Order Code RS20871
Updated July 9October 12, 2007
The Iran Sanctions Act (ISA)
Kenneth Katzman
Specialist in Middle Eastern Affairs
Foreign Affairs, Defense, and Trade Division
Summary
No firms have been sanctioned under the Iran Sanctions Act (ISA). Set to expire
in August 2006, legislation in the 109th Congress (the “Iran Freedom Support Act, P.L.
109-293) extended it until December 31, 2011, terminated application to Libya, and
added provisions, although with substantial Administration flexibility in
implementation. Proposed ISA-related legislation in the 110th Congress, such as H.R.
1400, which passed the House on September 25, 2007, would remove some of that
flexibility. See also CRS Report RL32048, Iran:
U.S. Concerns and Policy Responses,
by Kenneth Katzman.
Background and Original Passage of ISA
The Iran Sanctions Act (ISA), originally called the Iran-Libya Sanctions Act (ILSA), was
was introduced during a tightening of U.S. sanctions on Iran during the Clinton
Administration. In response to Iran’s stepped up nuclear program and its support to
terrorist organizations (such as Hizbollah, Hamas, and Palestine Islamic Jihad), President Clinton
issued Executive Order 12957 (March 15, 1995), banning U.S. investment in Iran’s
energy sector, and, President
Clinton issued Executive Order 12959 (May 6, 1995), banning U.S. trade with and
investment in Iran. The Clinton Administration and Congress maintainedrationale was that these
sanctions would curb the strategic threat
from Iran by hindering its ability to modernize
its key petroleum sector, which generates
about 20% of Iran’s GDP. Iran’s onshore oil
fields, as well as its oil industry
infrastructure, are aging and need substantial investment,
and its large natural gas
resources (940 trillion cubic feet, exceeded only by those of
Russia) were not developed at all at the time ISA un-developed when ISA
was first considered.
U.S. allies refused to sanction Iran in the mid-1990sjoin the U.S. sanction, and the Clinton Administration
and and
Congress believed that it might be necessary for the United States to try to deter their
investment in Iran. The opportunity to do so came in November 1995, when Iran
launched its first major effort to open first
opened its energy sector to foreign investment. To
accommodate Iran’s philosophy to
retain control of its national resources, Iran developed
a “buy-back” investment program
in which foreign firms recoup their investments from
the proceeds of oil and gas
discoveries but do not receive equity stakes.
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Some in Congress, with input from the Clinton Administration, developed legislation
to sanction such investment. On September 8, 1995, Senator Alfonse D’Amato
introduced the “Iran Foreign Oil Sanctions Act of 1995” to sanction foreign firms’ exports
to Iran
of energy technology. The bill passed the Senate on December 18, 1995 (voice
vote) but, in consideration of
acknowledging the difficulty of monitoring foreign exports to Iran,
all trade with Iran, sanctioned foreign
investment in Iran’s energy sector. On December 20, 1995, the Senate
passed anothera version
applying all provisionsthe legislation to Libya as well, which was refusing to
yield for trial the two
Libyan intelligence agents suspected in the December 21, 1988,
bombing of Pan Am 103.
The House passed its version of the bill, H.R. 3107, on June
19, 1996 (415-0), and then
concurred on a slightly different Senate version adopted on
July 16, 1996 (unanimous
consent). It was signed on August 5, 1996 (P.L. 104-172).
Key Provisions. ISA requires the President to impose at least two out of a menu
of seven sanctions on foreign companies (entities, persons) that make an “investment” of
more than $20 million in one year in Iran’s energy sector.1 The sanctions menu (Section 6)
are:
6) includes (1) denial of Export-Import Bank loans, credits, or credit guarantees for U.S. exports
exports to the sanctioned entity; (2) denial of licenses for the U.S. export of military or militarilyuseful
militarily-useful technology to the entity; (3) denial of U.S. bank loans exceeding $10
million in one
year to the entity; (4) if the entity is a financial institution, a prohibition on
its service as
a primary dealer in U.S. government bonds; and/or a prohibition on its
serving as a
repository for U.S. government funds (each counts as one sanction); (5)
prohibition on
U.S. government procurement from the entity; and (6) restriction on
imports from the
entity, in accordance with the International Emergency Economic
Powers Act (IEEPA,
50 U.S.C. 1701 and following). In the original law, the President may waive the
sanctions on Iran if the parent country of the violating firm agrees to impose economic
sanctions on Iran (Section 4(c)) or if he certifies that doing so is important to the U.S.
national interest (Section 9(c)). It terminatedterminates application to Iran if Iran ceases its efforts
to acquire WMD and is removed from the U.S. list of state sponsors of terrorism. Its
application to Libya terminated when the President determined on April 23, 2004, that
Libya had fulfilled the requirements of all U.N. resolutions on Pan Am 103.
Traditionally skeptical of imposing economic sanctions as a policy tool, European Union
states states
opposed ISA as an extraterritorial application of U.S. law and threatened counteraction counter-action
in the World Trade Organization (WTO). In April 1997, the United States and the
EU formally agreed to try EU
agreed to avoid a trade confrontation over it (and a separate “HelmsBurton” Cuba Helms-Burton” Cuba
sanctions law, P.L. 104-114). TheThis agreement contributed to a May 18,
1998, decision by
the Clinton Administration to waive ILSA sanctions (“national interest”
grounds —
Section 9(c)) on the first project determined to be in violation: a $2 billion2
contract,
signed in September 1997, for Total SA of France and its minority partners,
Gazprom of Russia
and Petronas of Malaysia to develop phases 2 and 3 of the 25-phase
South Pars gas field. For its part
In exchange, the EU pledged to increase cooperation with the United States on non-
1
For Libya, the threshold was $40 million, and sanctionable activity included exportation to
Libya of a broad range of technology of which the export to Libya was banned by Pan Am 103related Security Council Resolutions 748 (March 31, 1992) and 883 (November 11, 1993).
2
Dollar figures for energy investment contracts with Iran represent public estimates of the
amounts investing firms are expected to spend during the life of the project, which might in some
cases be several decades.
CRS-3
States on non-proliferation and counter-terrorism. The, and the Administration indicated that EU
firms would
likely receive waivers for future similar projectsinvestments in Iran.
ISA was to sunset on August 5, 2001 (5 years after enactment), in the context of
somewhat improved U.S.
relations with both Iran and Libya. During 1999 and 2000, the
Clinton Administration
had eased the trade ban on Iran somewhat in response to the more
moderate policies of Iran’s to try to engage the relatively moderate Iranian
President Mohammad Khatemi. In 1999, Libya yielded for
trial of the Libyan suspects in trial the Pan Am 103. suspects.
However, proponents of renewal maintained
that both countries would view its expiration
as a concession. Renewal legislation was
enacted in the 107th Congress (P.L. 107-24,
August 3, 2001); it changed the definition of
investment to treat any additions to pre-existingpreexisting investment as new investment, and
required an Administration report on ISA’s
effectiveness within 24 to 30 months of
enactment. That report was submitted to
Congress in January 2004 and did not
recommend that ISA be repealed.
Modifications in the 109th Congress
. During the 109th Congress, with U.S.
concern about Iran’s nuclear program
increasing, ISA was again to sunsetto terminate on August 5,
2006. Some Members, concerned that its
provisions were not being applied to purported violators because of Administration
diplomatic considerationsforeign companies had begun to openly ignore
ISA, introduced the “Iran Freedom and Support Act” (H.R. 282,
S. 333) to extend ISA
indefinitely, to close some of its perceived loopholes, and to authorize
funding for pro-democracyprodemocracy activities in Iran. These bills increased the requirements on
the Administration to justify waiving sanctions on companies determined to have violated
ISA, made exports to Iran of WMD-useful technology or “destabilizing numbers and
types of” advanced conventional weaponry sanctionable, set a 90-day time limit for the
to justify waiving sanctions on violators and, most notably, would have set a 90-day time
limit for the Administration to determine whether an investment constitutes a violation
of ISA (there
is no time limit in the original law), and increased the threshold for terminating ISA. H.R.
. H.R. 282 also would have cut U.S.
foreign assistance to countries whose companies have violated ISA and
applied the U.S.
trade ban on Iran to foreign subsidiaries of U.S. companies. H.R. 282
was reported out by the House International Committee on March 15, 2006, by a vote of
37-3, with slight amendment. The House passed it on April 26, 397-21. S. 333 had 61
co-sponsors as of June 21, 2006. To prevent ISA expiration while these bills were being
considered, H.R. 5877, extending it until September 29, 2006, was passed and signed on
August 4, 2006 (P.L. 109-267 was passed by the
House on April 26, 397-21. To prevent ISA expiration while these bills were being
considered, there was a temporary extension until September 29, 2006 (P.L. 109-267,
signed August 4, 2006).
Toward the end of the 109th Congress, H.R. 6198, a modified version of H.R. 282,
was introduced to address Administration concerns that H.R. 282 and S. 333 did not
allow sufficient Administration flexibility. ItAs did H.R. 282, it made sanctionable sales
of WMD-useful
technology or “destabilizing numbers and types of” advanced
conventional weapons, and added and
adds a required determination that Iran “poses no significant
threat” in order to terminate
application to Iran, a provision close to that contained in. Unlike H.R. 282. It, it recommended, but
did not require, a 180-day time limit for a determination of violation and changed the
multi-lateral sanctions waiver provision (“4(c) waiver,” see above) to a national security
interest waiver. The law also recommended against U.S. nuclear agreements with
countries that have supplied nuclear technology to Iran, extended ISA until December 31,
2011, dropped Libya from ISA, and contained a provision to try to prevent moneylaundering by criminal groups, terrorists, or proliferators. It was passed by the House and
Senate by voice vote and unanimous consent, respectively, and was signed on September
30, 2006 (P.L. 109-293). It changed the name of ILSA to the Iran Sanctions Act (ISA).
CRS-4
Effectiveness and Ongoing Challenges
Some believe ILSAISA slowed Iran’s energy development initially, but, as shown by the
projects agreed to below, its deterrent effect appeared to weaken as foreign companies
began to perceive that sanctions could be avoided. The projects listed in the table, all
drawn from mainstream press reports, are said to be are said to be
under review for ISA sanctions by
CRS-4
the State Department (Bureau of Economic Affairs),
but no determinations of violation
have been announced. State Department reports to Congress on
ISA, required every six
months, state that U.S. diplomats raise U.S. policy concerns about
Iran with both
investing companies and their parent countries. Most of the projects agreed
before 2004 are underway and, in many cases,
are now producing gas or oil. Still, some
energyOn the other hand, some experts believe that investment
would have been much more extensive if not for
both ISA as well as Iran’s purported aggressive aggressive
negotiating style. The new investment
investment has not boosted Iran’s sustainable oil production
significantly — it is still about 4 million
barrels per day (mbd)3 — and an analysis
published by the National Academy of Sciences
says that Iranian oil exports are declining
to the point where Iran might have negligible
exports of oil by 2015.4 Some questioned the study’s conclusions, and othersOthers maintain
that Iran’s gas sector, virtually non-existent in 1998, is becoming an increasingly
important factor in Iran’s energy future as a resultbecause of foreign investment.
ISA’s definition of “investment” does not specifically mentioninclude oil or gas purchases
from Iran, or the building of energy transit routes to or through Iran. However, the
. The Clinton and Bush Administration position has been that the construction of energy routes
would violate the law, because these routes would “directly and significantly contribut[e]
to the enhancement of Iran’s ability to develop petroleum resources.”5 The Clinton
of energy routes to or through Iran would constitute sanctionable activity because, as
stated in the ISA definition of “investment” (Section 14), such routes would develop
Iran’s petroleum resources. The Clinton Administration used that argument to deter
energy routes involving Iran and thereby
successfully promote an alternate route from
Azerbaijan (Baku) to Turkey (Ceyhan). This
; this route became operational in 2005. However,
neither Administration imposed sanctions
on another project viewed as beneficial to U.S.
ally Turkey: a natural gas pipeline from
Iran to Turkey (each country constructing the
pipeline on its side of their border). In July
1997, the State Department said that the
project did not violate ISA because Turkey would
be importing gas from Turkmenistan,
not Iran, and would therefore not benefit Iran’s
energy sector directly. However, direct
Iranian gas exports to Turkey began in 2001, in
apparent contravention of Turkey’s pledges
pledges and, as shown in the table, in July 2007 a preliminary agreement between Iran and
Turkey would expand that arrangement to transshipment of Iranian gas to Europe, via the
Iran-Turkey pipeline. It is not clear whether or not Iranian
investments in energy projects
in other countries, such as reputed Iranian investment to
help build five oil refineries in
Asia (China, Indonesia, Malaysia, and Singapore) and in
Syria, Syria, reported in June 2007,
would constitute sanctionable investment under ISA.
Further tests of ISA are looming, and some of the large, long-term deals (preliminary) deals
between Iran
and Indian, Chinese, and Malaysian firms, listed below, have the potential
to significantly
enhance Iran’s energy export prospects. On the other hand, some of these deals are
believed to be preliminary agreements that might not necessarily be implemented. Most
of the value of these agreements includes long-term contracts to purchase Iranian oil and
Most of the value of these
agreements includes long-term contracts to purchase Iranian oil and gas, and the exact
investment amounts for the exploration and production phases of these projects are not
known. A related deal, particularly those involving Indian firms,5 is the construction of
3
Testimony of Deputy Assistant Secretary of State Anna Borg before the House International
Relations Committee, Subcommittee on the Middle East and Central Asia. June 17, 2003.
4
Stern, Roger. “The Iranian Petroleum Crisis and United States National Security,” Proceedings
of the National Academy of Sciences of the United States of America. December 26, 2006.
5
This definition of sanctionable activity is contained in Section 5(a) of ILSA.
CRS-5
gas, and the exact investment amounts for the exploration and production phases of these
projects are not known. A related deal, particularly those involving Indian firms,6 is the
construction of Some of the Indian companies that reportedly might take part in the pipeline project are ONGC
Corp.; GAIL Ltd.; Indian Oil Corp.; and Bharat Petroleum Corp. Some large European
companies have also expressed interest. See Solomon, Jay and Neil King. “U.S. Tries to
Balance Encouraging India-Pakistan Rapprochement With Isolating Tehran.” Wall Street
(continued...)
CRS-5
a gas pipeline from Iran to India, through Pakistan, with a possible
extension to China.
All three governments have repeatedly reiterated their commitment
appeared committed to the $4 billion to $7 billion project,
which iswas planned to begin construction in 2007 and
to be completed by 2010. Since January 2007, the three countries have agreed on various
outstanding issues, including a pricing formula and the Indian and Pakistani split of the
gas supplies, but talks continue on several unresolved issues, including the pipeline route,
security, transportation tariffs, and related issues. U.S. officials, including Secretary of
State Rice, have “expressed U.S. concern” about the pipeline deal or have called it
“unacceptable,” but no U.S. official has to be completed by 2010. However,
press reports say India has not attended two recent meetings on the project, possibly
suggesting its interest is waning. The three countries have not reached firm agreement
on all the various issues, including a pricing formula, pipeline routing, transportation
tariffs, pipeline security, and the Indian and Pakistani split of the gas supplies. U.S.
officials, including Secretary of State Rice, have on several occasions “expressed U.S.
concern” about the pipeline deal or have called it “unacceptable,” but no U.S. official has
stated outright that it would be sanctioned.
ISA is not the only mechanism available to the United States to try to limit
investment in Iran. Undersecretary of State Burns told Congress on March 29, 2007, that
U.S. officials are having some success persuading European
governments to limit new
export credits guarantees to Iran. This result is due not only to U.S. diplomacy but also
to U.S. presentations of the financial risk posed by providing credit to Iran. The
Organization for Economic Cooperation and Development (OECD) in 2006 raised the
financial risk rating for Iran. The U.S. Treasury and State Departments have begun using
U.S. financial regulations in an apparently successful effort to pressure European banks
export credits guarantees to Iran, and to persuade European
banks not to provide letters of credit for exports to Iran or to process dollar transactions for
Iranian banks. Undersecretary of State Burns and Undersecretary of the Treasury Stuart
Levey testified on March 21, 2007, that “... many leading foreign banks have either scaled
back dramatically or terminated entirely their Iran-related business ... concluding that they
simply did not wish to be a banker for a regime that deliberately conceals the nature of its
illicit business.”
for Iranian banks. This result is due not only to U.S. diplomacy but also to U.S.
presentations of the financial risk posed by providing credit to Iran. The latest success
of the policy came with an announcement in July 2007 by Deutsche Bank that it would
seek no new business with Iran. The restrictions on financing are, according to Iranian
and outside
observers, making it more difficult to fund energy industry and other projects
in Iran.
Proposed Further Amendments
In the 110th Congress, H.R. 1400 contains numerous provisions, some of which
pertain to ISA, others of which do not. For all its major provisions, see CRS Report
RL32048, Iran: U.S.Concerns and Policy ResponsesThe bill passed the House on September 25, 2007
by a vote of 397-16. Among ISA-related provisions,
H.R. 1400 would remove the
Administration’s ability to waive application of sanctions
under ISA under Section 9(c),
national interest grounds. However, the bill would not
impose on the Administration a
time limit to determine whether a project is sanctionable.
Both it and other bills, its
Senate counterpart S. 970, and another House bill, H.R. 957,
(the latter passed the House
on July 31, 2007) would expand the definitions of sanctionable entities to official credit
guarantee agencies,
such as France’s COFACE and Germany’s Hermes, and apply ISA
sanctions to
investment in Iran’s efforts investment to develop a liquified natural gas (LNG) sector; Iran currently
in Iran, which
currently has no LNG export terminals. H.R. 1400 also would require the President to
impose the
ban on U.S. procurement from any entity sanctioned under ISA, and impose
one other of
the menu of sanctions. Another bill, H.R. 1357, would require government pension funds
6
Some of the Indian companies that reportedly might take part in the pipeline project are ONGC
Corp.; GAIL Ltd.; Indian Oil Corp.; and Bharat Petroleum Corp. Some large European
companies have also expressed interest. See Solomon, Jay and Neil King. “U.S. Tries to
Balance Encouraging India-Pakistan Rapprochement With Isolating Tehran.” Wall Street
Journal, June 24, 2005, p. A4.
CRS-6
to divest of shares the menu of sanctions. (For all the major provisions of H.R. 1400, see CRS
Report RL32048, Iran: U.S. Concerns and Policy Responses.)
Another bill, H.R. 1357, would require government pension funds to divest of shares
in firms that have made ISA-sanctionable investments in Iran’s energy
sector, and call on
private pension funds to divest as well. Another bill, H.R. 2347, which passed the House
on July 31, 2007, would protect from shareholder lawsuits fund managers that divest from
firms that have made ISA-sanctionable investments. H.R. 2880 would apply ISA
sanctions toH.R. 2880 would make
sanctionable any sales to Iran of refined petroleum resources after December 31, 2007.
This latter bill apparently seeks to express support for possible U.N. Security Council
sanctions, said to be under consideration, to ban The
5
(...continued)
Journal, June 24, 2005, p. A4.
CRS-6
U.N. Security Council — or a coalition of countries acting outside the Council — is said
to be considering a worldwide ban on gasoline sales to Iran.
Post-1999 Foreign Investment in Iran’s Energy Sector
Date
Company(ies)
Value
Feb. 1999 Doroud (oil)
Totalfina Elf (France)/ENI
(Italy)
$1 billion
205,000 bpd
Apr. 1999 Balal (oil)
Totalfina Elf/ Bow Valley
(Canada)/ENI
$300 million
40,000 bpd
Nov. 1999 Soroush and Nowruz (oil)
Royal Dutch Shell
$800 million
190,000 bpd
Apr. 2000 Anaran (oil)
Norsk Hydro (Norway)
July 2000
Field
Phase 4 and 5, South Pars (gas) ENI
Mar. 2001 Caspian Sea oil exploration
GVA Consultants (Sweden)
June 2001 Darkhovin (oil)
ENI
May 2002 Masjid-e-Soleyman (oil)
Sep. 2002
Phase 9 and 10, South Pars
(gas)
?
$1.9 billion
2 billion
cu.ft./day
$225 million
?
$1 billion
160,000 bpd
Sheer Energy (Canada)
$80 million
25,000 bpd
LG (South Korea)
$1.6 billion
?
$2.65 billion
3 billion
cu.ft./day
Oct. 2002 Phase 6, 7, 8, South Pars (gas) Statoil (Norway)
$200 million Japan
stake
260,000 bpd
$70 billion (value
Yadavaran (oil); deal includes Sinopec (China) and ONGC
of exploration not
gas purchases for 30 years
(India)
known)
300,000 bpd
Feb. 2004 Azadegan (oil)
Oct. 2004
Output Goal
June 2006 Gamsar block (oil)
Inpex (Japan) 10% stake
Sinopec (China)
Totals
$50 million
?
$80 billion+
Oil: 1.2 million
bpd
Gas: 5 billion
cu.ft/day+
Pending Deals/Preliminary Agreements
Golshan and Ferdows (offshore gas,
includes downstream development and
transportation)
SKS Ventures (Malaysia)
North Pars Gas Field (offshore gas)
China National Offshore
Oil Co.
Phase 13 and 14 - South Pars (gas);
includes building a liquified natural gas
(LNG) terminal
Royal Dutch Shell and
Repsol (Spain)
$20 billion
$16 billion
(includes
purchases of the
gas
$10 billion
100 million
cu.ft/day
3.6 billion
cu.ft/day
?Field
Feb. 1999 Doroud (oil)
Apr. 1999 Balal (oil)
Nov. 1999 Soroush and Nowruz (oil)
Apr. 2000 Anaran (oil)
Company(ies)
Totalfina Elf (France)/ENI
(Italy)
Totalfina Elf/ Bow Valley
(Canada)/ENI
Royal Dutch Shell
Norsk Hydro (Norway)
July 2000 Phase 4 and 5, South Pars (gas) ENI
Mar. 2001 Caspian Sea oil exploration
June 2001 Darkhovin (oil)
May 2002 Masjid-e-Soleyman (oil)
Phase 9 and 10, South Pars
Sep. 2002
(gas)
GVA Consultants (Sweden)
ENI
Sheer Energy (Canada)
LG (South Korea)
Oct. 2002 Phase 6, 7, 8, South Pars (gas) Statoil (Norway)
Value
Output Goal
$1 billion
205,000 bpd
$300 million
40,000 bpd
$800 million
$225 million
$1 billion
$80 million
190,000 bpd
?
2 billion
cu.ft./day
?
160,000 bpd
25,000 bpd
$1.6 billion
?
$2.65 billion
3 billion
cu.ft./day
$1.9 billion
$200 million Japan
stake
$70 billion (value
Yadavaran (oil); deal includes Sinopec (China) and ONGC
Oct. 2004
of exploration not
gas purchases for 30 years
(India)
known)
Feb. 2004 Azadegan (oil)
June 2006 Gamsar block (oil)
Inpex (Japan) 10% stake
Sinopec (China)
Pending Deals/Preliminary Agreements
Golshan and Ferdows (offshore gas,
SKS Ventures (Malaysia)
includes downstream development)
Phase 13 and 14 - South Pars (gas);
includes building a liquified natural gas
(LNG) terminal
Phase 22, 23, 24 - South Pars (gas), plus
agreement to transport Iranian gas to
Europe (signed July 13, 2007)
Construction of a petrochemicals plant in
Iran, near South Pars gas field. Might
produce rubber, plastics, other petroleumderived products. (Announced Sept. 2007)
300,000 bpd
?
Oil: 1.2 million
bpd
$80 billion+
Gas: 5 billion
cu.ft/day+
Totals
North Pars Gas Field (offshore gas)
$50 million
260,000 bpd
China National Offshore
Oil Co.
Royal Dutch Shell and
Repsol (Spain)
Turkish Petroleum
Company (TPAO)
GAIL-India, Jaipan
Industries Ltd. (India)
$20 billion
100 million
cu.ft/day
$16 billion
(includes gas
purchases
3.6 billion
cu.ft/day
$10 billion
?
$3 - $4 billion
2 billion cu.
ft/day
$2.3 billion