U.S. Enriches Companies Defying Its Policy on Iran
By JO BECKER and RON NIXON
New York Times - March 5th, 2010
The federal government has awarded more than $107 billion in
contract payments, grants and other benefits over the past decade to
foreign and multinational American companies while they were doing
business in Iran, despite Washington’s efforts to discourage
investment there, records show.
That includes nearly $15 billion paid to companies that defied
American sanctions law by making large investments that helped Iran
develop its vast oil and gas reserves.
For years, the United States has been pressing other nations to join
its efforts to squeeze the Iranian economy, in hopes of reining in
Tehran’s nuclear ambitions. Now, with the nuclear standoff hardening
and Iran rebuffing American diplomatic outreach, the Obama
administration is trying to win a tough new round of United Nations
But a New York Times analysis of federal records, company reports
and other documents shows that both the Obama and Bush
administrations have sent mixed messages to the corporate world when
it comes to doing business in Iran, rewarding companies whose
commercial interests conflict with American security goals.
Many of those companies are enmeshed in the most vital elements of
Iran’s economy. More than two-thirds of the government money went to
companies doing business in Iran’s energy industry — a huge source
of revenue for the Iranian government and a stronghold of the
increasingly powerful Islamic Revolutionary Guards Corps, a primary
focus of the Obama administration’s proposed sanctions because it
oversees Iran’s nuclear and missile programs.
Other companies are involved in auto manufacturing and distribution,
another important sector of the Iranian economy with links to the
Revolutionary Guards. One supplied container ship motors to IRISL, a
government-owned shipping line that was subsequently blacklisted by
the United States for concealing military cargo.
Beyond $102 billion in United States government contract payments
since 2000 — to do everything from building military housing to
providing platinum to the United States Mint — the companies and
their subsidiaries have reaped a variety of benefits. They include
nearly $4.5 billion in loans and loan guarantees from the
Export-Import Bank, a federal agency that underwrites the export of
American goods and services, and more than $500 million in grants
for work that includes cancer research and the turning of
agricultural byproducts into fuel.
In addition, oil and gas companies that have done business in Iran
have over the years won lucrative drilling leases for close to 14
million acres of offshore and onshore federal land.
In recent months, a number of companies have decided to pull out of
Iran, because of a combination of pressure by the United States and
other Western governments, “terrorism free” divestment campaigns by
shareholders and the difficulty of doing business with Iran’s
government. And several oil and gas companies are holding off on new
investment, waiting to see what shape new sanctions may assume.
The Obama administration points to that record, saying that it has
successfully pressed allied governments and even reached out
directly to corporate officials to dissuade investment in Iran,
particularly in the energy industry. In addition, an American effort
over many years to persuade banks to leave the country has isolated
Iran from much of the international financial system, making it more
difficult to do deals there.
“We are very aggressive, using a range of tools,” said Denis
McDonough, chief of staff to the National Security Council.
The government can, and does, bar American companies from most types
of trade with Iran, under a broad embargo that has been in place
since the 1990s. But as The Times’s analysis illustrates, multiple
administrations have struggled diplomatically, politically and
practically to exert American authority over companies outside the
embargo’s reach — foreign companies and the foreign subsidiaries of
Indeed, of the 74 companies The Times identified as doing business
with both the United States government and Iran, 49 continue to do
business there with no announced plans to leave.
One of the government’s most powerful tools, at least on paper, to
influence the behavior of companies beyond the jurisdiction of the
embargo is the Iran Sanctions Act, devised to punish foreign
companies that invest more than $20 million in a given year to
develop Iran’s oil and gas fields. But in the 14 years since the law
was passed, the government has never enforced it, in part for fear
of angering America’s allies.
That has given rise to situations like the one involving the South
Korean engineering giant Daelim Industrial, which in 2007 won a $700
million contract to upgrade an Iranian oil refinery.
According to the Congressional Research Service, the deal appeared
to violate the Iran Sanctions Act, meaning Daelim could have faced a
range of punishments, including denial of federal contracts. That is
because the law covers not only direct investments, such as the
purchase of shares and deals that yield royalties, but also
contracts similar to Daelim’s to manage oil and gas development
But in 2009 the United States Army awarded the company a $111
million contract to build housing in a military base in South Korea.
Just months later, Daelim, which disputes that its contracts
violated the letter of the law, announced a new $600 million deal to
help develop the South Pars gas field in Iran.
Now, though, frustration over Iran’s intransigence has spawned a
growing, if still piecemeal, movement to more effectively use the
power of the government purse to turn companies away from investing
Nineteen states — including New York, California and Florida — have
rules that bar or discourage their pension funds from investing in
companies that do certain types of business in Iran. Congress is
considering legislation that would have the federal government
follow suit, by mandating that companies that invest in Iran’s
energy industry be denied federal contracts. The provision is
modeled on an existing law dealing with war-torn Sudan.
Obama administration officials, while indicating that they were open
to the idea, called it only one variable in a complex equation.
Right now, the president’s priority is on breaking down Chinese
resistance to the new United Nations sanctions, which apply across
borders and are aimed squarely at entities that support Iran’s
But Representative Ron Klein, a Florida Democrat who wrote the
contracting provision moving through Congress with the help of a
lobbying group called United Against Nuclear Iran, said it offered a
way forward with or without international agreement.
“We need to send a strong message to corporations that we’re not
going to continue to allow them to economically enable the Iranian
government to continue to do what they have been doing,” Mr. Klein
An Unused Tool
Sending a strong message was Congress’s intention when it passed the
Iran Sanctions Act in 1996.
The law gives the president a menu of possible punishments he can
choose to levy against offending companies. Not only do they risk
losing federal contracts, but they can also be prevented from
receiving Export-Import Bank loans, obtaining American bank loans
over $10 million in a given year, exporting their goods to the
United States, purchasing licensed American military technology and,
in the case of financial firms, serving as a primary dealer in
United States government bonds or as a repository for government
Congress is now considering expanding its purview to a broader array
of energy-related activities, including selling gasoline to Iran,
which despite its vast oil and gas reserves has antiquated
refineries that leave it heavily dependent on imports.
From the beginning, though, the law proved difficult to enforce.
European allies howled that it constituted an improper attempt to
apply American law in other countries. Exercising an option to waive
the law in the name of national security, the Clinton administration
in 1998 declined to penalize the first violator — a consortium led
by the French oil company TotalFina, now known as Total.
The administration also indicated that it would waive future
penalties against European companies, winning in return tougher
European export controls on technology that Iran could convert to
Stuart E. Eizenstat, who as the deputy Treasury secretary handled
those negotiations, said the law let Iran “exploit divisions between
the U.S. and our European allies.”
Waiving it, though, was followed by additional investments in Iran —
and more government largesse for the companies making them.
In 1999, for instance, Royal Dutch Shell signed an $800 million deal
to develop two Iranian oil fields. Since then, Shell has won federal
contract payments and grants totaling more than $11 billion, mostly
for providing fuel to the American military, as well as $200 million
in Export-Import loan guarantee and drilling rights to federal
lands, records show.
Shell has a second Iranian development deal pending, but officials
say they are awaiting the results of a feasibility study. In the
meantime, the company continues to receive payments from Iran for
its 1999 investment and sells gasoline and lubricants there.
Records show Shell is one of seven companies that challenged the
Iran Sanctions Act and received federal benefits.
John R. Bolton, who dealt with Iran as an under secretary of state
and United Nations ambassador in the Bush administration, said
failing to enforce the law by punishing such companies both sent “a
signal to the Iranians that we’re not serious” and undercut
Washington’s credibility when it did threaten action.
Mr. Bolton recalled what happened in 2004 when he suggested to the
Japanese ambassador that Japan’s state-controlled oil exploration
company, Inpex, might be penalized for a $2 billion investment in
the Azadegan field in Iran. “The Japanese ambassador said, ‘Well,
that’s interesting. How come you’ve never sanctioned a European
Union company?’ ” Mr. Bolton recounted.
Inpex was never penalized, though several years later it decided to
reduce its stake in the Iranian project. And to Mr. Bolton’s
chagrin, the Bush administration did not act on reports about other
such investments, neither waiving the law nor penalizing violators.
Recently, after 50 lawmakers from both parties complained to
President Obama about the lack of enforcement and sent him a list of
companies that apparently violated the law, the State Department
announced a preliminary investigation. Officials said that they were
looking at 27 deals, and that while some appeared to have been
“carefully constructed” to get around the letter of the law, they
had identified a number of problematic cases and were focusing on
companies still active in Iran.
Among the companies on the list Congress sent to the State
Department is the Brazilian state-controlled energy conglomerate
Petrobras, which last year received a $2 billion Export-Import Bank
loan to develop an oil reserve off the coast of Rio de Janeiro. The
loan offers a case study in the competing interests officials must
confront when it comes to the Iran Sanctions Act.
Despite repeated American entreaties, Petrobras had previously
invested $100 million to explore Iran’s offshore oil prospects in
the Persian Gulf.
But the Export-Import Bank loan could help create American jobs,
since Petrobras would use the money to buy goods and services from
American companies. Perhaps more important, it could help develop a
source of oil outside the Middle East.
After The Times inquired about the loan, bank officials said that
they asked for and received a letter of assurance from Petrobras
that it had finished its work in Iran. A senior White House
official, in a Nov. 13 e-mail message, said that while it was the
administration’s policy to warn companies against such investments,
“Brazil is an important U.S. trading partner and our discussions
with them are ongoing.”
But if the administration hoped that the loan would bring Brazil in
line with its objectives in Iran, it would soon prove mistaken.
On Nov. 23, Iran’s president, Mahmoud Ahmadinejad, visited Brazil,
and the two countries agreed to share technical expertise on energy
projects. Iranian officials said they might offer Petrobras
additional incentives for further investment.
The visit infuriated American officials, who felt it undercut
efforts to press Iran on its nuclear program while lending
international legitimacy to the Iranian president. Brazil’s
relationship with Iran has also complicated American maneuvering at
the United Nations, where Brazil holds a rotating seat on the
Security Council. Just last week, Brazil’s president, Luiz Inácio
Lula da Silva, restated his opposition to the administration’s
sanctions proposal, warning, “It is not prudent to push Iran against
Carter Lawson, the Export-Import Bank’s deputy general counsel,
acknowledged that Mr. Ahmadinejad’s visit was “problematic for us,
and it raised our antenna.” He said that since December the bank had
been operating under a new budget rule requiring borrowers to
certify that they had no continuing operations in Iran’s energy
industry, and was carefully monitoring Petrobras’s activities.
In the meantime, Petrobras’s Tehran office remains open. And Diogo
Almeida, the acting economic attaché at the Brazilian Embassy in
Iran, said that while Petrobras was currently assessing how much it
could invest in Iran, given the huge discovery off Rio de Janeiro,
company officials were in active discussions with the Iranian
government and were interested in pursuing new business.
Opportunities for Profit
For all the American rules and focus, there is still plenty of room
for companies to profit in crucial areas of Iran’s economy without
fear of reprisal or loss of United States government business.
Auto companies doing business in Iran, for instance, received $7.3
billion in federal contracts over the past 10 years. Among them was
Mazda, whose cars in Iran are assembled by a company called the
Bahman Group. A 45 percent share in Bahman is held by the Sepah
Cooperative Foundation, a large investment fund linked to the
Revolutionary Guards, according to Iranian news accounts and a 2009
RAND Corporation report prepared for the Defense Department.
A Mazda spokesman declined to comment, saying the company was
unaware of the links.
Even companies based in the United States, including some of the
biggest federal contractors, can invest in Iran through foreign
subsidiaries run independently by non-Americans.
Honeywell, the aviation and aerospace company, has received nearly
$13 billion in federal contracts since 2005. That year it acquired
Universal Oil Products, whose British subsidiary is working on a
project to expand gasoline production at the Arak refinery in Iran.
Universal recently received a $25 million federal grant for a
clean-energy project in Hawaii.
In a statement, Honeywell said it had told the State Department in
January that while it was fulfilling its Arak contract, it would not
undertake new projects in Iran.
Ingersoll Rand, another American company with foreign subsidiaries,
says it is evaluating its “minor” business in Iran in light of the
political climate. But for now, according to a spokesman, Paul
Dickard, it continues to sell air-compression systems with a “wide
variety of applications,” including in the oil and gas industries
and in nuclear power plants.
Senator Byron L. Dorgan, a North Dakota Democrat, tried to close the
foreign subsidiary loophole after a furor erupted in 2004 over
Halliburton, former Vice President Dick Cheney’s old company, which
had used a Cayman Islands subsidiary to sell oil-field services to
Iran. But he said he was unable to overcome business opposition.
William A. Reinsch, president of the National Foreign Trade Council,
lobbied against Mr. Dorgan’s bill and has opposed other unilateral
sanctions. He argues that their futility can be seen in the
intransigence of the Iranian government and the way American oil
companies have simply been replaced by foreign competitors.
Moreover, many foreign companies with business interests in Iran are
also large American employers; deny them federal contracts and other
benefits, Mr. Reinsch said, “and it’s those workers who will pay the
But Hans Sandberg, senior vice president of Atlas Copco, which is
based in Sweden, offered a different perspective. Atlas Copco’s
sales of mining and construction equipment to Iran are dwarfed by
its American business, including military contracts. If forced to
choose, he said: “It would be no problem. We wouldn’t trade with
Eric Owles contributed reporting.