Order Code RS20871
Updated October 12November 15, 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 1400 (passed by
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
The Iran Sanctions Act (ISA), originally called the Iran-Libya Sanctions Act (ILSA),
was introduced during a tightening of enacted in a context of tightening 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 12959 (May 6, 1995), banning U.S. trade with and
investment in Iran. The rationale was that these sanctions would curb the strategic threat
from Iran by hindering its abilityattempts 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 Russia) were un-developedundeveloped when ISA
was first considered.
U.S. allies refused to join the U.S. sanction, and the Clinton Administration 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 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, withWith input from the Clinton Administration, some in Congress developed legislation
to sanction such investment. On September 8, 1995, Senator Alfonse D’Amato
introduced the “Iran Foreign Oil Sanctions Act” to sanction foreign firms’ exports to Iran
of energy technology. The bill passed the Senate on December 18, 1995 (voice vote) but,
acknowledging the difficulty of monitoring all trade with Iran, sanctioned foreign
investment in Iran’s energy sector. On December 20, 1995, the Senate passed a version
applying the 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
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) includes (1) denial of Export-Import Bank loans, credits, or credit
guarantees for U.S.
exports to the sanctioned entity; (2) denial of licenses for the U.S.
export of military or
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
Economic Powers Act (IEEPA, 50 U.S.C. 1701). In the original law, the President may
waive the
sanctions on Iran if the parent country of the violating firm agrees to impose economic
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 terminates 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, European Union states
opposed ISA as an extraterritorial application of U.S. law and threatened counter-action
in the World Trade Organization (WTO). In April 1997, the United States and the EU
agreed to avoid a trade confrontation over it (and a separate “Helms-Burton” Cuba
Cuba sanctions law, P.L. 104-114). This104114). The 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 partners, Gazprom of Russia
and Petronas of
Malaysia to develop phases 2 and 3 of the 25-phase South Pars gas field.
In exchange, the The EU pledged
to increase cooperation with the United States on non-proliferation and counter-terrorism,
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.
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proliferation and counter-terrorism, and the Administration indicated that EU firms would
likely receive waivers for future similar investments and the Administration indicated no penalties would be imposed on future similar
investments by EU firms in Iran.
ISA was to sunset on August 5, 2001, 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 to try to engage the relatively moderate Iranian
President Mohammad Khatemi. In 1999, Libya yielded for trial the Pan Am 103
suspects.
However, proponents of renewal maintained that both countries would view
its expiration
as a concession. Renewal, and 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 preexistingpre-existing 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 sunset on August 5,
2006. Some Members, concerned that foreign 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 prodemocracy activitiespro-democracy
activists in Iran. These bills increased the requirements on the Administration
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). 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 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 (a modification of H.R. 282,
was ), was
introduced to address Administration concerns that H.R. 282 and S. 333 did not
allow allow
sufficient Administration flexibility. As did H.R. 282, it made sanctionable sales
of of
WMD-useful technology or “destabilizing numbers and types of” advanced
conventional conventional
weapons, and added a required determination that Iran “poses no significant
threat” in
order to terminate application to Iran. Unlike H.R. 282, 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 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 moneylaunderingmoney-laundering 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. 109-293109293). It changed the name of ILSA to the Iran Sanctions Act (ISA).
Effectiveness and Ongoing Challenges
Some believe ISA has 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 avoidedhas been relatively limited. The projects
listed in the table, all
drawn from mainstream press reports, are said to be under review
for ISA sanctions by
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the State Department (Bureau of Economic Affairs), but no
determinations of violation
have been announced. State Department reports to Congress
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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 now producing gas or oil. On the other hand, some experts believe that investment
would have been much more extensive if not for both ISA as well as Iran’s aggressive
negotiating styleSome experts believe that what
investment has been deterred has been caused more by Iran’s aggressive negotiating style
than by ISA. The 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 Others maintain
that Iran’s gas sector, virtually non-existent in 1998, is becoming an increasingly
important factor in Iran’s energy future because of foreign investment.
ISA’s definition of “investment” does not specifically include oil or gas purchases
from Iran. Theprovide for sanctions on oil or gas
purchases from Iran. However, the Clinton and Bush Administration position has interpretations have
been that the construction
of energy routes to or through Iran would constitute
sanctionable activity because, as
stated in the ISA definition of “investment” (Section 14
(9)(A)), such routes would develop
Iran’shelp Iran develop its 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
route became operational in 2005. However,
neither Administration imposed sanctions on another
on a 1997 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 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 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. ItConstruction of oil refineries or
petrochemical plants in Iran would appear to constitute projects that develop Iran’s
petroleum resources. However, 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, reported
in June 2007,
would constitute sanctionable investment under ISA.
Further tests are loomingmajor tests loom, and some of the large, long-term (preliminary) deals
between Iran and Indian, Chinese, and Malaysian firms, listed below, have the potential
to significantly enhance Iran’s energy export prospects. 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
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...)
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a gas pipeline from Iran to India, through Pakistan, with a possible extension to China.
All three governments have appeared committed to the $4 billion to $7 billion project,
which was planned to begin construction in 2007 and 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
will take about three years to complete after work begins. Press reports say India
did not sign a reported “finalization” of a deal on the project, signed by Iran and Pakistan
on November 11, 2007. The two countries reportedly are requiring that India decide
within a few months whether or not it will join the project; previously, the three countries
had difficulty agreeing on such issues as 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. U.S. officials are having some success persuading European
governments to limit new 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. 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 Amendmentsrestrictions on
financing are, according to Iranian and outside observers, making it more difficult to fund
energy industry and other projects in Iran. British Prime Minister Gordon Brown said on
November 12, 2007 that Britain might propose, as part of a new U.N. Security Council
Resolution addressing Iran’s nuclear program, a worldwide ban on financing of energy
projects in Iran – the equivalent of a worldwide adoption of the principles of ISA – and
possibly a ban on all financial dealings with Iran’s banks. Some have speculated that the
U.N. Security Council — or a coalition of countries acting outside the Council — might
impose at some point a worldwide ban on gasoline sales to Iran. On October 25, 2007,
several major Iranian banks (Saderat, Melli, Mellat, and related banks) were designated
by the Bush Administration, along with Revolutionary Guard and Guard business entities,
as ineligible to deal with U.S. persons (or banks) under Executive order 13224 (terrorism
supporting entities) and Executive order 13382 (proliferation entities).
Proposed Further Amendments in the 110th Congress
In the 110th Congress, H.R. 1400 contains numerous provisions, some of which
pertain to ISA, others of which do not. The 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 to develop a liquified natural gas (LNG) sector 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. (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 wellH.R. 2880 would apply ISA sanctions to sales to Iran
5
(...continued)
Journal, June 24, 2005, p. A4.
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of refined petroleum resources after December 31, 2007. 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 to sales to Iran of refined petroleum resources after December 31, 2007. The
5
(...continued)
Journal, June 24, 2005, p. A4.
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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.(For all
the major provisions of H.R. 1400, see CRS Report RL32048, Iran: U.S. Concerns and
Policy Responses.)
Post-1999 Foreign Investment in Iran’s Energy Sector
Date
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
Oct. 2004
gas purchases for 30 years
(India)
known)
Feb. 2004 Azadegan (oil)
June 2006 Gamsar block
June 2006 Gamsar block (oil)
Sinopec (China)
$50 million
Feb. 2004 Azadegan (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)
Construction of oil refinery in Iran.
Announced October 2007, just after Essar
deal to acquire Minnesota Steel LLC
300,000 bpd
?
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)
Essar Steel (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
$8 billion
300,000 bpd
refined