
possess nuclear and missile capabilities, it would likely lead to 
increased intimidation of its Gulf neighbors and an increased 
willingness to confront the United States. Both American and Israeli 
intelligence are reported to believe that Iran could have such a 
capability within the next decade. The timing could be considerably 
shortened if Iran were to obtain the necessary fissile material from 
abroad.
    One can only imagine what the United States and our friends in the 
region would confront were the clerical regime in Iran to obtain such 
capabilities. Imagine a nuclear-armed Iran sitting astride the Persian 
Gulf shipping lanes through which so much of the world's petroleum 
resources flow. Imagine what Israel would confront. Imagine how much 
more severe would be the dangers of Iranian-supported terrorist groups 
emboldened by the Islamic Republics new weapons capabilities and the 
likelihood of Iran sharing these weapons with these very same groups. 
Clearly, Mr. Chairman, we believe the United States must do all it 
can--for our own sake and for that of our allies--to prevent such 
nightmare scenarios from becoming realities.
The Role of ILSA
    Over the course of the last 5 years, both the executive branch and 
the legislative branch of the U.S. Government have made concerted 
efforts to do precisely that--prevent Iran from gaining such dangerous 
capabilities. To demonstrate that direct American action was required 
to stop weapons proliferation, Congress in 1996 overwhelmingly passed 
the Iran and Libya Sanctions Act (ILSA), and last year enacted the Iran 
Nonproliferation Act, again overwhelmingly. The Clinton Administration 
made Russian transfers of dangerous technologies to Iran a very 
important item on the agenda of our bilateral relations with Moscow and 
engaged our allies to tighten their own nonproliferation controls. We 
are pleased that the Bush Administration has pledged to maintain this 
priority and take the necessary measures to address this serious 
national security problem.
    ILSA was designed to deter foreign investment in Iran's energy 
sector. It was based on a few simple facts: (1) Virtually all Iran's 
hard currency earnings are derived from its energy exports. It is this 
revenue that provides Iran the wherewithal to pay for its programs to 
acquire weapons of mass destruction and its support of terrorism. (2) 
Since the fall of the Shah through 1995, the clerical regime of Iran 
made no investments in its own petroleum and natural gas 
infrastructure; as a result, its production capabilities have declined 
by more than a third since 1979. At the same time, its population has 
doubled, meaning that Iran's export earnings per capita have dropped to 
about only one quarter of their level under the Shah.
    Iran's oil fields are aging. Ninety percent of its oil comes from 
its oldest onshore fields and their output is declining because they 
have not been rehabilitated by expensive water separation and gas 
reinjection. Senior Iranian officials have been warning since the mid-
nineties that output at some reservoirs is in sharp decline after years 
of being pushed too hard.
    If foreign investment could be prevented from reinvigorating this 
crucial sector to Iran, then its production capabilities would continue 
to decline, and with it, Iran's ability to continue its weapons 
programs and its support for terrorism. Indeed, the CIA estimated in 
1996 that ``unless Iran starts making massive investments in oil field 
maintenance, it will become a net importer of oil by the year 2005.'' 
[Emphasis added.]
    Not surprisingly, Iran has, since 1995, sought a great deal of 
foreign investment. It has promoted over 50 foreign energy investment 
opportunities. As of the end of the year 2000, only seven substantial 
contracts had been secured, a success rate of 14 percent. These seven 
projects have netted Iran less than $10 billion, less than $2 billion a 
year and well below what Iran's own planners expected. Compare that to 
tiny Qatar, with much fewer petroleum resources. During the same time 
frame, Qatar received twice as much foreign investment--$18 billion--in 
its energy sector.
    Iran's own government has admitted that ILSA has been effective in 
deterring investment. In an August 1998 report to the U.N., Iran stated 
that ILSA had ``led to the disruption of the country's economic system, 
. . . caused a decline in its gross national product, . . . [and] 
weakened the country's ability to deal with its international lenders, 
. . . which impeded credit transactions.'' Iran went on to report that 
ILSA created difficulties in the petroleum and oil sector, such as 
``reduction in international investment, delays in . . . oil projects, 
cancellation of some tender contracts, technological shortcomings, and 
increased negotiating expenses.'' President Khatami acknowledged in 
1998 that U.S. sanctions had ``inflicted damage upon us.''
    In short, Mr. Chairman, ILSA is an example of sanctions legislation 
that has worked. There are those who will assert that foreign 
investment in Iran is just about to really take off. Over the past 5 
years, I have read about any number of imminent contracts about to be 
signed. Most, however, never came to fruition. That is, no doubt, in 
part true because of Iran's own problems in attracting foreign 
investment. But it is also undoubtedly true because ILSA acts as a 
further complication for foreign corporations trying to decide where to 
invest in energy development.
    Indeed, ILSA is a carefully balanced piece of legislation that is 
narrowly and effectively targeted only at foreign energy investments in 
Iran. The legislation provides our Government with the necessary tools 
to stop or at least deter this investment. The menu of sanctions from 
which the President must choose ranges from the minor--such as 
prohibiting the Export-Import Bank from extending credit to sanctioned 
entities--to the major--such as invoking an import ban on these foreign 
entities. When Royal Dutch Shell, for example, with its hundreds of 
gasoline service stations in the United States, has to decide whether 
or not to invest in Iran, certainly ILSA requires consideration.
    ILSA is a good example of how sanctions legislation should be done. 
While addressing an issue of vital national security interest to the 
United States, it does not tie the President's hands but indeed 
provides great flexibility. If the President has determined that a 
sanctionable action has occurred, he may, if he determines that it is 
in the U.S. national interest, waive the application of sanctions. ILSA 
also is narrowly targeted at foreign companies and does not in any way 
restrict agricultural or medicinal trade between American companies and 
Iran.
    The point of ILSA is twofold: to raise the cost of Iran's dangerous 
policies and to delay the time for it to acquire weapons of mass 
destruction. And on that score I would argue ILSA has been very 
successful. Unless Iran is able to somehow obtain fissile material, it 
will have to master the entire nuclear fuel cycle in order to 
indigenously produce weapons-grade material. That is a long and costly 
endeavor. Raising the costs and delaying the timeline may allow for 
real political change in Iran. As we have seen from Iran's continuing 
efforts to seek weapons of mass destruction and support terrorism, ILSA 
alone is not enough but it is a necessary policy tool of our Government 
to delay Iranian success in these efforts as long as possible.
    I have no doubt that the vast majority of Iranians would end 
clerical rule if they had the opportunity to do so. One reason so-
called clerical ``moderates'' do so well in Iranian elections is that 
they are the most moderate allowed to run. They are, nevertheless, part 
of the clerical regime, and Iran has been experiencing considerable 
civil unrest over the past year in opposition to the regime. 
Unfortunately, we have seen no evidence whatsoever of any 
``moderation'' in Iranian foreign or national security policy and the 
changes at home have been minor and are reversible. Witness the nine 
Iranian Jews that have been falsely charged and imprisoned; the closing 
of Iranian dissident newspapers; and the arrest of dissident leaders.
    In short, our hope must be that we are able to delay Iran's 
acquisition of weapons of mass destruction long enough so that 
political change may occur. That is one of the underlying objectives of 
ILSA and it is based on historic experience elsewhere. In the early 
1980's, Argentina, Brazil, and Chile all had nuclear weapons programs. 
All were ruled by the military. The United States imposed restrictions 
in nuclear commerce with the three. Today, all three are democracies, 
and none of them have nuclear weapons programs. Delay allowed 
eventually for political change and an end to a nuclear proliferation 
threat.
    If Congress does renew ILSA for another 5 years, as I hope it will, 
it will send a new message to those now eagerly anticipating its 
demise. It will reinvigorate the deterrent effect of ILSA, and do so 
just at the start of a new Administration.
If ILSA Is Not Renewed
    Put simply, were ILSA allowed to lapse, it would be broadly 
interpreted by the Iranian regime, and others, as a weakening of 
America's opposition to Iran's policies and programs that threaten our 
vital interests. Iran has done nothing to warrant such a reward. 
Indeed, even those who have argued these past years that Iranian 
moderation was forthcoming have to admit that the Islamic Republic's 
international behavior has deteriorated not improved. Its weapons 
development program has accelerated; its financial and arms support for 
terrorists has increased both quantitatively and qualitatively; and its 
objections to an Israel-Arab peace process are as vociferous as ever.
    Based on this record, we would not only fail to derive any benefit 
from allowing ILSA to lapse, but also we would put our country and our 
allies at even greater risk.
    Over the past 3 years, the United States has made it clear to Iran 
that we wished to improve relations. We took several unilateral steps 
that were all rebuffed. We eased import restrictions on some Iranian 
products; we provided greater ease of travel between Iran and the 
United States and even encouraged Americans to visit; we sought to open 
a dialogue with the Iranian regime--all to no avail. Hard-line clerics 
shut down every initiative while continuing to pursue policies and 
programs inimical to our interests.
    But couldn't the lapsing of ILSA be seen as a gesture of support to 
Iranian moderates? Quite the contrary. The expiration of ILSA would 
provide Iran a potential windfall by allowing unfettered foreign 
investment in its petroleum industry, thereby securing its petroleum 
capabilities--and its ability to fund its weapons programs and support 
of terrorism--indefinitely. It would secure the hard-liners in power. 
And it would be seen by moderates hoping for political change in Iran 
as a weakening of America's posture against the very regime they seek 
to change.
    Thus, Mr. Chairman, I strongly urge the Congress to renew the Iran 
and Libya Sanctions Act. Iranian behavior demands it; ILSA has met the 
test and proven its effectiveness over time; and its expiration now 
would be a major, and totally undeserved, victory for the Islamic 
Republic, leading to potentially disastrous consequences to vital 
American national interests. We must, in short, remain vigilant and 
steadfast.

                               ----------

                PREPARED STATEMENT OF WILLIAM A. REINSCH
            President, National Foreign Trade Council, Inc.
                      Vice Chairman of USA*Engage
                             June 28, 2001
    Mr. Chairman and Members of the Committee, I am William Reinsch, 
President of the National Foreign Trade Council, an association of more 
than 500 U.S. companies engaged in international trade and investment. 
I am also appearing today as Vice Chairman of USA*Engage, a broad-based 
coalition of over 670 American companies and trade and agricultural 
organizations that support sanctions reform. My comments today will 
focus primarily on the Iran and Libya Sanctions Act (ILSA), but will 
also address the U.S. Executive Orders that impose unilateral sanctions 
against Iran and Libya.
    We support ILSA's goals--``preventing proliferation of weapons of 
mass destruction and the means to deliver them and acts of 
international terrorism''--and we support full compliance by Libya with 
U.N. Security Council Resolutions regarding the destruction of Pan Am 
Flight 103; however, we believe ILSA has not been effective in 
achieving those goals but has, in fact, been counterproductive. Simply 
maintaining it in place will not increase its prospects of success. 
Instead, we urge Congress to work with the Administration as it 
develops its policy toward Iran and Libya. We also urge Congress to 
continue its review of the utility of using unilateral sanctions as an 
instrument of foreign policy.
    The bill that you have before you today, S. 994, would extend ILSA 
for 5 more years. We are opposed to renewing these sanctions because 
they have been inef-
fective, costly to American economic interests, and posed significant 
diplomatic complications for the United States. The Bush Administration 
has asked for a 2 year extension of ILSA to provide time for them to 
conduct a thorough review of sanctions policy broadly and specific 
sanctions laws, such as ILSA. Although we certainly prefer that ILSA 
not be renewed for any length of time, we believe that the 
Administration's request is preferable to a 5 year extension.
    The theory of ILSA in 1996 was that the United States, acting 
unilaterally, could deny Iran the capital it needed to develop its most 
lucrative exports, oil and gas. That, in turn, was expected to reduce 
resources available for development of weapons of mass destruction and 
support for terrorism. In the case of Libya, the objective was 
primarily to gain leverage for compliance with the U.N. resolutions on 
the terrorist attack on Pan Am Flight 103. Significantly, ILSA was intended 
to block foreign companies from making investments that the Executive Orders 
of 1995 prevented U.S. companies from making--in other words to make 
sanctions against Iran and Libya equitable with respect to investment.
    Now, 5 years later, advocates of renewal argue that ILSA should be 
extended because it has succeeded--that is, because it has successfully 
deterred new foreign investment in Iran's energy sector. Any objective 
review of the record will conclude that ILSA has failed in its key 
objective of stopping major foreign investments in oil and gas 
development.
    Ironically, advocates of renewal also argue that this secondary 
boycott must be renewed because, in effect, ILSA has failed--Iran is 
still able to finance development of weapons of mass destruction and 
terrorism. Either way, ILSA has been entirely ineffective and 
counterproductive for U.S. interests.
    That latter point is crucial, because we would hope the Committee 
would view ILSA in light of our national interests. If it were 
achieving our policy goals, we would be here testifying in support of 
it. However, it is not advancing its stated purposes; it is creating 
collateral diplomatic damage to U.S. interests for essentially symbolic 
purposes. It has created precisely the situation it sought to avoid--
Iran and Libya are increasingly able to develop their oil and gas 
reserves through foreign investments from which American firms are 
excluded. In short, it does not meet a national interest test.
    Having ILSA on the books strains U.S. diplomatic relations with its 
allies because of their resentment of its secondary boycott. Further, 
if ILSA waivers were not granted, the economic costs for U.S. firms 
would increase because of retaliation by other countries. Finally, 
ILSA's attempt to target the oil and gas production of two key energy-
producing countries runs counter to U.S. long-term energy security 
requirements. United States and worldwide demand for oil and gas is 
rising rapidly. The world has entered a dangerous period of energy 
scarcity.
    Under these circumstances, it is shortsighted to try to diminish 
Iranian and Libyan energy production capabilities. In fact, a recent 
study shows that if we were actually successful in reducing Iran and 
Libya's oil production, it would have the perverse consequence of 
raising world oil prices, increasing revenues to the sanctioned 
countries and costing U.S. consumers over $150 billion.
    Of course, it is the world price of oil and these countries' 
ability to produce it that determines Iran and Libya's income from oil 
and gas production, not United States sanctions. It is that rising 
price level that is encouraging exactly the investment ILSA sought to 
block. There is no evidence that ILSA can deter foreign investment in 
Iran or Libya's energy sector. On the contrary, both Iran and Libya are 
receiving significant capital investment in their oil and gas sectors.
    Stark evidence of this is now coming to light. Last March, the 
Congressional Research Service reported that $10.5 billion of foreign 
investment has taken place in Iran's oil and gas sector since 1997. 
Iran expects $1.5 billion to be invested in its petrochemical sector 
this year. These investors are from France, Canada, Italy, the 
Netherlands, the UK, Japan, and Norway--companies from our closest 
allies and most important trading partners, which have not joined our 
sanctions nor been deterred by the threat of ILSA.
    On June 21 the Financial Times reported that the chairman of 
British Petroleum announced plans to start ``some sizable'' business in 
Iran, after delaying in the past in order not to ``unnecessarily upset 
our U.S. interests.'' That same day, The Wall Street Journal reported 
that four more large European oil companies were planning major 
investments in Iran: a $1 billion deal by Italy's EniSpa, and $3 
billion from various projects by Royal Dutch/Shell, France's 
TotalFinaElf SA and Spain's Cepsa.
    Exclusion of United States firms from Iran and ineffective 
sanctions against foreign firms will not determine how Iran uses its 
oil revenues. The desire of either Iran or Libya to support terrorism 
or pursue development of weapons of mass destruction is a national 
interest calculation, not a function of their oil and gas revenues. 
These issues are important, but they require a more sophisticated and 
targeted approach than ILSA, which is a very blunt instrument.
    Mr. Chairman, unilateral sanctions have not only failed to achieve 
their stated purposes, but also we believe they cannot achieve them. To 
prolong their life may provide the illusion of taking action, but 
nothing more. Equally important, if the benefits are ephemeral, the 
costs are real. Unilateral sanctions are doing significant damage to 
U.S. commercial prospects at a time of economic downturn and energy 
shortage. If ILSA were to make Iranian and Libyan oil production less 
efficient and thereby reduce their contribution to world oil supplies, 
oil prices would increase. To the extent that U.S. exports to these 
countries are prohibited, the American workers and farmers are damaged, 
and U.S. consumer product manufacturers are seriously compromised in 
their future competitiveness in those markets. Foreign affiliates of 
U.S. companies, where they need parent company approval, are also 
excluded from these countries; yet U.S. foreign affiliate sales are 
three times as large as total U.S. exports ($2.4 trillion in 1998).
    ILSA has not only failed to stop foreign investment in Iran's 
energy development. It has also been a major irritant in our relations 
with countries whose cooperation we need to conduct an effective policy 
toward Iran and Libya. We know for a fact that foreign investment will 
continue to flow into Iran and Libya's energy sectors, especially under 
current world energy supply conditions. The question is whether we 
continue our futile effort to prevent them.
    Some argue that ILSA has not worked because it has not been tried. 
In fact, ILSA could not have worked. ILSA forces the President either 
to implement sanctions that he knows will be ineffective and 
counterproductive or waive the law. That is what happened the one time 
the President was called upon to use ILSA. In 1998, after three non-
U.S. oil companies had been awarded a multibillion dollar contract to 
develop Iran's South Pars oil field, the Clinton Administration waived 
ILSA sanctions on Russian, French, and Malaysian companies. It took 
this action, among other reasons, to prevent retaliation against U.S. 
firms and to avoid provoking a trade war with the European Union, which 
regards secondary boycotts, such as ILSA, as illegal under the World 
Trade Organization. It is also ironic that U.S. law prohibits American 
companies from cooperating with secondary boycotts; yet in the case of 
ILSA we are imposing one and insisting that are allies comply with it, 
which can only undercut our efforts to weaken the Arab boycott of 
Israel.
    Implementation of ILSA today, just as the United States is 
preparing for a new round of global trade talks in which EU cooperation 
is crucial, would involve this country in another bitter trade dispute 
with the EU. It is clear that implementation of ILSA, indeed the 
reauthorization of ILSA, puts us at serious odds with our 
major allies and threatens cooperative action on a range of issues, 
including policy toward Iran and Libya. Nor does the inclusion of 
Presidential waiver authority mitigate the negative impact of a 
reauthorized ILSA. If the Act is waived, it becomes meaningless. If it is 
not waived, the negative effects cited in this testimony will be 
exacerbated.
    There is no evidence that ILSA can deter foreign investment in Iran 
or Libya's energy sector. Furthermore the rising price of oil insures 
that Iran's oil revenues will increase, U.S. sanctions notwithstanding. 
The only ``success'' of our sanctions policy toward Iran and Libya has 
been ceding those markets to our foreign competitors. Let me cite a few 
examples:

 World oil prices are a powerful incentive to foreign oil firms 
    to invest in Libya and Iran, which are now ranked numbers one and 
    two for new petroleum exploration projects by 85 international oil 
    firms polled in March by a British research firm;
 United States efforts to isolate Iran are creating distortions 
    in the development of the considerable petroleum resources of the 
    Caspian region and putting United States firms at a disadvantage 
    there;
 Iran Air and Libyan Arab Air have reportedly signed contracts 
    worth several 
    billion dollars with Airbus;
 In 1999 Caterpillar lost a major turbine contract in Turkey to 
    its European 
    competitors because of U.S. Government uncertainty over whether 
    ILSA sanctions applied.
 As a result of the ILSA and the 1995 Executive Orders, 
    Caterpillar has been forced to cede its Iran market to Europe. 
    Hardest hit has been its subsidiary, Solar Turbines, Inc. in San 
    Diego, which lost its market to Novo Pignone in Italy.
 Royal-Dutch Shell announced last month that it will begin 
    pumping oil in November from its $800 million investment in two 
    Iranian oil fields that will yield 190,000 barrels a day in 2 
    years;
 Iran is the largest automotive market in the Middle East with 
    172,000 new motor vehicles being sold in 1999 and with vehicle 
    sales of 500,000 a year forecast by 2003. Iran's huge growth 
    potential as a market for vehicles will be met by European, 
    Japanese and Korean automakers;
 Unilateral sanctions hurt American farmers, who are 
    effectively excluded from Iran's $2-3 billion agricultural market 
    by strict U.S. licensing and the strong EU relationships built up 
    before last year's legislation exempting food and medicine from 
    sanctions programs.

    Mr. Chairman, the Bush Administration is currently conducting a 
review of all United States unilateral sanctions policies, including 
Iran and Libya. Iran has just reelected its reformist president by a 
landslide majority. Most of the population has been born since the 1979 
revolution. The ultimate direction of the country's policies is very 
much in doubt. It would be unwise in the extreme for Congress to 
continue sanctions or impose new ones on the heels of President 
Khatami's victory and before the new U.S. Administration has developed 
its policy.
    In the case of Libya, the end of the Lockerbie trial offers an 
opportunity to bring an end to a long period of confrontation in our 
relations. While Libya must still fully comply with U.N. resolutions 
requiring appropriate compensation to the victims' families and 
acceptance of responsibility, the United States should encourage 
positive trends in Libyan behavior. Passing a new version of ILSA will 
have no impact on European and Asian investment in Libya but would 
signal that the United States does not acknowledge the progress that 
has been made.
    We conclude, therefore, that United States sanctions on Iran have 
not had their intended effect of changing Iranian behavior, that ILSA 
in particular has not been effective in isolating Iran or Libya, but 
that it has been very effective in isolating the United States from 
these two countries and imposing significant economic costs on us. This 
is the opposite of the ``smart sanctions'' policy that the Secretary of 
State is trying to develop. The consequences in the case of Iran are 
especially far reaching given the geographic and strategic importance 
of the country.
    We are convinced that expanded private contact with Iran, including 
business contact, will reinforce positive trends in that country in the 
long term. But let me be very clear. A decision by the Congress not to 
renew ILSA is not a concession to Iran or to Libya. Renewing ILSA sends 
a decidedly negative message that ignores changes that have taken place 
since 1996 and sends a powerful message to our 
European allies that we are continuing a failed unilateral policy. 
Allowing ILSA to expire would clear the way for a new policy based on 
current realities and better designed to U.S. interests and carefully 
considered policy objectives. Acceding to the Administration's request 
for a 2 year extension will at least permit a sober reconsideration of 
policies that will serve the U.S. national interest. We believe the 
choice is clear.

                               ----------

                PREPARED STATEMENT OF WILLIAM F. MARTIN
                 Chairman, Washington Policy & Analysis
                             June 28, 2001
    Good morning. My name is William Martin. I am delighted to be here 
today to testify on the reauthorization of the Iran and Libya Sanctions 
Act of 1996.
    I am an energy economist by training. I am the Chairman of the 
Council on Foreign Relations Energy Security Group and the Chairman of 
Washington Policy & Analysis, Inc., an international energy consulting 
firm. I served as Deputy Secretary of Energy and Executive Secretary of 
the National Security Council under President Reagan.
    The purpose of my testimony today is to share with you the results 
of a recent study conducted by my firm. It investigated the impact of 
sanctions on current and future energy markets and the ensuing effects 
on the American, and world economies. This study is consistent with the 
Administration's National Energy Policy 
recommendation that President Bush ``direct the Secretaries of State, 
Treasury, and Commerce to launch a comprehensive review of U.S. 
sanctions policy.''
    While a comprehensive review requires inquiries into national 
security, economic, energy, and foreign policy issues, WPA focused on 
how sanctions affect energy supply, demand and pricing. Its inquiry 
addressed four key areas:

          1. What is the state of the global oil market? How well can 
        the world respond to rising demand or to supply disruptions?
          2. What effects do maintaining sanctions against Iran, Iraq, 
        and Libya have on energy prices? What effect do rising prices 
        have on the world and on U.S. economies?
          3. How do unilateral United States sanctions against Iran and 
        Libya affect their energy sectors?
          4. How would lifting unilateral sanctions against Iran and 
        Libya and modifying multilateral sanctions against Iraq affect 
        the global energy balance and prices? Do sanctions 
        unintentionally provide Iran, Iraq, and Libya with higher 
        revenues than what they would earn in the absence of sanctions?
Findings and Recommendations
    In our study, WPA used its global energy model to develop a base 
case scenario for the future world oil market. It then created a second 
case to model how changes in sanctions policies toward Iran, Iraq, and 
Libya could affect the market. This comparative analysis led to the 
following findings.
    What is the state of the global oil market? How well can the world 
respond to rising demand or to supply disruptions?
    The global oil supply is a cause for concern. After decades of 
whittling away at surplus production capacity to the point where it has 
almost vanished, energy markets are so tightly balanced that they 
threaten global economic growth. If there were even a short-lived 
disruption of energy supplies, the oil market would have less 
flexibility to respond than in earlier decades for several reasons:

 Oil demand continues to grow steadily globally. Overall, 
    demand in developing, non-OECD countries is growing at a rate that 
    is 75 percent faster than in OECD countries; in the world's most 
    populous nations--China and India--demand is growing at a rate that 
    is 400 percent faster.
 Many of the countries in which demand is growing the fastest 
    neither participate in International Energy Agency (IEA) agreements 
    nor hold strategic stocks.
 Average commercial stock levels are low due to just-in-time 
    inventory management practices.
 OPEC surplus capacity has dwindled from 11 million barrels per 
    day (mbd) in the mid-1980's (equal to 18 percent of global demand) 
    to about 3 mbd in 2001 (equal to 4 percent of global demand).
 The world's oil producers, including both private companies 
    and state-controlled entities, are close to fully utilizing the 
    production capability they have to meet current global oil demand; 
    OPEC capacity utilization is now pushing toward the 95 percent 
    level.
 New production capacity is growing at slower than historical 
    rates in Saudi Arabia and Kuwait, which control about 65 percent of 
    the world's spare capacity, due to more conservative policies and 
    domestic issues.

    Given these conditions, the world now faces the tightest balance 
between readily accessible supply and global oil demand that it has 
experienced in many decades. As seen below, WPA expects global demand 
to grow by 1-2 mbd per day over the next several years, despite 
assumptions of a near-term economic slowdown and modest 2.5 percent 
global average growth over the 2001-2008 study period. On the supply 
side, WPA assumes aggressive growth in OPEC and non-OPEC production 
growth when compared to growth rates over the last decade--a 20 percent 
increase in OPEC's production growth rate and a 55 percent increase in 
non-OPEC supply growth by 2004. [Refer to Annex A.]

    Nevertheless, WPA forecasts shortfalls, even with steady increases 
in global oil production under stable conditions and in the absence of 
any major disruptive events. WPA recognizes that no actual shortfall 
exists; in reality, the market always balances. The growing notional 
gap suggests a greater likelihood of price increases because oil prices 
are set at the margin of supply and demand; even a small surplus or 
deficit can cause wide price swings. Thus, the already fragile world 
and American economies remain vulnerable to oil prices rising from 
today's high levels.
    The diminished OPEC supply cushion also has troubling implications 
for the ability of oil-consuming countries to weather major oil supply 
disruptions, which have occurred roughly every 5 to 7 years since the 
1970's. For the reasons discussed earlier, commercial stock release, 
surge capacity and the International Energy Agency system--the three 
key instruments the world relies on to respond to crises--could be less 
effective than they have been previously.
    What effects do maintaining sanctions against Iran, Iraq, and Libya 
have on energy prices? What effect do rising prices have on the world 
and U.S. economies?
    United States sanctions against Iran and Libya are intended to 
hinder investment in their energy sectors, but the sanctions do not 
affect oil exports. Multilateral United Nations sanctions against Iraq 
do limit exports and oil sector development. Recently proposed ``smart 
sanctions'' against Iraq aim to limit the acquisition of dual-use 
technologies. If implemented, they would permit increased Iraqi oil 
exports. However, this additional amount is not sufficient to 
dramatically alter the outlook for oil prices.
    An environment in which sanctions are maintained could see steady 
upward pressure on oil prices because they would rise as the notional 
gap mentioned earlier expands. Historical evidence shows that oil 
prices are set at the margin of supply and demand; even a small surplus 
or deficit can cause wide oil price swings. According to the WPA Global 
Energy Model, oil prices could rise to as much as $33 a barrel by 2003 
and to nearly $40 per barrel by 2008 (prices in 2000 dollars).
    WPA also evaluated a variety of alternative energy scenarios 
involving conditions in the world oil market in 2003 and the effects of 
plausible potential oil shocks. WPA concludes that supply shocks could 
drive per barrel prices from $33 to nearly $40, or even higher in the 
more severe scenarios. [Refer to Annex C.] These price spikes would 
occur even if present response mechanisms were fully utilized. In 
general, the more severe the shock scenario, the greater the degree of 
oil market instability and the larger the magnitude of the price spike.
    The International Monetary Fund (IMF) quantified the link between 
oil price increases and economic growth in a December, 2000 research 
paper. It estimated that every $5 increase in the price of crude oil 
skims an average of 0.27 percent per year from the real global economic 
growth rate for 3 consecutive years after the initial price spike 
occurs. The effects are more pronounced for the United States, which 
would experience a 0.37 percent average annual GDP decline during the 
same period, according to the IMF. Therefore, WPA expects that U.S. GDP 
will be at least 1 percent, or roughly $100 billion, lower in 2004 than 
it would be without a notional supply gap. The economic effect would be 
even more pronounced if there were unanticipated disruptions in oil 
markets.
    Sustained high petroleum prices take their toll on every sector of 
the U.S. economy. Any significant change in the crude oil price drives 
large retail price movements within the gasoline and home heating oil 
markets, although refining and distribution issues also affect product 
prices. If crude oil prices rise $10 a barrel to $35 in 2004, the 
typical American household will spend an extra $400 annually to fuel 
their cars; heating oil consumers will pay $50 a month more throughout 
the winter to keep their homes warm; distribution of goods and services 
will cost railroads and trucking companies an additional $10 billion 
each year; and collectively, American farmers will spend $1 billion 
more to fuel their tractors during the planting and harvesting seasons.
    How do unilateral United States sanctions against Iran and Libya 
affect their energy sectors?
    How effective United States sanctions against Iran and Libya have 
been in achieving their national security objectives is the subject of 
much debate. Some analysts argue that foreign oil firms are ready to 
disregard American sanctions and aggressively move forward with plans 
to exploit some of the largest fields in Iran and Libya. Many of these 
companies have the technological ability to quickly expand production 
capacity without United States participation. In fact, Iran has signed 
contracts worth more than $10 billion with foreign oil firms over the 
past 5 years.
    The situation is not that simple, however. U.S. sanctions and 
Executive Orders prohibit American investment and hinder non-U.S. 
companies' activities by creating political uncertainty surrounding 
Washington's response to violations. Furthermore, the SEC recently 
declared that it considers investments in sanctioned countries to 
represent significant material risk for investors. The SEC requires 
foreign businesses raising funds in U.S. capital markets to publicly 
disclose their dealings with the sanctioned countries and file the 
information electronically, making these companies more vulnerable to 
scrutiny.
    However, for the purposes of this study, WPA does not purport to 
take a position on the merits or effectiveness of U.S. sanctions 
policy. The only intent is to evaluate how future enforcement of 
sanctions could impact the ability to bring adequate oil supplies to 
market and alleviate higher energy prices over the short to long term.
    Based on these considerations, WPA assumes only modest increases in 
oil production from Iran and Iraq--400,000 barrels per day by 2004--
aided by investment from international oil companies, even if sanctions 
are maintained. WPA expects Libyan production to remain at current 
levels. By factoring these expectations into the Global Energy model, 
WPA projects that much greater production levels are needed to relieve 
the tight oil market situation and thus lower prices.
    Over the past 18 months, high oil prices have bolstered 
international oil firms' balance sheets, enabling the expansion of 
exploration and production activities worldwide. Although capital 
investment is occurring, the most promising and the lowest-cost 
properties remain in countries under U.S. sanctions. Libya and Iran 
were the two nations considered most attractive for new venture 
activity in a survey of 85 international oil firms by UK-based 
Robertson Research; Iraq came in eighth. Not surprisingly, Iraq, Iran, 
and Libya have the second, third, and sixth largest remaining reserves, 
according to U.S. Geological Survey figures.
    Yet rather than immediately reinvesting portions of their profits 
in exploration plays that carry more geologic risk, or in acreage that 
will result in high production costs, major U.S. oil firms are buying 
back their stock. They have announced some $10 billion in stock 
repurchases in the past year, clearly signaling that share buybacks are 
currently one of the best uses for available cash. If sanctions are 
lifted, however, Iran and Libya could offer American petroleum 
companies the opportunity to invest in some of the world's most 
prolific, and easily accessible, reserves. Such investment 
opportunities would perhaps present lucrative alternatives to stock 
buybacks and bring more supply to the market.
    How would lifting unilateral sanctions against Iran and Libya and 
modifying multilateral sanctions against Iraq affect the global energy 
balance and prices? Do sanctions unintentionally provide Iran, Iraq, 
and Libya with higher revenues than what they would earn in the absence 
of sanctions?
    United States sanctions were imposed against Iran and Libya in 1996 
when oil markets were in surplus and featured relatively low oil 
prices. In addition, preparations were being made to reintroduce 
significant volumes of Iraqi oil into an amply supplied market under 
the United Nations' Oil-for-Aid Program. Iraq's production quickly 
ramped up by more than 2 mbd from late 1996 to mid-1998. The oil market 
has tightened substantially since then as global demand growth has 
outpaced new supplies and driven oil prices higher.
    If United States unilateral sanctions are removed and U.N. 
multilateral sanctions are modified, WPA projects that oil output from 
Iran, Iraq, and Libya combined could increase 3 mbd by 2004; as much as 
5 mbd of new supply could be forthcoming from these three countries by 
2008. Over the longer term, such supply expansions are large enough to 
potentially reduce oil prices by some $12 a barrel in 2004 and by 
roughly $16 a barrel in 2008, as illustrated below.

    Furthermore, the supply expansion that is likely to result from 
both lifting sanctions against Iran and Libya and modifying sanctions 
against Iraq goes a long way toward closing the notional gap between 
supply and demand. The additional supply would also provide a cushion 
to help ease the effects of potential future oil shocks later in this 
decade, as shown in the table below. [Refer to Annex B.]

    Ironically, WPA's analysis reveals that U.S. sanctions may 
unintentionally provide the targeted nations with greater oil revenues 
than what they would earn in the absence of sanctions. In fact, lifting 
sanctions could reduce the collective revenues accrued by Iran, Iraq, 
and Libya--even as their production rises--because prices will drop 
precipitously in a well-supplied market. The subsequent price declines 
would actually cut their oil revenues by billions of dollars annually.
    For example, in the table on the next page, WPA predicts a $35 a 
barrel oil price in 2004 if sanctions are maintained and a $23 a barrel 
oil price if sanctions are removed. With sanctions, WPA estimates Iran 
would produce 3.8 mbd of oil and generate $133 million a day in 
revenues (3.8 mbd  $35 = $133 million). Without sanctions, WPA 
projects that Iranian production could reach 5.0 mbd by 2004 and 
revenues would fall to $115 million a day due to the lower oil price (5 
mbd  $23 = $115 million).

    The figures work similarly for Iraq; WPA predicts slightly higher 
revenues for Libya due to the increased production. Yet collective 
daily revenues in 2004 would decline slightly over $27 million from 
$287 million with sanctions to about $260 million without sanctions; 
annual 2004 revenues would be nearly $10 billion lower ($27.1 million 
 365 days = $9.89 billion). If sanctions were lifted, Iran, 
Iraq, and Libya's collective oil revenues for the 2002-2008 period 
would be almost $63 billion lower.
    Lifting sanctions would have both short- and long-term effects. The 
announcement of sanctions removal could lead to a small, near-term 
reduction in oil prices. It would positively signal the oil futures 
market to erase any premium it holds due to concerns over a lack of 
future oil supplies, which WPA believes could be approximately $0.50-$1 
a barrel.
    If sanctions are lifted, it is reasonable to expect changes in the 
dynamics of OPEC production restraint and quota allocations within a 
year or two. As more oil firms ink deals with the formerly sanctioned 
countries, Saudi Arabia and Kuwait may seek production quota increases 
to preemptively position themselves to boost their market shares before 
more Iranian, Iraqi, and Libyan oil comes on stream. Such intra-OPEC 
competition would likely push crude oil prices down by several dollars 
per barrel. Most energy economists agree that a competitive environment 
among OPEC members strongly diminishes the cartel's ability to exercise 
supply restraint and therefore dilutes their influence on oil prices.
    Over the medium- to long-term, crude prices will gradually trend 
downward as global oil supplies expand with the lifting of sanctions. 
As lower crude costs for refiners move through the distribution system 
to retail outlets, prices for consumer products, including gasoline and 
home heating oil, will experience comparable declines. Lower oil prices 
should translate into average retail prices at the gasoline pump in the 
area of $1.00-$1.50 a gallon compared to a $2.00-$2.50 a gallon range 
that could occur if sanctions are maintained.
    In conclusion, the National Energy Policy recommendation that 
President Bush have the Secretaries of State, Treasury, and Commerce 
initiate a comprehensive review of U.S. sanctions policy is extremely 
timely and well advised. The tightness and inflexibility of the world 
oil market make it both unprepared for the looming supply shortfalls 
that WPA forecasts and especially vulnerable to major supply shocks.
    To combat these distressing conditions, WPA suggests that the 
unilateral sanctions on Iran and Libya, which were imposed when the 
world oil market was in surplus, be reviewed with greater sensitivity 
to global energy needs. Replacing the unilateral sanctions and 
modifying the United Nations sanctions on Iraq would provide 3 mbd of 
additional supply by 2004 and as much as 5 mbd of additional supply by 
2008. These amounts would relieve increasing upward pressure on oil 
prices and create a modest supply cushion to help alleviate price 
spikes during any unforeseen oil supply disruptions.
    It is also likely that Iran, Iraq, and Libya would earn less from 
oil sales in the absence of sanctions than what they would receive in 
the presence of ongoing sanctions. For example, WPA's analysis 
indicates that their collective revenues would be almost $10 billion 
lower in 2004 without sanctions than what they would realize with 
sanctions. This surprising, counterintuitive finding, combined with the 
upward pressure on oil prices to which sanctions contribute, argues 
strongly for a reappraisal of sanctions and the consideration of 
alternative approaches to achieve the Nation's energy and national 
security goals.
    Thank you for inviting me to speak here today. I look forward to 
answering any questions that you may have.

                 PREPARED STATEMENT OF WILLARD M. BERRY
             President, European-American Business Council
                             June 28, 2001

Introduction
    Mr. Chairman and Members of the Committee, thank you very much for 
the opportunity to provide written testimony on the proposed 
reauthorization of the Iran and Libya Sanctions Act. I am Willard M. 
Berry, President of the European-American Business Council, or EABC. 
The Council is the one transatlantic organization that regularly 
provides actionable information on policy developments and works with 
officials in both the United States and Europe to secure a more open 
trade and investment climate.
    Comprised of over 80 United States and European Union companies, 
EABC is the leading business association active on transatlantic trade, 
tax and investment, and policy issues. The EABC is viewed as highly 
substantive, unique in both its membership composition and in its 
recognized role as an authoritative, highly credible and effective 
voice on transatlantic policy issues. EABC's work includes providing a 
forum for dialogue on transatlantic issues; preventing European Union-
United States disputes and roadblocks to desirable policy outcomes; 
shaping quality 
and workable issue strategies; and helping member companies achieve 
business 
objectives.
    The EABC works to resolve transatlantic disputes as they arise and 
to support the transatlantic trade and investment relationship, which 
is of critical importance to American companies and consumers. A 
healthy and effective transatlantic relationship is also critical to 
move forward global trading and investment rules.

The Transatlantic Economic Relationship
    The European Union and the United States are both global economic 
powers. Their combined GDP is around 56 percent of the world total. 
Forty percent of world trade is conducted between the United States and 
the European Union. Clearly, any successful agenda of world trade 
liberalization requires bilateral cooperation.
    Looking closely at United States-European Union trade and 
investment, we see a substantial economic relationship, which is 
unmatched in its magnitude, is essentially balanced and is mutually 
beneficial. If you add up the $552 billion in two-way trade between the 
United States and the European Union in 1999, the cross investment of 
more than $1 trillion, and the sales of United States and European 
Union company affiliates in each other's market, we find an economic 
relationship of more than $2 trillion. The United States is the 
European Union's largest single trading partner and vice versa, 
accounting for 20 percent of each other's trade in goods and 33 percent 
in services. Forty percent of transatlantic trade in goods in 
intracompany trade.
    Trade and investment flows between the United States and Europe 
provide real benefits for Americans and Europeans. More than seven 
million U.S. jobs depend on European investment in the United States, 
including 3.6 million Americans directly employed by European-owned 
companies. United States investment in Europe has a similar employment 
impact. One quarter of all United States exports go to Europe and those 
exports support 1.6 million jobs in the United States.
    Europe is the largest foreign investor in 43 of 50 United States 
States and number two in the remaining seven. It is the number one or 
two export market for 42 States. Just to cite one example, Mr. 
Chairman, Europe is Maryland's number one export market and your State 
sold $3.7 billion of goods to Europe last year alone. These exports 
support 14,000 jobs (in Maryland). European investment accounts for 
more than 64 percent, or about $6.8 billion, of the total foreign 
investment in your State and direct investment from Europe supports 
more than 73,000 jobs in Maryland. Senator Gramm, European direct 
investments in Texas totaled more than $58.3 billion in 1998, the 
largest amount of direct investment of all U.S. States, supporting 
235,300 jobs. Merchandise exports to Europe alone support an estimated 
77,100 jobs in Texas.

The Iran and Libya Sanctions Act
    The EABC, like many other business groups, cannot support the 
reauthorization of ILSA. We see this primarily in cost-benefit terms.
    ILSA, since its inception in 1996, has failed to reach its goal to 
change the behavior of the target regimes. The effectiveness of an 
economic sanction should be measured not by the volume of business 
activity deterred in Iran, but rather by improved behavior on part of 
the target regime. There is no clear evidence that ILSA has 
significantly improved the behavior of the target regimes. This, as a 
matter of fact, was recently pointed out by House Middle East and South 
Asia Subcommittee Chairman Gilman in a May 20 hearing on the 
reauthorization of the ILSA legislation. ``It is regrettable that 
Iranian behavior has not changed for the better,'' he said.
    The fact that unilateral sanctions do not work is reflected in the 
law's inability to stop foreign investment flows in the petroleum 
sectors into Libya and Iran. The law requires the President to apply 
two out of a possible seven sanctions to companies, United States or 
foreign, that invest more than $40 million per year in the Libyan 
petroleum sector and $20 million in the Iranian petroleum sector. Since 
1997, Iran has received more than $10.5 billion in foreign investment. 
At the same time, however, ILSA has imposed tangible costs on companies 
and has had real negative consequences for U.S.-based firms as is shown 
later in this testimony.

Cost of ILSA
    In the case of ILSA, as in other sanction measures, supporters of 
what is a laudable cause--stopping global terrorism--often do not 
realize that economic sanctions involve considerable trade-offs. U.S. 
sanction measures can have a significant negative impact on the U.S. 
economy, your political constituencies and on the competitive position 
of multinational companies which, in turn, contribute to the health of 
your States' economies.
    Negative effects of U.S. sanctions include fewer joint ventures 
opportunities, a key aspect of global competitiveness, fewer U.S. jobs, 
severed relationships with key suppliers, less investment outside the 
United States--and we know that companies cannot really compete in 
markets where they do not have a presence--and reduced U.S. exports. 
There are ``costs'' for both United States and European-based 
companies, although the ``costs'' are different for each. For United 
States-based companies, the most commonly cited ``costs'' are fewer 
joint venture opportunities and less investment outside the United 
States. For European-based firms, which constitute an important element 
in the economic base of most U.S. States, there will be less investment 
in the United States and fewer opportunities to work in cooperative 
ventures with United States-based firms. European-based companies are 
often inclined to withdraw investment from the United States and 
relocate to other, more congenial, markets.
    In 1997, the EABC conducted a study to examine the effect of 
sanctions on transatlantic corporations. This study was conducted after 
the establishment of the ILSA regime, and is the only study to closely 
examine the business impacts of particular sanctions measures and the 
business responses to these measures. Among the firms we surveyed, 
which include both United States and European companies, 76 percent 
said that sanctions had had an effect on their worldwide operations and 
62 percent said that their U.S. operations had been affected. Forty-
four percent of companies said they had had to forego a business 
opportunity to comply with a sanction law and 81 percent had increased 
costs, costs, which had not been budgeted in their business plans, to 
cover routine compliance measures.
    Sixty-six percent of our survey respondents say that ILSA has 
negatively affected their operations. Joint ventures are particularly 
sensitive to sanctions, and 37.8 percent of our respondents cited that 
sanctions reduce the ability to participate in joint ventures. This is 
manifest in employment cuts, and 33.6 percent of the surveyed companies 
said that sanctions result in lost U.S. jobs. Besides the direct effect 
of few joint ventures, and lower job growth, sanctions also affect 
other business activity. For example, they sever supply relationships 
(27.2 percent) and they reduce investment outside the United States 
(26.2 percent). They result in fewer exports to Europe (24.2 percent), 
less investment in the United States (23.8 percent), fewer U.S. imports 
(13.2 percent), closures of U.S. operations (21.4 percent), and 
reductions of operations outside of the United States (19.6 percent).
    These costs have important ramifications when considering the 
magnitude of the transatlantic commercial relationship. Nearly 7 
million United States jobs are tied to European investment in the 
United States, including 3.6 million Americans directly employed by 
European-owned companies. European firms account for 62 percent of 
United States jobs created by international investment. In fact, 12.5 
percent of United States manufacturing jobs are supported by European 
investment. United States exports to Europe support 1.6 million jobs.
    In calculating the cost of United States unilateral sanctions, it 
is important to keep in mind that European investment has been a real 
engine of United States economic growth. It brings real benefits to 
most of the U.S. States' economies. Foreign direct investment from 
Europe increased by $245 billion, or 34 percent, in 2000, according to 
U.S. Department of Commerce (DOC) data released in June 2001. The 
growth followed a 37 percent increase in 1999 and a 39 percent increase 
in 1998. European direct investment increased from $528.6 billion in 
1998 to $929.7 billion last year.
The May 1998 European Union-United States Understanding
    The United States and the European Union share a number of common 
goals which both have recognized can only be achieved through close 
cooperation. This cooperation is especially important in efforts to 
strengthen respects for human rights, to promote nonproliferation, 
fight terrorism, to address crises in troubled regions and much more. 
The benefits and need of cooperation were set out in the New 
Transatlantic Agenda (NTA) in December 1995 and incorporated into the 
May 1998 package of agreements between the European Union and the 
United States. These agreements were aimed at solving a serious dispute 
over ILSA and the Helms-
Burton law, and at setting a course for joint action between Europe and 
the United States for the future. The powerful impact of EU-U.S. 
cooperation will be enormously reduced with the reauthorization of 
ILSA. This action undercuts what was agreed in May 1998, as well as the 
framework for partnership (NTA) signed less than 3 years earlier.
    In May 1998, the United States and the EU agreed to certain 
principles with respect to economic sanctions policy. In order to avoid 
EU-initiated WTO action on ILSA and Helms-Burton and also to avoid the 
implementation of the European blocking legislation, the United States 
agreed to waive sanctions against EU-based firms. At the same time, the 
two allies identified sanctions as one of several possible responses to 
``unacceptable behaviour'' threatening peace, democracy and prosperity. 
The May agreement states that the use of sanctions ``requires careful 
consideration.'' It goes on to say that:

          [Economic sanctions] would be used only when diplomatic and 
        political options have failed or when a problem is so serious 
        as to require more far-reaching action. In such circumstances, 
        the EU and United States will make a maximum effort to ensure 
        that economic sanctions are multilateral. They are likely to 
        have the strongest political and economic impact when applied 
        as widely as possible throughout the international community. 
        Multilateral actions also distribute the costs of sanctions on 
        the imposing parties more evenly. Whenever possible, effective 
        measures taken by the U.N. Security Council are the optimal 
        approach.

    The two parties also agreed not to ``seek or propose'' and to 
``resist the passage of new economic sanctions legislation'' involving 
a secondary boycott to ensure the strength of the transatlantic 
partnership.
    This legislative proposal before you today challenges the 
principles of the May 1998 agreement with respect to economic 
sanctions. If passed it could bring into play many of the different 
bilateral problems it diffused. Unilateral action does not promise a 
positive change in the behavior of Iran but it clearly will diminish 
the capacity of the United States to work jointly with the European 
Union in addressing important human rights, nonproliferation, 
international terrorism and other mutual concerns.
    Thank you very much, Mr. Chairman, for the opportunity to express 
our views. We would be happy to respond to any questions you or any 
Member of the Committee may have.
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