Mr. Chairman, thank you for the privilege of appearing before this committee. Please permit me to say a few words about financial penalties as a counterterrorism technique. I draw upon my experience as an international economist with the IMF and World Bank and 20 years of research on the Middle East, the region in which can be found five of the seven state sponsors of terrorism. I will particularly address the Iranian case, since the Islamic Republic of Iran is the world's principal state sponsor of terrorism.
Let me offer three theses:
Financial penalties can discourage state sponsorship of terrorism. Countries like Iran, Cuba, or North Korea sponsor terrorism as a means to advance their state interests, not out of spite or blind ideology. They are quite good at calculating the costs and benefits from their behavior. If the world community imposes no penalties for violating the normal rules of international behavior, then the rogues will throw out the rulebook. But if there is a price to be paid, then they will consider if the cost of violating the rules is too high.
Iran is particularly sensitive to the price it must pay for its terrorism. Clear evidence about this was provided by the 1997 verdict of a German court in the Mykonos case, holding Iran's leaders responsible for the murder of four Iranian Kurds in a Berlin restaurant. In the aftermath of the court's verdict, all the European Union governments withdrew their ambassadors from Iran. The German government had been concerned that Iran might step up its terrorism in response to such a clear verdict. Quite to the contrary, Iran has not sponsored a single act of terrorism on European soil or against Europeans since the Mykonos verdict. Iran was not prepared to continue terrorism if that would put at risk its important business and political ties with Europe.
Perhaps some governments would be so strongly motivated by ideology that they would pursue terrorism irrespective of any price. That, however, does not seem to be the case with today's state sponsors.
State sponsors of terrorism do not respect the normal rules of international behavior, either in economics or in politics. Financial relationships between the United States and state sponsors of terrorism are tangled. It would therefore be inaccurate to characterize the U.S. counterterrorism financial claims as somehow being a unique roadblock to normal commercial relations with the terrorism state sponsors.
Some may say that allowing financial claims against state sponsors of terrorism invites retaliation. In fact, the U.S. financial penalties could be seen as a response to the assertive financial measures taken by the terrorism state sponsors--a way to redress the balance, after the terrorism state sponsors use extraordinary financial claims as part of their campaign against the United States.
For instance, the leaders of the Islamic Republic of Iran castigate the United States for not paying billions of dollars, which they say we owe them. To justify their allegation, they have put forward some creative claims, such as a suit asking for damages done to the Iranian railways during World War II. For many years to come, international tribunals will be considering Iran's claims about return of its prerevolutionary down payments for future arms shipments and about compensation for damages to an Iranian offshore oil rig destroyed by the United States in retaliation for Iranian mining of the Persian Gulf.
Intriguingly, the stream of assertive Iranian claims against the United States has lessened since the Foreign Sovereign Immunities Act was amended to permit claims against Iranian terrorism. In other words, Iran's actions are not consistent with the theory that the Foreign Sovereign Immunities Act amendments will provoke retaliation.
The best way to discourage politicized claims by the terrorism state sponsors is to take firm U.S. countermeasures. When the United States takes a compromising stance toward the state sponsors--looking for gestures of accommodation, for ways to address grievances no matter how far-fetched--the general response of the terrorism state sponsors is to escalate their demands, rather than to compromise.
By contrast, when the U.S. government shows that there is a heavy price to be paid for the campaign against the United States, that campaign is more likely to be abandoned. With the state sponsors of terrorism, we are not dealing with governments that play by the normal rules, and we should not expect the normal diplomatic method of compromise to work well.
A particularly clear test case for accommodation versus firm stance was provided by the Iranian-sponsored seizure of U.S. citizens in Lebanon. At first, the United States attempted to reach a deal with Iran, shipping to Iran arms in the famous Iran-contra affair. This was not a success for U.S. foreign policy. Iran released some hostages but took more. By contrast, when the U.S. government took a hard-line stance, making clear that holding the hostages only brought Iran grief in the form of international isolation, the hostages were released.
In short, financial claims against terrorism state sponsors is a firm response, and the typical response to such firm stands has been to back down, not to retaliate.
Good governance is essential to a well-functioning economy and to popular trust in the political system. In recent years, economists and political scientists have come to appreciate the importance of governance for economic development and for the functioning of a free, democratic society. If there is one clear lesson that has emerged about what constitutes good governance, that message would be: Governments should act on the basis of rules, not on the discretion of the ruler. Rulers are more likely to be arbitrary and open to influence-peddling; rules establish clearly what the government will do. Predictability is important to a sense of justice as well as to economic decision making. In the jargon of the trade, good governance requires transparent, clear, and law-based rules.
Some would argue that the U.S. government needs flexibility in its dealings with state sponsors of terrorism. To be sure. But U.S. citizens and businessmen also need clear, transparent, and enforceable rules. In particular, it would be a most peculiar procedure--one that would undermine citizens' and businessmen's faith in the rule of law--to permit judgments but then allow discretion about the execution of those judgments. Either the law should prohibit the judgments or it should facilitate their collection.
Some may say that the assets of state sponsors of terrorism should be used for broader public purposes, rather than being forfeited to the individuals who suffered the terrorism. Perhaps, although the heavy financial and emotional price inflicted on those held hostage by Iran for years in Lebanon strikes me as something that merits large compensation--a compensation that the U.S. government has not provided through other means. Be that as it may, the decision about who gets compensation should be made through clear laws that establish firm procedures, not through administrative discretion and not ex post facto.
In closing, Mr. Chairman, let me add that the U.S. government has advised many governments around the world to improve the quality of governance by enhancing the rule of law as contrasted to the discretion of the ruler. The U.S. government would be well advised to take its own advice. The rules about judgments against state sponsors of terrorism should provide clear guidance about what will happen once a judgment has been obtained.
