September 26, 2018

House Financial Services Subcommittee on Monetary Policy & Trade “Administration Goals for Major Sanctions Programs”

Key Topics & Takeaways

  • Special Purpose Vehicle: Members highlighted Monday’s announcement that the E.U., Russia and China agreed to set up a special payments system called a “special purpose vehicle” (SPV) which would allow for legitimate financial transfers between European and Iranian companies, designed to circumvent U.S. sanctions on Iran.
  • Applying Sanctions to U.S. Trade Policy: Rep. Warren Davidson (R-Oh.) said he is exploring ways to apply the sanctions regime to U.S. trade policy, and added “for the similar purposes that we’re engaging in unilateral action on tariffs, here we could be very precise and use the power of sanctions to target [certain] Chinese steel companies rather than taxing all steel.”
  • Designations of Large Chinese Banks: Several members pointed out that the U.S. has only sanctioned small Chinese banks for conducting business with North Korea and has not designated any large institutions. When specifically asked whether any of China’s large banks have knowingly engaged in sanctionable activities, Billingslea replied “we haven’t determined knowingly.”  

Opening Statements

Rep. Andy Barr (R-Ky.), Chairman, House Financial Services Subcommittee on Monetary Policy and Trade

In his opening statement, Barr expressed his confidence in sanctions to achieve certain goals, but remained cautious about measures that fail to achieve policy objectives. He emphasized the need to hold sanctions accountable by their results, and said it is imperative for Congress to better understand the administration’s goals and how the Treasury Department will bring about such goals. Barr then posed the following questions to Billingslea: (i) “What is the endgame in Iran and where are those sanctions supposed to lead?” (ii) “How has Russia responded to U.S. sanctions strategy? Is there evidence that current measures are countering Russian aggression and malign activities? If they are not effective, how is Treasury adapting its strategy?” (iii) “How is Treasury squeezing North Korea?”  

Rep. Bill Foster (D-Ill.), House Financial Services Subcommittee on Monetary Policy and Trade

In his opening statement, Foster emphasized the need for Congress to understand the administration’s thought process on sanctions policy. He maintained that “the effectiveness [of sanctions] are better if you have these strong multilateral supports.” He stated he was “disappointed on progress with North Korea” and called for “stronger multilateral effort on sanctions.” 

Testimony

Marshall Billingslea, Assistant Secretary for Terrorist Financing, Treasury Department

In his testimony, Billingslea outlined how the Treasury Department is using the full range of its authorities and tools to address the challenges in Iran, Russia, and North Korea. He focused primarily on Iran in his oral testimony, but explained that his written testimony covered U.S. engagement with Russia and North Korea in greater depth. He noted the three countries use some similar tactics to exploit the global financial system, particularly by establishing and employing front and shell companies to mask the origin and beneficial ownership of illicit financial flows, to disguise the nature of—and intent behind— transactions.

Billingslea touched on the U.S. withdrawal from the Joint Comprehensive Plan of Action (JCPOA) in his oral testimony. In his written remarks, he explained that the U.S. is reinstating sanctions on Iran in two phases: the first phase began on August 7th, when U.S. sanctions came back into full effect on a variety of activity, including the acquisition of U.S. dollar banknotes by the Government of Iran, Iran’s trade in gold and precious metals, transactions related to the Iranian rial, and activities related to the issuance of Iranian sovereign debt.  On November 4th, Treasury will reimpose the remaining sanctions that were lifted under JCPOA. These include, but are not limited to, sanctions on foreign financial institutions conducting certain transactions with the Central Bank of Iran and designated Iranian banks.

Billingslea outlined how the U.S. has worked to disrupt Iran’s abuse of the international financial system. In addition to targeting Iran directly, he explained that the U.S. simultaneously worked with the Iraqi government to take action against the operations of a “major bank” that was “deeply involved” in routing money to terror networks.  He outlined Treasury’s “extensive” efforts to “deliver direct messages” to the private sector on Iran’s involvement in extensive “illicit business activities, including using front and shell companies, counterfeiting currency, and cyberattacks to fund their support for terrorism,” asserting that sanctions have generated significant results, and said that since April, the Iranian rial has lost more than two-thirds of its value. He added that “Foreign direct investment (FDI) and business activity within Iran is also decreasing as the private sector recognizes the risk of doing business with Iran. Approximately 100 international companies have indicated they will leave Iran, and we expect to see more follow in their footsteps.”

With regards to U.S. policy towards Russia, Billingslea said the administration has imposed an “unprecedented level of financial pressure” against those working on behalf of the Kremlin and in key sectors of the Russian economy targeted by U.S. sanctions.” He noted that Russia stands apart from other countries of interest, given its economy is large and well-integrated into the international financial system and global supply chains. Billingslea cautioned that sanctions “are not and cannot be” the only tool on which the U.S. relies in Russia, and explained the administration’s other tools to counter Russian aggression including Treasury’s Financial Crimes Enforcement Network (FinCEN).

Billingslea discussed the ways in which Treasury is addressing North Korea, including sanctions, anti-money laundering and combatting the financing of terrorism (AML/CFT) measures and reporting requirements, enforcement actions, regulatory actions under Section 311 of the PATRIOT Act, foreign engagement, and private sector partnerships to identify and disrupt its ability to generate revenue and move funds. He emphasized the importance of law enforcement, FinCEN, and financial institutions working together to exchange key information on priority illicit threats, enabling the private sector to better identify and disrupt money laundering and other financial crimes.

Question & Answer

Countering America’s Adversaries Through Sanctions Act (CAATSA)

Rep. Denny Heck (D-Wash.) argued that after the president signed H.R. 3364, Countering America’s Adversaries Through Sanctions Act (CAATSA) into law, the administration was slow to impose sanctions on Russia and that sanctions “have not been taken to the degree where they actually harm, injure, or deter the oligarchs or Putin himself.” Billingslea countered that the administration has imposed three times the number of sanctions than the previous administration, adding that CAATSA is forward-looking.

JCPOA

Billingslea described the continued malign activities that justified the reimposition of sanctions on Iran. Barr asked how the administration intends to “bring allies who continue to support JCPOA to our side.” Billingslea replied that he has made it clear that secondary sanctions will be reapplied to those who conduct business with Iran.

Special Purpose Vehicle

Reps. Al Green (D-Texas) and Tom Emmer (R-Minn.) highlighted Monday’s statement that the E.U., Russia and China agreed to set up a special payments system called a “special purpose vehicle” (SPV) allowing for legitimate financial transfers between European and Iranian companies, designed to circumvent U.S. sanctions. Billingslea dismissed the idea that the U.S. is at odds with its allies and said that companies are staying engaged with the U.S. rather than maintaining business ties with Iran. When asked how Treasury will treat companies engaging with Iran through the SPV, Billingslea said the U.S. has “made it crystal clear to countries around the world that they need to make a business calculation…. [and]…the vast majority of multinationals that contemplated business with the Iranians have made it clear they’re not interested.”

Rep. Brad Sherman (D-Calif.) asked whether the special purpose vehicle will make U.S. banking sanctions less effective, not only against Iran, but against other targets in the future. Billingslea minimized the potential impact of a euro-denominated SPV since the U.S. dollar (USD) is the currency of choice for the banking system and for clearing financial transactions.

Designation of Large Chinese Banks

Reps. French Hill (R-Ark.), Sherman, and Emmer pointed out that the U.S. has only sanctioned small Chinese banks for conducting business with North Korea, such as the Bank of Dandong and Banco Delta Asia, but has not designated large institutions such as the Industrial and Commercial Bank of China (ICBC), China Construction Bank Corporation, or Agricultural Bank of China. Billingslea said Treasury was working with large Chinese institutions, and that Treasury has “alerted them to a wide range of entities we believe are controlled by North Korea and we’re helping them take enforcement actions to expunge accounts.”  When asked whether any of China’s large banks have knowingly engaged in sanctionable activities, Billingslea replied “we haven’t determined knowingly.”

Sherman suggested that the administration has failed to sanction large Chinese banks not because they abstain from business with North Korea, but because they are “too big to sanction,” referencing a reference harkening to pre-financial crisis claims that certain large banks were “too big to fail.”  Sherman referred to the letter to Treasury signed by House Foreign Affairs Subcommittee on Asia and the Pacific Chairman Ted Yoho (R-Fla.) which asked why no major Chinese banks had been designated for sanctionable activity with North Korea. Billingslea refused to comment on any specific bank, but said his staff had responded to the letter.

Sanctions Enforcement from China and Russia

Barr cited a Wall Street Journal article about a confidential UN report detailing North Korea’s violation of sanctions through its banned arms, fuel and financial trade with China, Russia, Syria and others. He called for continued pressure on Chinese and Russian banks to cooperate with enforcement efforts and asked Billingslea to describe U.S. actions to prevent actors in Russia and China from circumventing UN sanctions. Billingslea assured the members that such actors were being targeted and held to account.

Emmer explained that under H.R. 3898, the Otto Warmbier North Korea Nuclear Sanctions Act, companies and participating banks found to be operating joint ventures in North Korea would be subject to sanctions, and he asked when Treasury would be issuing such designations. Billingslea declined to provide a timeline.

Applying Sanctions to U.S. Trade Policy

Rep. Warren Davidson (R-Ohio) expressed concern that U.S. trade policy is “multiplying enemies instead of multiplying allies” and explained that he is exploring ways to use the sanctions regime to be “more targeted” in U.S. trade policy. He asked Billingslea if he perceived any “roadblocks” to applying sanctions to trade policy. Billingslea cited instances in which Treasury has targeted companies owned by nefarious actors and “immediately” issued U.S. companies licenses to extricate themselves from their ownership.

For more information on this hearing, please click here.