The Iran Sanctions Act (ISA)

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Order Code RS20871

Updated January 25, 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, bills in the 109

Congress, H.R. 282 (passed bythe House on April 26,

2006), S. 333, and H.R. 6198 extended it and added provisions to applyit more strictly.

The latter bill, (P.L. 109-293, signed September 30, 2006), extended it until December

31, 2011, changed its name from the Iran-Libya Sanctions Act (ILSA) to ISA by

terminating application to Libya, and allows substantial Administration flexibility in

applying the new provisions. This report will be updated. See also CRS Report

RL32048, Iran: U.S. Concerns and Policy Responses, by Kenneth Katzman.

Background and Original Passage of ILSA

ILSA was introduced in the context of a tightening of U.S. sanctions on Iran during

the first term of 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 issuedExecutive Order 12957 (March 15, 1995), which

banned U.S. investment in Iran’s energy sector, and Executive Order 12959 (May 6,

1995), which banned U.S. trade with and investment in that country. The Clinton

Administration and manyin Congress maintainedthatthesesanctions would depriveIran

of the abilityto acquire weapons of mass destruction (WMD) and to fund terrorist groups

byhinderingits abilityto modernize its keypetroleum sector. That sector generates about

20% of Iran’s GDP. Iran’s onshore oil fields, as well as its oil industry infrastructure,

were aging and needed substantial investment, and its large natural gas resources (940

trillion cubic feet, exceeded onlybythose of Russia) were not developed at all at the time

ILSA 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

foreign investment in Iran. The opportunityto do so came in November 1995, when Iran

launched its first major effort to open its energy sector to foreign investment, which Iran

had banned after the February 1979 Islamic revolution on the grounds that foreign firms

would gain undue control over Iran’s resources. To accommodate that philosophy while

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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 (Mar. 31, 1992) and 883 (Nov. 11, 1993).

attracting needed foreign help, Iran developed a “buy-back” investment program under

which foreign firms recoup their investments from the proceeds of oil and gas discoveries

but do not receive equity stakes.

SomeinCongress,withinputfromthe 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’ export

to Iran of energy technology. The bill passed the Senate on December 18, 1995 (voice

vote) but, in response to criticism that U.S. monitoring of foreign exports to Iran would

be too difficult to implement, sanctioned foreign investment in Iran’s energy sector. On

December 20, 1995, the Senate passed still another version that applied all provisions to

Libya as well, which at the time was still 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). The Senate

passed a slightly different version on July 16, 1996 (unanimous consent); the House

concurred, and the President signed it into law (P.L. 104-172, August 5, 1996).

ILSA 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 ILSA’s expiration as a concession, reducing incentive for

further moderation. Renewal legislation (H.R. 1954) was enacted in the 107

Congress

(P.L. 107-24, August 3, 2001); it changed the definition of investment to treat any

additions to pre-existinginvestment asanew investment, and required anAdministration

report on ILSA’s effectiveness within 24 to 30 months of enactment. That report was

submitted to Congress in January 2004 and did not recommend that ILSA be repealed.

Key Provisions. ILSA requires thePresident to imposeatleast two out of a menu

of six sanctions on foreign companies (entities, persons) that make an “investment” of

more than $20 million in one year in Iran’s energysector.

The six sanctions (Section 6)

are: (1) denial of Export-Import Bank loans, credits, or credit guarantees for U.S. exports

to thesanctioned entity; (2) denial of licenses for theU.S. export of militaryor militarily-

useful technologyto 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).

The President maywaive the sanctions on Iran if the parent countryof the violating

firm agrees to impose economic sanctions on Iran (Section 4(c)) or if he certifies that

doingso is important to theU.S. national interest (Section 9(c)). ILSA terminatesfor Iran

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Dollar figures for energy investment contracts with Iran represent public estimates of the

amounts investingfirms are expected to spend duringthe life of the project, which might in some

cases be several decades.

if Iran ceases its efforts to acquire WMD and is removed from the U.S. list of state

sponsors of terrorism. ILSA no longer applies to Libya if the President determines that

Libyahas fulfilled therequirements of all U.N. resolutions relatingto thedowningof Pan

Am 103. (President Bush made that Libya certification on April 23, 2004.)

Early Reaction. Traditionally skeptical of economic sanctions as a policy tool,

European Union states opposed ILSA, at first enactment, as an extraterritorial application

of U.S. law. The EU threatened formal counter-action in the World Trade Organization

(WTO), and 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 under Section 9(c))

on the first project determined to be in violation: a $2 billion

contract, signed in

September 1997, for Total SA of France and itsminoritypartners, 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 States on non-

proliferation and counter-terrorism. The Administration indicated that EU firms would

likely receive waivers for future projects that were similar. As did its predecessor, the

Bush Administration sought to work cooperatively with the EU to curb Iran’s nuclear

program and limit its support for terrorism rather than risk a rift by imposing sanctions

on EU or other firms.

Modifications in the 109

Congress

As the 109

Congress expressed increasing concern about Iran’s expanding nuclear

program, ILSA was to terminate on August 5, 2006, unless renewed. Some Members

were also concerned that its provisions were not being applied to purported violators

because of Administration diplomatic considerations. ILSA-related legislation in the

109

Congress included the “Iran Freedom and Support Act,” H.R. 282 (Rep. Ros-

Lehtinen) and a companion, S. 333 (Sen. Santorum). These bills would not only extend

ILSA indefinitely but would also close some perceived ILSA loopholes and authorize

funding for pro-democracy activities in Iran. In particular, these bills increased the

requirementsontheAdministration to justifywaivingsanctions on companies determined

to have violated ILSA provisions; made exports to Iran of WMD-useful technology or

“destabilizing numbers and types of” advanced conventional weaponrysanctionable; set

a90-daytimelimit for theAdministration to determinewhether aninvestment constitutes

a violation of ILSA (there was no time limit previously); and increased the threshold for

terminating ILSA by requiring the Administration to certify, in addition to existing

termination requirements, thatIran“posesno threat”to theUnited States, its interests, and

its allies. H.R. 282 also cut U.S. foreign assistance to countries whose companies have

violated ILSA’s provisions and applied the U.S. trade ban on Iran to foreign subsidiaries

of U.S. companies. H.R. 282 was reported out bythe House International Committee on

March 15, 2006, bya 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 ILSA expiration

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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.

Stern, Roger. “The Iranian PetroleumCrisis and United States National Security,” Proceedings

of the National Academy of Sciences of the United States of America. Dec. 26, 2006.

while these bills were being considered, H.R. 5877, extending ILSA until September 29,

2006, was passed by both chambers and signed on August 4, 2006 (P.L. 109-267).

As the 109

Congress was completing its work, a House bill, H.R. 6198, addressed

the Administration’s concerns that H.R. 282 and S. 333 did not allow sufficient

Administration flexibility in their application. H.R. 6198, introduced on September 27,

2006, recommends, but does not require, a 180-day time limit for a determination of

violation. It also recommends against U.S. nuclear agreements with countries that have

supplied nuclear technologyto Iran. Itdoes notapplythe trade ban to foreign subsidiaries

of U.S. firms, but it does make sanctionable sales of WMD-useful technology or

“destabilizing numbers and types of” advanced conventional weaponry. H.R. 6198 also

extends ILSA until December 31, 2011, and contains a provision to tryto prevent money-

laundering bycriminal groups, terrorists, or entities involved in proliferating WMD, and

it drops Libya from ILSA, as requested by the Administration. H.R. 6198 was passed by

the House and Senate by voice vote and unanimous consent, respectively, and President

Bush signed it on September 30, 2006 (P.L. 109-293). It formally changes the name of

the law to the Iran Sanctions Act (ISA).

Effectiveness and Ongoing Challenges

Some believe ILSA did slow Iran’s energy development initially, but, as shown by

the projects agreed to below, its deterrent effect weakened as foreign companies began

to perceive that actual sanctions would not likely be imposed. Since the 1998 Total SA

case, a number of investments in Iran have been formally placed under review for ILSA

sanctions by the State Department (Bureau of Economic Affairs). State Department

reports to Congress on ILSA, required every six months, state that U.S. diplomats raise

U.S. policyconcerns about Iran with both investingcompanies and their parent countries.

However, no projects havebeen determined to beviolations or not sincethen. Still, some

energy experts believe that investment would have been much more extensive if not for

both ILSA as well as Iran’s stringent terms and 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)

— and an analysis published bythe National

Academy of Sciences says that Iranian oil exports are declining to the point where Iran

might have negligible exports of oil by2015.

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.

Successive Administrations have wrestled with applications of ISA to some kinds

of international dealingswith Iran. ISA’s definition of “investment” does not specifically

mention as violations long-term oil or gas purchases from Iran, or the building of energy

transit routes to or through Iran. However, the Clinton Administration position was that

the construction of energy routes might violate the law, because these routes would

“directly and significantly contribut[e] to the enhancement of Iran’s ability to develop

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This definition of sanctionable activity is contained in Section 5(a) of ILSA.

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.

petroleum resources.”

The Clinton Administration used that argument to deter energy

routes involvingIran and therebysuccessfullypromote an alternate route from Azerbaijan

(Baku) to Turkey(Ceyhan). This route,which became operational in 2005, bypasses both

Iran and Russia.

At the same time, the Clinton and Bush Administrations have adopted flexible

interpretations of ISA to accommodate the needs of key regional allies for energy

supplies. A few weeks after ILSA was first enacted, Turkeyand Iran agreed to construct

a natural gas pipeline from Iran to Turkey (each country constructing the pipeline on its

side of their border). Turkey later announced that, at least initially, it would import gas

only from Turkmenistan through this pipeline. In July 1997, the State Department said

that the project did not violate the law because Turkey would be importing gas from

Turkmenistan, not Iran, and the project would therefore not benefit Iran’s energy sector

directly. Direct Iranian gas exports to Turkey began in 2001, in apparent contravention

of Turkey’s pledges not to buy Iranian gas directly, but the Bush Administration has not

imposed sanctions on the project.

Further tests of ISA are looming,and someof the large, long-termdeals between Iran

and Indian, Chinese,and Malaysian firms, listed below, havethepotential to significantly

enhance Iran’s energy export prospects. The value of some of these agreements appears

to include long-term contracts topurchase Iranian oil and gas. A related deal, particularly

those involving Indian firms,

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 by2010. Pakistan’s President

Musharraf said in January 2006 that there is enough demand in Pakistan for Iranian gas

to make the project feasible, even if India declines to join it. During her visit to Asia in

March 2005, Secretary of State Rice “expressed U.S. concern” about the pipeline deal;

other U.S. officials have called the project “unacceptable.” No U.S. official has directly

stated that it would be considered a violation of ILSA. During his trip to India and

Pakistan in March 2006, President Bush said theUnited States “understand[s]” Pakistan’s

need for gas, appearing to suggest he would not oppose the pipeline, but Administration

officials later said that there was no change in Administration opposition to it. Aside

from commercial considerations, the volatility of relations between India and Pakistan

could derail the project at any time.

The ISA is not the only mechanism available to the United States to try to limit

investment in Iran. The U.S. Treasuryand State Departments have begun usingU.S. trade

regulations to pressure European banks not to do business with Iran, with significant

effect on Iran. On December 20, 2005, the Treasury Department had fined Dutch bank

ABN Amro $80 million for failing to fullyreport the processing of financial transactions

involving Iran’s Bank Melli (and another bank partially owned by Libya). In 2004, the

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Treasury Department fined UBS $100 million for the unauthorized movement of U.S.

dollars to Iran and other sanctioned countries, and it and three other European banks,

HSBC (Britain), Credit Suisse (Switzerland), and Germany’s Commerzbank A.G, have

stopped dollar transactions from within Iran or pursuit of new business in Iran. The

restrictions on financing are, according to Iranian and outside observers, making it more

difficult to fund energyindustryand other projects in Iran. On December 20, 2006, Iran’s

Oil Minister, Kazem Vaziri-Hamaneh, said “Currently, overseas banks and financiers

have decreased their co-operation,” and Iran would need to tap into a reserve fund to

finance some pending projects.

Post-1999 Foreign Investment in Iran Energy Sector

Date

Field

Company(ies)

Value

Output Goal

Feb. 1999 Doroud (oil)

Totalfina Elf/ENI

$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

Phase 4 and 5, South Pars

(gas)

ENI

$1.9 billion

2 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

Sep. 2002

Phase 9 and 10, South Pars

(gas)

LG (South Korea)

$1.6 billion

Oct. 2002 Phase 6, 7, 8, South Pars (gas) Statoil (Norway)

$2.65 billion

3 billion cu.ft./day

Feb. 2004 Azadegan (oil)

Inpex (Japan) 10% stake

$200 million

Japan stake

260,000 bpd

Oct. 2004 Yadavaran (oil)

Sinopec (China) and

ONGC (India)

$70 billion

(includes gas

purchases for

30 years)

300,000 bpd

June 2006 Gamsar block (oil)

Sinopec (China)

$50 million

unknown

Jan. 2007

Golshan and Ferdows

(offshore gas)

SKS Ventures (Malaysia)

$20 billion

(includes

downstream

development

and

transportation)

100 million cu.ft/day

Totals

$100 billion+

Oil: 1.2 million bpd

Gas: 5.1 billion

cu.ft/day+

Pending Deals

North Pars Gas Field (offshore gas)

China National Offshore

Oil Co.

$16 billion

3.6 billion cu.ft/day