Iran: U.S. and International Sanctions Have Adversely Affected the Iranian Economy
Published: 2013-02-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 1987, the United States has implemented a broad range of sanctions targeting Iran to deter it from developing its nuclear program, supporting terrorism, and continuing its human rights abuses. Beginning in 2010, Congress has enacted additional financial sanctions which generally restrict Iranian access to the U.S. financial system. In addition, the United Nations and the European Union have adopted several sanctions to compel Iran to suspend its nuclear program. However, concerns have been raised in Congress and by the United Nations about the impact of these sanctions, including the effect of recent financial sanctions on exports of humanitarian goods to Iran. The export of certain humanitarian goods to Iran is allowed by U.S. law, under certain conditions.
In this report, GAO (1) describes recent laws and executive orders that have added to Treasury's authority to implement financial sanctions targeting Iran, (2) describes U.S. efforts to administer and enforce the financial sanctions, and (3) analyzes evidence of the effect that recent U.S. and international sanctions have had on the Iranian economy. GAO reviewed U.S. public laws, executive orders, and agency guidance; met with U.S. agency officials; and analyzed trade and economic data from the International Monetary Fund, European Union, and others, as well as forecasts of Iran's future economic performance.
section_title: What GAO Found
paragraphs: Since 2010, congressional legislation, such as the Comprehensive Iran Accountability, Sanctions, and Divestment Act of 2010 (CISADA), as well as a number of executive orders, have established additional U.S. financial sanctions targeting Iran. For example, CISADA authorized the imposition of sanctions on foreign financial institutions that facilitated certain activities or financial transactions by entities including Iran's Islamic Revolutionary Guard Corps. According to an Under Secretary of the Treasury, CISADA "set a new precedent," because "[i]t gave the Secretary of the Treasury the authority for the first time to require U.S. banks to terminate correspondent banking relationships with foreign banks that knowingly engaged in significant transactions with designated Iranian banks."
The Department of the Treasury (Treasury)-along with other U.S government agencies-administers and enforces U.S. financial sanctions targeting Iran. Treasury administers the sanctions by developing regulations, conducting outreach to domestic financial regulators and foreign banks, identifying apparent sanctions violations, and assessing the effects of the sanctions. State administers some investment and trade sanctions, principally energy sanctions, targeting Iran. U.S agencies and federal and state banking regulators have taken a range of actions to ensure compliance with financial sanctions. Specifically, in recent years, Treasury and the Department of Justice (Justice) have taken actions against banks for systematic and willful violations of sanctions laws, including violations of U.S. financial sanctions regulations targeting Iran. For example, in 2012, Justice announced that both HSBC Holdings, PLC and HSBC Bank USA NA had agreed to forfeit $1.256 billion to the United States in connection with violations of sanctions targeting Iran, among other countries.
The combination of U.S. and international sanctions has adversely affected the Iranian economy and its future outlook. According to GAO's analysis, the Iranian economy has consistently underperformed the economies of comparable peer countries across a number of key economic indicators since 2010, when recent sanctions were enacted. In contrast to its peers, Iran's oil production, oil export revenues, and economic growth estimates have fallen, and its inflation has increased. For example, Iran's oil export revenues fell by 18 percent from 2010 to 2012, while its peers' oil export revenues increased by 50 percent. In addition, professional and International Monetary Fund forecasts of the Iranian economy were downgraded to reflect deterioration in Iran's expected economic performance after the implementation of recent sanctions. Some experts have stated that Iran's recent economic deterioration has resulted from a combination of sanctions and Iranian economic mismanagement. GAO's analysis of European Union and U.S. exports to Iran of humanitarian goods indicates that exports of these goods, such as agricultural goods and medicines, increased in the first 10 months of 2012 compared with 2011. UN reports have raised concerns about the availability of such goods in Iran. According to open sources, the government of Iran has tried to adapt to the sanctions through various means, including using alternative payment mechanisms such as barter agreements and changing its trading partners. However, these recent agreements have thus far not fully offset the reduced exports of oil to the European Union and others.

section_title: Letter
paragraphs: Since 1987, the United States has imposed a broad range of sanctions  targeting Iran, such as financial, trade, and investment sanctions, that are  intended to deter it from expanding its nuclear program, supporting  terrorism, and continuing its human rights abuses. From July 2010 to  December 2012, Congress passed legislation that imposed additional  financial sanctions that restricted Iran from accessing the U.S. financial  system. The Department of the Treasury (Treasury), Department of State  (State), and Department of Justice (Justice) administer and enforce these  U.S. financial sanctions, and federal and state banking regulators ensure  effective compliance with the sanctions programs by the banks that they  regulate. The United Nations (UN) and the international community have  also been concerned about Iran’s nuclear program since the discovery in  2002 that Iran had concealed its nuclear activities for years in breach of  its international obligations. Since 2006, the UN has adopted sanctions  targeting Iran in an effort to compel it to suspend the development of  uranium enrichment and the expansion of its nuclear program. However,  concerns have been raised in Congress about the impact of U.S. and  international financial sanctions on Iran’s economy. In addition, the UN  has reported concerns about whether sanctions have limited exports of  food and medicine to Iran. U.S. law and regulations allow the export of  certain agricultural commodities, food, medicine, and medical devices  (which we refer to as “humanitarian goods” in this report) to Iran under  certain conditions.
In response to your request that we examine financial sanctions targeting  Iran enacted since 2010, this report (1) describes the recent laws and  executive orders that have added to Treasury’s authority to implement  financial sanctions targeting Iran; (2) describes U.S. efforts to administer  and enforce these financial sanctions; and (3) analyzes evidence of the  effect that recent U.S. and international sanctions have had on the Iranian  economy. (In addition, as agreed with your staff, app. IV provides open- source information on Iran’s nuclear program.)
To describe the recent laws and executive orders that have added to  Treasury’s authority to administer financial sanctions targeting Iran, we  reviewed the public laws and executive orders that define these sanctions  as well as the regulations developed to implement them. We also  reviewed the financial sanctions targeting Iran that the UN, European  Union (EU), and other countries have enacted. To review U.S. agencies’  efforts to administer and enforce recent U.S. financial sanctions targeting  Iran, we reviewed Treasury regulations and guidance establishing the  process for administering the sanctions. We interviewed banking  regulators and bank representatives to determine the process required for  banks to comply with financial sanctions. We also reviewed data on the  enforcement of financial sanctions, including enforcement actions and the  designation of entities owned or controlled by or acting on behalf of Iran.  To analyze evidence of the effect of recent U.S. and international  sanctions have had on the Iranian economy, we interviewed U.S.  government officials, as well as academic and independent experts,  regarding the extent to which sanctions targeting Iran have affected the  Iranian economy and government and have affected trade with Iran. To  assess the performance of the Iranian economy, we analyzed data for  several key macroeconomic variables from international trade, energy,  and financial data sources, and we compared Iran’s performance with  that of a select group of peer countries. In addition, we reviewed  independent forecasts of the Iranian economy, developed in 2010 and  2012, to identify changes in the predicted future performance of the  Iranian economy. In most instances we did not attempt to isolate the  impact of U.S. financial sanctions. The contemporaneous implementation  of many sanctions, including U.S., UN, and EU financial and non-financial  sanctions, would make attributing certain outcomes to any particular  sanction very difficult. We met with several business officials in Dubai,  United Arab Emirates–a significant exporter of goods to Iran–to discuss  the effect that sanctions have had on business with Iran and the resulting  impact on Iranian citizens. We also analyzed trade data to assess  changes in Iranian trade since 2010 and the effect of sanctions on  exports of humanitarian goods to Iran from select countries. Appendix I  contains a more detailed description of our scope and methodology. We  conducted this performance audit from February 2012 to February 2013  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: U.S. Government Sanctions Targeting Iran from 1987 to 2010
paragraphs: The U.S. government has imposed numerous sanctions targeting Iran  since 1987, in part to deter Iran from supporting terrorism and developing  its nuclear program. U.S. laws and executive orders have established a  U.S. trade and investment ban targeting Iran, have been used to impose  sanctions against foreign entities that support Iranian terrorist  organizations or proliferation activities, and have imposed financial  sanctions targeting Iran. According to a Treasury official, the U.S. trade  and investment ban was aimed at making it more difficult for Iran to  procure U.S. goods, services, and technology, including those that could  be used for terrorism or proliferation. In 1987, the United States enacted a  ban on imports of Iranian goods and services, and in 1995, executive  orders banned specified U.S. exports and investment in Iran. These  prohibitions apply to U.S. persons, including U.S. companies and their  foreign branches. In 1996, Congress enacted the Iran Sanctions Act of  1996 (ISA), which authorized the imposition of sanctions on foreign firms  that make certain investments in Iran’s energy sector. In ISA, Congress  declared that it is the policy of the United States to deny Iran the ability to  support acts of international terrorism and to fund the development and  acquisition of weapons of mass destruction and the means to deliver  them by limiting the development of Iran’s ability to explore for, extract,  refine, or transport by pipeline its petroleum resources.
section_title: Selected UN and International Sanctions and Actions Targeting Iran from 2002 through 2012
paragraphs: The UN and EU, as well as other countries, have also imposed sanctions  to pressure Iran to suspend the development of its nuclear program and  end its support for terrorism. In 2002, the International Atomic Energy  Agency (IAEA) confirmed allegations that Iran was building facilities that  could produce fissile material for the development of a nuclear weapon.  After Iran failed to suspend its uranium enrichment program in 2006  pursuant to UN Security Council (UNSC) resolution 1696, the UNSC  adopted resolutions that imposed several sanctions targeting Iran  between 2006 and 2010. Following a UNSC determination that Iran had  not suspended the development of its nuclear program, the UNSC  adopted additional resolutions that imposed sanctions on Iran, including,  among others,    a proliferation-sensitive nuclear and ballistic missile programs-related    a ban on the export or procurement of any arms and related material  from Iran and a ban on the supply of seven categories, as specified,  of conventional weapons and related material to Iran; and    a travel ban and an assets freeze on designated persons and entities.
The assets freeze also applies to any individuals or entities acting on  behalf of, or at the direction of, the designated persons and entities,  and to entities owned or controlled by the designated persons or  entities.
In addition to the UN, the EU has expressed serious and deepening  concerns over the Iranian nuclear program, and has imposed sanctions  targeting Iran since 2007. Recent sanctions that the EU enacted in 2012  imposed, among other things, restrictive measures on the energy sector,  including a phased embargo of Iranian crude oil imports into the EU and  financial sanctions against the Central Bank of Iran. Specifically,  recalling the potential connection between Iran’s revenues derived from  its energy sector and the funding of its proliferation-sensitive nuclear  activities as underlined in USCR 1929, the sanctions prohibited the  import, purchase, and transport of Iranian crude oil and petroleum  products by member states. In addition, the EU has enacted targeted  financial measures to freeze the assets of persons and entities  associated with Iran’s nuclear activities. The Council of the European  Union decided on March 15, 2012, to prohibit the provision of specialized  financial messaging services to certain persons and entities that are  designated by the UN or EU, or have engaged in, supported, or been  associated with Iran’s proliferation-sensitive nuclear activities or the  development of nuclear weapon delivery systems. In response to the  council’s decision, on May 17, 2012, the Belgium-based Society for  Worldwide Interbank Financial Telecommunication (SWIFT) announced it  would end all transactions with Iranian banks that had been designated  by the EU. Figure 1 identifies selected U.S. and international actions  targeting Iran.
U.S. law allows the export of certain agricultural goods, medicine, and  medical devices to Iran under certain conditions. The Trade Sanctions  Reform and Export Enhancement Act of 2000 (TSRA) required the  President to terminate any unilateral agricultural or medical sanction. In  addition, some of the laws and executive orders authorizing U.S.  sanctions targeting Iran include language that allows for certain  exceptions to the sanctions, such as for agricultural goods or medicine.  For the purposes of this report, we refer to agricultural goods, medicine,  and medical devices that are authorized for export to Iran as  “humanitarian goods.”
Treasury’s Office of Foreign Assets Control (OFAC) issues licenses that  authorize the export and reexport of humanitarian goods pursuant to  TSRA. OFAC indicated that it provides exporters with an efficient and  expedited process to export humanitarian goods.
section_title: From 2010 through 2012, the United States Established Additional Financial Sanctions Targeting Iran
paragraphs: Recent congressional legislation and a number of executive orders  enacted since 2010 have established additional U.S. financial sanctions  targeting Iran. According to Treasury, recent U.S. financial sanctions  targeting Iran are authorized by, and outlined in, four laws and a number  of executive orders. The discussion below provides examples of some of  the financial sanctions authorized by these laws and executive orders  from 2010 through 2012. According to an Under Secretary of the  Treasury, the new legislation that Congress has enacted has increased  financial and economic pressure on Iran.
In 2010, Congress passed the Comprehensive Iran Sanctions,  Accountability, and Divestment Act of 2010 (CISADA) to amend the Iran  Sanctions Act of 1996 and to enhance U.S. diplomatic efforts with  respect to Iran by expanding economic sanctions targeting Iran.  According to an Under Secretary of the Treasury, “CISADA set a new  precedent” because “… t gave the Secretary of the Treasury the  authority for the first time to require U.S. banks to terminate  correspondent banking relationships with foreign banks that knowingly  engaged in significant transactions with designated Iranian banks.”  Among other actions, section 104(c) of CISADA required the Secretary of  the Treasury to prescribe regulations to prohibit or impose strict  conditions on the opening or maintaining in the United States of a  correspondent account or a payable-through account by a foreign  financial institution found to have knowingly engaged in certain activities  or facilitating a significant transaction by entities such as Iran’s Islamic  Revolutionary Guard Corps (IRGC). Furthermore, section 104(d) of  CISADA required Treasury to “prescribe regulations to prohibit any  person owned or controlled by a domestic financial institution from  knowingly engaging in…transactions with or benefitting the ,” its  agents, or its affiliates whose property or interests in property are blocked  pursuant to the International Emergency Economic Powers Act (IEEPA).  This provision in CISADA also extends certain monetary penalties under  IEEPA (50 U.S.C. § 1705(b)) to domestic financial institutions if a person  owned or controlled by the domestic financial institution violates the  regulations and if the domestic financial institution knew, or should have  known, about the violation.
In 2011, Congress enacted the National Defense Authorization Act for  Fiscal Year 2012 (NDAA). The act required the President to block the  property and interests in property, which is subject to U.S. jurisdiction, of  all Iranian financial institutions, including the Central Bank of Iran. In  addition, the act required the President to prohibit the opening, and  prohibit or impose strict conditions on the maintenance, of a  correspondent or payable-through account in the United States by a  foreign financial institution found to have knowingly conducted or  facilitated any significant financial transaction with the Central Bank of  Iran or another designated Iranian financial institution. This sanction  applies to foreign central banks, only insofar as the transactions are  related to the sale or purchase of petroleum or petroleum products to or  from Iran. Moreover, the sanction applied to transactions related to the  purchase of petroleum or petroleum products from Iran only if the  President has made a determination that there is a sufficient supply of  petroleum or petroleum products from countries other than Iran.  However, if the President does determine that there is a sufficient supply  of petroleum and petroleum products, the financial sanctions will not  apply if the President determines that the country with primary jurisdiction  over the foreign financial institution has significantly reduced its volume of  crude oil purchases from Iran in a specific period. The President  delegated the authority to determine whether a country has significantly  reduced the volume of Iranian crude oil purchases in a specific period to  the Secretary of State, in consultation with the Secretary of the Treasury,  the Secretary of Energy, and the Director of National Intelligence.
In 2012, Congress passed the Iran Threat Reduction and Syria Human  Rights Act of 2012 (TRA) to strengthen Iran sanctions laws for the  purpose of compelling Iran to abandon its pursuit of nuclear weapons and  other threatening activities and for other purposes. TRA expanded  sanctions in a number of areas including sanctions relating to Iran’s  energy sector. For example, the TRA amends CISADA by requiring the  Secretary of the Treasury to revise the regulations prescribed under  CISADA section 104(c) to apply, to the same extent that they apply to a  foreign financial institution found to knowingly engage in an activity  described in CISADA section 104(c)(2), to a foreign financial institution  that the Secretary of the Treasury finds (1) knowingly facilitates, or  participates or assists in, an activity described in section 104(c)(2) of  CISADA; (2) attempts or conspires to facilitate or participate in such an  activity; or (3) is owned or controlled by a foreign financial institution that  the Secretary finds knowingly engages in such an activity. Moreover,  section 312 of the TRA also amended CISADA to require Treasury to  determine whether the National Iranian Oil Company or the National  Iranian Tanker Company is an agent or affiliate of the IRGC. On  September 24, 2012, Treasury made a determination that the National  Iranian Oil Company is an agent or affiliate of the IRGC. Although the  National Iranian Oil Company was already subject to sanctions under  Executive Order 13599 (see below), according to Treasury, the  determination that the National Iranian Oil Company is an agent or  affiliate of the IRGC carries additional consequences. According to  Treasury, as a result of the TRA section 312 determination, the National  Iranian Oil Company is now an agent or affiliate of the IRGC, as  described by CISADA section 104(c), whose property or interests in  property are blocked pursuant to IEEPA. Furthermore, foreign financial  institutions determined to have knowingly facilitated a significant  transaction for the National Iranian Oil Company could have prohibitions  or the imposition of strict conditions placed on their opening or  maintenance of correspondent or payable-through accounts in the United  States.
IEEPA granted the President a number of authorities, including the  blocking of a foreign country’s or foreign national’s property, to respond to  any unusual and extraordinary threat to the national security, foreign  policy, or economy of the United States. Administrations have invoked  authority provided by IEEPA, as well as other authorities, to issue  executive orders that provide for sanctions targeting Iran. The executive  orders have imposed a number of sanctions, including a comprehensive  trade and investment ban on Iran, and have been used to freeze the  assets of parties designated for their engagement in proliferation or  terrorism-related activities involving Iran. Recently, the Obama  administration has issued the following executive orders for additional  steps to increase the sanctions on financial transactions relating to Iran:    Executive Order 13599 (February 5, 2012). This executive order  blocked the property, and interests in property, of the government of  Iran, and any Iranian financial institutions, including the Central Bank  of Iran, that are in the United States. According to the executive order,  this was done “in light of the deceptive practices of the Central Bank  of Iran and other Iranian banks to conceal transactions of sanctioned  parties, the deficiencies in Iran’s anti-money laundering regime and  the weaknesses in its implementation, and the continuing and  unacceptable risk posed to the international financial system by Iran’s  activities.” As a result of this blocking, no property of the government  of Iran that is under the jurisdiction of the United States can be  transferred, paid, exported, withdrawn, or otherwise dealt in.    Executive Order 13608 (May 1, 2012). This executive order  authorized sanctions on a foreign person who has been determined to  have facilitated deceptive transactions for or on behalf of any person  subject to U.S. sanctions concerning Iran or Syria. The order defined,  “deceptive transaction” as any transaction where the identity of any  person subject to United States sanctions concerning Iran or Syria is  withheld or obscured from other participants in the transaction or any  relevant regulatory authorities. Pursuant to the executive order,  Treasury may prohibit all transactions or dealings, whether direct or  indirect, involving a foreign person that it has determined to have  facilitated deceptive transactions for, or on behalf of, any person  subject to the requisite U.S. sanctions. According to Treasury, “ith  this new authority, Treasury now has the capability to publicly identify  foreign individuals and entities that have engaged in these evasive  and deceptive activities, and generally bar access to the U.S. financial  and commercial systems.”    Executive Order 13622 (July 30, 2012). This executive order  authorized three new sanctions to be implemented by Treasury. First,  the executive order authorized new sanctions on foreign financial  institutions determined to have knowingly conducted or facilitated  specified significant financial transactions with the National Iranian Oil  Company or Naftiran Intertrade Company. Second, the executive  order authorized sanctions against foreign financial institutions found  to have knowingly conducted or facilitated significant transactions for  the purchase or acquisition of petroleum, petroleum products, or  petrochemical products from Iran. Under the executive order, foreign  financial institutions that engage in the two aforementioned activities  could be prohibited from opening or maintaining correspondent or  payable-through accounts in the United States. Third, the executive  order authorized Treasury to block the property of any person  determined to have materially assisted, sponsored, or provided  financial, material, or technological support for, or goods or services in  support of, (1) the National Iranian Oil Company, the Naftiran  Intertrade Company, or Central Bank of Iran or (2) the purchase or  acquisition of U.S. bank notes or precious metals by the government  of Iran. According to the executive order, these actions were taken  “in light of the government of Iran’s use of revenues from petroleum,  petroleum products, and petrochemicals for illicit purposes; Iran’s  continued attempts to evade international sanctions through deceptive  practices; and the unacceptable risk posed to the international  financial system by Iran’s activities.”    Executive Order 13628 (October 9, 2012). This executive order,  among other things, blocked a person’s property and interests in  property in the United States or under the possession or control of a  U.S. person once Treasury, in consultation with State, determines that  the person has engaged in certain specified conduct. For example,  the executive order blocked the property of a person determined to  have knowingly transferred or facilitated the transfer of goods, or  technologies to Iran or any Iranian entity for use by the government of  Iran to commit serious human rights abuses against the people of  Iran. The executive order also prohibited any entity that is owned or  controlled by a U.S. person and established outside the United States  from knowingly engaging in any transaction with the Iranian  government if that transaction would be prohibited under specified  executive orders if it were engaged in by a U.S. person or in the  United States.
section_title: U.S. Agencies Administer and Enforce U.S. Financial Sanctions Targeting Iran
paragraphs: U.S. government agencies and regulators administer and enforce U.S.  financial sanctions targeting Iran with banks’ assistance. Treasury has  primary responsibility for administering financial sanctions. State  administers some investment and trade sanctions, principally energy  sanctions, targeting Iran. Banks play an important role in the sanctions  process by blocking transactions that are required to be blocked by U.S.  law and reporting apparent violations to Treasury. The federal and state  banking regulators ensure effective compliance with these sanctions  programs by the banks that they regulate. Treasury and other U.S.  agencies have enforced sanctions through a variety of actions including  issuing enforcement actions against entities that violate the sanctions.  Specifically, since 2005, Treasury and Justice, in coordination with State  and federal regulators, have taken actions against banks, assessing large  financial settlements for systematic and willful violations of sanctions  laws, including violations of Iran financial sanctions regulations. Table 1  lists the various U.S. entities involved in the administration and  enforcement of U.S. financial sanctions targeting Iran, along with their  respective roles and responsibilities.
Treasury has primary responsibility for administering the finance-related  provisions of recent U.S. sanctions authorities by developing regulations,  conducting outreach to domestic and foreign financial regulators and  financial institutions, and identifying apparent sanctions violations.  Treasury also assesses the effects of financial sanctions on the Iranian  economy.
Regulations. OFAC developed and issued the Iranian Financial Sanctions  Regulations to administer the financial sanctions enacted in July 2010  pursuant to CISADA. Treasury has amended the Iranian Financial  Sanctions Regulations to implement additional legislation, such as  Section 1245 of NDAA. While drafting, and before publishing  regulations, OFAC solicited input on the proposed regulations from other  Treasury officials and State. All U.S. persons must comply with the OFAC  regulations, including all U.S. citizens, all persons and entities within the  United States, and all U.S.-incorporated entities and their foreign  branches.
Outreach. According to Treasury, since 2010, Treasury officials have  conducted outreach to more than 145 foreign financial institutions in more  than 60 countries as well as to foreign governments, regulators, and other  trade groups and associations. U.S. embassy consulate staff in Dubai  informed us that Treasury officials made several trips to the United Arab  Emirates to conduct outreach with financial institutions. Financial officials  we met with in Dubai confirmed that Treasury had provided them with  information on the new sanctions regulations under CISADA. According  to Treasury officials, Treasury conducted this outreach to raise  awareness of U.S. financial sanctions.
Identification of violations. According to Treasury, OFAC continually  compiles evidence and reviews information regarding potential sanctions  violations from a variety of sources, including intelligence and public  sources. Treasury officials stated that OFAC identifies potential violations  through a variety of means, including financial irregularities from bank  reports, referrals from federal bank regulators, and self-disclosures of  potential violations by banks. According to Treasury officials, when  OFAC designates an entity because of its engagement in sanctionable  activity, OFAC declassifies and uses a portion of the evidence in order to  make the designation public.
Assessments. Treasury regularly assesses the administration of  sanctions and their impact on Iran. According to Treasury officials,  Treasury gathers various sources of information to monitor and assess  the impact of U.S. sanctions targeting Iran. Treasury officials indicated  that they rely on Iranian press reports, input from banks and other  financial institutions, Iranian economic indicators, and intelligence  information, among other sources. According to U.S. consulate officers in  Dubai, they monitor Iranian events and the Iranian economy, collecting  information on trade, real estate, gold, and the volume of transactions in  exchange houses in Iran. Treasury develops classified quarterly reports  on the impacts of sanctions on Iran’s economy, trade, and other sectors.
State is responsible for administering the significant reduction exception  set forth in section 1245 of the NDAA of 2012. The act requires the  President to prohibit the opening, and prohibit or impose strict conditions  on the maintenance, of a correspondent or payable-through account in  the United States by a foreign financial institution found to have knowingly  conducted or facilitated any significant financial transaction with the  Central Bank of Iran or another designated Iranian financial institution.  The sanction applies to foreign central banks only insofar as the  transactions are related to the sale or purchase of petroleum or petroleum  products to or from Iran. The sanction applies to transactions related to  the purchase of petroleum or petroleum products from Iran only if the  President has made a determination that there is a sufficient supply of  petroleum or petroleum products from countries other than Iran. However,  if the President does determine that there is a sufficient supply of  petroleum and petroleum products, the financial sanctions will not apply if  the President determines that the country with primary jurisdiction over  the foreign financial institution has significantly reduced its volume of  crude oil purchases from Iran in a specific period. The President  delegated the authority to determine whether a country has significantly  reduced the volume of Iranian crude oil purchases in a specific period to  the Secretary of State, in consultation with the Secretary of the Treasury,  the Secretary of Energy, and the Director of National Intelligence. The  Secretary of State’s determinations are based on an assessment of each  country’s efforts to reduce the volume of crude oil imported from Iran.  According to State, the Secretary of State considers various factors,  including the quantity and percentage of the reduction in purchases of  Iranian crude oil over the relevant period; termination of contracts for  future delivery of Iranian crude oil; and other actions that demonstrate a  commitment to substantially decrease such purchases. On the basis of  the assessment led by State, the Secretary of State granted exceptions to  20 countries, including China, Japan, the Republic of Korea, and India, for  “significantly” reducing their volume of crude oil purchases from Iran since  the enactment of the NDAA.
Banks play an important role in the sanctions process by blocking  property or interests in property that are required to be blocked under  U.S. law and by reporting apparent violations to Treasury. Iran sanctions  regulations generally require banks to block transactions that (1) are by,  or on behalf of, a blocked individual or entity; (2) are to, or go through, a  blocked entity; or (3) are in connection with a transaction in which a  blocked individual or entity has an interest. Banks holding, receiving, or  blocking transfers of blocked property must report to OFAC within 10  days of the property becoming blocked. Banks must place the assets or  funds in a segregated interest-bearing account.
In addition, banks may report apparent violations to Treasury. Treasury  officials stated that once a bank discloses an apparent sanctions violation  to Treasury, the bank often engages in a thorough review of its own past  conduct and provides information to OFAC. According to OFAC officials,  the bank generally presents an overview of its transactions and the  context in which they occurred, and OFAC provides direction on where  additional review is needed from the banks. After the disclosure, OFAC  asks the bank to identify other recipients of the information of the  transactions. After OFAC’s review, OFAC then makes a determination on  the possibility of enforcement. The civil penalty for violating the Iran  financial sanctions regulations may be as much as $250,000 per violation  or twice the amount of the transaction, whichever is greater.
subsections: section_title: Multiple U.S. Agencies Enforce Financial Sanctions
subsections: section_title: Treasury Has Designated Entities, Imposed Sanctions, and Applied Enforcement Actions for Violations of Financial Sanctions
paragraphs: Designating entities. As part of its enforcement efforts, Treasury has used  a range of actions to enforce sanctions targeting Iran, including  designating entities for engaging in sanctionable activity related to Iran,  imposing sanctions on financial institutions, and issuing enforcement  actions against financial entities. For example, according to Treasury,  OFAC publishes a list of individuals and entities that have been  designated for engaging in certain conduct, as well as a list of individuals  and entities owned or controlled by, or acting for or on behalf of those  previously listed individuals and entities. OFAC also identifies individuals  and entities that are officials of; are owned or controlled by; or act on  behalf of certain countries. OFAC blocks the assets of these entities and  individuals and generally prohibits U.S. persons from dealing with them.  According to Treasury, as of January 2013, OFAC had designated more  than 360 individuals and entities–including banks, energy companies, and  businesses–linked to Iran’s weapons-of-mass-destruction program and  support for terrorism under various Iran-related executive orders. These  designations included actions taken under Treasury’s executive order  authorities related to the proliferation of weapons of mass destruction or  delivery systems for weapons of mass destruction and international  terrorism.
Imposing sanctions. In July 2012, Treasury imposed sanctions under  CISADA on two foreign financial institutions—the Bank of Kunlun (China)  and Elaf Islamic Bank (Iraq)—for knowingly facilitating significant  transactions and providing significant financial services for designated  Iranian banks. According to Treasury documents, the action against the  two banks effectively barred the banks from directly accessing the U.S.  financial system. In addition, financial institutions may not open  correspondent or payable-through accounts for Bank of Kunlun or Elaf  Islamic Bank in the United States, and any financial institutions that held  such accounts were required to close them within 10 days of the  imposition of the sanction.
Applying enforcement actions. OFAC has also issued enforcement  actions against banks for violations or apparent violations of Iran  sanctions regulations. From 2005 through 2012, OFAC imposed 45 civil  penalties against banks for facilitating transactions in apparent violation of  Iran sanctions regulations. The penalty and settlement amounts for  apparent violations varied significantly. For example, in May 2006 OFAC  announced a settlement with a bank for $3,352 in connection with an  unauthorized funds transfer involving Iran. In June 2012, OFAC  announced a $619 million settlement with ING Direct Bank N.V. to  address, in part, apparent violations of the Iranian Transaction  Regulations, among other sanctions programs, over a number of years  and involving a total of $1.6 billion in transactions. All enforcement actions  published to date involve violations of Iran sanctions regulations that were  enacted before 2007.
Federal and state banking regulators have imposed enforcement actions  concurrently, or in close coordination, with OFAC in cases of significant  failures to comply with OFAC regulations. For example, in 2005 the  Federal Reserve, FinCEN, the New York State Banking Department, the  Illinois Department of Financial and Professional Regulation, and OFAC  announced the assessment of penalties against the Dutch bank ABN  AMRO based, in part, on OFAC violations. The agencies jointly  assessed $75 million in penalties against the bank on the basis of  findings that it participated in transactions that violated U.S. sanctions  laws, as well as findings of the bank’s failures related to U.S. anti-money  laundering laws and regulations and other banking laws.
In a recent case, federal and state banking regulators did not impose  enforcement actions at the same time. In August 2012, the New York  State Department of Financial Services announced that Standard  Chartered Bank had agreed to a settlement of $340 million and the  implementation of remedial actions in connection with the omission of  Iranian customer information from U.S. dollar payment messages sent to  U.S. financial institutions with respect to 59,000 transactions that totaled  approximately $250 billion. The regulator determined that the bank’s  policies and procedures during the relevant period prevented examiners  from performing complete safety and soundness examinations, and from  identifying suspicious patterns of activity that could, among other things,  allow regulators to assist law enforcement authorities. In December 2012,  OFAC announced a settlement with Standard Chartered for $132 million  for apparent violations of U.S. sanctions laws and regulations. In a  separate action, also in December 2012, the Federal Reserve also  imposed a $100 million civil money penalty against the bank and its New  York branch, a portion of which related to unsafe and unsound banking  practices associated with the insufficient oversight of its compliance  program for U.S. sanctions.
From 2009 to 2012, Justice, through its Criminal Division, National  Security Division, and U.S. Attorney’s Offices, pursued criminal  investigations against seven banks for potential violations of sanctions  laws that involved transactions with Iran. All seven cases involved banks’  potential violations of IEEPA, under which it is criminal to violate, or  attempt to violate, regulations issued under those statutes. Criminal  investigations against banks for sanctions violations were resolved  through settlements that involved monetary forfeitures and deferred  prosecution agreements (see table 2).
Senior law enforcement officials cited threats to both national security and  the integrity of the U.S. financial system posed by the banks’ misconduct.  Furthermore, in each investigation, the bank systematically removed or  obscured payment data that would have revealed the involvement of  sanctioned countries and entities, including Iran. For example, in 2009,  Credit Suisse AG agreed to a one-count filing in federal court that  charged the bank with violating IEEPA. Justice determined that from 1995  through 2006, Credit Suisse AG in European locations deliberately  removed material information, such as customer names, bank names,  and addresses, from payment messages so that the wire transfers would  pass undetected through filters at U.S. banks. Credit Suisse AG also  provided its Iranian clients with a pamphlet that provided detailed  payment instructions on how to avoid triggering U.S. OFAC filters. The  scheme allowed U.S.-sanctioned countries and entities to move hundreds  of millions of dollars through the U.S. financial system.
In another investigation, Justice indicated that beginning in the early  1990s until 2007, ING Bank N.V. violated U.S. law by moving more than  $2 billion illegally through the U.S. financial system–via more than 20,000  transactions–on behalf of entities subject to U.S. economic sanctions,  including Cuba and Iran. According to Justice, bank staff intentionally  manipulated financial and trade transactions to remove references to Iran  and other sanctioned countries to avoid detection by software filters used  by unaffiliated banks in the United States.
Similarly, in December 2012, both HSBC Holdings, PLC and HSBC Bank  USA N.A. entered into a deferred prosecution agreement with Justice for  violations of IEEPA and the Trading With the Enemy Act in connection  with Iran and other sanctioned countries. Court documents indicated  that from the mid-1990s through September 2006, HSBC Holdings, PLC  allowed approximately $660 million in OFAC-prohibited transactions to be  processed through U.S. financial institutions, including HSBC Bank USA  N.A. According to an official from the Federal Reserve, HSBC Holdings,  PLC permitted subsidiaries in Europe and the Middle East to follow  instructions from sanctioned countries, including Iran, to omit and  otherwise obscure their names from U.S. dollar payment messages sent  to HSBC Bank USA N.A. and other financial institutions located in the  United States.
According to a senior Justice official, prosecutors sought to obtain the  appropriate dispositions of cases against banks for criminal violations of  financial sanctions laws.  Federal guidelines regarding prosecution of  business organizations direct prosecutors to consider additional factors to  those normally considered in prosecuting individuals. The guidelines  direct federal prosecutors to consider factors including the timely and  voluntary disclosure of the wrongdoing by the business and its willingness  to cooperate in the investigation, among others. In announcing the  deferred agreements, Justice officials cited the banks’ remedial actions,  willingness to accept responsibility, and significant cooperation during the  investigations.
section_title: U.S. and International Sanctions Have Adversely Affected the Iranian Economy, and Iran Is Attempting to Adapt to Them
paragraphs: The combination of the various U.S. and international trade, investment,  and financial sanctions has adversely affected the Iranian economy and  its future outlook. Our analysis indicates that the Iranian economy has  consistently underperformed comparable peer countries across key  economic indicators since the enactment of U.S. and international  sanctions between 2010 and 2012. Furthermore, professional and  International Monetary Fund (IMF) forecasters revised their projections of  the Iranian economy after the enactment of sanctions to reflect  deterioration in its expected performance. U.S. and EU exports of  humanitarian goods to Iran increased in the first three quarters of 2012  compared with 2011, according to our analysis of trade data. According to  open source reports, the government of Iran is attempting to adapt to the  sanctions through various means, including using alternative payment  mechanisms such as barter agreements, but thus far these agreements  have not fully offset Iran’s reduced oil exports.
subsections: section_title: U.S. and International Sanctions Have Adversely Affected the Iranian Economy
paragraphs: U.S. and international sanctions have adversely affected the Iranian  economy. Experts and U.S. officials have indicated that the sanctions  have created a number of difficulties for the Iranian economy and that the  financial sanctions have limited Iran’s ability to conduct trade and finance.  Following the enactment of sanctions beginning in 2010, Iran’s oil  production, oil export revenue, and gross domestic product (GDP) have  declined relative to comparable countries, and inflation has increased.  Moreover, IMF and professional forecasters downgraded their projections  of Iranian economic performance to reflect a deterioration of the Iranian  economy, specifically with regard to GDP, inflation, and unemployment,  since the enactment of recent sanctions.
U.S. and international sanctions have created a number of difficulties for  the Iranian economy. Some experts stated that the deterioration in Iran’s  recent economic performance resulted from a combination of sanctions— including U.S. and international sanctions—and economic  mismanagement by the government of Iran. The recent sanctions are  likely to have reduced Iran’s ability to ship and sell oil, an important  component of the economy and historically a key source of foreign  currency earnings and government revenue. U.S. financial sanctions  have made receiving payment for oil and other exports more difficult. U.S.  officials and representatives from financial institutions said that U.S.  financial sanctions have increasingly denied Iran access to U.S. and  international financial institutions, limiting its ability to finance trade and  conduct other financial transactions, and increasing transaction costs. For  example, according to officials from some international financial  institutions, many foreign banks are unwilling to process transactions for  Iranian businesses and citizens even when it was not clear that these  transactions would trigger sanctions. In addition, as already noted, in  2012 Iranian banks designated by the EU were cut off from the largest  financial messaging service, SWIFT, which processed more than 2 million  financial messages for 29 Iranian financial institutions in 2011.
To help isolate economic changes that are unique to Iran we identified a  set of comparable countries (peers) to serve as benchmarks for Iranian  economic performance. We identified 23 peers that were either countries  in the same region as Iran or countries with a similar share of oil in their  exports. We used this combined peer group to assess the performance  of Iran’s oil market, GDP, and inflation.
Oil production. Iranian oil production sharply diverged from peer oil  production beginning in 2011 (see fig. 2).
Iranian oil production has fallen by more than 16 percent since July 2010,  while production by peers concurrently increased by roughly 4 percent  according to our analysis of data from the Energy Information  Administration. However, significant deterioration in oil production and  exports did not occur until 2012. According to our econometric analysis,  oil production dropped by a statistically significant 26 percent more than  expected (on an annualized basis) in 2012. Several aspects of the  sanctions have reduced Iran’s ability to produce oil. U.S. officials and  independent experts stated that U.S. and international sanctions have  limited foreign investment in Iran’s oil and gas sectors. Furthermore, EU  sanctions, including an embargo on Iranian oil imports as well as  prohibitions on insurance for shipping of Iranian oil and petrochemicals,  were adopted in January 2012. According to State, 20 countries  reduced their volume of crude oil purchases from Iran after the passage  of NDAA.
Revenue from oil exports. Since 2010, Iranian oil export revenue has  declined while peers’ revenue has increased. According to our analysis of  IMF data, Iranian oil export revenue is estimated to have declined by  approximately 18 percent between 2010 and 2012, while peers’ combined  oil exports revenues are estimated to have increased by more than 50  percent over the same time period (see fig. 3). This reflects a large  estimated decrease in oil export revenue in Iran in 2012 relative to peers.
According to open source reports, the International Energy Agency stated  that Iranian oil exports declined from about 2.5 million barrels per day in  2011 to about 1.3 million barrels per day in November 2012. Declining  export revenue is principally driven by lower estimates of oil exports, but  lower prices may also be a factor. According to one expert we spoke with,  Iran may be offering as much as a 10 percent discount from its official  selling price to some customers. Revenue from oil exports is an important  component of government revenue in Iran and IMF estimates that Iran  ran its largest budget deficit since 1998—almost 3 percent of GDP—in  2012.
GDP. GDP—an aggregate measure of an economy’s production of goods  and services—has increased less in Iran relative to peers since 2010 (see  fig. 4).
Because official estimates of GDP have not been available since 2010,  we averaged estimates from IMF and two private economic information  services. The resulting consensus estimates indicate that the Iranian  economy grew by 1.9 percent in 2011 and shrank by 1.4 percent in 2012.
In contrast, Iran’s median peer economy grew by 4.2 percent in both 2011  and 2012.
Inflation. Annual inflation in Iran, which has historically been higher and  more volatile than inflation in peer countries, increased from almost 8  percent in 2010 to 27 percent in late 2012, while median peer inflation  remained lower, between 4 and 6 percent (see fig. 5).
According to our econometric analysis, inflation increased by a  statistically significant 12.6 percentage points more than expected (on an  annualized basis) in 2012. As recently as 2010, Iran had reduced  inflation to below 10 percent, down from nearly 30 percent in 2008.  Higher inflation may also have been driven in part by higher transaction  costs resulting from U.S. financial sanctions that made processing  payments for imports more costly. One measure of the Iranian rial-dollar  market exchange rate depreciated almost 70 percent from July 2010 to  October 2012. The depreciating exchange rate increased the price of  certain imported goods, which also likely contributed to the increase in  inflation. In December 2010, the government of Iran introduced a reform  of energy subsidies that increased energy prices and hence also had an  impact on inflation. One expert has suggested that excessive money  growth by the Central Bank of Iran also contributed to higher inflation.
Three forecasters—IHS Global Insight, IMF, and the Economist  Intelligence Unit—have downgraded their forecasts of the Iranian  economy to reflect a deterioration in Iran’s expected economic  performance after the enactment of recent U.S. and international  sanctions. We compared the forecasts performed before and after the  latest round of sanctions, and found that the forecasts predicted poorer  performance on key macroeconomic indicators, such as Iranian GDP,  inflation, and unemployment, between 2012 and 2016 than was  previously expected. For example, according to IHS Global Insight, Iran  will continue to face declining oil output, plunging exports, surging prices,  and a sharply weaker currency after 2012.
Real GDP. Before recent sanctions were enacted from July 2010 through  2012, the three forecasters predicted that between 2012 and 2016, the  Iranian economy would grow, on average, by about 3.2 to 4.3 percent per  year. However, in their updates, published in October and November  2012, all three forecasters predicted that Iran’s annual GDP would grow,  on average, by -0.5 to 0.8 percent for the same period (see fig. 6).
According to IHS Global Insight, the U.S. and EU sanctions that target  Iranian oil exports and the Central Bank of Iran are harsher and more  punitive than previously enacted sanctions, and will likely push the Iranian  economy into recession. In particular, after updating its forecast in August  2012, IHS Global Insight expected the Iranian economy to contract by 2.0  percent in 2012 and by 1.3 percent in 2013. According to the IMF’s  Regional Economic Outlook for the Middle East and Central Asia of  November 2012, Iran’s oil production has declined owing to tightened  U.S. sanctions and the EU oil embargo, lowering the country’s growth  outlook. All three forecasters predicted that Iran’s crude production and  exports would continue their downward trend as a result of the sanctions  and that Iran would be heavily reliant on its Asian and Middle Eastern  trading partners to purchase crude oil available for exports. Furthermore,  the IMF’s Regional Economic Outlook projected that Iran’s gross official  reserves would decline from $101.5 billion in 2011 to $89.2 billion in 2012  and $84.6 billion in 2013. Based on the IMF’s projections of Iran’s annual  imports of goods and services in 2012 and 2013, the anticipated reserves  will be less than Iran’s annual imports. Although the forecasters projected  that the negative trend of real GDP would likely reverse in or after 2013,  the Economist Intelligence Unit, for example, did not take into account  any future changes in current sanctions or the possible enactment of new  sanctions.
Inflation. The forecasters revised the projected inflation rate for Iran to  reflect predicted future economic environment that was worse than  originally projected (see fig. 7).
Before recent sanctions were enacted, the average annual inflation rate  predicted by IHS Global Insight, IMF, and the Economist Intelligence Unit  ranged between 10.0 and 16.3 percent for the period from 2012 to 2016.  However, the revised forecasts predicted that inflation would average  19.0 to 21.0 percent for the same period. According to the three  forecasters, the near-term inflation outlook for Iran has deteriorated in  light of subsidy cuts, the collapsing value of the Iranian rial, and additional  EU and U.S. sanctions. For example, according to the Economic  Intelligence Unit, inflation will remain high, driven by the removal of  subsidies and by sanctions, which are leading to a dramatic weakening of  the unofficial value of the rial and surging prices for imports. Since Iran is  a major consumer of refined petroleum, a domestic production shortage  means that the country needs to import refined petroleum to meet  demand, exacerbating the vulnerability to import price inflation.  Furthermore, the Economic Intelligence Unit anticipated that in the face of  declining government revenue, there is a risk that the authorities will print  money to fund spending, which could feed an inflationary spiral. IHS  Global Insight projected higher inflation over the next 5 years to reflect the  move to further reduce—and ultimately eliminate—potentially costly  government subsidies on food, utilities, education, and other goods and  services.
Unemployment. In addition to expecting the economy to shrink in the near  term, the forecasters also revised their projections of the employment  outlook for Iran (see fig. 8).
Before the enactment of the recent U.S. and international sanctions, the  three forecasters projected from 2012 through 2016, the unemployment  rate would average between 14.6 and 15.2 percent. After the enactment  of recent U.S. and international sanctions from 2010 through 2012, the  forecasters predicted a higher average unemployment rate for 2012  through 2016, ranging from an average of 15.0 to 16.6 percent. All three  forecasters anticipated a sustained high unemployment rate of 15 percent  or higher. For example, the IMF forecast predicts an increase of  unemployment to almost 19 percent in 2016.
section_title: EU and U.S. Exports of Humanitarian Goods to Iran Increased During 2012
paragraphs: Our analysis indicates that EU and U.S. exports of humanitarian goods to  Iran increased by about 35 percent in the first 10 months of 2012, from  $1.671 billion in the first 10 months of 2011 to $2.258 billion in the first 10  months of 2012 (see table 3). The increase is largely due to U.S. exports  of wheat and EU exports of wheat and barley. Medicine and medical  devices have remained relatively stable for the EU, but U.S. exports of  those goods declined by approximately 11 percent in the first 10 months  of 2012. However, the United States has not been a major supplier of  humanitarian goods to Iran. U.S. exports of humanitarian goods to Iran  are about 10 percent of the EU humanitarian exports to Iran.
Since the enactment of recent U.S. and international sanctions from 2010  through 2012, the annualized growth rate in EU exports of humanitarian  goods to between 2010 and 2012 Iran nearly tripled to 18.5 percent from  the historical average of 6.6 percent in 2004 through 2009 (see fig. 9). In  addition, from 2010 through the third quarter of 2012, EU exports of  medicine and medical devices grew at an annualized rate of about 11.2  percent, compared with about 0.6 percent from 2004 through 2009.  Moreover, EU exports of agricultural goods grew at an annualized rate of  31 percent from 2010 through the third quarter of 2012. In addition, U.S.  humanitarian exports to Iran increased at an annualized rate of about 10  percent since 2010 (see fig. 10). EU and U.S. agricultural exports  increased in the second half of 2008, owing to increased wheat exports  that assisted Iran in coping with a drought that had affected its agricultural  sector.
Official UN and open source reports have raised concerns regarding the  availability of humanitarian goods in Iran as a result of the U.S. and  international sanctions. According to a 2012 UN report, the sanctions  targeting Iran have had significant impacts on the general population,  including causing a shortage of necessary items, such as medicines.  The UN also reported that some nongovernmental organizations  operating in Iran have reported that people do not have access to life- saving medicines. In addition, a report published by the Wilson Center in  February 2013 stated that sanctions are “causing disruptions in the  supply of medicine and medical equipment in Iran.” Foreign financial  and business officials in Dubai informed us in September 2012 that  sanctions may have adversely affected some Iranian citizens and  businesses. Some of these officials stated that sanctions may have  limited the export of some humanitarian goods, such as food and  medicine, to Iran. For example, one business official indicated that the  recent financial sanctions had significantly limited his ability to export food  to Iran because foreign banks were unwilling to process transactions for  Iranian business. Some open source reports have noted that economic  mismanagement and insufficient funding for medicines by the Iranian  government have exacerbated the shortage of medicines in Iran.
section_title: Iran Is Trying to Adapt to Sanctions by Seeking New Payment Mechanisms and Changing Trading Partners
subsections: section_title: Iran Is Reportedly Using Barter Agreements for Some Oil Exports
paragraphs: According to open sources, the government of Iran has made efforts to  adapt to U.S. and international sanctions in a number of ways, including  using alternative payment mechanisms such as barter agreements and  changing its trading partners. Open sources report that Iran is selling oil  at a discount to a number of customers, and is accepting other countries’  currencies as payment, which may limit its ability to use the revenue for  anything other than purchasing products in those countries. For example,  open sources reported Iran has entered into barter agreements with  countries including India, exchanging oil for food, medicine, and  commercial products in lieu of using traditional payment methods.  According to an international energy market expert, while the barter  arrangements allow Iran to continue selling oil to other countries without  accessing the international financial institutions, such arrangements may  also limit Iran’s ability to receive the full market value of its oil.
Furthermore, as the EU and some countries, such as South Korea and  Japan, have significantly reduced the purchase of Iranian oil in response  to EU and U.S. sanctions, open source reports indicate that Iran has  attempted to reach agreements with India, Pakistan, and other countries  to purchase Iranian oil. However, these recent agreements have thus far  not fully offset the reduced exports to the EU and others. According to  open source reports, the International Energy Agency stated that Iranian  oil exports declined from about 2.5 million barrels per day in 2011 to  about 1.3 million barrels per day in October 2012.
Although Iranian exports of oil have declined, trade data from certain  countries show that their exports to Iran have increased since before  2010. In 2008 and 2009, before the enactment of recent U.S. sanctions  and international sanctions in 2010 through 2012, the average aggregate  quarterly exports to Iran were about $15.5 billion. During the first half of  2012, quarterly exports to Iran from the same countries were $20.4 billion  despite the recent U.S. and international financial sanctions targeting  Iran. Table 4 shows that the share of EU exports to Iran has decreased  while the shares of Turkish and United Arab Emirati exports have  markedly increased. The U.S. share of Iran’s imports has remained at 1  percent or less.
section_title: Agency Comments
paragraphs: We provided a draft of our report to Treasury, State, Justice, the Board of  Governors of the Federal Reserve, the Office of the Comptroller of the  Currency, and the International Monetary Fund for their review and  comment. The agencies and organizations did not provide official  comments on the report. The Departments of Treasury, the Board of  Governors of the Federal Reserve, the Office of the Comptroller of the  Currency, and the International Monetary Fund provided technical  comments on the draft, which we incorporated in the report, as  appropriate.
We are sending copies of this report to interested congressional  committees, the secretaries and agency heads of the departments  addressed in this report, and other interested parties. In addition, the  report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-9601 or melitot@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix V.
section_title: Appendix I: Scope and Methodology
paragraphs: To describe recent laws and executive orders that have added to the  Department of Treasury’s (Treasury) authority to implement financial  sanctions targeting Iran, we reviewed the public laws and executive  orders that define these sanctions, as well as the regulations developed  to administer them. We spoke with Treasury officials to identify laws  enacted and executive orders issued from 2010 through 2012 that added  to Treasury’s authority to administer and enforce financial sanctions  targeting Iran. Treasury officials identified four primary laws and four  executive orders that authorized the financial sanctions targeting Iran. We  focused primarily on those financial sanctions targeting Iran that are  defined in laws, regulations, or executive orders and that either (1) block  the property of designated entities or (2) target a financial transaction as  an action that can result in the prohibition of the opening or the prohibition  or imposition of strict conditions on the maintenance of a correspondent  or payable-through account in the United States by a foreign financial  institution. We discussed the sanctions with officials from Treasury and  the Department of State (State), and we reviewed official statements and  press releases on the content and purpose of the sanctions. We also  reviewed selected financial sanctions targeting Iran enacted by the United  Nations (UN) and European Union (EU).
To describe U.S. efforts to administer U.S. financial sanctions targeting  Iran, we reviewed Treasury regulations and guidance establishing the  process for administering the sanctions. We reviewed the Iranian  Financial Sanctions Regulations, Iranian Transactions and Sanctions  Regulations, and additional sanctions guidance and documents  developed and published by Treasury. We spoke with Treasury officials to  discuss the agency’s administration of financial sanctions through various  activities, including its development of regulations, outreach to banks and  financial institutions, review of financial transactions, identification of  potential violations, and assessment of the impact of financial sanctions.  We also interviewed State officials regarding the department’s process for  granting exceptions under section 1245 of the National Defense  Authorization Act of 2012. To describe the efforts of the U.S. government  and banks to ensure compliance with the financial sanctions targeting  Iran, we reviewed the Bank Secrecy Act, as amended, and the  examination procedures used by the regulators to assess banks’  compliance with Bank Secrecy Act and Office of Foreign Assets Control- related requirements, which includes guidance on the establishment and  maintenance of an effective Office of Foreign Assets Control (OFAC)  compliance program. We also reviewed available data from the  regulators on the numbers of Bank Secrecy Act examinations conducted  during fiscal years 2010–2012, which generally included reviews of  banks’ OFAC compliance programs. We interviewed officials from the  Board of Governors for the Federal Reserve System and the Office of the  Comptroller of the Currency to discuss the bank examination process  regarding OFAC compliance programs. We also spoke with  representatives from the American Bankers Association and the Institute  of International Bankers to discuss the role that banks play in the  administration of financial sanctions and the programs that banks  establish to comply with OFAC reporting guidelines.
To describe U.S. efforts to enforce financial sanctions targeting Iran, we  interviewed officials from Treasury, State, the Department of Justice  (Justice), and federal banking regulatory agencies to identify the methods  and activities that the agencies used for enforcement. We reviewed the  Specially Designated Nationals list, which Treasury publishes, to  determine the number of entities that Treasury designated for violations of  U.S. financial sanctions targeting Iran. We reviewed OFAC guidance on  the enforcement of financial sanctions. We also reviewed documents on  the federal banking regulators’ enforcement actions against banks  involving OFAC compliance issues. We additionally reviewed court  documents and press releases regarding enforcement actions taken by  Justice in response to banks’ criminal violations of financial sanctions.
To assess Iranian economic performance, we identified a group of peer  economies, which helped us to isolate economic changes that are unique  to Iran but not necessarily to identify the impact of sanctions. The peer  group we identified includes the International Monetary Fund’s (IMF)  Middle East and North Africa region, neighboring countries not included in  the Middle East and North Africa region, and oil export-dependent  countries outside the region. The peer group is comprised of Algeria,  Angola, Armenia, Azerbaijan, Bahrain, Djibouti, Egypt, Equatorial Guinea,  Gabon, Jordan, Kuwait, Mauritania, Morocco, Oman, Panama, Republic  of Congo, Qatar, Saudi Arabia, Tunisia, Turkey, Turkmenistan, United  Arab Emirates, and Venezuela. The group excludes Afghanistan, Chad,  Iraq, Lebanon, Libya, Nigeria, Pakistan, Sudan, Syria, and Yemen––  countries that were rated very high on the Fund for Peace Failed States  Index or very low on the Institute for Economics and Peace Global Peace  Index in 2011 or 2012. We assessed the performance of the Iranian oil  market (oil production and oil export revenue), gross domestic product,  and consumer price inflation against the peer group’s, using data from  IMF databases (World Economic Outlook and International Financial  Statistics), the Energy Information Administration (International Energy  Statistics database), IHS Global Insight, and the Economist Intelligence  Unit. We assessed the reliability of these data and found that they were  sufficiently reliable for identifying peers for the Iranian economy and  assessing Iran’s economic performance. For example, we corroborated  data from multiple sources and spoke with cognizant officials and experts  to confirm the reliability of the data. Because of concerns about Iranian  economic data, we relied on third party data and estimates to a large  extent, and considered the published views of the IMF on Iranian inflation  data, whose original source was the Central Bank of Iran. If, as some  suggest, Iranian official statistics underestimate inflation, our results with  respect to inflation are conservative. In addition to conducting simple peer  comparisons, we conducted a more rigorous econometric analysis that  controlled for historical trends in Iranian oil production as well as  contemporaneous changes in peers’ oil production. We interpreted the  results of our analysis in light of expert views, contemporaneous events  including U.S. and EU sanctions, and certain domestic policies in Iran. In  most instances we did not attempt to isolate the impact of U.S. financial  sanctions. The contemporaneous implementation of many sanctions,  including U.S., UN, and EU financial and non-financial sanctions from  2010 through 2012, would make attributing certain outcomes to any  particular sanction very difficult. For a complete description of our peer  group selection and econometric analysis see Appendix III.
To assess the impact of the sanctions on the projected future  performance of the Iranian economy, we reviewed the forecasts that three  sources–the IMF’s World Economic Outlook, IHS Global Insight, and  Economist Intelligence Unit–developed to predict the performance of  Iran’s economy from 2012 through 2016. We reviewed the forecasts that  each source developed before the enactment of the most recent U.S. and  international sanctions, and we compared the results with forecasts  published between September and October 2012 to identify changes in  the predicted performance of the Iranian economy. To compile the  original forecasts, we used IHS Global Insight data for June 2010 and the  IMF World Economic Outlook estimates for April 2010, with the exception  of predicted unemployment rate, which came from the September 2011  World Economic Outlook database. We also averaged two forecasts  developed by the Economist Intelligence Unit, from March 2010 and  October 2010, to establish a baseline forecast of the performance of  Iran’s economy before the enactment of the recent sanctions. For the  updated forecasts, we used the November 2012 IHS Global Insight data,  the October 2012 IMF World Economic Outlook database, and the  November 2012 Economist Intelligence Unit forecasts.
To identify the efforts of the government of Iran to adapt to the U.S. and  international sanctions, we reviewed U.S. government statements  regarding the impact of sanctions on Iran in publicly available testimonies,  speeches, and other remarks made by U.S. officials from State, Treasury,  and the White House. We reviewed these statements regarding the U.S.  government’s position on the impact of sanctions on Iran, factors that  might lessen their impact, the influence of international sanctions on the  impact of sanctions, and for ways that Iran was adapting to the sanctions.  We interviewed U.S. government officials, as well as academic and  independent experts, regarding the extent to which sanctions targeting  Iran have affected the Iranian economy and government and business  with Iran. In addition, we reviewed open source and media reports  regarding the effect of U.S. and international sanctions on Iran.
To review the impact of sanctions targeting Iran on the availability of  humanitarian goods to Iran, we reviewed official UN and open source  reports about the access of such goods in Iran. In addition, since the United  Arab Emirates is one of Iran’s largest trading partners, we met with several  business officials in Dubai, United Arab Emirates, to discuss the effect that  sanctions have had on business with Iran and the resulting impact on  Iranian citizens and the availability of humanitarian goods. To analyze the  export of humanitarian goods to Iran, we analyzed U.S. and EU trade data  between January 2004 and October 2012. For the purposes of this report,  we defined “humanitarian goods” as those goods authorized for exports by  the Iranian Transactions Regulations as of October 2011. The regulations  defined agriculture goods to include items that are intended to be  consumed by and provide nutrition to humans or animals in Iran, including  vitamins and minerals, bottled drinking water, and seeds that germinate  into items that are intended to be consumed by and provide nutrition to  humans or animals in Iran. Agricultural goods did not include alcoholic  beverages, cigarettes, gum, or fertilizer. Medicine and medical devices  consisted of medical supplies, equipment, instruments, and ambulances,  and medicines which include prescription and over-the-counter medicines  for humans and animals. We used a U.S. Census-defined concordance  between the North American Industry Classification System used by the  United States and the Harmonized Commodity Description and Coding  System used by the European Union. We performed our selection of  humanitarian goods at the two-, four- and five-digit levels of the harmonized  system codes, as appropriate. For the trend analysis since January 2004,  we also performed a sensitivity check by using the definition of authorized  agricultural exports to Iran stated in the Export Administration Regulations  as of July 2001. These regulations included tobacco and tobacco products,  beer, wine and spirits, livestock, fertilizer and reproductive materials in the  list of authorized agricultural exports. We found that those categories of  products did not have a significant impact on our analysis, and we decided  to use a consistent definition for our short-term 10-month comparison  between 2011 and 2012 exports, as well as our longer-term trend analysis.  In addition, the narrower scope of the authorized agricultural exports as  stated in the updated regulations provided a more precise definition of  humanitarian goods. To ensure that we did not overlook any authorized  agricultural commodities and medicine and medical devices exported by  the U.S. to Iran, we also reviewed OFAC data of export licenses issued to  U.S. businesses that allowed the export of these goods to Iran between  2009 and 2012.
We conducted this performance audit from February 2012 to February  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Selected U.S. and International Sanctions Targeting Iran
section_title: Appendix III: Econometric Analysis of Iran Economic Indicators
paragraphs: In this appendix we describe the process we used to identify peers for the  Iranian economy, the econometric approach we used to determine the  magnitude and statistical significance of recent changes in several  economic indicators for Iran, and the results of this analysis.
subsections: section_title: Peer Identification
paragraphs: To help understand economic changes occurring uniquely in Iran we  identified a set of peer countries to approximate a control group. We  identified (1) regional peers, and (2) oil exporting peers, and then we  pooled the two groups to form a single peer group. To identify regional  peers, we chose countries in the International Monetary Fund’s (IMF)  Middle East and North Africa peer group and other countries that  bordered Iran but were not in the group. To identify countries whose  dependence on oil exports is similar to Iran’s, we calculated Iran’s oil  exports as a percentage of goods exports (roughly 86 percent), and then  considered any country to be an oil exporting peer if its oil exports were  more than 75 percent of goods exports.
To remove certain countries that experienced significant instability  associated with civil conflict or political violence (e.g., certain countries  associated with the “Arab Spring”), we excluded countries from the peer  group if they exceeded certain thresholds on the Fund for Peace Failed  States Index or the Institute for Economics and Peace Global Peace  Index in 2011 or 2012. We then combined into a single peer group the  countries that we had identified with both methodologies (see table 5).
We estimated several panel data difference-in-difference models on the  growth rates of two macroeconomic indicators: oil production and  consumer prices. While the dependent variable varies, the independent  variables are the same across models—an intercept and month and  country fixed effects. We assume a robust covariance structure which  allows for heteroskedasticity–volatility could vary over time or across  countries–and serial correlation of the errors within a country. In addition,  we estimate two variations based on different “sanctions dummies” for  Iran that correspond to two key financial sanctions laws—Comprehensive  Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA),  passed in July 2010, and the National Defense Authorization Act for  Fiscal Year 2012 (NDAA), passed in December 2011 (As a result, the  post-sanction dummies are equal to 1 for observations on Iran from  August 2010 to the present in the case of CISADA and from January  2012 to the present in the case of NDAA). For the NDAA dummy in  particular, we recognize that European Union (EU) sanctions related to  insurance and an EU oil embargo are contemporaneous with NDAA  financial sanctions. Furthermore, we recognize that we are not identifying  the impact of sanctions based on this approach. We do not control for  other macroeconomic or idiosyncratic (time-country specific) factors. We  also recognize that we lack detailed institutional knowledge of  idiosyncratic factors across all of the countries in our sample. However,  we argue that other factors we might attempt to control for are likely to be  endogenous to the sanctions. For example, one would typically include  the growth of the money supply and the output gap in a regression  designed to explain inflation. However, both of these factors could be  influenced by the sanctions or by policy responses to the sanctions;  therefore, by including them we could underestimate the role of sanctions.
We estimated all models with data from February 2000 to the most  recently available month at the time of the analysis (June 2012 or   July 2012).
section_title: Results
paragraphs: Changes in the Iranian economic indicators we analyzed were  consistently statistically significant during the time period associated with  recent U.S. financial sanctions, and the measured effects (coefficients)  were of magnitudes that were economically meaningful. The size of the  effect is larger in the post-NDAA time period (which also includes EU  sanctions related to oil and insurance) than in the post-CISADA period.  Although this is not necessarily a measure of the impact of U.S. and  international sanctions, it does indicate that the recent deterioration in the  Iranian economy is larger than what one would expect relative to the  historical trends and volatility of Iran and its peers.
The increase in the inflation rate is statistically significant and large,  indicating that inflation is significantly larger than one would expect during  the post-CISADA and post-NDAA time periods (see table 6). The effect in  2012 (the post-NDAA period) is slightly larger: 12.6 percentage points  versus 10.2 percentage points in the post-CISADA period. An energy  subsidy program initiated in December 2010 is likely to have contributed  to higher inflation during this time period. U.S. and international sanctions  may have contributed to higher transaction costs, higher import prices,  and a lower exchange rate, all of which could increase inflation.
The decline in oil production is also statistically significant and large,  indicating that oil production fell significantly more than one would expect  during the post-CISADA and post-NDAA time periods (see table 7). The  effect in 2012 (the post-NDAA period) is much larger: 26 percentage  points versus 9 percentage points in the post-CISADA period. U.S. and  international sanctions, such as a European Union embargo on oil from  Iran, may have made it more difficult to attract investment in Iran’s oil  sector, more difficult to sell oil on international markets, and more difficult  to receive payment for oil Iran was able to sell, all of which could  decrease oil production.
We estimated several additional models to assess the robustness of our  results. In one instance, we allowed the Iran dummy variables  representing the post-CISADA and post-NDAA time periods to vary over  time, beginning in January 2010. The coefficients on the dummy variables  were larger and more likely to be statistically significant during the post- CISADA and, especially, post-NDAA time periods. We also estimated  models with alternative error structures that allow for more general  heteroskedasticity or for contemporaneous correlation across countries,  respectively, and our results were substantively unchanged.
section_title: Appendix IV: IAEA Reports on the Development of the Iranian Nuclear Program
paragraphs: Iran’s initial efforts to develop nuclear energy technology began in the  1950s with assistance from the United States through President  Eisenhower’s Atoms for Peace program. Iran’s nuclear energy program  accelerated during the mid-1970s through the efforts of Shah Mohammad  Pahlavi. However, not much was publicly known of the extent of Iran’s  nuclear capability until 2002, when the International Atomic Energy  Agency (IAEA) was informed of a previously undeclared nuclear  enrichment plant in Natanz and a heavy water plant in Arak. Subsequent  IAEA inspections revealed that Iran had already made significant  progress toward mastering the technology needed to make enriched  uranium, a material that can be used to fuel nuclear weapons. IAEA  inspectors reported that they were unable to conclude that Iran’s program  was exclusively peaceful. Under the terms of the Paris Agreement,  negotiated in 2004, Iran voluntarily suspended its uranium enrichment  program. In August 2005, coinciding with President Ahmadinejad’s  assumption of power, Iran resumed its enrichment program. In response,  IAEA reported these actions to the UN Security Council (UNSC). This  resulted in UNSC Resolution 1696, which demanded that Iran suspend its  uranium enrichment and reprocessing activities, acting under Article 40 of  the UN Charter. The resolution requested that the IAEA complete a  report by August 31, 2006, on whether Iran had suspended its enrichment  activities. The August IAEA report concluded that Iran had not suspended  its enrichment activities and had not addressed the outstanding  verification issues–-a conclusion that IAEA reasserted in May 2007.
In its follow-up inspection, IAEA reported that Iran had neither suspended  its enrichment activities nor provided the necessary transparency to  remove uncertainties associated with some of its activities. Iran continued  to defy the UNSC resolutions and was sanctioned by a series of  additional UNSC resolutions between 2006 and 2010 that, among other  things, prohibited the sale of technology that could contribute to Iran’s  enrichment activities and freeze financial assets of entities involved in the  Iranian nuclear industry.
Beginning in 2006, six countries formed a group, the “Permanent Five  Plus 1,” to negotiate with Iran through a series of discussions. The group  has negotiated with Iran on several occasions, but, to date, has not  achieved any breakthroughs or reached agreement with Iran.
A November 2011 IAEA report cited credible information that led to  serious concerns indicating that Iran carried out activities relevant to the  development of a nuclear explosive device and was continuing to expand  its inventory of enriched uranium. Most recently, the November 2012  IAEA report stated that Iran had installed additional centrifuges and had  continued to enrich uranium. In addition, the report reiterated IAEA’s  inability to reach agreement with Iran on a “structured approach” to  resolving outstanding questions regarding the potential military  dimensions to Iran’s program that were cited in the November 2011  report.
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Pierre Toureille (Assistant  Director), Tetsuo Miyabara (Assistant Director), John F. Miller, Eddie  Uyekawa, Emily Biskup, Grace P. Lui, Michael Hoffman, Tonita Gillich,  Gergana Danailova-Trainor, Jennifer Young, Debbie Chung, and Bruce  Kutnick made key contributions to this report. Additional technical  assistance was provided by Joanna Berry, Gezahegne Bekele, Etana  Finkler, Martin De Alteriis, Fang He, Reid Lowe, Elisabeth Helmer, Emily  Gupta, Roberto Pinero, Courtney LaFountain, and Heather Latta.