Gaffney testifies on financial warfare

The following testimony, entitled "The Financial Dimensions of the ‘War for the Free World,’" was given by CSP President Frank Gaffney on May 24, 2007 in front of the House Foreign Affairs Committee’s Subcommittee on Terrorism, Non-Proliferation, and Trade.

Mr. Chairman, last September, I had the privilege of appearing before this distinguished Subcommittee to address the nature of the conflict in which we find ourselves and what it will take for us to prevail in it. I call that conflict the "War for the Free World" as I believe this moniker best describes the magnitude of the challenge confronting us and what is at stake – the Free World, itself – should we fail to meet the present danger, and those in prospect.

[More]I am sorry to report that, in significant ways, this war has become more dangerous since my last appearance before you. And the risks associated with our failure have only grown concomitantly.

Time for an Intensified Effort

It behooves us, therefore, to be making a redoubled effort to counter our immediate enemies: adherents to a totalitarian ideology bent on world domination and the destruction of all who stand in the way of that goal. I believe they are best described as Islamofascists – a term that permits an important distinction to be made between such ideologues, who pursue political goals under the guise of a religion, from those hundreds of millions of Muslims the world over who are peaceably and tolerantly practicing their faith.

What makes these ideologues so dangerous is the fact that they are abetted in their often violent activities and political purposes by state-sponsors: notably, Iran, Syria, Sudan and North Korea. Fortunately, this vital relationship between rogue regimes and terrorist organizations – by which the former provide the latter with funding, safe-havens, logistical support, intelligence and other forms of material assistance and protection – also creates an opportunity for us: To use, among other instruments, financial weapons against the states that sponsor terrorism.

All of these instruments and how best to apply them are described at length in our book, War Footing: Ten Steps America Must Take to Prevail in the War for the Free World. For the present purpose, however, permit me to focus narrowly on ways in which financial means – over and above the existing sanctions currently imposed by the U.S. government – can be used to hurt our enemies.

Terror-Free Investing

As you know, Mr. Chairman, the Center for Security Policy has for several years now been urging institutional and private investors to engage in what we call "terror-free investing." By assessing whether public pension funds, mutual funds, 401k plans, college savings programs, university endowments and personal portfolios are, generally unwittingly, investing in publicly traded companies that do business with terrorist-sponsoring regimes – and, if so, divesting such stocks – we believe a formidable force-multiplier can be brought to bear in the War for the Free World.

Thanks to our government’s sanctions on state-sponsors of terror, American companies (with very few exceptions) are not doing business directly with regimes so designated by the State Department. As a result, terror-free investing can bring pressure to bear on foreign-owned and -operated companies on what might otherwise be described as an "extraterritorial" basis. Such pressure can cause these companies to desist from working with, and thereby assisting, our foes.

I am pleased to report that several prominent firms – UBS, Credit Suisse and Daimler-Benz – have already taken this step with respect to Iran. A more comprehensive effort to encourage terror-free investing would likely prompt many other corporations to reach a similar conclusion: Corporate reputation, share value and profits are better served by doing business with America than with her enemies.

Toward this end, I believe that every effort should be made, at the federal as well as state and local levels, to raise awareness of this financial warfare opportunity and to encourage both government pension systems and the market to help with the war effort by facilitating terror-free investing. In that connection, I want in particular, to commend you, Mr. Chairman, for the support you have shown for this initiative – both in the hearing you recently held on the subject and in your legislative efforts. I very much hope that, for example, your idea of eliminating capital gains penalties associated with shifting funds from investment vehicles that include terrorist state-partnering companies to ones that do not will become law this year.

Other Financial Warfare Opportunities

I was asked today to explore other ways in which the U.S. government might further discourage businesses from providing what amounts to life-support to terrorist-sponsoring states, through their investments in and business dealings with rogue regimes. Let me quickly address three areas worthy of your consideration in that regard:

The Overseas Private Investment Corporation (OPIC): As you know, OPIC provides such assistance as financing and political risk insurance that enables companies and private equity funds to support infrastructure projects and other investments in developing countries. I understand that OPIC assistance has been provided to the relatively small number of American corporations – including, for example, General Electric – that do business (usually through foreign subsidiaries) in Iran and/or in other officially designated state-sponsors of terror.

OPIC is also involved in facilitating joint ventures and projects in which American firms participate as members of consortia with foreign corporations, even though such consortia may be engaged in business dealings with our enemies. It is hard to calculate the precise value to terrorist-sponsoring states of this sort of indirect U.S. assistance. Suffice it to say, though, that any taxpayer-enabled aid to the financial wherewithal of those trying to kill Americans is too much aid.

If, as I believe it should, Congress wants to maximize the pressure on the world’s most dangerous governments – in particular, that of Iran – it should consider ways in which to constrict OPIC insurance and other assistance, whether direct or indirect, available to those doing business with such regimes. This is especially important insofar as the U.S. government has been seeking ways in which to encourage our allies to cut back their counterpart programs, which are enabling vast enterprises like Total, ENI, Elf, Statoil and Siemens to do extensive business with state-sponsors of terror.

The Export-Import Bank: A similar review is in order with respect to the lending and other export-facilitation programs of the Export-Import Bank. I would encourage the Subcommittee to evaluate Ex-Im’s exposure in the form of loans or guarantees associated with ventures doing business in or with state-sponsors of terror. At a minimum, any involvement on the part of such ventures with Iran and other terrorist-sponsors should be taken into account when the funding decisions are being made by the Bank.

Foreign Supplier Assessment: A little-known fact is that there are today some 15,000 foreign suppliers to the Department of Defense. They provide everything from advanced military hardware and components to relatively prosaic materials and supplies. I do not have a precise estimate of the value of these transactions, but it seems safe to assume they run to the many billions of dollars.

A topic for another day is the strategic inadvisability of so great a reliance on such suppliers for products essential for our armed forces and their missions. For the present purpose, it is enough to note that at least some of these foreign suppliers to the Pentagon also provide valuable goods and services to Iran and/or other state-sponsors of terror. To my knowledge, until now, little attention has been paid to the extent to which financial pressure in the form of U.S. procurement decisions could be brought to bear on our adversaries by forcing such suppliers to choose between doing business with our Defense Department or with rogue states.

As it happens, there is a relatively small and largely unknown unit within the Defense Security Service (DSS), known as the Foreign Supplier Assessment Center (FSAC). FSAC is charged with evaluating the Pentagon’s foreign suppliers in terms of their reliability, quality control, price competitiveness, etc. To date, however, this organization has not been charged with examining these suppliers’ business ties to hostile governments.

I believe Congress should consider directing FSAC to create a screening mechanism that would bar foreign companies that do business, for example, in Iran from receiving Pentagon contracts. The mere prospect of such an exclusion, let alone its implementation, may well compel such companies to forego any future transactions in the country in question, rather than lose access to so important (both symbolically and financially) a U.S. customer.

Properly constructed, such an FSAC screen would have the corollary benefit of establishing a comprehensive data base for over 15,000 foreign companies, one that could monitor their activities in terrorist-sponsoring states (if any), their supply of dual-use equipment and technology to such states and profiles of their Iranian and other problematic business partners. It would likewise cue foreign companies to the importance of implementing a robust security-minded risk-anagement program to oversee projects and transactions in sensitive countries, something already embraced by some leading Japanese and European firms.

Conclusion

Mr. Chairman, let me close by repeating points I made to this Subcommittee nearly nine months ago:

We confront a complex, multifaceted and increasingly dangerous world. Islamofascists are on the march. They benefit from the state-sponsorship of oil-rich regimes that subscribe to one strain or another of this totalitarian ideology. Such wealth and the determination to destroy us that is a central purpose of our enemies makes it – all other things being equal – just a matter of time before their attacks on us and/or our allies are inflicted with weapons of mass destruction.

To make matters worse, governments that are not themselves Islamist (such as that of Vladimir Putin in Russia, the Communist Chinese, Kim Jong Il’s regime in North Korea and Hugo Chavez’s in Venezuela) are aiding and abetting the Islamofascists.

This combination of factors leaves us no choice but to get far more serious about this war than we have been to date. Serious in terms of the nature of the enemy. Serious in terms of what it will take to defeat it – from a vastly larger investment in our military to the mobilization of our people, resources and energies. And serious about adopting the policies and programs, including counter-ideological political warfare-related ones, necessary to ensure that we prevail in this War for the Free World."

As I noted at the outset, a few things have changed since I made those remarks. Notably, the Congress is under new management. Another thing that has changed is the assessment of the imminence of the nuclear threat from Iran. For these reasons, I entreat this Subcommittee and the new leadership of the legislative branch to take to heart the assessment I have offered here – and last year – about the need to put our country on a "war footing" and the specific recommendations I have offered, both then and now, for doing so.

In particular, I hope these remarks will encourage you, Mr. Chairman, and your colleagues to bring to bear all instruments at our government’s disposal that could intensify the financial pressure on our enemies’ and, with luck, encourage an early end to the threat they pose to us and the rest of the Free World.