Iran Sanctions: Impact in Furthering U.S. Objectives Is Unclear and Should Be Reviewed
Published: 2007-12-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The 2006 U.S. National Security Strategy stated that the United States faces challenges from Iran, including Iran's proliferation efforts and involvement in international terrorism. To address these concerns, the United States employs a range of tools, including diplomatic pressure, a military presence in the Gulf, and sanctions. A U.S. sanction is a unilateral restriction or condition on economic activity imposed by the United States for reasons of foreign policy or national security. We were asked to review (1) U.S. sanctions targeting Iran and their implementation, (2) reported sanction impacts, and (3) factors limiting sanctions. To conduct the review, we assessed trade and sanction data, information on Iran's economy and energy sector, and U.S. and international reports on Iran, and discussed sanctions with U.S. officials and Iran experts.
section_title: What GAO Found
paragraphs: Since 1987, U.S. agencies have implemented numerous sanctions against Iran. First, Treasury oversees a ban on U.S. trade and investment with Iran and filed over 94 civil penalty cases between 2003 and 2007 against companies violating the prohibition. This ban may be circumvented by shipping U.S. goods to Iran through other countries. Second, State administers laws that sanction foreign parties engaging in proliferation or terrorism-related activities with Iran. Under one law, State has imposed sanctions in 111 instances against Chinese, North Korean, Syrian, and Russian entities. Third, Treasury or State can use financial sanctions to freeze the assets of targeted parties and reduce their access to the U.S. financial system. U.S. officials report that U.S. sanctions have slowed foreign investment in Iran's petroleum sector, denied parties involved in Iran's proliferation and terrorism activities access to the U.S. financial system, and provided a clear statement of U.S. concerns to the rest of the world. However, other evidence raises questions about the extent of reported impacts. Since 2003, the Iranian government has signed contracts reported at about $20 billion with foreign firms to develop its energy resources. Further, sanctioned Iranian banks may fund their activities in currencies other than the dollar. Moreover, while Iran halted its nuclear weapons program in 2003, according to the November 2007 National Intelligence Estimate, it continues to enrich uranium, acquire advanced weapons technology, and support terrorism. Finally, U.S. agencies do not systematically collect or analyze data demonstrating the overall impact and results of their sanctioning and enforcement actions. Iran's global trade ties and leading role in energy production make it difficult for the United States to isolate Iran and pressure it to reduce proliferation and support for terrorism. For example, Iran's overall trade with the world has grown since the U.S. imposed sanctions, although this trade has fluctuated. Imports rose sharply following the Iran-Iraq war in 1988 and then declined until 1995; most export growth followed the rise in oil prices beginning in 2002. This trade included imports of weapons and nuclear technology. However, multilateral UN sanctions began in December 2006.

section_title: Letter
paragraphs: The 2006 National Security Strategy stated that the challenges that Iran  presents to the United States include the country’s proliferation efforts,  involvement in international terrorism, opposition to the Middle East  peace process, and poor human rights record. To address these concerns,  the United States employs a range of tools, including diplomacy, a military  presence in the Gulf, and unilateral sanctions. The broad U.S. strategy is  intended to deter Iran from developing weapons of mass destruction,  acquiring advanced conventional weapons, and supporting terrorist  activities. Sanctions have played an important role in the U.S. approach to  confronting Iran. A U.S. “sanction” is any unilateral restriction or condition  on economic activity with respect to a foreign country or foreign entity  that is imposed by the United States for reasons of foreign policy or  national security.
We reviewed (1) U.S. sanctions targeting Iran and their implementation,  (2) the reported impact of the sanctions, and (3) factors that affect the  ability of U.S. sanctions to reduce Iran’s proliferation and terrorism-related  activities.
To determine implementation and assessment of U.S. sanctions involving  Iran, we identified and reviewed U.S. executive orders and laws that  established sanctions targeted at Iran. While we focused on Iran-specific  sanctions, we also reviewed financial sanctions that address proliferation  and terrorism concerns that the United States can use against any party,  including Iran, as well as United Nations (UN) sanctions. We reviewed  data identifying how often sanctions have been imposed. Further, to  review assessments and information about sanction impacts and factors  influencing sanctions, we reviewed U.S. agency documents and analyzed  international trade, energy, and private sector data. We interviewed  experts on Iran regarding the sanctions and their impact. We further  reviewed documentation from the United Nations, Department of State,  and Congressional Research Service (CRS) that identifies current  proliferation and terrorism-related activities by Iran. We also reviewed  U.S. classified documents related to the imposition of sanctions; however,  no classified information is used in this report. On the development of  nuclear power and Iran’s nuclear program, we reviewed information from  the Department of Energy and the International Atomic Energy Agency  (IAEA) and the November 2007 National Intelligence Estimate on Iran. For  all objectives, we interviewed officials from the Departments of the  Treasury, State, Commerce, Defense (DOD), Justice, Homeland Security  (DHS), and Energy, as well as the Central Intelligence Agency. We  conducted our review from November 2006 to November 2007 in  accordance with generally accepted government auditing standards.  Appendix I contains a more detailed description of our scope and  methodology.
subsections: section_title: Background
paragraphs: Iran is a nation of strategic importance due to its central geographic  location and huge reserves of fossil fuels. Iran’s neighbors include Iraq and  Afghanistan, two countries with ongoing U.S. and coalition military  operations, and Pakistan and Turkey, key U.S. allies in the global war on  terrorism (see fig. 1). Furthermore, Iran borders both the Persian Gulf and  the Strait of Hormuz, through which roughly one-fifth of the global oil  supply is exported. According to the Department of Energy, Iran has the  third largest proven oil reserves in the world. Iran’s oil export revenues  constitute about 80 percent of its total export revenue, and accounted for  nearly one-fifth of its gross domestic product (GDP) in 2004. High oil  prices in recent years have further boosted Iran’s oil export revenues.
U.S.-Iranian relations have often been strained since the early years of the  Cold War. Following the U.S.-supported overthrow of Iran’s prime minister  in 1953, the United States and others backed the regime of Shah  Mohammed Reza Pahlavi for a quarter century. Although it did much to  develop the country economically, the Shah’s government repressed  political dissent. In 1978, domestic turmoil swept the country as a result of  religious and political opposition to the Shah’s rule, culminating in the  collapse of the Shah’s government in February 1979 and the establishment  of an Islamic republic led by Supreme Leader Ayatollah Khomeini. In  November 1979, militant Iranian students occupied the American embassy  in Tehran with the support of Khomeini. Shortly thereafter, the United  States broke diplomatic relations with Iran, which remain suspended to  this day.
section_title: U.S. Agencies Implement Numerous Sanctions Targeting Iran
paragraphs: U.S. sanctions to deter Iran’s proliferation and support for terrorism fall  into three categories. First, Treasury leads U.S. government efforts to  implement a comprehensive trade and investment ban against Iran.  Second, State is responsible for implementing several laws that sanction  foreign parties engaging in proliferation or terrorism-related transactions  with Iran. Third, Treasury or State can impose financial sanctions,  including a freeze on assets and a prohibition on access to U.S. financial  institutions, against parties who engage in proliferation or terrorism- related activities with any party, including Iran. (See app. II for more  information regarding the timing and nature of U.S. and UN sanctions.)
subsections: section_title: Treasury’s Trade and Investment Ban Prohibits Virtually All U.S. Commercial Ties with Iran, but Transshipments May Circumvent Ban
paragraphs: Treasury administers a ban on almost all U.S. trade or investment activity  involving Iran. The prohibitions of the trade and investment ban began  with a 1987 ban on Iranian imports and were followed by a 1995 ban on  U.S. exports to and investment in Iran. These prohibitions apply to U.S.  persons, including U.S. companies and their foreign branches, wherever  located. U.S. officials stated that the ban does not apply to independent  foreign subsidiaries of U.S. companies. Non-U.S. persons are generally  exempt from the provisions of the ban. Trade sanctions against Iran were  eased in 2000 to allow for the purchase and import from Iran of carpets  and food products. Further, the Trade Sanctions Reform and Export  Enhancement Act of 2000 lifted, subject to certain exceptions, U.S.  sanctions on commercial sales of food, agricultural commodities, and  medical products to several sanctioned countries, including Iran. The ban  also prohibits U.S. financial institutions from having direct banking  relationships with banks in Iran and banks owned or controlled by the  government of Iran.
According to a Treasury official, the trade and investment ban is 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. The official further stated that, as with all U.S. economic  sanctions programs, the premise of the sanctions is to exact a price on the  sanctioned entity, which serves as an inducement to change the behavior  that threatens U.S. national security and foreign policy goals. Sanctions  also serve to make it more difficult for a sanctioned entity to pursue its  threatening conduct.
Treasury’s Office of Foreign Assets Control (OFAC) administers the trade  and investment ban and is responsible for reviewing and licensing requests  to export or re-export goods to Iran, with most items subject to a general  policy of denial. OFAC is also responsible for conducting civil  investigations of sanctions violations, which can result in warning letters,  cease and desist orders, and civil penalties of up to $250,000 (or an amount  that is twice the amount of the transaction that is the basis for the  violation) imposed administratively. We found that Iran sanctions were  involved in 94 out of 425 civil penalty cases that OFAC assessed or settled  as a result of sanction violations between 2003 and 2007. In cases where  OFAC finds evidence of willful violations of the trade and investment ban,  it may refer those cases to other federal law enforcement agencies for  criminal investigation. Investigations of potential criminal violations can  be conducted by the Department of Commerce’s Bureau of Industry and  Security (BIS), DHS’s Immigration and Customs Enforcement (ICE), and  the Department of Justice’s Federal Bureau of Investigation (FBI),  sometimes acting jointly. Criminal prosecutions are pursued by the  Department of Justice. Under recently enacted legislation, criminal  penalties for violations of the trade and investment ban can range up to  $1,000,000 and (for natural persons) 20 years in jail.
According to officials at key U.S. export enforcement agencies, the trade  ban may be circumvented by the transshipment of U.S. exports through  third countries. Officials identified several locations that serve as common  transshipment points for goods destined for Iran. These locations include  Germany, Malaysia, Singapore, the United Kingdom, and, according to  Commerce officials, the United Arab Emirates (UAE) in particular.
Two trends underscore the possibility that U.S. goods are being shipped to  Iran through the UAE. First is the considerable growth in U.S. trade flows  through the UAE. The United States has become the number one supplier  of imports to the UAE and Iran is the UAE’s largest trade partner.  Moreover, although trade statistics do not specify the portion of UAE  exports to Iran that are of U.S.-origin, the UAE transships a higher  proportion of its U.S. imports than other countries do. According to  Commerce officials transshipments have been a considerable problem in  terms of the effectiveness of sanctions in place against Iran. The second  trend is the high rate of unfavorable end-use checks for U.S. items  exported to the UAE. The Department of Commerce relies on post- shipment verification (PSV) checks as its primary method of detecting and  preventing illegal transfers, including transshipments, of U.S.-origin  exports to Iran. However, according to Commerce officials, in August  2007, the UAE enacted a comprehensive export, reexport, and  transshipment control law to better enable the UAE to control  transshipment of sensitive goods through its ports. The law is too new to  assess its effectiveness. (Further information is classified.)
section_title: State Sanctions Foreign Entities under Iran- Specific Laws
paragraphs: Congress has taken steps to discourage trade by third-country parties with  Iran by enacting sanction laws that have a “secondary boycott” effect.  Three U.S. sanction laws discourage foreign parties from engaging in  proliferation or terrorism-related activities with Iran (see table 1). State  leads efforts to implement these laws and has imposed sanctions under  these laws to varying degrees.
As table 1 shows, State has imposed sanctions against foreign parties,  including bans on U.S. government procurement opportunities and sales of  defense-related items, in 111 Iran-specific cases since 2000 under a law  currently known as the Iran, North Korea, and Syria Nonproliferation Act  (INKSNA). This law targets foreign persons that have transferred goods,  services, or technology to Iran that are listed on various multilateral  export control lists. According to a State official, entities engaged in  conventional arms transfers were the most widely sanctioned, followed by  those involved in chemical-biological, missile, and nuclear activities. Since  2000, almost half of the cases (52) involved Chinese parties, with North  Korean and Russian parties accounting for 9 and 7 cases, respectively. In  2007, Syrian parties were sanctioned in 8 cases. According to State  officials, in most cases, the full range of sanctions authorized under  INKSNA is imposed, and sanctions have been typically imposed for a 2- year period. Over 30 percent of all sanction cases involve parties that were  sanctioned multiple times under the law—some, primarily Chinese firms, 3  or more times. According to a State official, such instances were the result  of new proliferation activities by these firms. Because the law establishes  the sanctions that are available, the practical effect of continuing to  impose sanctions against the same parties is to extend the length of time  the sanctions are imposed and make the public aware of the firms  facilitating proliferation with Iran. State officials said that generally no  consideration of additional penalties or measures is given to parties who  have been sanctioned multiple times, although some of these entities have  been sanctioned under other sanction tools.  However, State officials  emphasized that they raise concerns about the activities of such entities  with foreign governments as appropriate.
In deciding to sanction an entity under INKSNA, State officials reported  that every 6 months they assess as many as 60,000 intelligence reports to  identify transfer cases that should be submitted to agencies for review.  State decides, on a discretionary basis, which parties to sanction following  a meeting chaired by the NSC that solicits input from DOD, Energy, and  Treasury and other agencies regarding the disposition of each case.  According to a State official, the Deputy Assistant Secretary-level  interagency group reviews cases to recommend whether the foreign  persons were reportable under the act, and if so, (1) whether there was  information establishing that a case was exempt from sanctions under the  act, (2) whether to seek from the foreign person additional information  concerning the transfer or acquisition as provided for in the act, and (3)  whether sanctions under the act should be applied. The final decision  regarding the disposition of each case is made by the Deputy Secretary of  State. One State official noted that there have been several cases in which  State decided not to impose sanctions because of positive nonproliferation  actions taken by the foreign government responsible for the firm engaging  in the proliferation transfer. A foreign government punishing or  prosecuting the firm responsible for the transfer is one example of the  type of positive action that has resulted in a decision not to impose  penalties. Another reason why State may decide not to impose sanctions is  a concern that such an action, which is made public, may compromise the  intelligence “sources and methods” used to collect information on a  particular proliferation case. Once final decisions are made, State then  submits a classified report to Congress identifying parties that have  engaged in sanctionable activities and parties that will be sanctioned, and  ultimately publishes the names of sanctioned entities in the Federal  Register. (See appendix III for a detailed listing of these sanction cases.)
Under a second law, the Iran-Iraq Arms Nonproliferation Act of 1992  (also shown in table 1), State has imposed sanctions 12 times. Under this  act, mandatory sanctions include prohibiting the export to Iran of all  goods specified on the Commerce Control List (CCL). State also can  impose sanctions against foreign parties, such as a ban on U.S.  government procurement opportunities or export licenses that knowingly  and materially contribute to Iran’s efforts to acquire destabilizing numbers  and types of advanced conventional weapons. As with the Iran, North  Korea, and Syria Nonproliferation Act, decisions under this act include  interagency input from Commerce, Energy, and DOD, with State in the  lead and responsible for deciding which cases warrant imposition of  sanctions. In 2002, State imposed sanctions in 10 instances, 9 of which  were against Chinese parties. In 2003, sanctions were imposed against  two parties, one Jordanian and one Indian. No sanctions have been  imposed since 2003 primarily because, according to State officials, it is  difficult to establish that transfers were made by parties who knowingly  and materially contributed to Iran’s proliferation.
Table 1 shows that State has not imposed sanctions against any party  under a third law—the Iran Sanctions Act—though State officials noted  that the law has been useful in raising U.S. concerns over Iran. The goal of  the Iran Sanctions Act (previously known as the Iran-Libya Sanctions Act  of 1996, or ILSA) has been to deny Iran the financial resources to support  international terrorism or the development of weapons of mass  destruction (WMD) by limiting Iran’s ability to find, extract, refine, or  transport its oil resources. State considered sanctions on one occasion in  1998; however, the U.S. government granted waivers to the parties  involved. In that instance, the U.S. government determined that the  investments of three foreign companies—Total (France), Gazprom  (Russia), and Petronas (Malaysia)–in the development of Iran’s South Pars  gas field were sanctionable under ILSA. However, the Secretary of State  determined that it was important to the U.S. national interest to waive the  imposition of sanctions against these firms. In making this determination,  the Secretary considered factors such as the desire to build an effective  multilateral regime to deny Iran the ability to acquire WMD and support  acts of international terrorism. Further, the European Union (EU) had  concerns that the use of the act to impose sanctions would constitute  extraterritorial application of U.S. law. The possibility that the EU might  take this issue to the World Trade Organization for resolution played a role  in convincing the U.S. government to waive sanctions. In addition, a report  on the use of ILSA prepared by State and cleared by the NSC noted that  the sanctions that could be imposed were unlikely to induce the three  companies to abandon their investments because the companies were  insulated from any practical negative impact of the sanctions.
section_title: Targeted Financial Sanctions Freeze Assets of Parties Involved in Proliferation and Terrorism-Related Activities
paragraphs: The U.S. government has taken actions against Iran using targeted  financial sanctions that can be used against any party that engages in  certain proliferation or terrorism activities. In June 2005, the President  issued Executive Order 13382 to freeze the assets of persons engaged in  proliferation of WMD and members of their support networks. This  action followed the issuance in September 2001 of Executive Order 13224  to freeze the assets of persons who commit, threaten to commit, or  support terrorism. Executive Orders 13382 and 13224 were both issued  under the authority of the International Economic Emergency Powers Act  (IEEPA). Persons targeted under these financial sanctions are said to be  “designated” as either WMD proliferators or global terrorists, depending  on which set of sanctions is employed, and any transactions with them by  U.S. persons are prohibited.  According to Treasury, the goal of this  action is to deny sanctioned parties’ access to the U.S. financial and  commercial systems. Treasury or State can make designations under these  financial sanctions, which are published in the Federal Register.
As of October 25, 2007, 53 of the 70 parties designated under the  nonproliferation financial sanctions were tied to Iranian proliferation  activities. Of these 53 parties, 48 were either Iranian entities or overseas  subsidiaries of Iranian banks, 4 were Chinese, and 1 was American.  Several designations have been made in recent months. For example, in  June 2007, Treasury designated four Iranian companies for their role in  Iran’s proliferation of WMD. On October 25, 2007, State and Treasury  designated 27 entities or individuals under Executive Order 13382,  including the Islamic Revolutionary Guard Corps (IRGC) and other  companies or individuals affiliated with the IRGC, the Ministry of Defense  and Armed Forces Logistics, and two Iranian banks, including Bank  Melli—Iran's largest bank.
With regard to the antiterrorism financial sanctions, Treasury was unable  to provide us with data on the number of Iran-related designations  because it does not compile information about the country or countries  with which the designated entities are involved. We were, however, able to  identify instances where antiterrorism financial sanctions were imposed.   For example, on October 25, 2007, under Executive Order 13224, Treasury  designated the IRGC’s Qods Force a supporter of terrorism.  According to  Treasury, the Qods Force provides material support to the Taliban,  Lebanese Hizbollah, Hamas, and other terrorist groups. Treasury also  designated Iran's Bank Saderat, which is already subject to financial  restrictions under the trade ban, as a terrorism financier.
section_title: U.S. Agencies Have Not Assessed the Overall Impact of Sanctions Targeting Iran
paragraphs: U.S. officials and experts report that U.S. sanctions are having specific  impacts on Iran; however, the extent of such impacts is difficult to  determine, and agencies have not assessed the overall impact of sanctions.  First, U.S. officials report that U.S. sanctions have slowed foreign  investment in Iran’s petroleum sector, which hinders Iran’s ability to fund  proliferation and terrorism-related activities. Second, financial sanctions  deny parties involved in Iran’s proliferation and terrorism activities access  to the U.S. financial system and complicate their support for such  activities. Third, U.S. officials have identified broad impacts of sanctions,  such as providing a clear statement of U.S. concerns about Iran. However,  other evidence raises questions about the extent of reported economic  impacts. Since 2003, the Iranian government has signed contracts reported  at approximately $20 billion with foreign firms to develop its energy  resources, though it is uncertain whether these contracts will ultimately be  carried out. In addition, sanctioned Iranian banks may be able to turn to  other financial sources or fund their activities in currencies other than the  U.S. dollar. U.S. and international reports also find that Iran continues  proliferation activities and support for terrorism. Finally, U.S. agencies,  except for Treasury’s assessments of its financial sanctions under  Executive Orders 13382 and 13224, do not assess the impact of sanctions  in helping achieve U.S. objectives nor collect data demonstrating the  direct results of their sanctioning and enforcement actions.
subsections: section_title: Agencies Report that Sanctions Have Delayed Investment in Iran’s Petroleum Sector and Had Other Impacts
paragraphs: State and Treasury officials report that sanctions have had specific  impacts such as delaying foreign investment in Iran’s petroleum sector and  reducing Iran’s access to the U.S. financial system. In addition, broad  impacts of sanctions, such as their symbolic value, also have been  recognized.
subsections: section_title: U.S. Officials State that Iran Sanctions Act Has Contributed to Delays in Foreign Investment in Iran’s Petroleum Sector
paragraphs: U.S. officials and experts have stated that U.S. sanctions have played a role  in slowing Iran’s progress in developing its oil and gas resources. The Iran  Sanctions Act is intended to limit investment in Iran’s petroleum sector,  with an expectation that curbing such investment would disrupt the  revenue generated by new oil and gas investments and reduce Iran’s ability  to pursue policies that the United States deemed unacceptable. A 2004  State Department report noted that the law had, among other things,  helped delay investment in Iran’s petroleum sector. According to State  Department officials, there have been no new final oil and gas investment  deals in Iran since 2004. Other experts have similarly noted a slowdown in  investment in Iran’s oil and gas sectors and have cited statements that  Iranian oil officials had made to that effect. U.S. officials and experts have  also noted that, while the existence of the Iran Sanctions Act and its use as  a tool for dialogue with foreign parties may be a contributing factor to a  slowdown in foreign investment in Iran, Iran’s own investment policies  may be contributing to a reduced flow of investment.
On the other hand, the Department of State has raised concerns about  possible energy deals between Iran and potential foreign investors,  including the reported $16 billion China National Offshore Oil Corporation  deal for the development of Iran’s North Pars gas field. Further, the United  States has expressed concerns about the estimated $4.3 billion preliminary  agreement that Royal Dutch Shell, along with Spain’s Repsol, concluded  with the Iranian regime for the construction of a liquefied natural gas plant  at South Pars, the world’s largest natural gas field. Also, Indian firms have  entered into contracts in recent years for the purchase of Iranian gas and  oil. The proposed construction of a pipeline to deliver Iranian natural gas  to India through Pakistan is a project about which the United States has  expressed concerns.
We also found that since 2003 the Iranian government has signed contracts  reported at approximately $20 billion with foreign firms to develop Iran’s  energy resources. It is uncertain whether these contracts will ultimately be  carried out, and at least one has already been withdrawn. However, these  agreements demonstrate foreign firms’ significant interest in financing or  underwriting projects in Iran’s energy sector. (See app. IV for a listing of  recent major agreements between Iran and foreign investors in Iran’s  energy sector.)
section_title: U.S. Officials Report that Financial Sanctions Deny Entities Involved in Proliferation and Terrorism Access to U.S. Financial System
paragraphs: State and Treasury officials have testified that financial sanctions deny  designated individuals and entities access to the funds needed to sustain  Iran’s proliferation. For example, in January 2007, the U.S. government  designated Bank Sepah under Executive Order 13382 as a supporter of  WMD proliferation, thereby eliminating its access to the U.S. financial  system and reducing its ability to conduct dollar transactions. Further,  U.S. financial sanctions also have reportedly disrupted Iran’s support for  terrorism. U.S. officials report that the United States has disrupted  Hizbollah’s financial support network by reducing the ability of Iranian  banks to interact with the U.S. financial system. For example, in  September 2006, Treasury altered the trade ban regulations to cut off Bank  Saderat, Iran’s second largest state-owned bank, from dollar transactions  due to its support for terrorism. Treasury officials reported that Iran used  Bank Saderat to move millions of dollars to terrorist organizations such as  Hizbollah, Hamas, and the Palestinian Islamic Jihad. This action  complicated the bank’s financial transactions and alerted the world’s  financial community to Bank Saderat’s role in funding terrorism.
However, Iran may be able to find alternative financial sources or fund its  activities in currencies other than the dollar. Treasury officials have noted  that sanctioned parties often find “workarounds” to lessen the sanctions  impact, and other financial options can be used. For example, sanctioned  Iranian banks may turn to euro or other currency transactions to support  Iranian government activities. Further, in 2006, a Treasury official testified  that stopping money flows to Iran is particularly challenging because the  Iranian government draws upon a large network of state-owned banks and  parastatal companies that is difficult to penetrate.
State and Treasury officials further reported that the effects of U.S.  financial sanctions have been augmented because several large European  banks, responding to U.S. diplomatic efforts, have curtailed their business  with sanctioned Iranian entities and are refraining from conducting dollar  transactions with Iran. At least 7 of the banks that have limited or ended  their dealings with sanctioned Iranian entities rank among the 20 largest  European banks. U.S officials also report that a number of governments,  including France, Germany, Italy, and Japan, are beginning to reduce their  export credits for goods shipped to Iran. U.S. officials have contended  that such developments have made it increasingly difficult for Iran to  execute important financial transactions necessary for Iran’s domestic  energy and other projects. U.S. agency officials and experts also have cited  the increased costs to Iran of obtaining finance and goods, sometimes  resulting in inferior component parts. State officials assert that as more  countries limit their financial interactions with Iranian entities and  individuals engaging in suspect activities, these parties have been denied  access to major financial and commercial systems.
section_title: Experts and Officials Recognize that Sanctions Have Other Broad Impacts
paragraphs: U.S. officials and sanction experts state that sanctions have other broad  impacts. For example, State officials stressed that U.S. sanctions serve as  a clear symbolic statement to the rest of the world of U.S. concerns  regarding Iran’s proliferation and terrorism-related activities. State  officials also noted that sanction laws can be used as a vehicle for dialogue  with foreign companies or countries, and the prospect of sanctions can  encourage foreign parties to end their interactions with Iran. Finally, U.S.  officials have stated that publicly identifying entities and listing them in  the Federal Register may deter other firms from engaging in business with  sanctioned entities.
section_title: Iran Halted Its Nuclear Weapons Program but Continues to Enrich Uranium, Acquire Advanced Weapons, and Support Terrorism
paragraphs: The extent of the sanctions’ impact in deterring Iran from proliferation  activities, acquiring advanced weapons technology, and support for  terrorism is unclear.  Although Iran halted its nuclear weapons program, it  continues to enrich uranium, acquire advanced weapons, and support  terrorism.  According to the November 2007 U.S. National Intelligence  Estimate, Iran halted its nuclear weapons program in the fall of 2003.  According to the estimate, Iranian military entities were working under  government direction to develop nuclear weapons. However, Iran halted  the program because of international scrutiny and pressure resulting from  exposure of Iran’s previously undeclared nuclear activities.  (See app. II  for a timeline of UN and international actions with regard to Iran’s  enrichment activities.)
Although it has halted its nuclear weapons program, Iran continues its  uranium enrichment program. While enriched uranium can be used for  nuclear weapons, Iran has stated that its program is for peaceful civilian  purposes.  The Director General of the International Atomic Energy  Agency (IAEA) stated on September 17, 2007, that Iran had not  suspended its enrichment activities and continued to build its heavy water  reactor at Arak. This announcement followed a series of IAEA discoveries  about Iran’s nuclear program. In 2002, the 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  made significant progress toward mastering the technology to make  enriched uranium.
Iran also continues to acquire advanced weapons technology, including  ballistic missile technology, according to Treasury.  According to State  officials, Chinese entities supply certain dual-use items to Iran, including  some that U.S. officials believe could be used in support of Iran’s WMD,  ballistic and cruise missiles, or advanced conventional weapons programs.
The U.S. government also reports that Iran continues to support terrorism.  We have reported that Iran is one of several countries from which Islamic  extremism is currently being propagated. In addition, according to State’s  2006 Country Report on Terrorism, Iran continues to be an active state  sponsor of terrorism. The report states that the IRGC and Ministry of  Intelligence and Security influence Palestinian groups in Syria and the  Lebanese Hizbollah to use terrorism in pursuit of their goals. The report  also noted that Iran provided guidance and training to select Iraqi Shi’a  political groups and weapons and training to Shi’a militant groups to  enable anticoalition attacks. In July 2007, officials of U.S. intelligence  agencies testified that Iran regards its ability to conduct terrorism  operations as a key element of its national security strategy.
section_title: U.S. Agencies Do Not Assess the Overall Impact of Sanctions and Lack Data on Sanction Results
paragraphs: U.S. agencies do not assess the overall impact of sanctions in deterring  Iran’s proliferation, acquisition of advanced weapons technology, or  terrorism-related activities, noting the difficulty of isolating the impact of  sanctions from all other factors that influence Iran’s behavior. In addition,  except for Treasury assessments of financial sanctions, agencies do not  possess data on the direct results of sanctions, such as the types of goods  seized that violate the trade ban or the subsequent behavior of parties that  sell prohibited goods to Iran.
subsections: section_title: Agency Officials Cite Difficulties Measuring the Overall Impact of Sanctions on Iran
paragraphs: State, Treasury, and Commerce officials said that they do not measure the  overall impact of sanctions they implement. For example, both State and  Treasury officials emphasized that, with one exception regarding one  sanction law, they have not attempted to measure the ability of U.S.  sanctions to deter Iran’s proliferation or terrorism-related activities. State  officials stated it is not possible to isolate the impact of sanctions from all  other factors that influence Iran’s behavior, such as the actions of other  countries. Further, State officials reported that sanctions are just one  component of U.S. efforts to influence Iran’s behavior.
Treasury officials conduct classified assessments of entities designated  under Executive Orders 13382 and 13224, but report that they do not  assess the overall impact of sanctions, stating it can be difficult to  differentiate the impact of various U.S. efforts. For example, it is difficult  to know where the effects of U.S. diplomacy end and the effects of U.S.  sanctions begin. State and Treasury officials noted that, while the goal of  sanctions is to change Iran’s behavior, such changes take time, and it is  not possible to track how sanctions imposed today might affect overall  behavior in the future. Such an exercise would be extremely difficult due  to the challenges associated with establishing any causal linkage between  U.S. sanctions and Iran’s subsequent behavior. In addition, agency officials  noted that the sanctions targeting Iran do not constitute a separate  program or line of effort; thus, these activities are not monitored or  assessed separately. However, according to Treasury officials, sanctions  implemented by OFAC constitute a separate program with its own set of  regulations (the Iranian Transaction Regulations) and OFAC does focus  specific effort on Iran sanctions. Finally, Treasury and Commerce officials  stated that it would be difficult to measure either the deterrent impact of  sanctions or, conversely, the extent to which illegal or sanctionable  activities continue undetected.
In 2004, State completed a review of the Iran Sanctions Act (then known  as the Iran-Libya Sanctions Act). The ILSA Extension Act of 2001 required  the President to provide Congress with a report describing the extent to  which the act had been effective in denying Iran the ability to support acts  of international terrorism and fund the acquisition of WMD by limiting  Iran’s ability to develop its petroleum resources. This report stated that  actions taken pursuant to the act had a “modest positive impact.” The 2004  report is the only formal assessment U.S. agencies have completed on the  broad impact of sanctions against Iran.
section_title: Agencies Lack Data on Direct Sanction Results
paragraphs: In addition, agency officials do not possess data on the direct results of  sanctions. For example, regarding the trade ban, officials from DHS’s  Customs and Border Protection reported that inspectors are not required  to document whether or not a given seizure is related to the ban. As a  result, they are unable to provide complete data on the volume or nature  of goods seized that violate this ban. Further, although Treasury posts on  the Internet its OFAC administrative penalties, it does not compile  information regarding the number of cases that involve violations of Iran  sanctions (we were able to identify such cases after reviewing more than  400 detailed case descriptions) and the nature of such violations. FBI  officials said that, within their counterintelligence division, they classify  investigations by country of origin but would not be able to distinguish  cases involving Iran sanctions from other Iran-related cases because the  bureau’s automated data systems do not include such information. In  addition, complete DHS/ICE data on Iran sanctions cases are not available  because ICE agents are not required to document the country of  destination when opening a case, nor is this information always  subsequently added as the case progresses. Further, a Justice official  stated that the department prosecutes and organizes its cases by statute  and does not classify its cases by the specific country or nationality of the  individual involved in its data system. It is thus not possible to identify  cases specific to the trade and investment ban with Iran. In addition,  although agencies cite transshipment as a key means of evading the trade  ban, they do not collect data that would help illustrate the magnitude of  the problem.
Further, State does not review whether sanctions imposed under the law  currently known as the Iran, North Korea, and Syria Nonproliferation  Act—the law used most frequently to sanction foreign parties—stop  sanctioned parties from engaging in proliferation activities with Iran or are  relevant for these parties.  The law does not require such a review. State  officials said that, while they are aware of instances where proliferation  activities ended following the imposition of sanctions on particular firms,  such information is primarily collected on an anecdotal basis. There has  been no overall or systematic review of whether sanctioned entities ended  their proliferation activities, though State officials indicated that they  monitor the activities of sanctioned parties as part of their daily  responsibilities. Further, these officials emphasized that State must apply  the sanctions established by law, such as a prohibition on participating in  U.S. government procurement opportunities, regardless of their relevance  or potential impact. State officials acknowledged the likelihood that the  sanctions established by law may have limited relevance for sanctioned  parties, which may be illustrated in cases where the same parties are  sanctioned repeatedly for proliferation activities with Iran.
In addition, OFAC does not compile data on the value of assets frozen  pursuant to targeted financial sanctions. OFAC tracks information on  assets frozen in the aggregate, not by the amount of assets frozen for each  particular party that is sanctioned. OFAC also did not have information  regarding the number of parties sanctioned under Iran-related  antiterrorism financial sanctions.  According to OFAC, systematically  tracking these data and information is not a useful measure of the efficacy  of sanctions.
section_title: Iran’s Global Trade Ties Limit U.S. Sanction Influence on Iran’s Behavior; UN Sanctions Have Recently Been Imposed
paragraphs: Iran’s global trade ties and leading role in energy production make it  difficult for the United States to isolate Iran and deter its acquisition of  advanced weapons technology and support for terrorism. First, Iran’s  trade with the world—both imports and exports—has grown since the  U.S. trade ban began in 1987. Although trade has fluctuated from year to  year, most of the growth has occurred since 2002, coinciding with the rise  in oil prices. This trade includes imports of weapons and nuclear  technology. Second, global interest in purchasing and developing Iran’s  substantial petroleum reserves has kept Iran active in global commerce.  Iran’s integration in the world economy has complicated U.S. efforts to  encourage other countries to isolate Iran; however, multilateral efforts  targeting Iran have recently begun. Beginning in December 2006, the  UNSC adopted sanctions against Iran in response to Iran’s noncompliance  with its international obligations. These sanctions are still being  implemented.
subsections: section_title: Iran’s Strong Global Trade Makes It Difficult for U.S. Sanctions to Pressure Iran
paragraphs: Over the past 20 years, U.S. trade with Iran has decreased, but Iran’s trade  with the rest of the world has increased, in large part due to increases in  oil prices between 2002 and 2006. Asian countries, particularly China, are  increasing their trade with Iran. Countries such as China and Russia  continue to provide Iran with sensitive goods.
subsections: section_title: Iran’s Trade with the United States Decreased Substantially Following the Imposition of the Trade Ban
paragraphs: U.S. trade with Iran declined sharply immediately following the adoption  of both the 1987 U.S. ban on imports from Iran and the 1995 ban on U.S.  exports to and investment in Iran. However, U.S exports to Iran  rebounded to some degree when the sanctions were eased in 2000. Before  the 1987 U.S. import ban, 16 percent of Iran’s total exports, primarily oil,  were shipped to the United States. Following the ban, this share dropped  to about .1 percent. According to our analysis of U.S. trade data, Iran  exported $2 billion in goods to the United States in 1987, about $10 million  in 1988, and less than $1 million annually for most of the 1990s. Further, 2  percent of Iran’s imports were from the United States before the export  ban in 1995; this dropped to almost zero after the ban. Total U.S. exports  to Iran declined from about $282 million in 1995 to less than $400,000 in  1996. By 2000, however, total U.S.-Iran trade had increased to about $218  million, largely as a result of the relaxation of the sanctions in that year to  allow for the purchase and import of Iranian carpets. In 2006, total U.S.- Iran trade was $247 million.
Our analysis of U.S. trade data indicates that both the export and import  declines coincided with significant changes in the types of goods traded.  For example, the top U.S. exports to Iran prior to the 1995 export ban  were in the UN trade category “nuclear reactors, boilers, and machinery,”  while the top exports immediately following the ban were in the category  “printed books and other informational materials.” In 2006, the top U.S.  exports to Iran were pharmaceuticals and tobacco products. The top U.S.  import from Iran before the 1987 import ban was oil, whereas the top  import immediately following the ban—and also in 2006—was carpets and  other textile floor coverings.
section_title: Iran’s Overall Trade Has Grown Since 1987, and Its Trading Partners Are Diverse
paragraphs: Despite the ban of Iranian imports to the United States in 1987 and the ban  on U.S. exports to Iran in 1995, Iran’s overall trade has grown. From 1987  through 2006, Iran’s exports grew from $8.5 billion to $70 billion, while  Iran’s imports grew from $7 billion to $46 billion (see fig. 2). The annual  real growth in Iran’s exports between 1987 and 2006 was nearly 9 percent;  however, the export growth rate between 2002 and 2006 was 19 percent,  reflecting the steep rise in oil prices since 2002 (see fig. 2). Iran’s imports  grew at an average annual rate of about 7 percent between 1987 and 2006.  Iran’s exports and imports both fluctuated during this period. For  example, Iran’s imports increased significantly following the end of the  Iran-Iraq war in 1988, followed by steep declines from 1993 to 1994,  following Iran’s major currency devaluation (over 1,800 percent).  Likewise, Iran’s exports fluctuated. The growth in Iran’s exports from 1989  to 1993 was followed by a general decline through 1998. Exports grew  dramatically from 2002 to 2006, coinciding with the rise in the price of oil  from $25 to $65 a barrel. The overall growth in Iran’s trade from 1986 to  2006 demonstrates the limits of the U.S. trade ban to isolate Iran and  pressure it to reduce its proliferation activities and support for terrorism.
Figure 2 shows that in the year following the 1987 U.S. ban on Iranian  imports, Iran’s exports to the world did not decline. In fact, Iran’s exports  began growing dramatically in 1989. In the 2 years following the 1995 ban  on U.S. exports to Iran, Iran’s imports from the world grew, and have  generally continued to grow. Iran has been able to readily replace the loss  in U.S. trade through trade with other countries, and the total value of  Iranian imports and exports has continued to grow largely uninterrupted.
In addition to the overall growth of Iran’s trade since 1987, Iran has  extensive global trade ties with Europe and the developing world. In  particular, trade with Asian countries has nearly doubled since 1994.  Asian countries accounted for 30 percent of Iran’s exports in 2006, up from  about 16 percent in 1994. Iran’s exports to China increased from about 1  percent in 1994 to about 13 percent in 2006. Japan and China were the top  two recipients of exports from Iran, together accounting for more than  one-quarter of Iran’s exports in 2006 (see table 2).
Iran’s growing trade with China has played a large role in replacing the  declining share of EU countries’ trade with Iran over the past decade and  contributing to Iran’s growing trade with Asian countries. In 2006, the EU  accounted for nearly one-quarter of Iran’s exports to the world, down from  33 percent in 1994. Germany and the United Kingdom were part of this  decline. From 1994 to 2006, Iran’s exports to Germany declined from about  6 percent to less than 1 percent and from about 9 percent to less than 1  percent for the United Kingdom.
In 2006, Germany and China were Iran’s largest providers of imports,  accounting for 23 percent of Iran’s imports. Although Germany has  remained the largest supplier of imports to Iran for over a decade, its share  of Iran’s imports has declined from about 19 percent in 1994 to 12 percent  in 2006, while Iran’s imports from China increased from about 1 percent in  1994 to about 11 percent in 2006 (see table 3). Iran increased its imports  from Middle East countries from about 8 percent to 13 percent, with  UAE’s share increasing from over 5 percent in 1994 to about 9 percent in  2006.
A regional shift in Iran’s import suppliers also took place between 1994  and 2006. The EU’s share of Iran’s imports from the world declined from  50.5 percent in 1994 to slightly over one-third of Iran’s imports in 2006,  while Asian countries’ share has tripled, from 9 percent to 27 percent.
section_title: Other Countries Continue to Provide Weapons and Nuclear Technology to Iran
paragraphs: Other countries’ exports to Iran include dual-use or sensitive goods, such  as arms, aircraft, and nuclear equipment and technology–goods that the  U.S. statutorily prohibits from export to Iran. For example, according to  UN trade data, Russia and Spain exported $28.9 million of nuclear reactor  parts from 2004 to 2005, over 89 percent from Russia. Iran also acquired  spare parts to U.S.-made fighter jets, parts that were sold to other  countries as surplus. According to State officials, Chinese entities supply  certain dual-use items to Iran, including some that U.S. officials believe  could be used in support of Iran’s WMD, ballistic missile, cruise missiles,  or advanced conventional weapons programs. According to a CRS report  and the testimony from U.S. intelligence agencies, Iran is becoming self- sufficient in the production of ballistic missiles, largely with foreign help.  Iran is also an important customer for Russia’s weapons and civil nuclear  technology. Additional information detailing Iran’s purchases of weapons  and nuclear technology is classified.
section_title: Iran’s Prominent Oil- Producing and Exporting Role Limits the Impact of Sanctions
paragraphs: Demand for Iranian crude oil, coupled with high oil prices, helps support  Iran’s economy and limits the effects of the U.S. trade ban. Iran is a  prominent world oil producer, and its economy relies heavily on oil export  revenues. Iran ranked fourth in terms of world oil production and exports  in 2005, exporting about 2.6 million barrels of oil per day. Iran has the third  largest proven oil reserves and the second largest reserves of natural gas  worldwide, according to the Oil and Gas Journal. Oil export revenues  represent nearly 80 percent of Iran’s total merchandise export earnings  and accounted for about 19 percent of Iran’s GDP in 2004.
In 2005, Japan and China accounted for 27 and 14 percent of Iran’s crude  oil exports, respectively, as shown in table 4.
Given the strong demand for Iranian crude oil, bolstered by continuing  support for Iran’s non-oil exports, several private sector and U.S.  economic experts stated that Iran’s near-term growth prospects look  favorable. However, a sharp drop in oil prices is a risk, and, according to  the IMF, a further escalation of tensions associated with nuclear issues  would adversely affect investment and growth. Another concern is Iran’s  growing gasoline consumption, which is heavily subsidized by the  government. According to the Department of Energy, Iran is the second  largest importer of gasoline in the world after the United States and has a  shortage of refining capacity to produce gasoline. In 2006, as part of the  Iranian government’s effort to reduce the subsidy on gasoline, the  government raised the price of gasoline 25 percent and introduced “smart  cards” in an effort to deter gas smuggling, reduce gasoline shortages, and  improve the budget situation. In addition, according to economic experts,  Iran has benefited from strong growth in non-oil exports in recent years.  Non-oil exports increase the resiliency of Iran’s economy and mitigate its  vulnerability to falling oil prices, as well as provide jobs. As part of the  government’s policy to move away from crude oil exports, Iran is  expanding its petrochemical production capacity and moving toward  export of petrochemical products.
section_title: UN Established Multilateral Sanctions against Iran in 2006
paragraphs: Multilateral efforts targeting Iran resulted in the imposition of UN  sanctions in 2006 as a result of concerns that Iran’s nuclear program might  contain a weapons-related component. In July 2006, UNSC resolution 1696  demanded that Iran suspend its uranium enrichment program by August  2006 or face possible sanctions. Iran did not suspend these activities, and  in December 2006, the UNSC unanimously approved UNSC resolution  1737. This resolution prohibits UN member states from supplying Iran  with the nuclear and missile-related materials or technology specified in  the resolution, as well as any other items that would contribute to  proliferation-sensitive nuclear activities or the development of nuclear  weapon delivery systems. In addition, UN member states are required to  freeze the financial assets and other economic resources of individuals  and entities designated by the UNSC as having ties to Iran’s nuclear or  ballistic missile programs. Further, the resolution provides for a ban on  the provision of financial services related to the supply, sale, manufacture,  transfer or use of prohibited items specified in the resolution. Iran was  required to suspend its enrichment-related, reprocessing, and heavy water- related activities and cooperate fully with the IAEA by February 2007 or  face possible additional sanctions.
The UNSC imposed further sanctions on Iran after the IAEA found that it  did not suspend its enrichment or heavy water-related activities. In March  2007, the UNSC passed resolution 1747, which banned arms exports from  Iran; called upon all UN member states to exercise restraint in sales to Iran  of certain categories of  heavy conventional arms; designated additional  individuals and entities, including Bank Sepah and those affiliated with the  IRGC, as subject to the asset freeze requirement; and urged UN member  states and international financial institutions not to enter into new  commitments for financial assistance to the government of Iran, except for  humanitarian and developmental purposes. Resolution 1747 reaffirmed  Iran’s obligation to suspend its enrichment, reprocessing, and heavy water- related activities and affirmed UNSC intentions to consider additional  sanctions should Iran fail to comply by May 2007. The IAEA Director  General confirmed Iran’s failure to comply in its report of May 2007. State  officials noted that this report triggered ongoing consultations among six  countries regarding next steps, including the possible adoption of  additional sanctions.
UNSC resolution 1737 established a sanctions committee charged with  monitoring implementation by UN member states of the measures  imposed under the resolution, including by reviewing required country  compliance reports. The State Department reported that, as of August  2007, the UNSC 1737 Sanctions Committee had received reports from 82  UN member countries (43 percent) on resolution 1737 and reports from 64  UN member countries (33 percent) on resolution 1747.
U.S. officials have stated that UN sanctions enhance the international  credibility of U.S. sanctions and provide leverage to increase pressure on  Iran. State officials have noted that multilateral sanctions enhance the  potential effectiveness of U.S. sanctions.  Since UN sanctions have been in  place for about a year, it is difficult to assess their impact.
section_title: Conclusion
paragraphs: For the past 20 years, U.S. sanctions against Iran have been an important  element of U.S. policy to deter Iran from weapons proliferation and  support for terrorism. Congress is considering additional sanctions  targeting Iran. UN sanctions may also play an important role in pressuring  Iran, but these sanctions have not yet been fully implemented. However,  the overall impact of sanctions, and the extent to which these sanctions  further U.S. objectives, is unclear. On the other hand, some evidence, such  as foreign firms signing contracts to invest in Iran’s energy sector and  Iran’s continued proliferation efforts, raise questions about the extent of  the sanctions’ impact. Moreover, U.S. agencies do not systematically  collect information on the direct results of the multiple sanctions they  implement, or their data do not provide specific information on Iran  sanctions. These agencies have not conducted a baseline assessment of  the impact of the sanctions. Collecting data on the results of multiple  sanctions against Iran and conducting an overall baseline assessment is  challenging, given all the agencies involved and the complexities of  collecting some of the necessary information. However, without an overall  assessment of the sanctions’ impact and subsequent reviews on a periodic  basis, the Congress and the Administration will continue to lack important  information for developing effective strategies to influence Iran’s behavior.
section_title: Matter for Congressional Consideration
paragraphs: Congress and the Administration need a better understanding of the  impact of U.S. sanctions against Iran and the extent to which sanctions are  achieving U.S. foreign policy objectives. The Administration needs to take  a series of actions to first improve the disparate data collected on Iran  sanctions and then establish baseline information for the continuous  monitoring and periodic reporting on what U.S. sanctions have achieved.  Accordingly, we recommend that Congress consider requiring the NSC, in  collaboration with the Departments of State, the Treasury, Energy, and  Commerce; the intelligence community; and U.S. enforcement agencies to  take the following actions:  (1) collect, analyze, and improve data on U.S. agencies’ actions to enforce  sanctions against Iran and complete an overall baseline assessment of the  impact and use of U.S. sanctions, including factors that impair or  strengthen them. This assessment should collect information, to the extent  feasible, from various U.S. agencies and consider factors such as, but not  limited to, the following:  the number of goods seized, penalties imposed, and convictions obtained  under the trade ban (Homeland Security, Treasury, Commerce, Justice);    sensitive items diverted to Iran through transshipment points (Commerce  and the intelligence community); the extent to which repeat foreign violators of Iran-specific sanctions laws  have ended their sales of sensitive items to Iran (State and intelligence  community); the amount of assets frozen resulting from financial sanctions (Treasury  and the intelligence community); and the extent of delays in foreign investment in Iran’s energy sector (State,  Energy, and the intelligence community). (2) develop a framework for assessing the ongoing impact of U.S.  sanctions, taking into account any data gaps that were identified as part of  the baseline assessment , and the contribution of multilateral sanctions.  (3) report periodically to the Congress on the impact of sanctions against  Iran in achieving U.S. foreign policy objectives.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Departments of State, the  Treasury, Commerce, Defense, Energy, Justice, and Homeland Security.  We also provided a draft to the NSC and the Office of the Director of  National Intelligence (ODNI). The Department of the Treasury provided a  formal response emphasizing that, as a result of financial pressure, Iran is  experiencing increasing isolation from the global community. The  department’s response also states that Iran continues to pursue nuclear  capabilities and ballistic missile technology and to fund terrorism. This  comment reinforces our finding that the overall impact of sanctions is  unclear. In addition, the Treasury noted its assessments of the  effectiveness of financial sanctions. We revised the report to recognize  that Treasury assesses the impact of financial sanctions but maintain that  an overall impact assessment of all U.S. sanctions has not been  undertaken. Finally, Treasury commented that the amount of assets  blocked under available financial sanctions is not a measure of the  program’s value. The department also noted that other sanction effects,  such as the inability of designated parties to use the U.S. financial system  or the reputational harm that stems from a designation, can often be the  primary way sanctions have an international impact. We have noted the  broad positive benefits of sanctions in our report. Treasury also told us in  an earlier communication that it did not disagree with the part of our  Matter for Congressional Consideration calling for an assessment of assets  frozen using these financial tools. Treasury’s letter can be found in  appendix V.
The Departments of State, the Treasury, Commerce, and Energy provided  written technical comments. We incorporated these comments into the  report as appropriate. The Department of Commerce submitted its  technical comments in a letter that is included in appendix VI. The NSC  provided brief oral comments and ODNI provided a classified response;  we considered this information and revised the report as appropriate. The  Departments of Defense, Justice, and Homeland Security provided no  comments on the draft report, though Homeland Security supported the  part of our Matter for Congressional Consideration that specifically  involves the department.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to other congressional  offices as well as the Departments of State, the Treasury, Commerce,  Defense, Energy, Justice, and Homeland Security. Further, we will provide  copies to the NSC and the Office of the Director of National Intelligence.  We will also make copies available to others on request. In addition, this  report will be available on GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-8979 or at christoffj@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. Other contacts and major contributors are listed in  appendix VII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The Ranking Member of the House Subcommittee on National Security  and Foreign Affairs of the Committee on Oversight and Governmental  Reform requested that we review U.S. sanctions involving Iran. This report  addresses (1) U.S. sanctions targeting Iran and their implementation, (2)  the reported impact of the sanctions, and (3) factors that limit the ability  of U.S. sanctions to reduce Iran’s proliferation and terrorism-related  activities.
To identify U.S. sanctions targeting Iran and determine the U.S. efforts to  implement and assess sanctions against Iran, we first identified, reviewed,  and summarized U.S. executive orders and laws that establish sanctions  and are targeted at Iran. While we focused on Iran-specific sanctions, we  also reviewed targeted financial sanctions that address proliferation and  terrorism concerns and can be used against any party, including Iran. In  addition, we discussed the sanctions with officials from the Departments  of State, Treasury, Commerce, Defense, Energy, Homeland Security  (DHS), and Justice, as well as the Central Intelligence Agency.
We submitted several requests for specific data to help illustrate U.S. trade  ban implementation and enforcement efforts; however, in many cases  agencies were not able to fully answer our requests. Due to limitations in  how agencies collect and organize their information, we were unable to  collect complete data on export licenses issued by Treasury, or Customs  and Border Protection seizures, Federal Bureau of Investigation (FBI) or  Immigration and Customs Enforcement investigations, or Justice criminal  convictions related to sanctions against Iran. We could not compile  comprehensive data on the number of ongoing FBI investigations because  the FBI considers such data sensitive. We were able to collect data on the  extent of civil penalties imposed by Treasury, which we assessed to be  sufficiently reliable for our purposes of showing the number of Iran- specific sanction violations since 2003. We were also able to collect data  on the number of post-shipment verification checks conducted by  Commerce in the past 5 years, which GAO has previously assessed as  reliable.
To determine the use of Iran-specific laws to impose sanctions, we  reviewed and compiled publicly available information on the Department  of State’s Web site (www.state.gov/t/isn/c15231.htm), reviewed relevant  Federal Register notices, and additional information that was declassified.  We determined that such data are sufficiently reliable for our purposes.  State officials explained that they do not collect data on direct sanction  results, emphasizing that such data falls within the purview of the  intelligence community. Regarding the targeted financial sanctions, we  were able to collect data on Iran-related designations made under the  nonproliferation sanctions, which we determined to be sufficiently  reliable. However, Treasury could not provide data on designations made  under the antiterrorism sanctions or specify the amount of assets frozen  under either set of financial sanctions.
To obtain U.S. government views on the impact of sanctions on Iran, we  collected publicly available testimonies, speeches, and other remarks  made by U.S. officials from the Departments of State, Commerce,  Treasury, and DHS from March 2006 through April 2007. We reviewed  these documents for statements regarding the U.S. government’s position  on the impacts of sanctions on Iran, factors that might lessen their impact,  UN sanctions, and other issues identified as key to the U.S. foreign policy  strategy for Iran. We also interviewed U.S. officials as well as a  judgmentally selected group of experts from think tanks and universities  and reviewed numerous scholarly articles and testimonies to gain  additional perspectives on the impact of sanctions on Iran. After reviewing  the literature on Iran sanctions and conducting a Web-based search of  universities and other institutions with research projects or issue areas  focusing on U.S. policies toward Iran, we identified a large field of experts.  To balance our selection of experts to interview, we identified the  institutions with which they were affiliated. These 39 institutions  represented a wide variety of perspectives on U.S. foreign policy and,  within them, we identified 56 scholars who have written papers and given  presentations on Iran sanctions. We then selected six prominent scholars,  each from an institution having a different political perspective, and with  multiple publications on Iran sanctions. After reviewing their publications  and speeches, we interviewed them on a set of questions concerning the  impact of unilateral and UN sanctions against Iran, factors that might  hinder impact, and other issues identified as key to U.S. foreign policy  strategy for Iran.
To obtain information on the impact of sanctions in deterring investment  in Iran’s energy sector, FACTS Global Energy provided us with a list of  recent major agreements between Iran and foreign firms and governments.  FACTS Global Energy explained, in response to our questions concerning  its methodology and the value of the contracts, that these are publicly  reported figures, though the actual worth of the contract may be slightly  higher or lower. While FACTS reports that some contracts are legally  binding, Iran has been involved in several instances in which these  contracts have not been fulfilled. We also substantiated many of these  reported agreements based on our review of a variety of sources, including  expert reports (Congressional Research Service , Economist  Intelligence, Global Insight, Energy Information Administration); scholarly  articles; testimony of senior U.S. officials; and other experts. Based on our  interviews and checks, we determine the data were sufficiently reliable for  the purposes of indicating the estimated value of publicly announced  binding contracts between foreign companies and Iran.
To determine the major factors that affect U.S. sanctions ability to  influence Iran’s behavior, we reviewed numerous scholarly articles,  professional economists’ publications, official U.S. documents, and  testimonies of officials and experts. In addition, we read open-source  documents, including newspaper and journal articles, both national and  global. We also interviewed a selected group of experts on Iran, met with  agency officials, and attended conferences on the subject. In addition, we  collected and analyzed data from several widely used databases of  international trade statistics, including International Monetary Fund (IMF)  Direction of Trade Statistics and International Financial Statistics National  Income database, the UN trade database, U.S. Department of Commerce  Trade Statistics, Department of Energy statistics, and United Nations  Conference on Trade and Development Foreign Direct Investment  statistics. We also reviewed and analyzed proprietary private sector data  from an internationally recognized consultant on Iran’s energy sector. We  have determined that these data are sufficiently reliable for the purposes  for which they were used in this report.
To determine the effect of U.S. sanctions on U.S. trade with Iran, we used  1986 to 2006 U.S. trade statistics from the Department of Commerce,  Bureau of the Census Web-based database. We converted these data from  nominal dollars to 2006 dollars using Department of Commerce, Bureau of  Economic Analysis U.S. export and import commodity price deflators  from the online database. We also analyzed these data at the 2-digit  commodity level to determine what goods the United States exported to  and imported from Iran in various years and the relative importance of  U.S. trade to Iran for various years encompassing the imposition of the  trade bans.
We used IMF Direction of Trade Statistics (May 2007 CD ROM) to analyze  trends in Iran’s trade, exports and imports, as well as Iran’s trade with the  world by major country groupings and individual partners, from 1986 to  2006. We determined that the U.S. commodity price deflators noted above  were not appropriate deflators for the purpose of analyzing Iran’s global  trade. Thus, we converted the annual export and import data, which IMF  reports in U.S. dollars, into 2006 dollars using the following methodology.  We converted annual dollar trade flows to Iranian rials using an exchange  rate conversion factor from the World Bank’s World Development  Indicators Online. This conversion factor, known as the DEC alternative  conversion factor, is, as a rule, the official exchange rate reported in the  IMF’s International Financial Statistics. This alternative conversion  factor differs from the official rate when the official exchange rate is  judged to diverge by an exceptionally large margin from the rate actually  applied in international transactions. In such cases, it employs a method  known as the Atlas method to average exchange rates for a given year and  the two preceding years, adjusted for differenced in rates of inflation  between the country and a specified groups of major trading countries.  For 1991 and 1992, for which the World Bank does not publish a DEC  alternative conversion factor for Iran, we constructed conversion rates by  applying rates of change exhibited in a purchasing power parity  conversion rate for Iran, from the World Development Indicators Online,  from 1990 to1993.
As Iran does not publish separate price indices for exports and imports, in  their place we use the Iranian gross domestic product (GDP) deflator from  the World Bank’s World Development Indicators Online to convert trade  flows into 2006 rials. We then use the official 2006 exchange rate (which  happens to be the same as the DEC conversion factor) to express these  trade flows in constant 2006 dollars. This methodology preserves the real  growth rates computed in real Iranian rials. Thus, it reflects how Iran may  view its global trade when adjusted for exchange rate anomalies and price  inflation.
We obtained general information on other countries’ trade in sensitive  goods (arms, aircraft, and nuclear equipment and technology) from  publicly available official sources, including State Department reports and  testimonies, Department of Justice data, the unclassified National  Intelligence Estimate, and CRS reports and testimonies. To identify  countries and the value of their exports to Iran of possibly sensitive items,  we used the global shipping company DHL’s online interactive product  classification tool to identify Harmonized System (HS) trade codes in the  export control category 0: Nuclear materials, facilities, equipment and  miscellaneous items. We then used the UN trade database to identify  countries and their reported value of exports to Iran for these items.
The Department of Energy’s Energy Information Administration (EIA)  provided data on Iran’s position in world oil and gas reserves and  production, gasoline consumption, and export earnings. We calculated  Iran’s oil export revenue as a percent of Iran’s GDP using reporting  countries’ crude oil import statistics from Iran and GDP data from the  most currently available IMF International Financial Statistics CD ROM  (December 2006). To determine top Iranian crude oil export destinations  and respective country shares, we used UN trade statistics at the 2-digit  commodity level (HS2709), for the period 1989 to 2005, and ranked  countries by dollar value and country share of crude oil exports from Iran.  For the top recipients of Iran’s crude oil, we also calculated each country’s  crude oil imports from Iran as a percent of that country’s total crude oil  imports to demonstrate the relative importance of Iranian crude oil to  these countries. We also used 2-digit commodity level (HS2710 and  HS2711) UN trade statistics to determine the major suppliers of refined  petroleum products to Iran.
We based our assessment of Iran’s near-term growth prospects on a  review of economists’ reports on Iran, including IMF’s 2007 Article IV  consultation with Iran and country reports on Iran from Economists  Intelligence Unit and Global Insight. We also utilized proprietary  information obtained from FACTS Global Energy regarding current  developments in Iran’s energy sector. We supplemented our review with  reports on Iran from other official sources, including CRS and the  Department of Energy’s EIA.
To determine the development and current status of Iran’s nuclear  program, we reviewed documents from the International Atomic Energy  Agency, an independent agency affiliated with the United Nations. We also  reviewed reports by the CRS specific to Iran’s nuclear program and  proliferation concerns. Finally, we reviewed the November 2007  unclassified National Intelligence Estimate on Iran. We also reviewed State  and other documents to examine Iran’s broad proliferation efforts. To  identify continued behavior by the government of Iran that establishes  continued support for terrorism, we reviewed the Department of State’s  2006 Country Report on Terrorism, other unclassified documentation  (such as Department of State testimonies and CRS reports) as well as  classified information.
To trace the development of UN sanctions against Iran for its efforts to  enrich uranium and possibly develop nuclear weapon capability, we  reviewed UN Security Council (UNSC) resolutions 1696 (2006), 1737  (2006), and 1747 (2007) and reports and documents from the UNSC 1737  Sanctions Committee. We also reviewed documentation from the  Department of State and CRS. The State Department’s Bureau for  International Organization Affairs declined to meet with us, which  precluded direct contact with the United Nations. The Bureau stated that  negotiations in the UNSC were ongoing at the time.
We conducted our review from November 2006 to November 2007 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: U.S. and UN Sanctions Targeting Iran
section_title: Appendix III: Sanctions Imposed Under the Law Currently Known as the Iran, North Korea, and Syria Nonproliferation Act
section_title: Appendix IV: Potential Investors in Iran’s Energy Sector
paragraphs: The following table illustrates various major agreements between Iran and  foreign firms and governments in Iran’s energy sector. The table is not  intended to imply a complete or thorough listing of foreign deals. Because  several of these deals are in progress, we are making the conservative  assumption that these agreements, at a minimum, express commercial  interest between Iran and the foreign party to trade, finance or underwrite  a project in Iran’s energy sector.
section_title: Appendix V: Comments from the Department of the Treasury
paragraphs: The following are GAO’s comments on the Department of the Treasury’s  letter dated December 6, 2007.
subsections: section_title: GAO Comments
paragraphs: 1.  GAO has acknowledged Treasury’s efforts to identify the impact of  financial sanctions as appropriate in the report.  While Treasury  assesses such impact, we maintain that a larger impact assessment of  all U.S. sanctions has never been undertaken.  2.  Our report acknowledges various broad positive impacts of sanctions.   3.  Treasury’s letter included an attachment with numerous technical  comments that we incorporated into the report as appropriate.
section_title: Appendix VI: Comments from the Department of Commerce
paragraphs: The following are GAO’s comments on the Department of Commerce’s  letter dated November 1, 2007.
subsections: section_title: GAO Comments
paragraphs: 1.  We reviewed Commerce’s classified technical comment and  considered it in revising our report.  2.  We incorporated this information into the report.
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the person named above, Tet Miyabara, Assistant Director;  Kathryn Bernet; Lynn Cothern; Aniruddha Dasgupta; Martin De Alteriis;  Leslie Holen; Bruce Kutnick; Grace Lui; Roberta Steinman; Anne Stevens;  and Eddie Uyekawa made key contributions to this report.