Counterterrorism Blog

Today the Treasury and State Departments announced sweeping designations of Iranian entities and individuals involved in proliferation and terrorist activities. Though unilateral, the designations will effectively cut the affected parties off from the international financial system. Publicly identified as pariahs, the Iranian banks, leaders, military institutions and companies identified in the Treasury fact sheet accompanying the designations provides still further evidence of the means by which Iran facilitates and finances illicit activities related to nuclear proliferation, ballistic missile production, and terrorism.

Today’s action includes three major components: targeting Iranian banks, the Revolutionary Guard and its Qods Force, and specific IRGC companies involved in the oil and gas industry.

(1) Banks: With today’s designation, four of Iran’s largest banks (including its largest, Melli) are cut off from the U.S. financial system and, by extension, are also largely cut off from the international financial system. Bank Sepah was already designated, and as of today the U.S. added Bank Melli and Bank Mellat (for proliferation financing) and Bank Saderat (for terror financing).

(2) IRGC and Qods Force: Part of today’s sanctions package included the State Department’s designation of the Islamic Revolutionary Guard Corp (IRGC) for proliferation activities and the Treasury Department’s designation of the IRGC’s Qods Force for supporting terrorism. These actions will make streamline future designations of individual members, front companies and other entities tied to the IRGC and IRGC-Qods Force by enabling the government to designate them as derivative designations under the existing IRGC and IRGC-Qods Force designations.

(3) IRGC companies: The IRGC is widely believed to be self-funded, living off the income of its not-so-small empire of companies it owns or controls. The Iranian government’s award of no-bid contracts to IRGC companies is the stuff of domestic criticism and charges of cronyism. Moreover, the IRGC controls vast financial assets and economic resources. While most of the actual funds and assets are in Iran and beyond seizure, the IRGC's business and industrial activities -- especially those connected to the oil and gas industries -- are heavily dependent on the international financial system. Consider, for example, the $2.09 billion contract to develop parts of the South Pars natural gas field, or the $1.3 billion contract to build parts of a pipeline, both meted out to the IRGC's engineering arm, the Khatam-ol-Anbia. Treasury’s fact sheet noted that in 2006 Khatam-ol-Anbia “secured deals worth at least $7 billion in the oil, gas and transportation sectors, among others.”

Targeted financial measures represent the strongest non-military tool to convince Tehran to change its behavior. It is a myth that policymakers have to choose between sanctions, diplomacy, and military action. In fact, these tools are best employed in a complementary fashion. These designations should be seen not only as a means to hold Iran to task for its illicit conduct, and not only as a means of protecting the international financial system from abuse, but as a means to create leverage for diplomacy. As Under Secretary of State Nicholas Burns explained, “we are focused on diplomacy, we want to get to a diplomatic solution through negotiations, but Iran has to accept that path.” In the words of Secretary of State Condoleeza Rice, “we and our partners remain fully committed to a diplomatic solution with Iran.”

On its own, no one tool can fix this problem. But together, financial sanctions and international diplomatic censure offer the most effective non-military option for dealing with the threat posed by the Iranian nuclear program.

And while multilateral sanctions are always preferable, targeted financial measures unilaterally applied by the United States are sufficient to successfully target Iran with painful financial sanctions. Major international financial institutions throughout the world incorporate the U.S. Treasury’s various designation lists into their due diligence databases, meaning that these Iranian banks, entities and individuals will now find it very difficult to secure loans, lines of credit or otherwise gain access to the international financial system. With this action, four of Iran’s largest banks no longer have access to U.S. dollars (a significant obstacle in general terms, made more so by the fact that the international oil economy is in dollars and Iran is required under its contract with Russia to pay it’s $25 million monthly payment for Bushier in dollars).

With the multilateral UN sanctions process has bogged down it became all that much more important that action be taken to lay the groundwork for substantive sanctions before Iran’s report to the International Atomic Energy Agency next month on its past nuclear activities. French officials have already stated that if there are no new UN sanctions by the end of the year, the European Union (EU) should “look at more individual kinds of sanctions.” Today, the United States led by example, as it did in January 2007 when it designated Bank Sepah unilaterally. The international community followed suit then, designating Sepah multilaterally under UN Security Council Resolution 1747 in March 2007. It should do so now as well, designating at least some if not all of the banks, companies, and persons - as well as the Revolutionary Guard (proliferation) and Qods Force (terrorism) - in a third UN Security Council resolution before the end of the year.

The UN channel, however, is not the only one available. Other countries and regional bodies are also considering sanctioning Iran outside the UN system, especially following the October 11 statement issued by the Financial Action Task Force (FATF)—which works by consensus and includes Russia and China—warning that “Iran's lack of a comprehensive anti-money laundering/combating the financing of terrorism regime represents a significant vulnerability within the international financial system.”

So it should not surprise that the EU is now debating whether that body should impose its own sanctions targeting Iran, nor should it surprise that both the German and French governments announced they are advising their firms not to invest in Iran.

Whether employed multilaterally, regionally, or unilaterally, graduated and targeted financial measures of the kind announced today (that is, smart sanctions with teeth) are the surest way to avoid military confrontation with Iran and create the necessary leverage for effective diplomacy.