It’s about time: Lautenberg Amendment would address ‘outsourcing’ loophole used to neuter sanctions

(Washington, D.C.): This afternoon, the United States Senate is expected to conduct a roll-call vote on an important initiative offered as an amendment to the National Defense Authorization Act for Fiscal Year 2005. The amendment, being offered by Sen. Frank Lautenberg (D-NJ) would attempt to close a loophole that allows American companies to circumvent presidentially-imposed sanctions on terrorist-sponsoring states by what might be called “outsourcing” investments and other business via overseas subsidiaries.

The Lautenberg Amendment

In order to close this loophole, the Lautenberg amendment would apply the same restrictions imposed on U.S. companies’ dealings with a foreign country or persons dealing with that country pursuant to the International Emergency Economic Powers Act (IEEPA) to foreign-incorporated subsidiaries of such companies, where the U.S. parent owns at least a 50% share of the subsidiary.

The rationale for giving the President the authority to impose such sanctions under IEEPA is obvious. The provision of advanced technology, equipment, know-how and revenues by U.S. companies to rogue regimes advances their ability to sponsor terrorism and build weapons of mass destruction and ballistic missiles.

Such a theory is neither new, nor the exclusive domain of either party. Indeed, former Clinton Under Secretary of State for Policy Peter Tarnoff testified in defense of the Iran-Libya Sanctions Act in 1995, stating: “A straight line links Iran’s oil income and its ability to sponsor terrorism, build weapons of mass destruction, and acquire sophisticated armaments. Any government or private company that helps Iran to expand its oil must accept that it is contributing to this menace.”

There Is a Problem

The Bush Administration has expressed its opposition to the Lautenberg amendment, arguing that it is, on the one hand, duplicative and in some ways less far-reaching than existing legal authorities and, on the other, would incur the wrath of foreign governments due to its additional, “extraterritorial” reach.

Three points should be borne in mind in response:

• The Lautenberg amendment does not alter the decision-making process with respect to sanctions implementation. The President still has the authority to determine when sanctions are to be applied and what parties are affected. The amendment refers only to those companies that have already been sanctioned by the President. This amendment seeks to ensure that, only after a company has been prohibited from having business ties to the sanctioned country would its foreign subsidiary likewise be barred from conducting business in that country.
• The Lautenberg amendment undoubtedly is extraterritorial in its scope. That said, the Iran-Libya Sanctions Act – which enjoyed broad, bipartisan support – established the precedent that, in cases of national security, national interest supercedes extraterritoriality.
• The Administration is correct that companies are already barred from setting up foreign subsidiaries for the express purpose of circumventing sanctions. The Treasury Department is already charged with investigating and punishing offenders in this connection. Unfortunately, these responsibilities have generally not been exercised with respect to “outsourcing” to rogue states.

  The Lautenberg amendment, however, seeks to correct this shortfall by focusing attention on all companies that conduct business via subs, not just demonstrably witting sanctions violators. The amendment is intended to ensure compliance with existing sanctions policy, rather than expand its scope.

The Bottom Line

The message the Senate ought to be sending to American and foreign-owned businesses should reinforce the point that U.S. sanctions should be made as effective as possible, not undermined. A vote for the Lautenberg amendment will send such a signal by crimping, if not utterly closing, the loophole through which the most egregious undermining has taken place via “outsourcing” of sanctions-barred business with rogue state regimes.