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. 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.) 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.) 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.