Bloomberg News

Lax Law Gives U.S. Subsidiaries an Opening to Sell to Iran: View

October 04, 2011

Oct. 5 (Bloomberg) -- “U.S. and international officials appear to agree that the sanctions have not, to date, hurt Iran’s economy to the point at which the core Western goals on Iran’s nuclear program can be accomplished.”

That was the conclusion of a report last month by Kenneth Katzman of the Congressional Research Service, a nonpartisan group that writes policy and legal analysis for lawmakers.

A prime example of the porousness of the sanctions can be found in November’s issue of Bloomberg Markets magazine, which focuses on the business ethics of the petrochemical conglomerate owned by Charles and David Koch, the billionaire brothers who are big donors to conservative political causes. Starting in the 1990s and until at least 2007, a Koch Industries Inc. subsidiary with offices in Italy and Germany circumvented the U.S. embargo by selling millions of dollars of equipment to Iran’s oil industry.

Did Koch break the law? It seems not. The company relied on a loophole in the 1996 Iran Sanctions Act and subsequent laws and executive orders that make it illegal for U.S. companies to do business in Iran’s oil sector, the lifeblood of the rogue nation’s economy. This weakness in the sanctions regime has allowed opportunistic foreign subsidiaries of American companies to conduct business in Iran as long as American or U.S.-based employees weren’t involved in the transactions.

A subsidiary, Koch-Glitsch, sold products to a unit of the state-owned National Iranian Petrochemical Co. to help build the largest plant in the world to process natural gas into methanol, a compound used in plastics, paints and chemicals. According to documents obtained by Bloomberg Markets, Koch-Glitsch also sought to work on the expansion of the largest refinery in Iran and the development of South Pars, the world’s largest natural- gas field.

Koch-Glitsch began to wind down its involvement in Iran in 2006, and Melissa Cohlmia, the director of corporate communications for the Wichita, Kansas-based parent company, informed Bloomberg that the European unit’s actions “were consistent with applicable U.S. laws allowing such sales at the foreign subsidiary level.”

Koch is hardly the only U.S. company to have benefited from this shortcoming in the law. According to the Congressional Research Service report, Honeywell International Inc., General Electric Co., Caterpillar Inc., Halliburton Co. and Huntsman Corp. -- the family business of Republican presidential hopeful Jon Huntsman -- have all conducted business in Iran through foreign subsidiaries.

These companies began pulling back operations only after a 2005 scandal, when it came to light that Halliburton, where Vice President Dick Cheney had served as chief executive officer, used a subsidiary registered in the Cayman Islands to carry out contracts for work on oil fields in Iran. Nobody knows how much commerce is being done this way with Iran today -- because it is not illegal, it isn’t being carefully tracked.

Last year’s Comprehensive Iran Sanctions, Accountability and Divestment Act strengthened previous restrictions for U.S. companies and their subsidiaries. It prohibited U.S. companies from doing energy-sector work -- particularly work that could help Iran produce or import gasoline. The legislation also set penalties for financial institutions that did business with the entities affiliated with the Tehran regime.

Although the law was a step in the right direction, gaps remain. Some American companies are likely to turn a blind eye to unsavory practices by subsidiaries as long as there is “wiggle room,” says Gary Milhollin, the director of the Wisconsin Project on Nuclear Arms Control, which monitors business dealings with Iran. Despite the sanction, it remains possible for subsidiaries of U.S. companies to provide Iran so- called dual-use supplies that could be adopted for use in missile and nuclear programs.

This dangerous situation could be remedied with an unequivocal prohibition on commerce by U.S. companies and their subsidiaries with Iran. Language to that effect was included in the Senate version of last year’s measure, but was stripped out of the law before it was sent to President Barack Obama -- another demonstration of effective resistance by some business trade groups and their allies in Congress.

Iran gets closer each day to developing a nuclear weapon, further destabilizing an already shaky region. The U.S. faces an uphill battle in rallying international support for tougher sanctions, and the unseemly laxity toward American companies leaves the administration open to justified accusations of hypocrisy. Congress could ease this diplomatic challenge -- and make the world a somewhat safer place -- with a stricter law on sales to Iran.

--Editors: Max Berley, Tobin Harshaw

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To contact the Bloomberg View editorial board: view@bloomberg.net.


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