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52–971 PDF 2009

S. HRG. 111–126 

ENGAGING IRAN: OBSTACLES AND 

OPPORTUNITIES 

HEARING 

BEFORE THE

COMMITTEE ON FOREIGN RELATIONS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MAY 6, 2009 

Printed for the use of the Committee on Foreign Relations 

( 

Available via the World Wide Web: http://www.access.gpo.gov/congress/senate 

COMMITTEE ON FOREIGN RELATIONS

JOHN F. KERRY, Massachusetts, Chairman

CHRISTOPHER J. DODD, Connecticut 

RUSSELL D. FEINGOLD, Wisconsin 

BARBARA BOXER, California 

ROBERT MENENDEZ, New Jersey 

BENJAMIN L. CARDIN, Maryland 

ROBERT P. CASEY, JR., Pennsylvania 

JIM WEBB, Virginia 

JEANNE SHAHEEN, New Hampshire 

EDWARD E. KAUFMAN, Delaware 

KIRSTEN E. GILLIBRAND, New York 

RICHARD G. LUGAR, Indiana 

Republican Leader designee 

BOB CORKER, Tennessee 

JOHNNY ISAKSON, Georgia 

JAMES E. RISCH, Idaho 

JIM DEMINT, South Carolina 

JOHN BARRASSO, Wyoming 

ROGER F. WICKER, Mississippi 

DAVID MCKean, Staff Director

KENNETH A. MYERS, JR., Republican Staff Director

(II)

C O N T E N T S 

Page 

Burns, Hon. R. Nicholas, professor in the practice of diplomacy and international politics, Harvard Kennedy School, former Under Secretary of State 

for Political Affairs, Cambridge, MA .................................................................. 19 

Prepared statement .......................................................................................... 22 

Responses to questions submitted by Senator Robert P. Casey, Jr. ............ 35 

Kaufmann, Adam, Bureau Chief, Investigation Division Central, Office of 

the District Attorney, New York County, New York, NY ................................. 12 

Prepared joint statement with Robert Morgenthau ...................................... 6 

Kerry, Hon. John F., U.S. Senator from Massachusetts, opening statement ..... 1 

Morgenthau, Hon. Robert M., district attorney, New York County, former 

U.S. attorney for the Southern District of New York, NY ................................ 4 

Prepared joint statement with Adam Kaufmann .......................................... 6 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Submitted by Robert Morgenthau and Adam Kaufmann: 

Deferred Prosecution Agreement .................................................................... 36 

Exhibit A—Factual Statement ........................................................................ 38 

(III)

(1) 

ENGAGING IRAN: OBSTACLES AND 

OPPORTUNITIES 

WEDNESDAY, MAY 6, 2009 

U.S. SENATE, 

COMMITTEE ON FOREIGN RELATIONS, 

Washington, DC. 

The committee met, pursuant to notice, at 9:38 a.m., in room 

SD–419, Dirksen Senate Office Building, Hon. John Kerry (chairman of the committee) presiding. 

Present: Senators Kerry, Feingold, Cardin, Shaheen, Kaufman, 

and Risch. 

OPENING STATEMENT OF HON. JOHN F. KERRY, 

U.S. SENATOR FROM MASSACHUSETTS 

The CHAIRMAN. The hearing will come to order. Thank you all for 

being here and, again, thank you for being here at this early hour. 

Let me just announce ahead of time that we are going to have 

a little bit of a truncated hearing, and I’m going to try to expedite 

it, the reason being the U.S. Senate, in its wisdom, has scheduled 

10 votes at about 10:40. And 10 votes, as we all know, takes about 

11⁄2 to 2 hours around here. So we’re going to try to really move 

through this as expeditiously as we can. And I appreciate everybody understanding that. It’s just one of those things that happens. 

It is a huge privilege to welcome our guests here today, and I’ll 

say a few words about both of them in a minute. But let me just 

say that faced with a crowded field, the foreign policy challenges, 

we’re here today to discuss one of the most complicated and important to all of us, and that is the question of how to engage with 

Iran and to prevent it from becoming a nuclear-armed nation. 

This is our third public hearing on Iran in the last 2 months, and 

it is not going to be the last. We’re very fortunate to have two panels of witnesses whose broad experience will help us look at the 

issues that are front and center in this relationship. 

Obviously, there are obstacles in our path as we pursue a new 

policy, but there are huge opportunities, and I want to emphasize 

the opportunities. Iran is a country with a huge and important history. We need to recognize that history and we need to understand 

the extraordinary skills and capabilities and heritage of the Iranian people. 

Theirs is a country with enormous history, with great literature, 

great art, great architecture, great accomplishment. And I think 

that it is important for us to view the Iranians and the country in 

its entire context, not just in the years of difficulty since 1979. 

2 

All of us have a right to hope for a restoration of a relationship 

with Iran that reflects that history and the prospects of what a 

honest relationship, even with its differences, could bring to us in 

terms of our mutual interests and the interests particularly of the 

Middle East and of that region. 

As I’ve said before, I believe President Obama is 100 percent correct to open the door to direct talks with Iran. We want to join with 

him here in this committee in seeking a new way forward based 

on mutual respect and mutual interests. 

We start with the reality recognized by the administration that 

merely expressing your desire to engage and then engaging is not 

in itself a strategy, and talks are not an end unto themselves. 

They’re the beginning of what is a complicated effort, to forge a 

new relationship, a new era in United States-Iran relations. 

Clearly, progress is not automatic. Our efforts need to be reciprocated by the other side. It is important to note that Iran, for a 

number of years, has perceived that the United States policy is fundamentally regime change. And that perception drives a certain set 

of choices. 

That is not the current policy of this new administration, and it 

is important for Iran to understand that. Just as we abandoned 

calls for regime change in Tehran and recognize a legitimate Iranian role in the region, Iran’s leaders need to moderate their 

behavior and particularly that of their proxies, Hezbollah and 

Hamas. 

And Iran’s leaders must comply with the international community’s requirements that its nuclear program is strictly for peaceful 

purposes, and meet its nuclear nonproliferation treaty obligations. 

Let me emphasize here: That is not a requirement that singles out 

Iran. That would be a requirement for any country that is a signatory to the NPT that has not complied with NPT requirements. 

We obviously can’t succeed in this effort alone. We need to work 

with our allies to establish realistic goals for negotiating with Iran 

and reach a private agreement on a set of escalating measures, 

should Iran fail to respond to negotiations. 

I emphasize, again, our preference is engagement. Our preference is not to have confrontation of any kind, through sanctions 

or otherwise. But that will depend on choices that Iran itself 

makes. This is neither the time nor the forum to outline all of the 

contingencies available to the United States in the event that we 

fail. This is a time to reaffirm our commitment to giving meaningful negotiations with Iran’s leaders a chance and not simply fall 

back on the stale rhetoric and failed strategies of the previous 

years. 

Still, as policymakers, we also need to understand the nature of 

the sanctions that have defined our relationship with Iran for more 

than two decades now, and understanding the past and the choices 

we have made in implementing it or enforcing it is really critical 

to understanding how we’re going to build a new relationship or 

how we’re going to deal with contingencies in the event we fail to. 

Sanctions, even coordinated multilateral sanctions, still remain a 

fairly blunt instrument with an imperfect track record. And when 

it comes to Iran, the verdict on them is mixed at best, and that’s 

part of what we examine here today. Sanctions did slow Iran’s 

3 

nuclear program, but bottom line, they did not prevent it from acquiring the capacity to enrich uranium on an industrial scale. 

With the help of other countries, we’ve had more success in denying banks and companies involved in Iran’s proliferation and terrorism activities access to the United States financial system. But 

as our first witnesses will explain, the firewalls and filters there 

don’t always work. 

The most startling example came to light recently when Britain’s 

Lloyds Bank settled a criminal case with the New York district 

attorney and Justice Department, and I emphasize, they did settle 

the case, so that is now a matter of court record. Lloyds agreed to 

pay a $350 million fine for helping Iranian banks wash hundreds 

of millions of dollars’ worth of prohibited transactions through 

United States financial institutions. 

The scheme was so pervasive that bank employees were given a 

handbook on how to evade U.S. prohibitions. The CIA and FBI are 

reconstructing several hundred thousand individual transactions to 

determine whether they involved material and technology destined 

for Iran’s nuclear and missile programs. 

We’re going to hear about the case and others from a man whom 

I’ve known and respected for more years than either of us care to 

count, and that is Robert Morgenthau, the distinguished district 

attorney of New York. 

Let me say two things here. One, before I say a few words about 

District Attorney Morgenthau, the majority on the committee will 

be releasing today or tomorrow—it’s more logistical, but it’ll be 

either later this afternoon or tomorrow—a report on Iran’s nuclear 

program, sort of establishing a baseline with respect to how we got 

where we are and where Iran is with respect to its nuclear 

program. 

Needless to say, we have been spending great efforts through the 

Treasury Department and the FBI and others to enforce those 

sanctions that are currently in place. I was first assistant district 

attorney in one of the largest counties in America back in the 

1970s to 1980, and I will remind folks that there was a saying that 

crime knows no border. 

The truth is, there’s one district attorney in the country who 

from the 1970s until today, has a reputation that knows no borders, and malefactors fear his name, not just in mob hangouts in 

New York or in the corridors of Wall Street, but in foreign capitals 

too. 

And I learned that full well when we worked very closely when 

the Foreign Relations Committee in the 1980s uncovered the Bank 

of Credit and Commerce International scandal, which involved not 

just General Noriega laundering money through it, but also had 

the bank account of a fellow who was to become well-known by the 

name of Osama bin Laden. That’s when we first learned of this 

interconnected, interlocked series of fronts, shell companies, and 

various bank accounts that link arms trafficking with narcotics 

trafficking with terror. 

It’s an important network for our criminal justice system and law 

enforcement authorities to understand. I’m grateful to Mr. Morgenthau for his role in helping to make that happen. But let me just 

say that from the first days I stepped into a responsible role in the 

4 

district attorney’s office, all of us in the country back then were 

modeling many of our efforts on what District Attorney Morgenthau had done. He was a groundbreaker in the way he organized 

his office, professionalized the office, created different task forces, 

and really reformed what until then had been a backwater of the 

criminal justice system. And he set an extraordinary example. 

After 35 years of service, he will be retiring at the end of his current term. Mr. District Attorney, we are really privileged to have 

you here today, and we’re very grateful to you. 

Following his testimony will be another distinguished and familiar face and public servant. Ambassador Nick Burns was the Bush 

administration’s point man on Iran as Under Secretary of State 

from 2005 to 2008, a very well-regarded and strong advocate for 

diplomacy. And many of the policies that Secretary Burns advocated and talked about with us are now being implemented. I’m 

sure he is pleased to see that, though some of it probably is a little 

bittersweet. 

He’ll pick up on the other side of the coin and help us understand the diplomatic challenges and the opportunities for success. 

I might add that after serving many years overseas and wandering 

in the wilderness of Washington, DC, he is now teaching at Harvard, and I’m very pleased to welcome him here today, and back 

to his home State of Massachusetts. So we thank you for being 

here today. 

I should mention the district attorney’s assistant, Adam Kaufmann, is here, and he will also present testimony with him, and 

we’re delighted to have you here. 

Mr. District Attorney, thank you for being with us, sir. 

STATEMENT OF HON. ROBERT M. MORGENTHAU, DISTRICT 

ATTORNEY, NEW YORK COUNTY, FORMER U.S. ATTORNEY 

FOR THE SOUTHERN DISTRICT OF NEW YORK, NY 

Mr. MORGENTHAU. Well, thank you for giving me the opportunity 

to testify here today. Twenty-one years ago, when you were the 

chairman of the Subcommittee of the Foreign Relations Committee 

on Terrorism and Narcotics, I had the honor of testifying before 

you in connection with the activities of BCCI. 

I learned that day the importance of disclosure, the importance 

of sunlight on corrupt activities. You asked me whether we were 

getting any cooperation from the Bank of England, and I said no, 

and that was in the papers the next day, and the following day, 

I got a call from Eddie George from Bank of England saying, ‘‘How 

can we help you?’’ 

So a lot of people who do things in the dark, when there is sunlight—when this committee focuses attention—things change. So 

that’s why I’m particularly grateful for the opportunity to be here 

today and to talk about two activities of Iran: One, the international money movement, hiding the sources of that money; and 

two, the people who are providing Iran, through dummy companies, 

with the material for long-range missiles and nuclear weapons. 

And this is an ongoing and serious problem, very serious. In 

addition to these first cases that we brought, we’ve had a number 

of investigations which have stopped Iranian activities, but we 

can’t talk about those. 

5 

But the Lloyds case, which we investigated in very close cooperation with—with the Department of Justice, Asset Forfeiture and 

Money Laundering Section, showed how the Iranians were moving 

money through a British bank, stripping the identification information so that the New York banks that were receiving that money 

did not know it was Iranian money. 

There was a settlement of that case. Lloyds paid a fine of $350 

million, evenly divided between New York and the Department of 

Justice. But that matter had widespread repercussions because 

people suddenly realized, hey, you do this kind of illegal activity in 

the dark—eventually somebody’s going to find out about it. 

And we have other similar investigations, fairly well along. We 

hope to stop—with the cooperation of the Department of Justice, 

we hope to stop the movement of Iranian money for the purchase 

of materials for long-range missiles. 

The second case we brought was against a Chinese provider of 

material. This company used six dummy corporations and the Iranians used four dummy corporations. And the Iranian military was 

buying serious material to be used for long-range missiles. Just to 

give you an idea of what was involved and to show that they are 

definitely serious about proceeding with their missile and nuclear 

programs. 

For instance, the materials shipped to Iran included 15,000 kilograms of a specialized aluminum alloy used almost exclusively in 

long-range missile production; 1,700 kilograms of graphite cylinders used for banned electrical discharge machines, which are used 

in converting the uranium; more than 30,000 kilograms of tungsten-copper plates; 200 pieces of tungsten-copper alloy hollow cylinders, all used for missiles; 19,000 kilograms of tungsten-metal 

powder; and 24,500 kilograms of maraging steel rods. Maraging 

steel—and I must say, before we got into this, I’d never heard of 

it. But it’s a specially hardened steel suitable for long-range 

missiles. 

And that’s just the partial list. There were gyroscopes, accelerometers, armor piercing tantalum. Again, I had never heard of the 

tantalum, but we learned about it during the investigation. Tantalum is found in those roadside bombs that are being used against 

troops in Iraq and Afghanistan. 

So this is a serious problem. These missiles can reach anywhere 

in the Middle East. We have troops in Afghanistan and Iraq and 

elsewhere. And I just think that the work of this committee is so 

important to let the public know that the Iranians are deadly serious, and they’re making good progress, and we’ve got to intensify 

our efforts to embargo the shipment of WMD, as it’s called, to Iran. 

And equally important, we’ve got to let the public know what’s 

going on. That’s why the work of this committee is so valuable: To 

shed some light on this. To use the words of Justice Louis Brandeis,‘‘The best disinfectant is, in fact, sunlight,’’ and that’s what 

this committee is showing. 

And I thank you for the opportunity to be with you. 

[The joint prepared statement of Mr. Morgenthau and Mr. Kaufmann follows:] 

6 

JOINT PREPARED STATEMENT OF HON. ROBERT M. MORGENTHAU, DISTRICT ATTOR- NEY FOR NEW YORK COUNTY, AND ASSISTANT DISTRICT ATTORNEY ADAM S. KAUF- MANN, CHIEF OF INVESTIGATION DIVISION CENTRAL, NEW YORK COUNTY DISTRICT

ATTORNEY’S OFFICE, NEW YORK, NY 

We would like to express our appreciation for the work undertaken by the committee, and our gratitude to the committee, and Senators Kerry and Lugar, for the 

opportunity to appear on this important issue. There are few issues in international 

security policy more pressing than Iran’s efforts to develop long-range ballistic missiles and nuclear weapons. The Manhattan District Attorney’s Office has played a 

role in enforcing U.S. sanctions and the rule of law through the use of traditional 

law enforcement means, and we welcome the opportunity to discuss two recent 

investigations. 

The Office of District Attorney for New York County has a unique role in the law 

enforcement community. A local prosecutor is charged with maintaining the safety 

and security of the public he or she represents. However, in the case of New York 

County, the task of protecting the public and maintaining the public trust includes 

policing the most important financial markets in the world, watching over the biggest financial institutions on the planet, and ensuring the integrity of the global 

financial system. From Main Street to Wall Street, from Harlem to the Financial 

District, the Manhattan D.A.’s Office endeavors to maintain that public trust. To 

put it another way, there is nothing like a good beat cop to keep the streets safe, 

and the District Attorney’s Office is the beat cop for Manhattan’s city streets and 

its financial markets and institutions. 

Our international investigations have covered many areas, both in geography and 

criminal conduct. Our investigation and prosecution of members of BCCI in the 

early 1990s, a matter well known to Chairman Kerry from his investigation of the 

same group, shined a spotlight on corrupt banking practices and the undisclosed involvement in United States banking activities by secret interests in the United Arab 

Emirates and Pakistan. We could not have successfully prosecuted BCCI without 

the expertise and assistance of Senator Kerry and members of the staff of the Subcommittee on Terrorism, Narcotics and International Operations, which Sentator 

Kerry then chaired. We investigated and prosecuted the looting of a Venezuelanowned bank by its wealthy owners in the early 1990s, and also discovered their payments of illegal campaign contributions to United States political interests through 

intermediaries in the United States. More recently, we have brought cases to highlight problems associated with black market casas de cambio in Brazil, Uruguay, 

Paraguay, and Argentina and the United States banks that turned a blind eye to 

their misconduct. These investigations tracked money flowing from the Tri-Border 

Area of South America to bank accounts associated with terror organizations in the 

West Bank; as well as the use of black market systems to launder millions of dollars 

of embezzled public funds from Brazil to secret accounts in Switzerland and the Isle 

of Jersey by Paulo Maluf, the corrupt former mayor and current Congressman from 

Sao Paulo, Brazil. Other cases have included the use of electronic digital currency 

and United States shell companies by Russian organized crime to perpetrate identity theft and fraud, the use of offshore shell companies by a securities fraud ring 

to launder its illegal proceeds and hide its activities, and our ongoing efforts to target and bring to justice the tax cheats who use offshore accounts and shell companies to avoid paying their fair share of taxes. 

All of these cases, and many others pursued by the District Attorney’s Office, 

involve the misuse of New York banks by criminals to launder ill-gotten goods or 

otherwise violate the criminal laws of New York State. And, they share a common 

theme. In each case, the investigation of discrete criminal conduct by specific individuals served to illustrate black market or otherwise opaque financial systems that 

allowed criminals to move their money. Corrupt and illicit systems are often set up 

to facilitate tax evasion and capital flight, but are also susceptible to use for more 

sinister purposes by criminals and the financiers of terrorism. Once an underground 

system exists to help people move money anonymously, those in control of it become 

accustomed to not asking too many questions, and criminals and terrorists can, and 

will, take advantage of that. Bringing these criminal cases has exposed these systems to the strong light of day, and has contributed to the recognition of systemic 

problems by the financial industry and financial regulators. To borrow a phrase 

from Justice Louis Brandeis, all of these cases demonstrated that sunlight is the 

best disinfectant. This theme—of transparency—runs through all of these cases and 

is evident in the matters we will address today. 

More recently we turned our attention—and brought a degree of sunlight—to dangers well known to this committee: The threat to the United States and global peace 

posed by Iran’s efforts to build nuclear and long-range ballistics missiles. Our focus 

7 

1 Cases such as these are the result of difficult and long-drawn investigations. We wish to recognize the efforts of the following members of the District Attorney’s staff for their contributions 

to these matters. For Lloyds: Senior Trial Counsel Richard T. Preiss, Assistant District Attorney 

Aaron Wolfson, Investigation Division Central Deputy Chief Gary T. Fishman, former Assistant 

District Attorney Laura Billings, former Intelligence Analyst Eitan Arusy, Financial Intelligence 

Director David Rosenzweig, and Paralegals Gregory Dunleavy, Aaron Davidowitz, Sarah 

Schoknecht, and former paralegals Melissa Clarke and Jamelia Morgan. In addition, the investigation was pursued jointly with the Asset Forfeiture and Money Laundering Section of the Department of Justice and the New York State Banking Department, and the efforts of the Federal 

prosecutors and Federal and State investigators assigned to the investigation should be recognized. For Limmt: Assistant District Attorneys Adam S. Miller and Aaron T. Wolfson, Investigative Analysts Lauren Lichtman and Max Adler, Intelligence Analyst Jasmine Sicular, Financial 

Intelligence Director David Rosenzweig and Investigators Jonathan Savel and Alex Arenas of 

the DANY Special Investigations Group. Assistant District Attorneys Marc Krupnick and Marc 

Frazier Scholl, Senior Investigative Counsel, also assisted. In addition, a parallel investigation 

was pursued by the Office of Foreign Assets Control of the Department of the Treasury that 

resulted in SDN designations for activities relating to weapons proliferation. The expertise of 

the staff at OFAC as well as at the Federal Reserve Bank of New York provided a tremendous 

contribution to the success of the investigation. 2 ‘‘Bank Shots: How the Financial System Can Isolate Rogue Regimes,’’ Foreign Affairs 

(March/April 2009). 

today is not on United States policy toward Iran per se, rather it is on the enforcement of the rule of law and the implementation of transparency in cross-border payments in the international banking system. The two investigations highlighted 

today examine the efforts of Iran and its providers of weapons material to move 

money through the international markets, including banks in New York, through 

deceit and fraud. Our efforts uncovered a pervasive system of deceitful practices and 

fraud designed to let Iranian banks skirt United States and international sanctions 

and move money all over the world without detection. It is our hope that this hearing, and our testimony, will enhance efforts to curtail these practices and have an 

impact on the enforcement of sanctions and the adoption of transparent banking 

practices worldwide. 

Our efforts have, thus far, led to two publicly announced investigations that culminated in a deferred prosecution agreement with a British bank and with the indictment of a Chinese citizen and his corporation. We will refer to these two matters 

as the Lloyds investigation and the Limmt indictment, respectively.1

One important goal of cases like the Lloyds investigation and the Limmt indictment is to encourage change from within the banking industry and bring change 

to the regulatory playing field. Regulatory schemes are generally, and appropriately, 

set up to work with industry to promote government policies. However, there is a 

degree of clarification brought by criminal prosecutions that differs from the results 

of any regulatory inquiry, particularly when addressing intentional misconduct. Targeted criminal prosecutions of serious misconduct can send a message of deterrence 

that regulatory schemes cannot match. And, as discussed below, it is the effect of 

this message of deterrence in the banking community that may prove to be the most 

valuable result of these prosecutions. 

Law enforcement plays an important role in cases involving violations of sanctions 

and intentional fraudulent conduct. If the United States imposes sanctions and requires U.S. banks to comply with them, then prosecutors should target and expose 

to the light of day those who intentionally violate the law and defraud our financial 

institutions. If foreign banks, businesses, and persons engage in conduct that violates New York and U.S. law, they should expect to be held accountable for their 

misconduct. And the threat of public accountability has a tremendous deterrent impact on the conduct of banks and financial institutions. A recent article in the periodical Foreign Affairs, by Rachel Loeffler, recognizes and articulates this point.2 Ms. 

Loeffler examines various sanctions and actions brought to enforce them, and notes 

the importance of interaction between government policy and financial institutions 

to curtail the access of rogue regimes to international money centers. She comments 

that enforcement actions such as the Lloyds deferred prosecution agreement ‘‘provide a lever of influence when fewer and fewer seem to exist.’’ A foreign bank that 

might otherwise ignore U.S. sanctions in its business model might be reluctant to 

do so in the wake of the Lloyds settlement. As discussed further below, we have 

seen multinational banks change their behavior after the Lloyds settlement, which 

makes United States sanctions more effective, further isolates the Iranian regime, 

and hampers Iran’s ability to obtain items needed for its weapons programs. 

These themes—transparency, accountability, and deterrence—are explored in the 

two case studies presented below. 

8 

3The role played by international correspondent banking in global finance and the risk of 

money laundering it can pose is ably described and analyzed in a report from the U.S. Senate 

entitled ‘‘Role of U.S. Correspondent Banking in International Money Laundering,’’ Senate Permanent Subcommittee on Investigations, July 15, 2004. 4These payment messages consisted of communications sent by the Society for World Wide 

Interbank Financial Telecommunication, or ‘‘SWIFT.’’ SWIFT is the predominant system used 

for international funds transfers with over 80 percent of the world’s transfers executed by 

SWIFT message, or almost 15 million payment messages per day on average. SWIFT can be 

likened to a secure e-mail system used by banks to ensure that payment orders are sent and 

received with accuracy and security. 

I. ‘‘STRIPPING’’ OF WIRE TRANSFER DATA: THE LLOYDS TSB INVESTIGATION AND

DEFERRED PROSECUTION AGREEMENT

The term ‘‘stripping’’ refers to the practice of removing wire transfer information 

that would reveal that the transfers originated from a prohibited source. By stripping out the originator information, the wire transfers can pass through the screening software used by U.S. banks that would otherwise reject or freeze them for further inquiry. The stripping of wire transfer information in this manner effectively 

conceals that the parties involved are sanctioned entities. 

The U.S. Government places restrictions on certain countries, entities, and individuals from accessing U.S. financial institutions and the U.S. banking system. 

These sanctions are administrated and enforced by the U.S. Department of the 

Treasury’s Office of Foreign Assets Control (‘‘OFAC’’). OFAC imposes controls and 

administers economic sanctions against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the 

proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States. Many of the sanctions are mirrored in United Nations and other international commitments, and involve close cooperation with governments around the world. The sanctioned entities are blocked 

from accessing the U.S. banking system and, with minor exceptions, U.S. citizens 

and institutions are prohibited from conducting financial transactions with them. 

In the spring of 2006, the District Attorney’s Office discovered evidence of fraud 

in the processing of international wire transfers by certain European banks on 

behalf of their client Iranian banks. The Iranian banks maintained correspondent 

accounts with the European banks. Correspondent bank accounts constitute the 

relationships between banks that allow funds to move all over the world, and are 

a foundation of international commerce.3 In the case of Lloyds, Lloyds maintained 

correspondent accounts on behalf of a number of Iranian banks, all sanctioned entities banned from doing business in the United States or with United States financial institutions. 

The initial evidence of criminal conduct by Lloyds and other banks discovered by 

prosecutors from the District Attorney’s Office consisted of information concerning 

individuals with close ties to the Government of Iran located in the New York area. 

These individuals received wire transfers from Bank Melli and other Iranian banks. 

However, the incoming wire transfers to the U.S. accounts of these individuals did 

not contain any reference to the Iranian banks or individuals that originated the 

funds transfers.4 Instead, the payment messages made it appear that the wire 

transfers originated from Lloyds (or from other European banks engaged in similar 

practices). 

To ensure that the U.S. financial institutions that process international wire 

transfers do not unintentionally engage in prohibited transactions, they use sophisticated computer systems to monitor and screen all wire transfer activities. Banks 

in New York that process most of the world’s U.S. dollar payments depend on these 

automated systems to prevent sanctioned entities as well as terrorists, money 

launderers, and other criminals from gaining access to the U.S. banking system. In 

this way, the financial institutions are the first line of defense to protect our financial system. 

The Lloyds investigation focused primarily on Lloyds’ handling of accounts for 

financial institutions from three designated countries: Iran, Sudan, and Libya 

(Libya was removed from the list of sanctioned countries in 2004 and was less 

prominent in Lloyds’ stripping scheme). Knowing that they could not legally access 

United States banks, Iranian and Sudanese banks with accounts at Lloyds sought 

to evade these sanctions. Beginning in the mid-1990s, Lloyds began removing any 

information from Iranian and Sudanese wire transfers that would trigger the detection systems at the United States correspondent banks. This was a systemic, acrossthe-board operation on behalf of the sanctioned banks. To execute this policy, Lloyds 

payment center personnel removed any Iranian and Sudanese wire payment messages from the automated processing system, stripped out the identifying data, and 

9 

then manually reentered the payment information so that the transfer would be 

processed undetected by United States banks. From 2001–04, Lloyds’ conduct allowed the illegal transfer of more than $300 million on behalf of Iranian banks and their customers to accounts in the United 

States. In addition, Lloyds sent billions of dollars in Iranian payments through 

United States banks in so-called ‘‘U-Turn’’ payments (payments that begin and end 

in foreign banks and merely transit through the United States). For example, a 

U-Turn payment would include a commercial transaction sent from the account of 

an Iranian bank at Lloyds, through a correspondent account at a United States 

bank, for payment to an Italian company for a commercial invoice. U-Turn payments also included overnight time deposits sent on behalf of the Iranian banks 

themselves from Lloyds through correspondent accounts at United States banks to 

banks in Cayman and elsewhere, and then processed back to Lloyds via the same 

route the next day. In our opinion, the U-Turn exemption constituted a glaring hole 

that undermined both the enforcement of, and the rational behind, the Iranian sanctions program. Effective November 10, 2008, the authority for the U-Turn exemption 

was revoked. 

While Lloyds voluntarily exited the Iranian business by 2004, the Sudanese busi- ness, which resulted in the illegal transfer of approximately $30 million, continued 

into 2007 (after the beginning of the investigation by the District Attorney’s Office 

and the Department of Justice). Also during the period from 2001–04, Lloyds’ conduct allowed one Libyan customer to transfer approximately $20 million to United 

States banks. 

The District Attorney’s Office and the Department of Justice agreed that the appropriate resolution of the Lloyds investigation was through joint Deferred Prosecution Agreements. As a result of the settlement and Deferred Prosecution Agreements with the District Attorney’s Office and the Department of Justice, Lloyds 

agreed to adhere to best practices for international banking transparency, to cooperate with ongoing law enforcement investigations, to conduct an internal review of 

past transactions, and to pay $350,000,000 in fines and forfeiture. 

The message of deterrence from the Lloyds resolution should not be underestimated. In many of the financial industry’s international antimoney laundering conferences in the past few months, the top item on the agendas is cross-border 

payment issues and the Lloyds case. While somewhat apocryphal, this observation 

highlights the deterrent effect of a successful criminal investigation, which goes well 

beyond the deterrent effect of a regulatory finding. This is not intended to undermine the value of regulatory work. To the contrary, most matters involving financial 

institutions are best handled by regulators who can identify problems and work 

with the banks to rectify them. However, intentional and systemic misconduct resulting in fraud constitutes criminal conduct and should be treated as such. 

As we assess the deterrent effect of the Lloyds settlement, we have begun to observe a ripple effect move through the international banking community. At a recent 

antimoney laundering conference, one of the assistant district attorneys from the 

Lloyds investigation participated in a debate as to whether the Lloyds matter was 

an unwarranted extra-territorial application of U.S. sanction laws to a non-U.S. 

bank. We argued that the Lloyds case was simply the application of domestic (U.S.) 

fraud provisions to conduct that originated in Europe but exercised its fraud on correspondent banks in the United States. From the prosecutorial analysis, the violation of sanctions law was the motive and reason for the fraud, but the fraud perpetrated on the U.S. clearing banks was the gravamen of the criminal conduct. The 

charge in the state deferred prosecution agreement reflects the duality of this analysis. The charge admitted by Lloyds was a violation of the New York State Penal 

Law crime of Falsifying Business Records in the First Degree, alleging that Lloyds 

caused false entries to be made in the records of the U.S. clearing banks, in furtherance of and to conceal the commission of another crime, specifically, the Federal 

sanctions/IEEPA violation. 

The final assessment of success for the Lloyds investigation and resolution will 

come from the deterrent effect and whether we successfully change behavior on the 

part of international banks. Already we have seen some impact as Lloyds becomes 

the topic of the day in conferences and industry periodicals. The impact on the international banking community was well reflected in comments from the head of global 

antimoney laundering for a major U.K. banking institution. This gentleman, who is 

a leader in the field of global compliance, explained that it mattered not whether 

one agreed with this application of U.S. law, or whether one viewed it as a criminal 

fraud case, or whether one viewed it as a violation of U.S. sanctions, or something 

in between. As he saw it, what mattered was that the world was now on notice that 

it could not disregard any country’s sanctions without running afoul of the analysis 

employed in Lloyds. The result for his bank, as he explained it, was two-fold. First, 

10 

5 Aliases used by Limmt and Li included Li Fang Wei a/k/a Karl Lee, a/k/a Patric, a/k/a Sunny 

Bai, a/k/a K. Lee a/k/a KL, a/k/a David Li, a/k/a F.W. Li) and Limmt Economic and Trade Company, Ltd., a/k/a Limmt (Dalian ftz) Metallurgy and Minerals Co., Ltd., a/k/a Limmt (Dalian 

FTZ) Minmetals and Metallurgy Co., Ltd., a/k/a Limmt (Dalian FTZ) Metallurgy and Minerals 

Co., Ltd., a/k/a Ansi Metallurgy Industry Co. Ltd., a/k/a Blue Sky Industry Corporation, a/k/a 

SC (Dalian) Industry & Trade Co., Ltd., a/k/a Sino Metallurgy and Minmetals Industry Co., 

Ltd., a/k/a Summit Industry Corporation, a/k/a Liaoning Industry & Trade Co., Ltd., a/k/a 

Wealthy Ocean Enterprises Ltd. 6 As a result of our joint effort with OFAC, these entities are now on the Treasury Department’s list of sanctioned entities. 

his bank was now looking at sanctions with a fresh eye to make sure that crossborder transactions originating in one country and transiting another did not violate 

any local sanctions regimes. Second, his bank was withdrawing or curtailing international payment services for banks from sanctioned countries such as Iran and 

Sudan. When we speak of deterrent effect and making sanctions more effective, this 

may be the ultimate model of success. 

II. THE PROLIFERATION OF WEAPONS OF MASS DESTRUCTION: CHINA TO IRAN

In April of this year, the District Attorney’s Office announced the indictment of 

a Chinese businessman named Li Fang Wei and his metallurgical production company, Limmt Economic and Trade Company, Ltd., on charges that they falsified the 

records of banks in New York and conspired to send illegal payments through New 

York banks (a copy of the indictment is attached*). Defendant Li Fang Wei is the 

manager of Limmt, a provider of metal alloys and minerals to the global market. 

The investigation revealed that Limmt has two primary lines of business. First, 

Limmt sells standard metallurgical products to commercial customers throughout 

the world. Second, Limmt sells high-strength metals and sophisticated military materials, many of which are banned from export to Iran under international agreements, to subsidiary agencies of the Iranian Defense Industries Organization (DIO). 

In June 2006, the United States Department of the Treasury, Office of Foreign 

Assets Control (OFAC) sanctioned Limmt for its support of and role in the proliferation of weapons of mass destruction (WMD) to Iran. As a result of the sanctions, 

Limmt was banned from engaging in transactions with or through the U.S. financial 

system, and remains banned to this day. Subsequently, Li Fang Wei and Limmt 

used aliases and shell companies to continue Limmt’s international business.5 Li 

Fang Wei and Limmt’s purpose in doing so was to use fraud and deception to gain 

access to the U.S. financial system, to deceive U.S. and international authorities, 

and to continue the proliferation of banned weapons material to the Iranian 

military. 

The indictment charges that during the period from November 2006 through September 2008, Limmt sent and received dozens of illegal payments through U.S. 

banks by using aliases and shell companies. Because Limmt was banned from 

transacting with U.S. banks, any transfers sent in its real name would have been 

detected by the sophisticated wire transfer monitoring systems at the U.S. banks 

and blocked. By substituting aliases in the place of its true name, Limmt deceived 

U.S. banks into processing its transactions. Thus, Limmt’s conduct was specifically 

designed to defeat these filters through the use of false information. The result was 

the falsification of the records of banks located in Manhattan relating to dozens of 

illegal transactions. 

The investigation revealed that in the almost 3-year period since Limmt’s designation, Limmt used its aliases to continue sending banned missile, nuclear, and socalled dual-use materials to subsidiary organizations of the DIO. The investigation 

identified subsidiary organizations set up by the DIO to procure and produce hightech weapons systems, including: Amin Industrial Group, Khorasan Metallurgy Industries, Shahid Sayyade Shirazi Industries, and Yazd Metallurgy Industries.6

Some of the materials shipped from Limmt to the DIO front companies included: 

• 15,000 kilograms of a specialized aluminum alloy used almost exclusively in 

long-range missile production; 

• 1,700 kilograms of graphite cylinders used for banned electrical discharge 

machines; 

• More than 30,000 kilograms of tungsten-copper plates; 

• 200 pieces of tungsten-copper alloy hollow cylinders; 

• 19,000 kilograms of tungsten metal powder; 

• 24,500 kilograms of maraging steel rods; 

• 450 metric tons of furnace electrodes; and 

• 1,400 metric tons of high carbon ferro-manganese. 

11 

In addition, Limmt and the DIO engaged in negotiations to have Limmt send the 

DIO 400 Gyroscopes, 600 Accelerometers, and 100 pieces of Tantalum. Gyroscopes 

and Accelerometers are crucial technology for Iran’s development of long-range missiles, and Tantalum in the form indicated can be used to manufacture armor-piercing projectiles of the sort found in improvised explosive devices (IEDs). 

Limmt conducted its nonmilitary commercial business primarily with U.S. dollar 

payments. These payments were processed, or ‘‘cleared,’’ by U.S. banks. These payments, although from non-military customers, were nonetheless illegal under U.S. 

law because of Limmt’s status as a proliferator of WMD. Limmt’s Iranian military 

shipments were paid for primarily in euros. For all of these payments, from both 

the Iranian military subsidiaries and Limmt’s commercial customers, Limmt used 

its aliases to complete the transactions. The District Attorney’s Office has been in 

contact with European law enforcement personnel to continue the investigation into 

Iran’s use of European banks to clear its euro transactions. Many of the euro transactions relate directly to the procurement of weapons materials by the Iranian military front companies in clear violation of international law. It is unclear at this time 

whether the European banks acted intentionally or whether these transfers violated 

any laws of the countries where they occurred. We are working with foreign law enforcement and regulatory authorities in the specific countries to find answers to 

these questions. 

In addition, the District Attorney’s Office has made preliminary contact with the 

Chinese Government concerning both the role of the Chinese banks as described in 

the indictment and the illegality of Limmt’s conduct under Chinese law. In all of 

Limmt’s transactions, the wire payments were sent to and from a limited number 

of Chinese banks that handled the accounts of Limmt’s front companies. It is unclear whether these banks acted intentionally or knew the true identity of Limmt 

as the true interest behind the alias/front companies. However, it is clear that some 

of Limmt’s shipments to Iran violated Chinese export control laws. We have stated 

our willingness to share this information with the Chinese authorities. We note that 

there is no extradition treaty between the United States and China, so that if Mr. 

Li is to face justice, it will be before a Chinese tribunal for his violations of Chinese 

law. 

Many of the items shipped by Limmt in China to Iran were so-called ‘‘dual-use’’ 

items, suitable for both civilian commercial as well as military uses. In this case, 

certain communications made clear that the items were intended for military use 

by the Iranians, but the circumstantial evidence was equally strong. When the materials are sent to front companies set up by the Iranian military, and Limmt procured false end-user certificates for the shipments, the intent to use these materials 

for military purposes is readily inferred. 

One communication from Li Fang Wei to an agent of the Iranian DIO in 2007 

was especially telling. Li Fang Wei discussed with the Iranian agent the difficulties 

in producing certain aluminum alloys as requested by the Iranians. He went on to 

relate that there should be little doubt as to the quality of the alloy, as Limmt’s 

factory had supplied the alloy for customers for many years, including for the Chinese military and for the Iranian Aerospace Industries Organization [another part 

of the Iranian military, responsible for development and procurement of long-range 

ballistic missiles]. Certainly this conversation demonstrates that despite his public 

protestations to the contrary, Mr. Li and his company were, in fact, intentionally 

selling weapons materials to the Iranians. In public statements to the media, Mr. 

Li denies his relationship with the Iranian military and denies supplying them with 

weapons materials. The factual record developed by our investigation and presented 

to a grand jury belies these self-serving claims. Mr. Li has supplied the Iranian 

military with weapons material for years while scoffing at international agreements 

restricting such trade. For Mr. Li and his co-conspirators, ‘‘business as usual’’ meant 

violating the law and providing materials for weapons of mass destruction to a dangerous regime. 

III. CONCLUSIONS

Sanctions, both from the United States and from the international community, are 

an important tool to deter rogue regimes and encourage the path of diplomacy. Nations such as Iran need to be engaged in dialogue, and need to be invited to become 

responsible members of the global community, but also need to know there are 

ramifications for ignoring the path of responsibility. Sanctions provide an important 

arrow in the quiver of diplomacy. The question we face is how best to make sanctions effective, to deter misconduct, and to encourage adherence by the private sector. Regulatory actions are an important part of enforcement, but some matters, 

criminal in nature, need to be redressed through the mechanisms of criminal justice. 

12 

OFAC does a tremendous job identifying threats to the national security and bringing civil enforcement actions. Prosecutors should not become involved in this area 

lightly. Slight violations or ambiguous behavior do not lend themselves to criminal 

enforcement. But where there is systematic and pervasive intentional misconduct, 

criminal prosecutions are necessary. Criminal prosecutions of financial institutions 

send a strong message of deterrence. 

Banks that provide access to the world’s financial systems to criminals, proliferators and terrorists should expect that they will be found out and prosecuted. Sanctions are effective only if they are enforced. We may not be able to shut down Mr. 

Li’s factories, but we can shine a spotlight on his conduct and the conduct of the 

foreign banks that permit these types of operations to flourish. 

This fight will be won only if there is strong resolve on the part of the world’s 

major economic and military powers to stand firm against Iran’s efforts. We are 

working with Federal law enforcement, regulatory and intelligence agencies to develop more leads and to use the information we have already gathered, and we are 

also reaching out to law enforcement agents in foreign countries to target this conduct and to shut down the pipeline of weapons to Iran. 

These are important matters that need to be addressed in a global framework. 

Law enforcement efforts should be part of the global equation to make sure that 

sanctions are enforced and illegal conduct deterred. Through strong and resolute 

action, this crisis may still be averted, but we do not have the luxury of waiting 

any longer. 

[*EDITOR’S NOTE.—The copy of the indictment submitted with this 

prepared statement was too voluminous to include in the printed 

hearing but will be maintained in the permanent record of the 

hearing. A second article submitted for the record ‘‘Deferred Prosecution Agreement’’ can be found in the ‘‘Additional Material Submitted for the Record’’ section of this hearing.] 

The CHAIRMAN. We thank you very, very much for that summary. 

Mr. Kaufmann, did you want to add to that? 

STATEMENT OF ADAM KAUFMANN, BUREAU CHIEF, INVESTIGATION DIVISION CENTRAL, OFFICE OF THE DISTRICT 

ATTORNEY, NEW YORK COUNTY, NEW YORK, NY 

Mr. KAUFMANN. Senator, very briefly, if I may. What we found, 

to just give you an overview of the conduct that we looked at in 

the Lloyds investigation with the Department of Justice, so you 

understand exactly what Lloyds was doing and what its criminal 

conduct was, essentially, Lloyds offered banking services to Iranian 

banks to help the Iranian banks move money all over the world to 

pay for—at times, commercial transactions; at other times, military-related transactions. 

The majority of contracts between international companies are 

denominated in U.S. dollars, which means that to clear—or execute 

those transfers—they have to transit through banks in the United 

States. That is generally the case. 

What Lloyds did was to say to the Iranian banks, ‘‘Look, you’re 

banned from transacting through the U.S. by the Department of 

Treasury regulations and the Office of Foreign Assets Control.’’ 

United States banks—all of the major United States banks that 

operate in this business of clearing United States dollar transfers— 

have very sophisticated systems that if a transfer came in referencing Iran, the bank would block it and then investigate it and 

either reject or freeze or block the money. 

Lloyd’s provided a service to the Iranian banks to make sure 

their transfers went through the United States banks undetected, 

13 

to effectuate Iranian commerce. And the way they did this was by 

what we’ve referred to as ‘‘stripping.’’ 

Every wire payment message that came in from an Iranian bank 

to Lloyds would be taken out of the automated payment processing 

system. Then, any information that would identify the payment as 

being Iranian would be removed. Then that altered payment message would be sent by Lloyds to the U.S. banks to complete the 

transaction. 

I have here—it was going to be on a PowerPoint presentation, 

but since that’s a—we’re a little technologically disabled at this 

table, we have a sample. This is not an actual stripped SWIFT 

message. It’s one that I put together as an example or a hypothetical. 

But I’ll pass it up to the committee. And you’ll see what it shows 

is an incoming message sent from Melli Bank, which is a banned 

Iranian bank, to Lloyds, asking for a payment message to be sent 

on in United States dollars. 

You’ll see in the bottom field, which is a—this is a SWIFT message, which is an international payment system. At the bottom, it 

says, ‘‘Please do not mention our name’’—that’s Bank Melli’s 

name—‘‘to any bank in the U.S.A.’’ And then underneath that, 

you’ll see an outgoing SWIFT message that is sent to a correspondent bank in the United States. When this payment message was 

reviewed by the automated filtering systems at the United States 

bank, not only does it not mention anything about Melli Bank or 

Iran, it actually gives the appearance of having originated with a 

Lloyds customer. 

So in terms of the conduct, it was an intentional effort to defraud 

the systems of the U.S. banks, and that was the gravamen of the 

criminal conduct that we investigated. 

Now, what we did with the Department of Justice was determine 

that it was appropriate to resolve the case with a deferred prosecution agreement and a rather large fine. One of the important 

things about this case that we’ve seen, in terms of the deterrent 

effect, is the impact it’s having on other banks that are handling 

accounts for Iran. And I should note it wasn’t just Iran. It was also 

Sudan and, for a time, Libya. 

What we’re hearing from other banks is that they are taking a 

very hard look—and not just U.S. banks, but more significantly, 

international banks, foreign banks—they are taking a hard look at 

how they handle international payments to make sure that the 

payments do not violate any sanctions, not only U.S. sanctions, but 

also sanctions in other countries that might be involved in the 

transiting of these international wire transfers. 

So the deterrent impact that we are starting to see from Lloyds— 

and as the district attorney mentioned, we have a number of similar cases coming in—I think we’re going to see a new respect on 

an international level, an effect on the international banking system of respecting and minding these sanctions, so as not to get 

caught as Lloyds did. 

The CHAIRMAN. You’ve got a certain standard in England and a 

certain capacity to be able to investigate, as you did. What about 

some other locations? I mean, the same stripping and the same 

camouflaging can take place in any of the Gulf States or in any Far 

14 

Eastern States, South Asian State, could it not, and then be transferred from one of those banks—a bank in Bahrain, a bank anywhere, into the New York finance system, correct? 

Mr. KAUFMANN. That’s correct, Senator. 

The CHAIRMAN. And the only real way to prevent that from happening ultimately is to have their cooperation in this sunshine 

effort. I mean, you’ve got the banks knowing your customer, the 

international standard of the banking community, that is essential 

here, is it not? 

Mr. KAUFMANN. It is. I think one answer is that there are two 

kinds of cooperation. There’s truly voluntary cooperation, and there 

is an appeal to enlightened self-interest. And if we can—what we’re 

starting to see in regards to the China proliferation case, we’ve spoken with some of the Chinese banks that were involved in handling 

those accounts. And it is—it may not be the world’s most voluntary 

cooperation, but if people or banks think they’re going to get caught 

or exposed, they’ll hopefully straighten up their act. And it can’t be 

a universal impact, but—— 

The CHAIRMAN. I’ve often wondered about this, going way back 

to the BCCI days—is it possible that we should be asking that the 

U.S. financial system, which is a critical hub in the flow of funds 

from various places—ought to demand a higher standard of scrutiny of those funds to make commingling more difficult, to make 

the stripping effort less simple. 

Mr. MORGENTHAU. Well, I think the U.S. banking system is—in 

these cases that we’ve seen, has acted responsibly. The weak link 

is these foreign banks that are happy to facilitate illegal transactions, provided they don’t get found out. And that’s why this committee, you turn the spotlight on them, and then it goes away. 

In several transactions—eight total—we’ve started an investigation and the transaction has halted completely, because they don’t 

want to be found out, and they don’t want to be held up to international ridicule for dealing with WMD and Iran. 

The CHAIRMAN. What I’m wondering—— 

Mr. MORGENTHAU. The more we can expose this activity, the 

better. 

The CHAIRMAN. I couldn’t agree with you more. The question is 

how—in this case, you had information which empowered you to investigate. If you don’t have the information that empowers you to 

investigate, the question is, What’s the standard by which people 

are operating day to day? 

And I’m thinking that as we look at the world financial crisis and 

the demands of the G20 and others to really sort of reform the 

effort and to rewrite how we do this, a little more scrutiny with respect to some of the securitized entities, a little more sunshine with 

respect to the kinds of transactions that we’re being sold in the 

marketplace would have prevented a lot of damage from being 

done. 

So this doesn’t only go to Iran. It doesn’t only go to the question—it’s the whole question of blind masked financial transactions 

that purport to be one thing are really another. And it could be in 

housing. It could be in derivatives. But it can also be in the illegal 

network to support the nuclear program. 

15 

Mr. MORGENTHAU. In the case of Lloyds, the bank actually 

printed a manual explaining exactly how to strip identification and 

avoid disclosure in the United States. So, I mean, this was not kind 

of an accidental rogue operation, but this was a major bank operation, and then so—— 

The CHAIRMAN. How did you discover that? How did this come 

to you, Mr. District Attorney? 

Mr. MORGENTHAU. I’m sure we can—the United States banks can 

tighten up, but we have not seen a case where United States banks 

will knowingly handle Iranian money. I’m not saying it hasn’t happened, but we haven’t seen that. 

The CHAIRMAN. How did you discover this? 

Mr. MORGENTHAU. How what? 

Mr. KAUFMANN. He asked how we discovered it. 

Mr. MORGENTHAU. We were looking at the Alavi Foundation. It 

was a major Iranian foundation in New York. And we found money 

going overseas to suspect people. And then we were looking at their 

banking transactions, and we discovered Lloyds through that. 

We went to the CIA because we thought they would be primarily 

interested, and they said, ‘‘Well, that’s within the FBI’s jurisdiction.’’ So we then talked to the FBI. And then they said, ‘‘Maine 

Justice is interested in this.’’ So we then got in touch with Maine 

Justice, and we formed a partnership and did the work together. 

The CHAIRMAN. And you’re saying that the international banks 

have, in fact, been cooperative with you in this effort? 

Mr. MORGENTHAU. No. 

Mr. KAUFMANN. Sometimes yes; sometimes no. I think, Senator, 

to go back to your point, if I may for a moment, about what do we 

do and transparency across the board in the financial sector, you’re 

certainly preaching to the choir to this table, where we’ve been battling issues, especially the district attorney, for 35 years against 

secrecy, opaque systems. 

A lot of the cases we look at—and you spoke in your introductory 

remarks about the interconnectedness of different types of criminal 

systems. Again and again and again, we see that. We see opaque 

networks being used—set up for tax evasion, being used by narcotics money launderers. We see those same systems sending 

money to accounts associated with Hamas on the West Bank, so 

the need for transparency is great. 

The CHAIRMAN. Is that the single most important weapon in 

efforts to fight this? 

Mr. KAUFMANN. I think it is. I think at a macrolevel, the more 

transparency you have in financial systems, the more difficult you 

make it for criminals to use systems to move their money and hide 

it. You’re never going to legislate to address fraud. We already 

have fraud laws, and this was a case of fraud. 

In this area where you talk about how do we—what can the U.S. 

banks do, I think Mr. Morgenthau is right. The U.S. banks are primarily doing a pretty darn good job of screening for this type of 

behavior. This was fraud and it was difficult to detect. 

I think you have to be careful. There certainly is a need to screen 

and have a high level of certainty by the banks, but you also can’t 

make it so difficult that you shut down international commerce. 

16 

We’re talking trillions of dollars a day in wire transfers. So it’s a 

very difficult matter to address proactively. 

The CHAIRMAN. Which is why it came down to this question of 

this international standard adopted at the Basel Convention with 

respect to banking, which is ‘‘know your customer.’’ I remember, 

that’s when we put into place—it was a result of our early investigation that we put in place the $10,000 reporting requirement 

and subsequently went after some of the cooperative agreements, 

the mutual legal assistance treaties and other efforts in order to 

require countries to cooperate with us when we had probable cause. 

And I think the cooperation has been raised significantly. The 

financial syndicate office down at Treasury Department has done 

a darn good job with too little resources, frankly, in pursuing some 

of this. We could do more, I think, to hold people accountable if we 

put more resources into that effort. 

Mr. KAUFMANN. The—— 

The CHAIRMAN. Senator Shaheen. I’m going to call Senator Shaheen in a minute. 

Mr. KAUFMANN. I’m sorry. 

The CHAIRMAN. Go ahead. Make a comment. 

Mr. KAUFMANN. The MLAT system has improved matters. I will 

tell you that the view from the trenches, it is still very slow and 

difficult to obtain information. Any efforts that would encourage 

direct cooperation between prosecutors without necessarily going 

through a centralized clearing system would, I think, go a long way 

to enhance and expedite matters. It can take—in a criminal investigation, 6 months is the end of the world, and it can take 6 

months, a year for us to get anything from the most cooperative 

countries. 

The other thing I’ll just say—you speak of Basel. There is one 

significant happening this year that will go a long way toward promoting transparency in international wire transfers, and that’s a 

movement put forth under the Wolfsberg principles to require originator information on SWIFT payment messages of a certain type 

between banks. 

Right now, the way it’s—it’s a little technical, but basically, 202 

Cover Payments are bank-to-bank transfers. They’re messages 

between banks to effect money transfers that do not have originator information contained in them. 

In November of this year, there’s a new message system—and it 

was as simple a matter as creating a new form and a new computer field so the automated system will require originator information on those payment messages. In terms of transparency, that 

is tremendously significant. 

The CHAIRMAN. Good. Senator Shaheen. 

Senator SHAHEEN. I just want to follow up on Senator Kerry’s 

question about what more can be done to close the loopholes that 

exist, and wanted you to talk a little bit more, if you would, about 

what you meant when you said prosecutor-to-prosecutor cooperation without going through a centralized system. What more could 

be done to encourage that kind of cooperation? 

Mr. KAUFMANN. Right. About the MLATs? 

Mr. MORGENTHAU. Well, I mean, the problem with MLAT is even 

with phenomenal cooperation, I mean, we have to go to the Justice 

17 

Department. That has to go to the State Department. That has to 

go to the Embassy. And by that time, not only has the horse been 

stolen, but the barn has been burned down. 

So it’s a very cumbersome operation, even with the best of intentions. It takes—I mean, recently we had a case where we had to 

get information on London, and it took us a year and a half before 

the MLAT information came back. So we’ve got to figure out a way 

to speed that system up, both internally and with our cosigners. 

It’s a very, very cumbersome process, and by the time you get the 

information, usually it’s too late to do anything about it. 

Senator SHAHEEN. And is the difficulty the system that’s been set 

up, the process itself, or is it that the players who are part of that 

use this as a convenient excuse for delaying information? 

Mr. KAUFMANN. It can be both, Senator. Some countries are more 

hypertechnical about their requests than others, and that can provide difficulties, or as you say, cover. Some MLATs contemplate 

direct cooperation between local prosecutors or police. And that is 

a very simple—it’s usually just a paragraph within the treaty that 

both country parties are recognizing that while there is a treaty 

mechanism, there can also be a direct cooperation mechanism. 

And where that exists, we are much more able to reach out 

directly to our foreign counterparts and establish the kind of direct 

working relationship where if I can pick up the phone and talk to 

the prosecutor in Poland and explain to him exactly what I need, 

or find out directly from him what he needs from me to allow him 

to help me. Having some framework that allows that type of direct 

communication and cooperation is very helpful. 

Senator SHAHEEN. So are you suggesting that we should have 

that kind of a provision as a matter of course in our treaty agreements or our cooperation agreements? 

Mr. KAUFMANN. I would respectfully suggest that, yes, ma’am. 

Senator SHAHEEN. Thank you. 

The CHAIRMAN. That’s a good idea. As a matter fact, I’ve just 

been prompted by your comments and I think we’re going to 

request that the State Department formally see if we can’t try to 

get some kind of a direct bypass. I couldn’t agree with you more. 

I mean, you can take forever before you get to what you need to 

do. 

You ought to be able to go directly and there ought to be an 

understanding through this process, since it’s agreed upon, and 

if they have a problem, then there ought to be a stoppage route, 

rather than an access route. It seems to me it could become pro 

forma that way and we could proceed much more rapidly. 

Mr. KAUFMANN. Just remember, sir, to include State authorities 

in those provisions and not just Federal. I’ll throw that in for the 

local guys. 

The CHAIRMAN. I’m very sensitive to that. 

Mr. MORGENTHAU. Senator, if I can make—emphasize one point, 

and that is, I mean, we have Iran’s shopping list for materials 

related to weapons of mass destruction. We have literally thousands of records. 

We have consulted top experts in the field from MIT and from 

private industry and from the CIA, and the one thing that comes 

out loud and clear is that, one, the Iranians are deadly serious 

18 

about proceeding with this program, and No. 2, that it’s later than 

a lot of people think. Frankly, some of the people we’ve consulted 

are shocked by the sophistication of the equipment that they’re 

buying. 

So we don’t have a lot of time to waste. I’m not an expert on proliferation, but we’ve consulted a lot of people—and it comes out 

loud and clear. It’s late in this game, and we don’t have a lot of 

time to stop Iran from developing long-range missiles and nuclear 

weapons. 

The CHAIRMAN. Well, Mr. District Attorney, that’s a very, very 

important statement that you’ve just made. And it is a significant 

reason that we really wanted to have you here today, is so people 

can see inside—you know, take away the opaqueness and see 

what’s really going on here. It’s uncomfortable for some people, but 

it’s necessary. 

The report that we’re going to issue from the committee builds 

on what you’ve just said and kind of lays out the realities of where 

we see the Iranian program now. Now, that has to be, in our 

democracy, discussed here. And the Senate and the various committees of jurisdiction here, the intelligence committee and armed 

services, need to really confront this question. 

Your documents are very important, and we’re going to make the 

committees aware of their existence to the degree that they’re not 

yet, because it really does help shed light on the seriousness of purpose of their program and of how deep it runs and of what they’re 

getting, in terms of materials, and how concentrated it’s been. 

And I think it’s a great service that you’re providing us through 

a law enforcement agency that in many cases would never have 

dared to touch this. That’s been true of so many of the cases that 

you’ve taken on in the New York jurisdiction, and again, I thank 

you for that. 

So with that note, because of our time constraint, what I’m going 

to do is leave the record open for any questions that may be submitted. We might just ask you for the lessons of the Chinese case 

particularly, but I don’t want to go into it right now just because 

of the time constraints. But I would like to have that in the record 

so we can also see another side of the coin here, of how this plays. 

But Mr. District Attorney, I know it’s a long way to travel for a 

shortened testimony. I hope you’ll forgive the committee for that 

fact. Or maybe you’re thrilled. Maybe the Senate saved you. But at 

any rate, again, I can’t say enough about your years of service and 

your friendship, and we thank you very, very much for coming in 

here today. 

Mr. MORGENTHAU. Thank you for the opportunity, and thank you 

for putting some sunlight on this problem. 

The CHAIRMAN. Well, we’re going to keep doing that, I promise 

you, in your tradition. 

Mr. MORGENTHAU. Thank you. 

The CHAIRMAN. Thank you, sir. 

Mr. KAUFMANN. Thank you, Senator. 

The CHAIRMAN. If I could ask Secretary Burns to come up to the 

table, we’ll have a transition here without interrupting the hearing, 

hopefully. Again, Secretary Burns, we’re grateful to you for coming. 

I know this is an area you’ve thought about a lot. 

19 

[Off-the-record discussion.] 

The CHAIRMAN. Mr. Secretary, thank you for coming. We look 

forward to your statement. 

STATEMENT OF HON. R. NICHOLAS BURNS, PROFESSOR IN 

THE PRACTICE OF DIPLOMACY AND INTERNATIONAL POLITICS, HARVARD KENNEDY SCHOOL, FORMER UNDER SECRETARY OF STATE FOR POLITICAL AFFAIRS, CAMBRIDGE, 

MA 

Ambassador BURNS. Thank you, Mr. Chairman. I think, as you 

know, I’ve submitted my written testimony for the record. I will 

not—I’ll be merciful and not read that. But with your permission, 

I’d just like to make a few points to start off. First, I’d say—and 

as I said in my written testimony—I fear that we are on a collision 

course with the Iranian Government. We’ve had a 30-year deep 

freeze in our relationship. 

We’ve had no substantial or meaningful discussions from the 

Carter administration to the Obama administration with a series 

of Iranian governments. There’s no real understanding of each 

other, and we see each other as adversaries. So this is a situation 

that is fraught with a lot of danger for both countries. 

I do see the Iranians as a real threat to our country. There’s no 

question they’re seeking a nuclear weapons capability. No one 

doubts that. They’re the principal funder of most of the Middle 

East terrorist groups that are shooting at us, shooting at the 

Israelis and the moderate Palestinians, and they’re influential in 

Iraq and Afghanistan, sometimes in ways that are very negative 

for United States interests. 

So they pose a challenge for us in the most important region of 

the world to us, in the Middle East and South Asia. That’s the 

dilemma. I do think, however, that our past policies, not just the 

George W. Bush administration, but for many administrations, of 

isolating Iran, of refusing to meet with its officials, of calling for 

regime change, have not worked. They’ve not influenced the behavior of the Iranian Government. So I see a twin test—— 

The CHAIRMAN. Could it have influenced them the wrong way? 

Ambassador BURNS. Excuse me? 

The CHAIRMAN. Could it have influenced them the wrong way? 

Ambassador BURNS. Hard to say. Hard to say. I mean, the Iranians have been fairly consistent in their support for terrorism. 

They’ve been trying to build this nuclear-weapons program for a 

long time. This predates the Bush administration. So it’s very hard 

to say that calling for a regime change had an additional negative 

impact on them. 

But I do think that this poses a twin test for the Obama administration. On the one hand, we’ve got to counter, and if we can, roll 

back the more pernicious aspects of Iranian policy. On the other 

hand, I do think it makes sense for us to try to seek engagement, 

not because, as you say, diplomacy is an end. It’s not an end. It’s 

a means to an end. But because it might be a vehicle for us to exert 

greater influence on the Iranians, particularly in conjunction with 

other countries, like Russia and China and the European countries. 

So I frankly think it’s time for a new approach, and that the 

Obama administration ought to think very seriously of a policy of 

20 

engagement reinforced by the threat of sanctions and by the threat 

of force. 

Now, I do not believe it’s time for the use of military force by the 

United States or by anyone else. I don’t think it would work. I’m 

not familiar with any scenario where military force could actually 

fully stop a program that is based on scientific research and whose 

most important elements are really in the minds of the scientists 

of Iran. 

Second, we have to worry about unintended consequences. We 

learned in Iraq that sometimes when you start a war, you don’t 

know where it’s going to end. That would certainly be the case with 

Iran. 

Third, there is every reason to indicate that if we use force now, 

the Iranians would use asymmetric force back against us, through 

Hamas and Hezbollah, and certainly through the Shiite militant 

groups in Iraq. I just can’t see it being in our best interest to start 

a third war in the Middle East and South Asia at this time without 

having tried diplomacy for 30 years. 

So, I do think that leaves diplomacy as our best option. I think 

what President Obama has been trying to do—and we only see at 

this point the outlines of his policy—has been fairly impressive. In 

a way, I think he is probably outpointing the Iranians, and he has 

put them on the defensive, which is a good thing. 

I mean, the fact that he has offered to send a diplomat to these 

P5 talks, the fact that Secretary Clinton invited the Iranians to the 

U.N. conference on Afghanistan, the fact that President Obama 

says that he wants and is willing to sit down and talk about a variety of issues, I think has probably puzzled the Iranians, and you 

have not seen any kind of consistent response from the 

Ahmadinejad government. And if we are putting them on the 

defensive for the first time in a long time, I think that is favorable, 

and it is a good start for the Obama administration. 

I would say, however—and you mentioned this in your early 

March—your March 3 hearing—we’ve got to negotiate from a position of strength. We can’t go, hat in hand, to these negotiations and 

think that just by talking, we’re going to make progress. Therefore, 

I think we’ve got to have an agreement with Russia and China in 

advance of sitting down for draconian sanctions on Iran. 

Put it another way. If we’re going to give up a long-held American position that we should not talk to Iran, if we’re going to give 

that up and talk to them, then our partners in this process, particularly the Russians and Chinese, who are very influential, ought 

to be with us, agreeing beforehand that if the talks fail, they will 

join us in very, very tough sanctions. I think that makes sense. 

And I do think it makes sense to keep the threat of force on the 

table. I don’t see Iran negotiating seriously if there isn’t a marriage 

between diplomacy and the threat of force. It’s a language they 

understand, and it’s certainly language that if we took it off the 

table, I think would probably injure our negotiating position. 

So, just two final thoughts. Why should we then support diplomacy, and what reason do we have to feel that diplomacy might be 

useful? First, it may be the only way we’ll ever know if there’s a 

peaceful outcome here—if it’s possible to have a peaceful outcome. 

21 

I don’t know if it is. But it is the only way we’ll ever be able to 

test that proposition. 

Second, I think it would be unconscionable to go to war without 

having tried diplomacy first, given the record of the last 30 years. 

Third, it could actually work. There’s a possibility—probably not a 

high probability—that a combination of American, Chinese, Russian, European influence and pressure on Iran could alter its 

behavior. 

But fourth, even if that does not become the result, even if negotiations fail, we will be in a much stronger position having tried 

negotiations. We will be much more credible with the international 

community to then say to the rest of the world, to all the trading 

partners of Iran, ‘‘If you don’t want to leave us with just one 

option, a military option, you need to join us in much tougher sanctions than those that we have tried in the past.’’ 

The three sanctions resolutions that I negotiated for the United 

States, for the Bush administration, are just the beginning. They 

haven’t really made a dent in Iran’s armor. We need to go far 

beyond that. 

But a final thought. If we are going to try diplomacy, we need 

as a country to be patient enough to let diplomacy work. And what 

I would predict is if President Obama embarks on diplomacy, there 

will be the inevitable attempts by the hard-liners in Iran to try to 

deflect that by intemperate statements or even violent actions. 

I’m sure there’ll be rhetorical attacks on President Obama in our 

own country. They’ll say that diplomacy is weakness, that diplomacy is naive, that diplomacy is appeasement, and I would reject 

that. I think that diplomacy can be an effective tool for the United 

States, even in a situation as perilous as this, and we’re going to 

have to give the President some time and some flexibility to negotiate what is going to be an extremely complex diplomatic negotiation with lots of different countries involved, perhaps with a new 

Iranian Government. We’ll see what happens in their elections 

after June. 

And finally, I would suggest that as a country, in addition to trying to negotiate with the Government of Iran, we try to open up 

to the people of Iran. We should bring thousands of Iranian students to the United States, if it’s possible to get them out to study 

in our universities. 

I hope it will be possible for Members of Congress to be able to 

travel to Iran, for journalists and businesspeople to do that. We 

haven’t had that kind of normal relationship in a long time. I think 

the combination of trying to open up to the people of Iran and trying to engage this very tough Government in Iran is probably the 

right way to go at this point. 

Since 9/11, we’ve often led with the military, and at least in the 

case of Afghanistan, that was appropriate. Sometimes it’s better to 

lead with diplomacy, with the military in reserve. I think this is 

one of those times. 

That I think fairly summarized what I said in my written testimony. 

[The prepared statement of Ambassador Burns follows:] 

22 

PREPARED STATEMENT OF AMBASSADOR NICHOLAS BURNS, PROFESSOR IN THE PRAC- TICE OF DIPLOMACY AND INTERNATIONAL POLITICS, HARVARD KENNEDY SCHOOL, FORMER UNDER SECRETARY OF STATE FOR POLITICAL AFFAIRS, CAMBRIDGE, MA 

Chairman Kerry, Senator Lugar, and members of the committee, thank you for 

the invitation to testify today on United States policy toward Iran. 

I have testified to this committee in the past as a government official. This is my 

first appearance as a private citizen and thus the views that follow are entirely my 

own. In many ways, I fear that the United States is on a collision course with the Government of Iran. How we counter the multiple threats that Iran poses to our most 

important interests in the Middle East is surely one of our highest policy objectives. 

But, whether we can find a way to communicate more effectively with the Government of Iran and to agree to negotiations on the issues that divide us is another 

important goal. This twin test of American effectiveness with Iran will be an early 

and central concern for the Obama administration. 

Consider the following ways in which American ambitions clash with those of the 

Government of Iran: 

—The Iranian leadership seeks a more powerful and perhaps even dominant role 

in the Middle East. In nearly every arena, it poses the major challenge to America’s own power in the region. Iran’s pursuit of a nuclear-weapons future is a 

direct threat to Israel and our Arab partners. Its intrusion into the politics of Lebanon has been unhelpful and often destructive. Its opposition to a two-state solution between the Palestinians and Israel is a significant impediment to progress 

on that overarching priority; 

—As the United States has sought to blunt and defeat the terrorist threat in the 

Middle East, we have found that Iran is the principal funder and even director 

of some of the most violent groups that sponsor terrorism in the region— 

Hezbollah, Palestinian Islamic Jihad, Hamas, and some of the Shia militant 

groups in Iraq; 

—Iran is an influential neighbor of the two countries where we are at war—Afghanistan and Iraq. It sometimes uses that influence in ways that are directly contrary 

to American interests. Is it possible to find common ground with Iran as we seek 

to promote stability in both countries? 

Everywhere we look in the greater Middle East, Iran often plays a negative and 

troublesome role. As this region is now, along with South Asia, the most critically 

vital for American foreign policy, it is essential for the United States to fashion a 

more effective strategy toward Iran. For three decades, Iran and the United States 

have been isolated from each other and we presently have no real ability to communicate effectively. This is surely a situation we should not wish to see continue. 

I therefore believe the Obama administration has been correct in undertaking a 

full review of the present poor state of relations between our two countries. The 

time has come for new and more creative thinking so that we might, as a country, 

defend where we must against Iran’s more pernicious influence in the world but also 

find a way to engage its government and people where and when we can. 

With this in mind, I suggest three guideposts for American policy that may help 

to frame this issue for Congress. 

First, given the lethal nature of Iran’s challenge to the United States, we must 

respond to it with seriousness of purpose, toughness, and strength. One of our highest long-term priorities should be to maintain America’s leading role in the Middle 

East and to deflect Iran’s own ambitions. 

Second, we need to recognize that the 30-year deep freeze in our relations with 

Tehran has resulted in an extraordinary situation—we know precious little about 

the very government and country that looms so large as a negative influence on all 

that is most important to us in the Middle East. Isolating Iran, resisting any contacts between our governments and threatening regime change have not resulted in 

positive changes to its behavior on issues critical to our security. In the absence of 

diplomatic relations and the lack of a substantial American business or journalistic 

presence in Iran, we have no real basis to understand its government, society, and 

people. It does not serve American interests for this deep freeze to continue. 

Third, I therefore support a policy of strength but also realism and engagement 

with the Government of Iran. We need to be firm in defending Israel and the interests of the Arab States uneasy with Iran’s rise to power. We should continue to oppose Iran’s pursuit of nuclear weapons. But, we should do so while simultaneously 

opening a dialogue with the Iranian Government and people to test whether 

progress is possible through peaceful means. 

Such a dialogue is most important on the most serious issue that divides us with 

Tehran—its pursuit of nuclear weapons. Some continue to argue that the only way 

23 

to halt Iran’s accelerating nuclear research effort is through American or Israeli air 

strikes. But, there is no convincing scenario where such use of military force would 

work effectively to end the Iranian nuclear program. Even worse, air strikes would 

undoubtedly lead Iran to hit back asymmetrically against us in Iraq, Afghanistan, 

and the wider region, especially through its proxies, Hezbollah and Hamas. This reminds us of Churchill’s maxim that, once a war starts, it is impossible to know how 

it will end. An America that is already waging two difficult and bloody wars should 

be wary of unleashing a third. Choosing military power at this stage would surely 

be precipitous and unwise. 

That leaves diplomacy as the most plausible way to blunt Iran’s nuclear ambitions. I have some familiarity with the difficulties and tradeoffs of a diplomatic approach. For 3 full years, between 2005 to early 2008, I served as the point person 

on Iran for Secretary of State Condoleezza Rice. We worked hard to find a path to 

the negotiating table with Iran. 

In June 2006, we launched the most serious and ambitious American attempt 

since the Iranian revolution of 1978 to establish meaningful discussions with Iranian officials. Along with Russia, China, Britain, France, and Germany, we offered 

Iran negotiations on nuclear and other issues. We were determined to begin talks 

with Iran and expected that negotiations would take place. Unfortunately, Iran rejected over the next 2 years repeated offers by the United States and its partners 

for talks. Iran walked away and missed a rare opportunity to pursue a better relationship with the United States. 

Since then, Iran has accelerated its nuclear research efforts despite three United 

Nations Security Council sanctions resolutions. As you stated in your March 3 hearing on Iran, Mr. Chairman, the recent IAEA report indicates that Iran has expanded significantly the number of operational centrifuges at its uranium enrichment plant at Natanz. Iran has also continued construction of the Arak reactor. 

These developments and its ballistic missile tests all point to a future nuclear capability that could cause further instability and pose another risk to peace in the Middle East and beyond. 

How should the new American Government led by President Barack Obama respond to this open challenge? While I am not in a position to know what our Government will ultimately do, I am frankly encouraged by the initial statements of the 

President and his team to take the offensive against Iran through strong and active 

diplomacy. In this sense, I believe we are fortunate, indeed, that President Obama 

and Secretary of State Hillary Clinton have asked Ambassador Dennis Ross to coordinate our policy toward Iran. He is one of the most skillful and experienced public servants in our country and one of our foremost experts on the problems of the 

Middle East. 

I think the Obama administration has made the right decisions on Iran in its first 

months in office. President Obama’s new and positive appeal to Moslems worldwide, 

his video message to the Iranian people, his invitation for Iran to attend the U.N. 

conference on Afghanistan and his pledge that the United States will now participate in the P5 nuclear talks with Iran, have all put us back on the diplomatic offensive with the Iranian regime. The absence of a clear Iranian Government response 

to these steps is telling—accustomed to keeping the United States off balance in recent years, the Iranian leadership appears to not know how to respond to these 

more positive American initiatives. That is not an insignificant accomplishment at 

this early stage of the new administration. 

Unfortunately, many in the Moslem world saw the United States, incorrectly, as 

the aggressor in the conflict with Iran in past years. They believed the United 

States was unwilling to meet with Iranian officials. They criticized the United 

States and its P5 partners for imposing a condition on talks—the prior suspension 

of Iran’s enrichment activities. 

With the benefit of 20/20 hindsight, it would have been more effective in 2006– 

07 if we had offered unconditional talks. Such an offer would have deprived Tehran 

of the excuse it used subsequently to some effect that such a conditional offer was 

unacceptable and unworthy of a true breaking of the ice between our two countries. 

And, the fact that there were no diplomatic contacts with Iran whatsoever during 

my 3 years as Under Secretary of State for Political Affairs was a reflection of the 

limitations of our approach. 

In my judgment, President Obama has put the United States in a stronger position as he considers how best to proceed with Iran. He has taken a different path 

with the Iranians, showing openness and respect to the people of Iran and offering 

to have United States diplomats participate routinely in the P5 talks with Iran for 

the first time without conditions. 

The work ahead, however, will be even more challenging. The key question now 

is how to frame negotiations with Iran so that they have the strongest possibility 

24 

of delivering the outcome we should want to have—engagement but with a resulting 

decision by the Iranian leadership to slow and stop altogether its pursuit of nuclear 

weapons and to accept intrusive international oversight of all of its activities. 

As Senator Lugar mentioned in your March hearings, Iran is not in a strong 

international position as these talks begin. The decline in the world price of oil, the 

U.N. sanctions and the Ahmadinejad government’s disastrous economic policies have 

all contributed to weakening Iran in the last year. Its transparent aim to become 

nuclear capable has caused nearly all its neighbors to seek its isolation. The new 

Iranian Government to be elected in June may have to reconsider the type of offer 

most likely to be made by the international community—expanded economic ties 

and a return of Iran to the community of nations in return for a halt to its nuclear 

efforts. 

While agreeing to negotiations, President Obama should not want to go hat in 

hand to the Iranians. As you stated in the March 3 hearings, Mr. Chairman, we 

must negotiate with Iran from a position of strength. President Obama would be 

wise to set a limited timetable for talks. He should make clear that the United 

States and others would walk away and impose much tougher financial and economic sanctions if progress in the negotiations is not made in a reasonable period. 

This would prevent Iran from running out the clock until they become nuclear 

capable. 

It will be crucial that the President agree on the automaticity of these sanctions 

with the P5 countries, especially Russia and China, in advance of talks. China has 

violated the spirit of the U.N. sanctions by becoming Iran’s leading trade partner 

at the same time that our European allies have begun to withdraw from Iranian 

markets. Russia sells Iran arms and is helping Iran to construct its first nuclear 

reactor. If the United States is to break with past policy by meeting Iran halfway 

at the negotiating table, then it is only reasonable that our P5 partners, most especially China and Russia, pledge to join us in draconian sanctions on Iran should the 

talks break down. 

Most importantly, the President should renew his campaign position that all options will remain on the table. This marriage of diplomacy with the threat of force 

is essential, in my view, to convince Tehran it needs to make a difficult choice and 

soon. Without this threat, I doubt Iran’s leaders would take the talks seriously. The 

Iranian leadership wants more than anything else security guarantees from the 

United States. We should not give them such guarantees until they have met our 

core aims. This does not mean that the United States should default to the use of 

force if diplomacy and new sanctions fail. And, as I have said in this statement, it 

is in our overriding national interest to resolve our differences with Iran peacefully. 

Let us hope that will be possible. 

Any negotiations with Iran will likely be frustrating with only a modest probability of success. So, why does President Obama’s diplomatic approach now make 

sense for the United States? 

First, it may be the only way we will ever know if there is a chance for a peaceful 

outcome in our long-running feud with Iran. Before contemplating the use of force, 

it is in our clear interest to see if we can avoid war by peaceful means. Diplomacy’s 

great promise is that one can never predict where discussions will lead once they 

are begun. Certainly, it would be unconscionable to start a war with Iran without 

having first given negotiations a serious and sustained effort. 

Second, a negotiation may now be the most effective way to slow down Iran’s nuclear progress. One of the first tactical aims of a negotiation should be to prevail 

upon Iran to freeze its nuclear research as the talks proceed. Otherwise, Iran may 

steam ahead unimpeded. 

Third, negotiations would serve to isolate Iran even further internationally and 

put it on the defensive. An unconditional offer deprives Iran’s leaders of the excuse 

not to negotiate. Our sitting down with Iranian leaders brings another advantage— 

it will significantly undercut Iran’s ability to posture as the leader of the anti-American front among the radical governments and movements of the Middle East. 

Finally, we will be no worse off if we try diplomacy and fail. In fact, we might 

be stronger internationally. Having made a good faith effort at diplomacy, the 

United States would be in a far stronger position to convince Russia and China and 

other countries to join us in tougher sanctions. It would not be in their interest to 

see President Obama left only with the military option. I also believe we would be 

more credible around the world if countries saw that we had tried in good faith to 

resolve the crisis peacefully. 

A diplomatic opening to Iran will require patience on the part of Americans. 

Progress is unlikely to be made in the early stages. As Karim Sadjadpour testified 

to this committee in March, there will certainly be those in Iran who seek through 

intemperate statements to derail the process. There will undoubtedly be criticism 

25 

by some in the United States that diplomacy is naive or even appeasement. We 

would do well to ignore these all too predictable attacks and to give President 

Obama the time and flexibility he will need to sustain a complicated and difficult 

diplomatic negotiation with Iran. 

Ultimately, Mr. Chairman, conflict with Iran is neither inevitable nor desirable. 

A first, serious negotiation with Iran in three decades makes much more sense for 

the United States than risking the awful calculus of war. Having placed too much 

of the burden in recent years on our military to sort out the most difficult global 

security challenges, Americans need to have greater faith in our diplomatic power 

to resolve crises. This is such a crisis. It is the right place to begin anew with Iran. 

Mr. Chairman, once negotiations begin, we should not limit them to the nuclear 

issue. As we did with North Korea, our Government should use the vehicle of multilateral talks to enable our own bilateral discussions on the margins. There are many 

issues to discuss with Iran. We need to find a way to convince the Iranian leadership that it is in its interest that Iraq emerge united and stronger as America 

brings home our troops. And, we know that Iranian interests would be served by 

greater stability in Afghanistan and the weakening of the current Taliban offensive. 

These issues and the dramatic struggle for stability and peace in Lebanon are all 

reason for us to begin a wide-ranging discussion with the Iranian leadership in the 

months ahead. 

I have one final suggestion for the committee, Mr. Chairman. We should also 

want to have a much more open and diverse relationship with the Iranian people. 

One of the great ironies of America’s position in the Middle East is that the Iranian 

people demonstrate consistently in opinion polls their high regard for the United 

States. While the pace and nature of our talks with the Iranian Government are 

difficult to predict, it is a much more certain bet that opening up channels to the 

people of Iran will benefit both of our countries for the long term. 

It is also almost certain that an eventual normalization of relations with Iran and 

a peace between our governments—and those should be our most important longterm ambitions—will take some time. We have every reason to build bridges to the 

people of Iran in the meantime. Our Iranian-American community in the United 

States is evidence enough of the richness, energy, and talent of the Iranian people. 

We should have as primary objectives bringing thousands of Iranian students to 

study in our universities. We should want our religious leaders of all faiths to continue the interfaith dialogues that have begun tentatively in recent years. I hope 

it will be possible for Members of Congress and journalists to travel to Iran in much 

greater numbers in the coming months and years. Greater openness between us and 

more frequent people-to-people contacts will serve us and the cause of peace well 

as President Obama negotiates the trickier shoals of government-to-government 

diplomacy in the period ahead. 

Thank you for the opportunity to testify before this committee today. 

The CHAIRMAN. Well, it’s a good statement, and we very much 

appreciate it. Let me explore a few of the implications of it, if I 

may. 

What did you learn from your experience, and what do you believe as a result of it, China’s and Russia’s attitudes are about this? 

Ambassador BURNS. I am sorry to say that based on my 3-year 

experience of negotiating with the Chinese and Russians, which 

was a weekly and sometimes daily occurrence for me to be on the 

phone with them, to meet them, I think both have approached this 

from a fairly cynical point of view. 

For whatever reason, the Russians decided to withhold their full 

support from the P5 effort. I can’t see it any other way. They continue to sell arms to Iran. Most of these sanctions and negotiations 

in the United Nations took 2 or 3 months longer than they should 

have because of Russian foot-dragging. 

And so Russia, in an odd sort of way, is the one country among 

the P5 that has the most to risk, because it’s closest geographically 

to Iran. It cannot be in Russia’s interest to see Iran become nuclear 

capable. And yet, they held back. The Chinese I think probably 

more cynical—— 

The CHAIRMAN. Let me just stay with Russia for 1 minute. 

26 

Ambassador BURNS. Uh-huh. 

The CHAIRMAN. I have had various Russian officials say to me 

point-blank, ‘‘We don’t want Iran to be a nuclear power.’’ They 

believe—at least they expressed to me that they believe it’s a little 

further off than we believe it. Did you conclude that their sense of 

timing is different here, or are they just playing a double game, or 

is it, in fact, in their interest not to have an Iranian nuclear 

capacity? 

Ambassador BURNS. Oh, I think it’s very much in Russia’s interest not to have. 

The CHAIRMAN. And do they perceive that? Do they believe that? 

Ambassador BURNS. I believe that some of their officials do, but 

for whatever reason, the leadership did not give the Bush administration the support that I think the Bush administration deserved 

from them. 

So my hope would be that if the Russian Government sees an 

Obama administration willing to go the extra mile toward negotiations, Russia will choose to put its influence with the United 

States. But here is the only way I think we should proceed, Mr. 

Chairman. I don’t believe it is in our interest to sit down with Iran 

unless we work out a deal with Russia and China ahead of time 

that when talks fail, Russia and China will show up at the sanctions effort. 

So, the Russians, I think, are acting out of fairly cynical purposes, the Chinese even more so. What’s happened with China is 

that as the Europeans have reduced their export credits to Iran— 

they were at ÷22 billion in 2005. They’ve more than halved that 

right now. 

The Europeans are doing the right thing. They’re pulling away 

from Iranian markets. The Chinese are rushing to fill the void, and 

China has become Iran’s leading trade partner in the process. 

So I do think that perhaps the most important element of the diplomacy is not with Iran at this stage; it’s with Russia and China, 

the Europeans being largely supportive of the direction in which 

the Obama administration, I think, is heading. 

The CHAIRMAN. Well, that’s an important statement and an important concept, and I don’t disagree with you. I believe we have 

to go two tracks here, and I hope the Iranians understand the 

genuineness of the American outreach to engage in a real dialogue, 

and that we are not in regime change mode. 

I would say that again and again. This is not about regime 

change. It is about finding a relationship that meets the needs of 

the region and satisfies the global interests with respect to the 

nuclear program. 

That said, we need to prepare for the possibility that things don’t 

work. I’m convinced that the economic sanctions have far more 

likelihood of actually doing something than any potential military 

option that I’ve seen, which I think carries with it dramatic potential downsides. 

But anyway, let me, since we have time constraints here because 

the vote’s coming up, I want to let my colleagues go right at it, and 

we’ll just sort of do a truncated round, if we can. 

So, Senator Feingold. 

27 

Senator FEINGOLD. Thanks, Mr. Chairman, for holding our third 

Iran hearing in the last 2 months. There’s a great deal to discuss. 

I continue to be very concerned by the threat that Iran poses, 

whether with regard to its nuclear ambition, its support for terrorism, or its general unwillingness to cooperate with the international community. 

I am pleased that the Obama administration has tried to address 

the current impasse with a new approach—by calling for strong 

diplomatic engagements, and speaking directly to the people of 

Iran. I think that extending an open hand on multiple levels, while 

still keeping all options on the table, has strengthened the new 

administration’s position and undermined any efforts by the Iranian Government to blame others for not coming to the table. 

That said, tackling our longstanding tensions and problems with 

Iran is a considerable task, and the administration needs to continually reassess the situation in order to develop a realistic model for 

engagement that does not put our national security—or that of our 

friends and allies in the region—at risk. 

Mr. Secretary, the State Department’s recently released ‘‘Country 

Reports on Terrorism’’ notes that the ‘‘Quds Force provided aid in 

the form of weapons, training, and funding to Hamas and other 

Palestinian terrorist groups, Lebanese Hezbollah, Iraq-based militants, and Taliban fighters in Afghanistan.’’ 

These activities obviously affect our national security interests on 

a broad range of fronts, including not only the terrorist threat to 

the United States and our partners and allies, but also our policies 

with regard to stabilizing Afghanistan, redeploying from Iraq, and 

building support for a two-state solution for the Middle East. 

So as we consider our options for engaging with Iran, how do we 

most effectively confront its support for terrorism—as a single overriding problem, or do we confront it as one of a number of problems—and what can we reasonably expect, in terms of marginal 

improvements in the behavior here? 

Ambassador BURNS. Well, Senator, I agree with the way you’ve 

framed the problem. I think we’ve got three major threats from 

Iran. One is the nuclear threat. The second is the support for terrorism. The third is Iran’s influence in Iraq and Afghanistan. 

So as I said in my opening comments, in the region of the world 

which is arguably the most important to the United States, we see 

Iran everywhere as a negative force. I said in my testimony that 

I think we have to proceed in two ways. 

One is I think it is time to have a policy of engagement with the 

Iranian Government, not because we believe it is highly probable 

it will succeed, but because we haven’t tried it before in 30 years. 

It may be that through a process of negotiation and engagement 

and pressure on them, along with pressure from other countries, 

we’re able to maneuver them to a different place. 

If that is not possible, then particularly on the nuclear issue, 

we’re going to have to consider other options. They would be much 

tougher sanctions than we’ve seen before. And it will be a real test 

for the Obama administration, and I wish them well, to put 

together an international consensus for those sanctions. 

And if we believe that Iran is close to becoming nuclear capable, 

obviously, there will be this extraordinarily difficult choice. Do we 

28 

consider the use of force, or do we consider constructing some type 

of containment regime of the Iranians? There will be lots of countries who would want to see that happen. The moderate Arab 

States. Israel certainly would want to see that happen. 

That is a very compelling and very difficult choice for any American President to make. We’re not there yet. But if you play this 

out, that’s certainly something that we have to think is a set of 

choices that we may face down the road. 

Senator FEINGOLD. Thank you, Mr. Chairman. In fairness to my 

colleagues, I’m just going to ask that question. I had many other 

questions, but I want them to have a chance. 

The CHAIRMAN. Well, thank you, Senator Feingold. 

Senator Cardin. 

Senator CARDIN. Thank you, Mr. Chairman. Ambassador Burns, 

it’s a pleasure to have you back before our committee. I share the 

concerns of my colleagues. If Iran were to become a nuclear weapons power, it would be a game-changer that would cause major impact in that region—something we cannot allow to happen. We 

have to use every tool we have at our disposal effectively to try to 

make sure that doesn’t happen. So I appreciate your observations. 

I want to get your best advice as to how much time we have 

here. June elections are upcoming in Iran. We know that the Foreign Minister of Israel, Mr. Lieberman, suggested that 3 months 

might be the appropriate time to continue negotiations. After that, 

I don’t know what he was implying, but that certainly raises some 

time issues. 

We’ve all heard about the urgency of this issue to make progress, 

and we know that one of Iran’s strategies may well be delay. The 

longer they can delay issues, the more they can advance toward 

achieving their goal of becoming a nuclear weapons power. 

So I’d just like to get your advice to us as to how urgent these 

issues are, how much time we have, and what you would suggest 

as the next steps. 

Ambassador BURNS. Well, Senator, as you know, I’ve been out of 

government for more than a year, so I am probably not the best 

person to ask, on an authoritative basis, how much time. But my 

assumption is that there is time. Now, how much is an open question, and that might be a dynamic question that you have to reassess from time to time. 

I have not heard anyone else say that 3 months is the amount 

of time that we have. I’ve not heard anyone else support that statement of the Israeli Foreign Minister. So I assume there is a degree 

of time. 

Now, having said that, and having read some of the testimony 

that was given to you in March, I very much agree with those who 

say—in fact, the chairman said it—that we have to impose a timetable on whatever negotiations we get into with the Iranians. If we 

just had an open-ended negotiation, they could run out the clock. 

They could continue to enrich, build those centrifuges and simply 

keep us at the table until they were ready to declare themselves 

nuclear capable. 

So, I think the Obama administration would be well advised, if 

they go into negotiations, to do it in a very—a set basis. A couple 

29 

of months; if there’s no progress, then move on to sanctions. I think 

that would be the best course of action. 

Senator CARDIN. Thank you. Let me just ask very quickly a second question about Syria. We know that Syria has gotten much 

closer to Iran. We know that there are open discussions now taking 

place between the United States and Syria, or at least, there’s been 

better communication. 

And we also know historically, it’s odd to see a close relationship 

between Syria and Iran, and we know that Israel was making some 

progress through Turkey in negotiations with Syria, which would 

be inconsistent with the relationship with Iran. 

So is there hope that Syria, in fact, could be independent of Iran, 

and we could make progress in isolating Iran through Syria? 

Ambassador BURNS. I certainly think that should be one of our 

objectives. I read in the paper this morning that Secretary Clinton 

is sending two senior diplomats to Damascus for their second round 

of talks, the paper said this morning. I think that’s a good sign. 

And I frankly think that you might look at this—we all might look 

at this not just as a United States-Iran issue, how do we deal with 

Iran, but as a triangular issue. Israel is involved, too. 

On Israel, our responsibility to safeguard Israel, protect its security, is an important, vital American interest. If Israel could make 

progress with the Syrians, if the United States could open up a better diplomatic relationship with the Syrians, that might help the 

diplomacy that we’re conducting with Iran. 

My own judgment would be that Syria’s long-term interests are 

going to be much more involved with the Arab States and with 

Israel than they will be with the present Government of Iran. 

Senator CARDIN. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much, Senator Cardin. 

Senator KAUFMAN. Mr. Chairman, I want to thank you for these 

hearings on Iran. They have really been very, very helpful in terms 

of clarifying what we’re about. 

You know, we’ve talked about, and I agree with all the problems 

we have with Iran, serious problems, if we’re going to do negotiations, we’ve got to start talking about some common interests. 

What kind of common interests do you think we have in Iran? 

Ambassador BURNS. With Iran today? 

Senator KAUFMAN. Yes. 

Ambassador BURNS. It’s hard to find them, but I think there are 

some. I certainly think that the Iranians have benefited strategically from the removal of the Taliban in power in Afghanistan in 

2001. The Iranians have certainly benefited from the removal of 

Saddam Hussein in Iraq. 

And so what we tried to do in the Bush administration was to 

open up some talks between our Ambassador, Ryan Crocker, and 

the Iranian Ambassador in Iraq. They didn’t go very far. I would 

hope that we might look at those potential interests that we can 

share with Iran, try to work with the Iranians productively. 

It was a good decision by Secretary Clinton to invite the Iranians 

to this conference in The Hague on narcotics in Afghanistan 

because there is another interest. The Iranians have a major drug 

problem in their country that emanates—drug usage that emanates 

from Afghanistan. 

30 

So in this case of diplomacy, we know where we oppose the Iranians. Perhaps by building on some common ground, we might be 

able to make some progress that could have some benefits elsewhere. I’m not predicting that will be the case. I don’t see diplomacy as an absolute panacea here. 

But I think it’s worth a try because we have not done this in the 

past, and as the chairman said, and I agree with him, we ought 

to make it clear we’re not out to change the regime of Iran. We 

ought to make it clear that we find them distasteful, the government, that we oppose much of what they stand for, but we’re willing to work with them if we can find common ground, and certainly 

willing to work with them if we can convince them to roll back 

their nuclear efforts. 

Senator KAUFMAN. You know, we all have talked ad infinitum 

about how so many other of the Arab States—Saudi Arabia, Jordan, Turkey—they’re all very much in fear of Iran getting a 

nuclear weapon. I mean, is this—do you see them stepping forward 

and doing something substantial to actually help us in this 

process? 

Ambassador BURNS. I hope so. I think what you did not see 

between 2006 and 2008 when the United States launched a diplomatic initiative to try to get Iran to negotiate—and Iran walked 

away. You didn’t see a lot of the Arab countries or Turkey significantly diminishing their trade with Iran the way that we had done, 

the way that France and Germany were doing. 

And so if sanctions are to work, and if economic pressure is going 

to work as an inducement to Iran, you have to look at all the trade 

partners: China, Russia, Japan, South Korea, United Arab Emirates, Saudi Arabia, Turkey. And I do think it is in the interest of 

some of the Arab States now to speak up a little bit more boldly 

than they’ve been willing to do in the past. Because privately, what 

you’ll hear—as anyone who travels the Arab world—a lot of anxiety 

about the rise to power of Iran. But we haven’t seen, at least in 

my judgment, the actions, particularly on economic sanctions, that 

would be very helpful. 

So these sanctions will only work if they’re nearly universal. 

They are nowhere close to that right now. And that’s the real diplomatic challenge for the Obama administration. 

Senator KAUFMAN. Thank you. 

The CHAIRMAN. Thank you, Senator Kaufman, for your usual 

good probing questions. How far do you believe the Russians and 

Chinese are willing to go with respect to economic pressure? 

Ambassador BURNS. Well, I think we’re about to test that as the 

Obama administration sets out to participate in negotiations. 

The CHAIRMAN. But you don’t have a—I mean, your sense is— 

well, let me ask it this way, because I think it’s a tricky question. 

I mean, it’s not meant to be, but it is hard to get your hands 

around that. 

Is it your sense from the discussions that you had that conceivably, over a period of time in the past administration, that there 

were enough other issues floating around, Georgia, missile defense, 

other kinds of things, that the climate just wasn’t right for them 

to be able to be brought into an effort with respect to Iran, but if 

those dynamics are somehow further away in history and/or being 

31 

approached differently, whatever the dynamics may be, does that 

open up an opportunity in your judgment for them to say, ‘‘You’re 

right. This will be our primary area of cooperative focus with the 

United States, and we’re going to get something done’’? 

Ambassador BURNS. Well, I think you’re right, Mr. Chairman, to 

say this is the key issue. If sanctions are to work, these two countries have to be involved. So why didn’t they help us over the last 

3 years? One reason might be that they were linking our interest 

in this with their interest on other issues, like missile defense. 

A second possible explanation—and this is just really speculation 

on my part—is that they feared the United States was really out 

to use force against Iran, and they didn’t want to participate in 

that process. I think they were mistaken. They misread us. 

I know, working for Secretary Rice, that we were very much 

determined to get into negotiations in 2006. We were planning for 

negotiations, hoping for negotiations. So I do think the Russians 

may have—particularly the Russians—may have miscalculated and 

misread and misunderstood the United States. 

So the challenge now, for the present United States administration, for President Obama, is to convince the Russians and Chinese 

we are willing to give diplomacy a try. But there should be a price 

for that. The Russians and Chinese should, therefore, be willing to 

give sanctions a try. That might be the closing of a circle here that 

we’ve all been looking for the last few years. 

The CHAIRMAN. Well, I might add to that that it seems to me 

that time is of the essence here, as we’ve heard. District Attorney 

Morgenthau has talked about the seriousness of the evidence that 

he’s been seeing. And so it seems to me that as much as you might 

like to begin at some lower level of talking about just narcotics or 

the Taliban or whatever we have interests in that regard, we may 

have to get right at the nuclear issue pretty quick, I think. Do you 

agree with that? 

Ambassador BURNS. I do. And I think that the signals are from 

the administration that it intends to send an administration official 

to the next round of talks. That would be a good thing. But I do 

agree that if we can, perhaps on the margins of those talks, engage 

in some of these other bilateral issues, that would be of use as well. 

The CHAIRMAN. And in addition to that, I might add, people forget that only 8 years ago, in 2001, when we launched our efforts 

against al-Qaeda in Afghanistan, Iran was very helpful. In fact, 

there was significant cooperation on a number of issues. I know 

they’re not fond of the Taliban, and I know they’re not happy with 

the narcotics situation on their border. 

It seems to me there are legitimate interests, not to mention the 

possibility of a regional partnership. The fact is that under the 

right circumstances, unless they desire a confrontation, there are 

many, many things to cooperate on. 

That said, I’ve been asked to go to the floor because I’ve got to 

lead off with my amendment. So Senator Risch, I’ll recognize you 

for questions, and Senator Kaufman, could you close out the hearing, and you’ll chair in my absence? Thank you. Thanks for being 

with us. 

Ambassador BURNS. Thank you, Mr. Chairman. 

The CHAIRMAN. I really appreciate it. Thank you. 

32 

Senator Risch. 

Senator RISCH. Ambassador Burns, you believe that the Iranians 

understand that at the end of the day, however this comes out 

when it comes to negotiations, that the Israelis will never allow 

them to create a nuclear weapon and possess a nuclear weapon one 

way or another. Do they understand that, do you think? 

Ambassador BURNS. You know, I don’t know the level of sophistication in the Iranian Government in determining the Israeli position or our position. I think there may be a problem here of Iranians continually misunderstanding both Israel and the United 

States. 

I certainly have heard both the past Israeli Government in their 

public statements, the current, the new Israeli Government of 

Prime Minister Netanyahu, say that this is an existential threat to 

Israel. And I think one of the obligations that the United States 

has, and the interest that the United States has, is to safeguard 

Israel, and to try to work in such a way that that threat never 

materializes to Israel. 

My judgment is that the best way to do that would not be the 

immediate use of force against Iran, but this two-track policy that 

we’ve been discussing in this hearing of engagement and negotiations, but backed up by the threat of force and backed up by draconian sanctions. And at some point, if the negotiations fail, it would 

then be this very difficult decision that our President would have 

to make as to which direction to go in. 

But you have asked a very good question. I think the Iranians 

have isolated themselves from us, from Israel, from a lot of other 

countries. It is unclear to me if they fully understand how angry 

and how worried many of their neighbors are, including Arab 

neighbors, about their rise to power, about their support for terrorism, particularly about the nuclear program. 

Senator RISCH. And I don’t disagree with that. It seems to me 

that the Iranians lump the United States and Israel together as far 

as those two countries’ edginess toward the ultimate resolution of 

the issue. And I’m not so sure—I’m not only not so sure, I’m confident after discussing—that we aren’t exactly on track with how 

close we are to that. 

Having said that, it also seems to me that the Government in 

Iran seems to be the only people on the face of this planet that 

don’t have a clear realization of what the Israeli position ultimately 

will be on this issue. And I frankly don’t understand it. I don’t 

know why they don’t understand it. I mean, it seems to me to be 

clear to just about everyone except them as to what the ultimate 

resolution’s going to be if they continue on the course that they’re 

on. 

Ambassador BURNS. Well, it’s a regime that has isolated itself, 

not just from us, but from many other countries. And I think that 

strategic isolation is one of its dilemmas right now. So the test for 

our diplomacy is: Could we help them relieve that strategic isolation? 

Essentially, what the Bush administration and the P5 countries 

offered Iran on this two-track policy was that we would be willing 

to have an economic relationship with them, we would be willing 

to facilitate their entry into the WTO, for instance, if they stood 

33 

down on their nuclear efforts. The Iranians never took us up on 

that two-track offer, unfortunately. 

But it would seem to me that the long-range interest of the Iranian Government, a government that is suffering economically— 

the price of oil is falling, and they’re having a hard time domestically just taking care of their own people—that opening up trade 

and investment is in their long-term interests. They seem to be 

putting other issues first right now. 

So the task of these negotiations should be to focus on that issue. 

The Iranians need to halt their nuclear weapons development 

effort, in return for which there should be incentives by the international community to them to have a greater measure of trade 

and investment. 

One other word on Israel. I think it is one of our central interests 

here to help Israel. I do think the United States is right to take 

the lead here, and I think leading diplomatically, not through military force, is in the best interest of both Israel and the United 

States at this point. 

Senator RISCH. Thank you. I appreciate that. The other thing 

that seems to be wound up in this is there seems to be, when you 

read what comes out of Iran, almost—not almost—an actual 

national pride somehow tied in with this nuclear enrichment, and 

it permeates not only the government, but it seems the Iranian 

people—the Iranian people seem to be more reasonable than their 

government is, but both of them seem to be somehow tied up in 

this national pride thing, almost like a soccer team or something 

like that, that they have this national pride tied to nuclear enrichment, which really complicates matters, it seems to me. 

Ambassador BURNS. It does, and President Ahmadinejad unfortunately has made this one of his central initiatives, to try to build 

this sense of pride out of the nuclear project. I think that the Iranian people ought to feel pride in trying to build a civil nuclear 

capacity. 

It has been the position of the United States for a long time, 

including in the Bush administration, that we would have no objection to the properly monitored and regulated civil nuclear capacity 

of the Government of Iran, but they shouldn’t take pride in 

unleashing proliferation in the Middle East, unleashing a situation 

where they might become nuclear weapons capable. Because the 

impact on the Iranians will be, as you said, to anger Israel, the 

United States, and nearly all their neighbors. 

So helping the Iranian people understand that civil nuclear 

power is one thing, nuclear weapons are another, is really a task 

for our public diplomacy and for Arab public diplomacy as we go 

ahead, I think. 

Senator RISCH. Thank you, Mr. Burns. 

Ambassador BURNS. Thank you. 

Senator RISCH. Thank you. 

Senator KAUFMAN [presiding]. Mr. Ambassador, you’ve said several times today about we’d lead with diplomacy, we’d have the 

military—do you have any doubt that the Iranian Government 

understands that militarily, we would use what we have to use if 

we have to use it? 

34 

Ambassador BURNS. That’s a good question, a hard question to 

answer. I do think it would be important for the Obama administration to reaffirm our willingness to use force if necessary, if absolutely necessary. Not that we would default to it, not that we 

wouldn’t go through an agonizing process before doing it. But I 

don’t see diplomacy succeeding unless that threat of the use of 

force is clearly visible. And I’m not sure, given the change of 

administration, and given the fact it’s early days, given the fact 

that the policy as I’ve seen it publicly is not completely rolled out, 

I think we need to see more definition on that policy. And that 

would be my advice. 

And I am someone who very much supports the direction that 

President Obama is heading in, and think that what he has done 

tactically has been very astute. His openness to the Arab world— 

the Nowruz message, the video message that he sent to the Iranian 

people over Nowruz, the fact that he said that we’ll be at these 

talks. I think President Obama has done all the right things here, 

but as we get into the negotiations, the consequences of sanctions 

and the possible use of force, I think, need to be very clearly 

spelled out. That would be my judgment. 

Senator KAUFMAN. I have two questions I just can’t let you get 

away without answering, if you can do anything. The Ayatollah 

Khomeinei’s comment yesterday rebuking Ahmadinejad, do you 

read anything into that? 

Ambassador BURNS. It is hard to say. It was interesting to see 

that during an election campaign, he chose to rebuke Ahmadinejad. 

The Supreme Leader chose to rebuke Ahmadinejad publicly. It has 

happened a few times in the past. I don’t know what it means ultimately. We haven’t seen him come out for or against—the Supreme 

Leader—any other candidates. 

Obviously, what happens in June in their elections will be a 

major determinant of whether President Obama’s policy of seeking 

a diplomatic approach can be successful. 

Senator KAUFMAN. Well, that brings the second question, what 

do you think is going to happen in June? 

Ambassador BURNS. It is hard to say. 

Senator KAUFMAN. I know, and I realize this. 

Ambassador BURNS. But, I do think that Ahmadinejad, unfortunately, has succeeded in some respects in the Muslim world in 

depicting himself as a champion of the Palestinian people, which 

he has not been, as Iran has not been much interested in the Palestinian cause until very recently. But at home, as best as I can 

see, Ahmadinejad is not as popular as he may want to be. His economic policies are largely considered to have been a failure at 

home. The Iranian people are hurting. 

You have this incredible irony. It is a wealthy country. It is the 

second-largest gas producer in the world. It is a major oil producer. 

They can’t even refine their own gasoline. They are importing 

nearly half of their gasoline needs. And average people are having 

a tough time in Iran. 

Whether we see that expressed in the voting booths in Iran is an 

open question. But obviously, my own personal view is that 

Ahmadinejad has been a disaster for the Iranian people and for 

Iran’s long-term interests. 

35 

Senator KAUFMAN. Great. Thank you for your usual spectacular 

testimony. And I’m going to adjourn the meeting. 

Ambassador BURNS. Thank you. 

[Whereupon, at 10:58 a.m., the hearing was adjourned.] 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

RESPONSES OF HON. R. NICHOLAS BURNS, TO QUESTIONS SUBMITTED FOR THE

RECORD BY SENATOR ROBERT P. CASEY, JR. 

EFFICACY OF INTERNATIONAL SANCTIONS TARGETED TO IRAN’S GASOLINE IMPORTS

In your opening statement, you made the following statement endorsing the value 

of international sanctions as an effective handmaiden to diplomacy: 

While agreeing to negotiations, President Obama should not want to go 

hat in hand to the Iranians. As you stated in the March 3 hearings, Mr. 

Chairman, we must negotiate with Iran from a position of strength. President Obama would be wise to set a limited timetable for talks. He should 

make clear that the United States and others would walk away and impose 

much tougher financial and economic sanctions if progress in the negotiations is not made in a reasonable period. This would prevent Iran from running out the clock until they become nuclear capable. 

Due to an inadequate domestic reprocessing capacity, Iran must import up to 40 

percent of its domestic gasoline consumption, despite the fact that it is one of the 

world’s leading oil producers. Last week, a bipartisan group of Senators introduced 

S. 908, the Iran Refined Petroleum Sanctions Act, a bill that would authorize the 

President to impose additional economic sanctions against those foreign firms that 

export reprocessed gasoline products to Iran. I am a cosponsor of this bill. 

Question. How do you view the potential efficacy and viability of international 

sanctions that seek to target Iran’s so-called Achilles heel—its dependency on imports of reprocessed gasoline for the functioning of its domestic economy? 

Answer. As I stated in my testimony, I support President Obama’s determination 

to begin negotiations with the Iranian Government. But, should those negotiations 

not produce progress toward ending Iran’s quest for a nuclear weapons capability, 

the United States should then lead an effort to impose much tougher sanctions on 

Iran. To be successful, those sanctions would have to be supported and implemented 

by Iran’s major trade partners, including China, Russia, Japan, South Korea, neighboring Arab States and European governments. In the event of failed negotiations 

with Iran, I believe sanctions on importation of reprocessed gasoline should be 

among the options the United States and other countries consider. 

Question. Do you have specific thoughts on congressional legislation recently 

introduced to empower the President to levy sanctions on foreign companies that 

facilitate the export of reprocessed gasoline products to Iran? 

Answer. To be successful, sanctions will need to be draconian in nature. Sanctions 

on reprocessed gasoline products would fit this definition. I would not favor tying 

the President’s hands by having the Congress mandate sanctions automatically. 

Rather, it would be more effective, in my judgment, for the President to have the 

authority to decide when and if such sanctions should be imposed. 

Question. Do you think it is useful for the administration and the Congress to 

play a ‘‘good cop, bad cop’’ routine when it comes to balancing diplomacy with coercive pressure? 

Answer. I believe the administration should be given maximum flexibility and 

freedom of action in conducting the difficult diplomacy ahead with Iran, including 

determining how long to conduct diplomatic negotiations with Iran. It will surely 

be helpful for Congress to support negotiations with Iran but also to make clear that 

harsh sanctions would follow failed discussions. Such a determined posture on the 

part of Congress would be very valuable, in my judgment, to the administration in 

its talks with Iran. But, given the complexity of the U.S. relationship with Iran and 

the difficulty of holding together the international coalition of countries opposed to 

Iran’s nuclear research efforts, I suggest President Obama be free to determine the 

timetable for both negotiations and the imposition of sanctions. 

36 

MATERIAL SUBMITTED BY ROBERT MORGENTHAU AND ADAM KAUFMANN


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