The Least of All Sanctions Legislation Evils

On July 15, Senate Banking Committee Chair Christopher Dodd (D-CT) and Ranking member Richard Shelby (R-AL) announced they will introduce new bipartisan sanctions legsislation entitled the “Comprehensive Iran Sanctions, Accountability and Divestment Act of 2008.” The Senate Committee on Banking, Housing, and Urban Affairs will mark-up the legislation on Thursday, July 17, 2008 at 10 am. The full text of the legislation and designation is not yet available. However, Senators Dodd and Shelby released a summary of the legislation along with the announcement.

At best, the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2008 can be described as the least of all sanctions legislation evils. However, the legislation sends the wrong signal from Congress just as there seems to be a very significant shift in administration policy on diplomacy with Iran. This legislation could harm diplomatic efforts not only with Iran, but also harm relations with European allies, Russia, India and others.

Based on the summary, the legislation differs from the Iran Sanctions Act of 2008, formally introduced by Senator Max Baucus on July 7, 2008, in a few significant ways.

First, perhaps most important, the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2008 drops the controversial provision that would bar nuclear cooperation between the United States and Russia until Russia halts missile and nuclear energy aid to Iran. This provision has proven to be the most significant roadblock to both the Iran Counterproliferation Act of 2007 (S.970) and the Iran Sanctions Act of 2008 (S.3227).

Instead, the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2008 adds a section (and creates a new term) on “Destinations of Possible Diversion Concern.” According to the summary, the legislation would require the “Director of National Intelligence to submit to the Secretaries of State, Commerce, and the Treasury, and appropriate Congressional Committees, a report that identifies all countries that the Director believes are of concern with respect to trans-shipment, re-exportation or diversion of sensitive technologies to an entity owned or controlled by the government of Iran.” Countries that appear to be targets of this provision include Russia and India, and perhaps others. Such countries would be subject to additional licensing requirements for sensitive technologies if they fail to improve export control systems. However, this provision includes a presidential waiver if such a waiver is in the national security interest of the United States.

The Comprehensive Iran Sanctions, Accountability and Divestment Act of 2008 maintains a provision to make U.S. parent company liable for violations of sanctions by foreign subsidiaries. However, according to the summary, “The provision does not apply to those firms which terminate business with such an entity or which divest themselves of the subsidiary within 90 days of the legislation’s effective date. The President may waive this requirement if he determines that such a waiver would be in the national interest of the United States, and reports to Congress on the reasons for the waiver.”

Also of significance, the summary of the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2008 does not include a provision in the Iran Sanctions Act on World Bank Loans to Iran calling for a report on loans to Iran and a reduction in the U.S. contribution to the World Bank if any loans are granted to Iran.

According to the summary, the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2008 also does not appear to contain provisions in the Iran Sanctions Act calling for greater programming in radio broadcasting to Iran, authorizing exchange programs or making it the policy of the U.S. to support the establishment of an international regime for the assured supply of nuclear fuel for peaceful means under a multilateral authority, such as the International Atomic Energy Agency.

According to the summary, the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2008 adds a significant section on divestment from Iran. The legislation “Expresses the sense of Congress that the U.S. government should support efforts by State and local governments to divest from, or prohibit investment of the assets of state or local governments in, a person that the government determines poses a financial or reputational risk.”

The legislation will also authorize, though not mandate, state and local divestment from Iran’s energy sector. According to the summary, “Patterned after legislation enacted last year to enable divestment from firms investing in certain sectors in Sudan, the Chairman’s mark gives authority to State and local governments to divest from any company that invests $20 million or more in the energy sector in Iran, or extends $20 million or more in credit to be used for investment in the energy sector in Iran. While not mandating divestment, this authorization is designed to recognize that investors may have moral, prudential or reputational reasons to divest from companies that accept the substantial business risk of operating in countries subject to international economic sanctions.”

In addition, the bill will require “advance written notice to persons to which the measure is to be applied; offers an opportunity for comment by the person to which the measure would be applied (including an opportunity to demonstrate that the person does not engage in the prohibited investment activities related to Iran’s energy sector); urges care by State or local governments related to erroneous targeting of divestment; and requires written notice to the Department of Justice within 30 days of enactment of divestment legislation or adoption of other similar divestment measures.”

If enacted, the legislation would also give cover to asset managers as it would amend “the Investment Company Act of 1940 to prohibit legal action against asset managers who, based on credible information available to the public, choose to divest assets from, or avoid investing in, persons investing $20 million or more in Iran’s energy sector, or extending credit for such investments in Iran’s energy sector.” In addition, it would require “the Securities and Exchange Commission to revise current regulations as necessary to require disclosure of Iran divestment actions.” Finally, the section on divestment expresses the sense of Congress that managers of certain Employee Retirement Income Security Act of 1974 pension plans may divest assets from Iran’s energy sector without breaching their fiduciary obligations “if their decision is made based on credible publicly available information, and is conducted consistent with current Department of Labor regulations related to economically targeted investments.

Although some of the provisions and wording may differ slightly or have been finessed, the reality is the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2008 only repeats the failed approach to dealing with Iran in previous and pending sanctions legislation. It’s time for Congress to think beyond pursuing an “all sticks and no carrots” approach to Iran.