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The Limits of U.S. Sanctions

An interesting, if not depressing article in the Boston Globe this weekend that highlights the limits of sanctions in stopping Iran's nuclear ambitions. Recognizing the shortcomings of the international process, the U.S. has imposed its own sanctions aimed at cutting off Iran's access to American technological innovation - a move that has hindered the Islamic Republic's ability to develop critical infrastructure.

It seems, however, that Iran is still getting its hands on some things. The Boston Globe reports:

In the oil fields of Iran, a 2,000-pound drilling tool shaped like a metal pipe probes deep under the earth for fresh supplies of crude, the lifeblood of one of the most formidable foes of the United States.

While helping to enrich Iran's economy, the drilling tool also presents a potential risk to American security, were it to fall into the wrong hands. It is powered by a radioactive chemical that scientists say could fuel a so-called "dirty bomb," capable of spreading radiation across many city blocks.

The tool is the type of sophisticated technology that the United States has sought for 13 years to prevent from reaching Iran, a country the US government says is financing terrorism with its oil profits.

But the device - developed by the oil-services firm Schlumberger in labs in Connecticut and Texas - was brought to Iran through a legal loophole that allows multinational corporations to use foreign subsidiaries to sidestep US sanctions, according to a Globe investigation.

And how is Schlumberger conducting business with Iran without facing penalties from the U.S. government? The answer is apparently quite simple:

Since 1995, federal regulations have barred Americans from exporting goods, technology, or services to Iran, and also prohibited non-Americans from directly exporting US-made equipment there.

But the regulations leave the door open for companies to stock the warehouses of their overseas subsidiaries for general international commerce, after which the subsidiaries can "reexport" the goods to Iran, so long as no Americans were involved in the transfers.

Such "reexports" are generally regarded as legal if the goods are not on a Commerce Department list of items with potential military applications, according to current and former Commerce Department officials.

"If a company has got all their ducks in a row, they can take advantage of [the reexportation exception] and I'm sure that they do," said Richard Modesette, a former special agent with the Commerce Department's Office of Export Enforcement in Houston.

The regulations were designed to allow companies to avoid penalties if they happened to send low-tech items, such as light bulbs or tires, to stock warehouses overseas, and the goods inadvertently ended up in Iran, the current and former officials said.

But over the years, sophisticated oil machinery, including devices that contain radioactive material, began to be sent to Iran in this way, seriously eroding the impact of the sanctions.

The vast majority of US exports - an estimated 96 percent - are not on the Commerce Department list, and therefore could potentially make their way to Iran. Schlumberger's radioactive drilling tool, called the azimuthal density neutron tool, is not on the list, according the company.

Moreover, while much of the Schlumberger's R&D is conducted in its Texas and Connecticut laboratories and its CEO is based in Houston, it is not a U.S. company. Rather, it is registered in the Netherlands Antilles.

Congress is working to close some of the loopholes by "holding US companies accountable for the work of their foreign subsidiaries in Iran." Such a move, however, will not effect Schlumberger or other non-U.S. based companies.

The outlook is not promising and only emphasizes the need for greater multilateral cooperation if Iran is going to be stopped (a difficult task on its own).

"It is getting harder and harder to make sanctions effective," said Michael Lynch, an oil market analyst and director at Strategic Energy & Economic Research Inc., an energy consulting firm based in Winchester. "It has gotten to the point where keeping the technology away from [Iran and other countries under sanctions] is almost impossible."

President-elect Obama is going to have his hands full when he takes office in January.

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