Order Code RS20871
Updated July 9, 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, 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, originally called the Iran-Libya Sanctions Act (ILSA), 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 (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 Executive Order 12959 (May 6, 1995), banning U.S. trade with and
investment in Iran. The Clinton Administration and Congress maintained 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 was first considered.
U.S. allies refused to sanction Iran in the mid-1990s, 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
launched its first major effort to open 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 the difficulty of monitoring foreign exports to Iran,
sanctioned foreign investment in Iran’s energy sector. On December 20, 1995, the Senate
passed another version applying all provisions 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 (Section 6)
are: (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 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 terminated 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 economic sanctions as a policy tool, 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 formally agreed to try to avoid a trade confrontation over it (and a separate “Helms-
Burton” Cuba sanctions law, P.L. 104-114). 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 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, the EU pledged to increase cooperation with the United
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 103-
related 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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States on non-proliferation and counter-terrorism. The Administration indicated that EU
firms would likely receive waivers for future similar projects.
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 President Mohammad Khatemi. In 1999, Libya yielded for
trial of the Libyan suspects in Pan Am 103. 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-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 to terminate on August 5, 2006. Some Members, concerned that its
provisions were not being applied to purported violators because of Administration
diplomatic considerations, introduced the “Iran Freedom and Support Act” (H.R. 282,
S. 333) to extend ISA indefinitely, to close some perceived loopholes, and to authorize
funding for pro-democracy 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
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.
282 also 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).
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. It made sanctionable sales of WMD-useful
technology or “destabilizing numbers and types of” advanced conventional weapons 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 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 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 money-
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. 109-293). It changed the name of ILSA to the Iran Sanctions Act (ISA).

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Effectiveness and Ongoing Challenges
Some believe ILSA 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 are said to be
under review for ISA sanctions by the State Department (Bureau of Economic Affairs),
but no determinations 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, now producing gas or oil. Still, some
energy experts believe that investment would have been much more extensive if not for
both ISA as well as Iran’s purported aggressive negotiating style. The new 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 others maintain
that Iran’s gas sector, virtually non-existent in 1998, is becoming an increasingly
important factor in Iran’s energy future as a result of foreign investment.
ISA’s definition of “investment” does not specifically mention oil or gas purchases
from Iran, or the building of energy transit routes to or through Iran. However, 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
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 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. 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, would constitute sanctionable investment under ISA.

Further tests of ISA are looming, and some of the large, long-term 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
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.

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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 a gas pipeline from Iran to India, through Pakistan, with a possible
extension to China. All three governments have repeatedly reiterated their commitment
to the $4 billion to $7 billion project, which is 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 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
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.” 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 Responses. 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,
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 to develop a liquified natural gas (LNG) sector; Iran 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.

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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. H.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 gasoline sales to Iran.
Post-1999 Foreign Investment in Iran’s Energy Sector
Date
Field
Company(ies)
Value
Output Goal
Totalfina Elf (France)/ENI
Feb. 1999 Doroud (oil)
$1 billion
205,000 bpd
(Italy)
Totalfina Elf/ Bow Valley
Apr. 1999 Balal (oil)
$300 million
40,000 bpd
(Canada)/ENI
Nov. 1999 Soroush and Nowruz (oil)
Royal Dutch Shell
$800 million
190,000 bpd
Apr. 2000 Anaran (oil)
Norsk Hydro (Norway)
?
2 billion
July 2000
Phase 4 and 5, South Pars (gas) ENI $1.9
billion
cu.ft./day
Mar. 2001 Caspian Sea oil exploration
GVA Consultants (Sweden)
$225 million
?
June 2001 Darkhovin (oil)
ENI
$1 billion
160,000 bpd
May 2002 Masjid-e-Soleyman (oil)
Sheer Energy (Canada)
$80 million
25,000 bpd
Phase 9 and 10, South Pars
Sep. 2002
LG (South Korea)
$1.6 billion
?
(gas)
3 billion
Oct. 2002
Phase 6, 7, 8, South Pars (gas) Statoil (Norway)
$2.65 billion
cu.ft./day
$200 million Japan
Feb. 2004 Azadegan (oil)
Inpex (Japan) 10% stake
260,000 bpd
stake
$70 billion (value
Yadavaran (oil); deal includes
Sinopec (China) and ONGC
Oct. 2004
of exploration not
300,000 bpd
gas purchases for 30 years
(India)
known)
June 2006 Gamsar block (oil)
Sinopec (China)
$50 million
?
Oil: 1.2 million
bpd
Totals
$80 billion+
Gas: 5 billion
cu.ft/day+
Pending Deals/Preliminary Agreements
Golshan and Ferdows (offshore gas,
$20 billion
100 million
includes downstream development and
SKS Ventures (Malaysia)
cu.ft/day
transportation)
$16 billion
China National Offshore
(includes
3.6 billion
North Pars Gas Field (offshore gas)
Oil Co.
purchases of the
cu.ft/day
gas
Phase 13 and 14 - South Pars (gas);
Royal Dutch Shell and
includes building a liquified natural gas
$10 billion
?
Repsol (Spain)
(LNG) terminal

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